Friday, October 24, 2014

BOUGHT 50 NGHCP at $24.3/Sold 50 AMNB at $23.03/Bought 100 PNNT at $10.66-Regular IRA/Bought Back PWCDF at $25.81/Bought 50 PSEC at $9.65-Roth IRA

Housekeeping: There will be no monthly update of the basket strategies. Google deleted that post today when I attempted to open it. Google Just Deleted My Monthly Update for the Basket Strategies-THERE WILL BE NO UPDATE THIS MONTH

I did discuss one Lottery Ticket purchase made over the past month in a SA Instablog: Lottery Ticket Basket Strategy-Bought 40 CORR At $7 - South Gent | Seeking Alpha

I also discussed one small addition to the regional bank basket at that site: Regional Bank Basket Strategy: Added 50 ONB At $12.45 - South Gent | Seeking Alpha

Google remains unable to take visitors to my blog who are using the correct blog URL. I have quit using it to gain access. Instead, I will bookmark the "blog archive" for the latest month. Stocks, Bonds & Politics: October 2014

I am now on an irregular publication schedule. Some trades will be discussed here and some individual trades will be discussed at SA.

Big Picture Synopsis 

Stocks:
Stable Vix Pattern (Bullish)(Requires a Trigger Event To End)                   
Short Term: Market Needs to Correct 10% to 15%               
Intermediate Term: Slightly Bullish (gains to date borrow from the future)
Long Term: Bullish

The VIX remains in a Stable Vix Pattern. The brief spike to the mid-20s was insufficient to generate a Trigger Event under the Model.

Close on October 24, 2014 VIX: 16.11 -0.42 (-2.54%)

Vix Asset Allocation Model - South Gent | Seeking Alpha

According to the S & P 500 chart, the rally today did not piece the 50 day SMA line to the upside, while that index did close above its 200 day SMA line and only traded a few days below that SMA line. Interactive Chart In several recent SA comments, I mentioned that the S & P 500 break below the 200 day SMA line was not a good sell indicator. I would want to see a close lower than 5% below that line and a Trigger Event in my Vix Asset Allocation Model.

Bonds:               
Short to Long Term: Slight Bearish Based on Interest Rate Normalization
The Difficult Path to Interest Rate Normalization


The 10 year TIP break-even spread closed today at 1.9% and has been trending down.

That forecast is known as the break-even spread, the average annual rate of inflation for the owner of the 10 year TIP to break even with the owner of the non-inflation protected treasury.

The break-even spread is calculated by subtracting the yield of the TIP
Daily Treasury Real Yield Curve Rates

From the Yield of the Non-inflation protected treasury
Daily Treasury Yield Curve Rates

A persistently low inflation rate is a predicate condition for a long term secular bull market in stocks.
For the 12 month period ending in September, the government reported that CPI rose at a non-seasonally adjusted rate of 1.7%  Consumer Price Index Summary

I do not believe that my Blue Cross health insurance premium increase for 2015 is included in that number. I did a mental calculation, always a hazard for an OG, and came up with 18+%.


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

1. Bought 50 NGHCP at $24.3 (see Disclaimer):


Snapshot of Trade:



Security Description: National General Holdings Corp. 7.5% Pfd. Series A (NGHCP) is a new non-cumulative equity preferred stock that pays qualified dividends at the fixed coupon rate of 7.5%  on a $25 par value. The issuer, National General Holdings (NGHC), has the option to redeem the issue on or after 7/15/2019. This preferred stock will be perpetual until the issuer elects to redeem it. The issuer may redeem on or after 7/15/2019 when it is in its interest to do so.

Prospectus

The prospectus contains a typical Dividend Stopper Clause, the legal mechanism for enforcing the preferred shareholders superior rights to common shareholders:

Dividend Stopper Clause

Company Description: National General Holdings was formed in 2009 and is a speciality personal lines insurance holding company.  Profile

The company reported second quarter net income of $30.3M or $.32 per share up from $13.1M or $.22 per share in the 2013 second quarter.

National General Website

Investor Relations - National General

Key Developments Page at Reuters

The consensus E.P.S. estimate is fo $1.18 in 2014 and $1.59 in 2015. NGHC Analyst Estimates

NGHC 2014 2Q 10-Q

NGHC 2013 10K (risks discussed starting at page 25)

Rational: This security generates a yield of about 7.72% at a total cost of $24.3 per share. The dividends are qualified so that yield is tax favored in a taxable account when the taxpayer has a marginal rate in excess of 15% and a 15% cap on qualified dividends.  Taxes on Income and Capital Gains for 2014

The after tax rate of approximately 6.56%, assuming a 15% tax rate, is significantly above the current rate of inflation.

The general idea is to harvest several quarterly dividends and to escape with a profit.

I view equity preferred stocks with some disfavor for the reasons outlined throughout this blog for the past 6 years and in the following section.


Risks: The company discusses risks incident to its operations starting at page 18 of the prospectus. One of the risks mentioned is phrased this way: "Our principal stockholders have the ability to control our business, which may be disadvantageous to other stockholders".

There are a number of investors who have issues with the principal stockholders. This preferred stock is selling at an unusually yield that may be due to what I would call the Michael Karfunkel discount.

Mr. Karfunkel is an elderly gentleman who co-founded the American Stock Transfer and Trust Company in 1971, a stock transfer company, that was sold in 2008.  He is a founder and Chairman of the Board of Amtrust (AFSI) and is also a founder of Maiden. It is the AmTrust connection that makes some queasy as I previously mentioned when buying 50 shares of its preferred stock. Item # 7 Bought 50 AFSIPRB at $24.79

National General started to pay a quarterly dividend of $.01 per share in the 2013 4th quarter. NGHC Dividend Date & History If that cash dividend is eliminated, there is no legal impediment to eliminating the non-cumulative preferred stock dividend. An elimination of that common dividend would likely cause the preferred stock to crater in price in my opinion. Why would a company eliminate a 1 cent per quarter dividend?  The dividend stopper clause does prevent National General from eliminating the preferred dividend for as long as it maintains a cash dividend payment to the common shareholders.

The lowly status of equity preferred stocks makes them subject to severe downdrafts in price during periods of market turmoil and financial stress. Many of the non-cumulative preferred stocks crashed in 2008, falling in many cases to the single digits, even when the issuer kept paying the dividends. The most recent severe decline occurred during the 2011 stock market correction. I noted in a August 2011 post a really bad day for several different types of exchange traded securities, having a higher priority than common stock in the capital structure. Item # 1 Fear and Enhanced Volatility in Certain Classes of Income Securities

I lump equity preferred stocks with bonds since their bond characteristics are more dominant than their equity features. Many of their equity features are undesirable including their potential perpetual terms without actually having an equity interest in the business and with interest rate risk being asymmetric with the issuer. I view equity preferred stocks as a disfavored asset class and will consequently attempt to trade them opportunistically.

The interest rate risk is asymmetric between the issuer and the owner of the preferred stock.

If interest rates rise, the issuer will allow the owner to keep the preferred stock which is declining in value. The investor has the option to sell at a loss, or to keep the security declining in value and consequently lose the opportunity to reinvest the proceeds in a higher yielding security.

These securities can become perpetual for an individual's lifetime when rates rise and then remain at a level sufficiently high enough that it is not advantageous for the issuer to exercise their optional call right.

If interest rates decline and the issuer can refinance at lower rates, then the issuer has the option after the call date to redeem the security and to pay only par value plus accrued dividends, providing the investor with cash that can only then be reinvested in a lower yielding security.

When bought near par value, share price appreciation is minimal, while downside price risk is retained by the investor rather than the issuer, due to two factors.

First, in a declining rate environment, where the issuer is likely to redeem the security when it is legally able to do so (generally five years after the IPO), the price will be unable to rise much above par value even under optimal credit conditions for the issuer.

Second, the downside risk to the investor is not capped due to interest rates rising.  In a rising rate scenario, the issuer has locked a favorable rate to its advantage, possibly into perpetuity, while the owner of the fixed coupon preferred stock has only bad choices left.

In a BK, an equity preferred stock is likely to meet the same fate as the common stock.

Future Buys/Sells: I am not likely to buy more. I am always in a trading mode for equity preferred stocks. I have sold a bunch of them so far this year.

I summarized some of the REIT preferred stock dispositions in my recently published gateway post:

I have also bought and sold several equity preferred stocks this year. Stocks, Bonds & Politics: Gateway Post: Equity REIT Common and Preferred Stock Basket

See Also: Advantages and Disadvantages of Equity Preferred Floating Rate Securities (includes snapshots of profits)

Closing Price Last Friday: NGHCP: $24.30 +0.05 (+0.21%)

2. Bought 100 PNNT at $10.66-Regular IRA (see Disclaimer): 

Snapshot of Trade:



Company Description: PennantPark Investment is a BDC that invests in middle market companies, defined as companies with annual revenues between $50 to $1B. Those companies do not generally have bond ratings.

In early September 2014, PNNT announced that it wanted to sell 11 million shares. Preliminary Prospectus Supplement Perhaps, this game is becoming a bit tiresome and the BDC was only able to sell 8.5M shares at $11.63. PennantPark Investment Corporation Prices Public Offering There was a standard over allotment option.

The $11.63 price is the price paid by the public.

After underwriting fees and costs, PNNT received significantly less. SEC Filing ($11.2811 per share before $500,000 in expenses) The last reported net asset value per share was $11.33 as of 6/30/14. SEC Filed Earnings Press Release

PennantPark Investment Corporation is currently paying a quarterly dividend of $.28 per share.

Prior Trades: This trade brings me up to 200 shares. I also currently own 100 shares. Item # 6 Bought 100 PNNT Taxable Account at $10.84 (5/3/14 Post) The net asset value per share reported for the Q/E 3/31/14 was $11.13, 10-Q, so that purchase was below book value per share.

I last sold PNNT when the market price was at a premium to NAV per share, viewed as substantial for an externally managed BDC in my opinion. Item # 5 Sold 50 PNNT at $11.92 (12/17/13 Post)(profit $71.68)-Item # 6 Bought 50 PNNT at $10.2-ROTH IRA (11/21/12 Post) When I sold that 50 share lot, the last reported net asset value per share was $10.49 as of 9/30/13, so an $11.92 market price was a 13.63% premium to that NAV number.

Last Earnings Report: Prior to this last trade, the last earnings report was for the Q/E 6/30/14. SEC Filed Press Release PNNT reported core net investment income of $.28 per share and a 12.3% yield on investments at the quarter's end.

I do not find much comfort in the large weighting in second lien debt and securities lower down in the capital structure:

Click To Enlarge:
Portfolio Description

Rationale: As with all BDCs, my goal is to harvest a 10% annualized total return and will consider doing so when and if I achieve that objective. I could achieve that annualized return by collecting 4 dividends and selling the shares at a slight loss. I am not likely to sell the shares for a loss unless I become spooked about this BDC's performance.

The current quarterly dividend is $.28 per share. At a total cost of $10.66 per share, and assuming a continuation of that rate, the dividend yield would be about 10.51%.

The general idea is to harvest that yield and to escape without losing money on the shares. Easier said than done is my motto for externally managed BDCs.

By buying at below the last reported net asset value per share, I simply improve my chances of getting out with a share loss.

I placed this purchase in a regular IRA. If the shares fall by more than 10% from my purchase price, I will consider doing a Roth IRA conversion. My last IRA purchase was a 50 share lot made in a Roth IRA and sold at $11.92.

Risks: As with all BDCs, PNNT has considerable risks summarized in a very long discussion found in its F/Y 2013 Annual Report staring at page 14, Form 10-K

PNNT is not a serial issuer of common stock like PSEC which unfortunately also has a history of selling shares before net asset value per share.

BDCs invest in risky companies and do not retain much of a capital after paying dividends to their common shareholders. The shares will perform badly during a recession.

PNNT has an usually large allocation to riskier subordinated debt and a large second lien debt weighting (see above snapshot)

Loans made by BDCs are generally not rated by Moody's or S & P. If the loans were rated, most of them would be at CCC+ or lower.  An average portfolio yield of 12.3% adequately describes the risk when the ten year treasury is hovering around 2.2.%.

Future Buys and Sells: I will not buy more shares. I am full at 200 shares given my analysis of the potential rewards and risks.

I will sell the shares bought in the Regular IRA in accordance with the trading rules for externally managed BDCs. I am looking for an annualized total return in excess of the dividend yield. The goal is to harvest an annualized total return of 10% whenever that can be achieved through a combination of capital appreciation and/or dividends. I will consider selling shares whenever the market price exceeds net asset value per share by more than 5% and will consider buying share sold when and if the market price falls below net asset value per share.

Closing Price Last Friday: PNNT: $10.65 +0.03 (+0.28%)

3. Bought Back 100 PWCDF at $25.81 (see Disclaimer):  This trade is discussed in a recent SeekingAlpha Instablog.

Bought Back Power Corporation Of Canada at $25.81 (PWCDF) - South Gent | Seeking Alpha

Item # 5 Sold 100 PWCDF at $28.83 (8/2/14 Post)-Item # 4 Bought 100 PWCDF at $27.29 (7/12/14 Post)

Closing Price on Friday PWCDF: $25.97 +0.16 (+0.61%)

4. Bought 50 PSEC at $9.65-Roth IRA (see Disclaimer): Let me be clear in case anyone has not yet gotten the message. I do not like this company. I only like its current dividend.

Possibly, I do not have the same disdain that was evident in this SA Instablog discussing the many problems of externally managed BDCs.: Added 50 AINV At $7.94 - South Gent | Seeking Alpha

Snapshot of Trade:

2014 PSEC Bought 50 at $9.65-Roth IRA
This purchase was at a 9.64% discount to PSEC's last reported net asset value per share of $10.68 as of 6/30/14.

Company Description: PSEC is an externally managed BDC.

PSEC Interactive Chart

Annualized Total Return 7/27/2004 through 10/23/14:  6.13%, Calculator

That return is with dividend reinvestment.

PSEC has a bad history of selling stock at below net asset value per share. Seeking Alpha

Net Asset Value Per Share Destruction: The last reported net asset value per share was $10.68.  PSEC 10-Q Q3 2014

Sourced from PSEC's 10-Q Filings

6/30/2014:  $10.68
9/30/09  $11.11
6/30/09 $12.4
3/31/08: $14.15 10q
6/30/07: $15.04
6/31/06 $15.31

Prior Trades: I have traded down to just a few shares in a taxable account.

PSEC 74+ Shares Average Cost Per Share  $9.46

With this 50 share purchase, I am just nibbling, replacing for now only 50 of the 100 shares sold in the Roth IRA a few weeks ago. Sold Roth IRA: 100 PSEC at $10.65 (9/6/14 Post) I accomplished my objective, escaping with a profit (+$30.99) after harvesting $230.67 in dividends. Bought 100 PSEC @ $10.2-Roth IRA (11/16/12 Post) So now I have reset my average cost at a lower number than the previous buy in November 2012 ($9.65 vs. $10.2, so my yield goes up and I have a better chance of escaping with a profit).

Rationale: The rationale starts and stops with the dividend. PSEC increasing the dividend by a minuscule amount each month since it slashed the dividend back in 2010, when it went from a $.41 quarterly rate to a $.10 monthly rate. PSEC Dividend Date & History For ease of computation, I will just call it a $.11 monthly rate. That produces about a 13.68% percent yield at a total cost per share of $9.65, which is tax free in the Roth IRA. Assuming I can escape with a loss on the shares, easier said than done, money will double in about at a tax free rate of 13.68%.

Risks: I have discussed the risks until I am no longer willing to repeat them. They can be found in prior PSEC posts here and at SA (South Gent's Comments on PSEC: Prospect Capital Corporation | Seeking Alpha)

I also discuss risks relating to externally managed BDC's in three recent SA Instablogs:

New Mountain Finance Share Offering Today Illustrates Multiple Risks Inherent In BDC Stocks - South Gent | Seeking Alpha

Added 50 AINV At $7.94 - South Gent | Seeking Alpha

Bought 50 ARCC At $15.41-A Typical Small Lot Purchase Of An Externally Managed BDC Stock - South Gent | Seeking Alpha

Extensive risk discussion can be found in PSEC's Annual Reports filed with the SEC.

Friday Closing Price: PSEC: $9.74 +0.10 (+1.04%)


5. Sold 50 AMNB at $23.03 (REGIONAL BANK BASKET STRATEGY)(see Disclaimer): 

My discussion of this sell was deleted by Google and was part of my regional bank update.

I am not going to rewrite it.

While this bank had several positive metrics in its last earnings report, the E.P.S. downtrend is viewed unfavorably. I may consider buying shares back at below $21. For now, I decided to chuck it.

American National Bankshares Inc. Reports Third Quarter 2014 Earnings

Snapshot of Trade:


Snapshot of Profit:

2014 Sold 50 AMNB +$77.57

Bought 50 AMNB at $21.16 (9/7/13 Post)

Closing Price on Friday: AMNB: $22.83 -0.16 (-0.70%)


Bought Back 100 PWCDF at $25.81

I just published a SA Instablog discussing the repurchase of Power Corporation of Canada made yesterday. I discuss buying the shares on the pink sheet exchange using USDs. I am not discussing the near simultaneous purchase of the ordinary shares trading in Toronto using CADs. 

Google Just Deleted My Monthly Update for the Basket Strategies-THERE WILL BE NO UPDATE THIS MONTH

I attempted a moment ago to open for editing my monthly update for the Lottery Ticket, Regional Bank and REIT Baskets. I clicked the link, as I have have always done, and Google deleted the blog rather than opening it.  Within one second after clicking the link to open the draft, Google simultaneously deleted it and then saved a blank post in its place: 

Snapshot of What Was Left Within One Second After Clicking to Open-Nothing But White Space

There will consequently be no update this month for those basket strategies. 

Given the extreme level of dysfunction now present with Google's Blogger site, I am partly to blame for failing to save my work product on my computer. 

I am consequently posting more at the SeekingAlpha Instablog website. South Gent's Instablog | Seeking Alpha


Google is still unable to connect readers to my blog using the correct URL. I have quit using the blog URL to gain access. 

Instead I will use a link to a particular or a link to the most current month's archive: Stocks, Bonds & Politics: October 2014

SA Instablog Published on WTBA Earnings Report Released Today

Thursday, October 23, 2014

SA Instablog Published On New Mountain's Share Offering Today/ SOLD 100 of 150 NMFC at $14.4773

New Mountain Finance Share Offering Today Illustrates Multiple Risks Inherent In BDC Stocks - South Gent | Seeking Alpha

Added 10/23/14: In that post, I discuss NMFC's writedown of a PIK first lien loan made to a company called UniTek Global Services, who agreed to a prepackaged bankruptcy filing with its lenders. In UniTek's press release, the agreement is generally described as more than a 40% swap of bonds for equity. UniTek Global Services

TICC Capital (TICC) listed a UniTek "tranche B term loan" in the principal amount of $11,781,583 and valued by TICC at $11,781,583 as of 6/30/14:

Page 4 10-Q for the Q/E 6/30/14

Apollo Investment is providing 1/2 of the debtor-in-possession financing, according to an article published by The Deal Pipeline (a subscription publication that provided a free preview through a Yahoo Finance link at UNTK.

Main Street Capital (MAIN) also listed a loan to UniTek in its last SEC Form 10-Q, valuing the loan in excess of its principal amount at that time:



10-Q Filing at page 21 I am surprised to see that BDC participate in this loan.

Among the BDC's that I own, NMFC had the largest exposure to UniTek.  NMFC's investment was written down as noted in a 10/22/14 filing, 8-k, and a new NAV estimate was required as a predicate for NMFC's  stock offering of 5 million shares priced at $14.53 to the public: New Mountain Finance Corporation Announces Pricing of 5,000,000 Shares of Common Stock The net proceeds to NMFC were $14.35 before expenses. Prospectus

NAV Per Share as of 6/30/14: $14.65 10-Q

NAV Per Share Estimate as of 10/22/14: $14.35 8-K

Net Proceeds after Underwriters' Discount: $14.35

Added 10/24/14: 

I was not please with NMFC's large investment in UniTek or the issuance of stock just after NMFC wrote down that investment.

As noted in my SA Instablog article, I was then down to 150 shares.

I elected to sell 100 of the 150 remaining shares this morning. I escaped with a minuscule profit and harvested 7 quarterly dividend payments. That is actually viewed as a success for an externally managed BDC.


Snapshot of Trade:



Snapshot of Profit: 

2014 NMFC 100 Shares +$3.79


Snapshot of Dividend Payments:  

2014:


2013:

Total Dividends: $185.55

Total Return: $189.34

% Return on $1,435.95 Total Cost= +13.19% (holding period 16+ months) 

SA Instablog Published: Added 100 LXP at $10.43

I published another SA Instablog discussing a purchase yesterday of 100 LXP:



Wednesday, October 22, 2014

Published Another Instablog at SeekingAlpha: IRA Buy of 50 AINV at $7.94

I published another article today at SeekingAlpha, a rewrite of the material deleted by Google in my recent AINV discussion, Added 50 BWG at $17.01/Added 100 APTS at $8.29/Bought 50 AINV at $7.94-Roth IRA/Sold 361+BTZ at $13.45-Taxable Account


Link to More Comprehensive SA Discussion: Added 50 AINV At $7.94 - southgent1951 | Seeking Alpha

SeekingAlpha Article Published on Why I Will Aggregate MY LXP Position Solely in a Fidelity Roth IRA

I published another SA article today giving a detailed Left Brain discussion of why I will aggregate my LXP position in a Fidelity Roth IRA account.  

SeekingAlpha Instablog Published Discussing Purchase of 100 APTS at $8.29

As noted in my post published last night, Google kept deleting sections of a draft blog and had gone haywire in other ways. Added 50 BWG at $17.01/Added 100 APTS at $8.29/Bought 50 AINV at $7.94-Roth IRA/Sold 361+BTZ at $13.45-Taxable Account

I elected to publish that blog even with entire sections no longer available, though they were written and saved by me. 

Instead of fooling with Google's Blogger service, I elected to publish to rewrite and publish today a discussion of the 100 APTS add.  

Tuesday, October 21, 2014

Added 50 BWG at $17.01/Added 100 APTS at $8.29/Bought 50 AINV at $7.94-Roth IRA/Sold 361+BTZ at $13.45-Taxable Account

I am having yet a another new problem with Google's Blogger website. When writing this post, I receive this message every few seconds:


I have not logged out from another location. If I click the phrase "Yes, I want to log in again", then I log in again, and then I will receive the same message again within a few seconds. To write this blog, I have to click close and then try to type a few words before I have to hit close again.

I found that Google was not saving most of the what I was writing, which would disappear when I opened the blog back up even after managing to save the work product. Google was destroying my work product making it impossible for me to make changes. 


Google improved in its ability to keep material after I published the post for the first time, which has allowed me to make some additions, like the one I am typing now.  The text in bold red lettering was added after this post was first published which apparently resolved Google's problem. 

Needless to say, this is most annoying and caused me to quit writing this blog, and to go ahead and publish it even though it had entire sections missing.

Google's Blogger service has reached a highly dysfunctional state. 

The same is true for Google's email service. Last night I received an email saying that some one had my password and Google has blocked access to my Gmail account. As far as I can tell after investigating this claim, Google blocked my attempt to access the account from the computer that I always use to access the account.

I was not allowed to log into my account later this evening due to my "account settings" being out of date. I logged back into the account and was taken to the account settings page. After that happened , I clicked the tab "advanced sync settings" and then clicked OK which seemed to solve the problem at least for now. What the heck?

To access the blog most of the time, the blog URL does not work. Typically there will be a delay followed by a message that the site is unavailable. Google has simply lost the ability to connect to my blog using the blog URL.

I may start writing more posts for publication at SeekingAlpha.

Big Picture Synopsis 

Stocks:
Stable Vix Pattern (Bullish)(Requires a Trigger Event To End)                   
Short Term: Market Needs to Correct 10% to 15%               
Intermediate Term: Slightly Bullish (gains to date borrow from the future)
Long Term: Bullish


Bonds:               
Short to Long Term: Slight Bearish Based on Interest Rate Normalization
The Difficult Path to Interest Rate Normalization

That forecast is known as the break-even spread, the average annual rate of inflation for the owner of the 10 year TIP to break even with the owner of the non-inflation protected treasury.

The break-even spread is calculated by subtracting the yield of the TIP
Daily Treasury Real Yield Curve Rates

From the Yield of the Non-inflation protected treasury
Daily Treasury Yield Curve Rates


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

Recent Developments:

China's GDP grew at 7.3% during the third quarter, the slowest rate in five years. CBS News

Existing single family home sales increased at a 2.4% seasonally adjusted annual rate in September. Sales reached their highest pace so far this year, but are still 1.7% below the annualized rate from September 2013.  Existing-Home Sales Rebound in September | realtor.org


******************
Omega HealthCare (OHI): 

OHI raised its quarterly dividend by 1 cent per share to $.52 per share: Omega Announces Ninth Consecutive Increase in Common Stock Dividend

In a Seeking Alpha article published last week, Brad Thomas discusses this dividend increase in the context of improving fundamentals.

I own 100 shares as part of  my Equity REIT Common and Preferred Stock Basket.

Item # 2 Bought: 100 OHI at $29.85 (12/23/13 Post)

At the new quarterly rate, the dividend yield would be about 6.97% at a total cost per share of $29.85.

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

1. Added 50 BWG at $17.01 (see Disclaimer):

Snapshot of Trade:

2014 Added 50 BWG at $17.01

Snapshot of Quote Before Trade:



Snapshot of Data Day Before Trade 10/15/14




Security Description: The Legg Mason BW Global Income Opportunities Fund (BWG) is a leveraged bond CEF that invests globally.

Data From Date of Trade:
Closing Net Asset Value Per Share: $19.85
Closing Market Price: $17.07
Discount -14.01%
Average Discount 1 Year= -12.97%

CEFConnect Page for BWG

I suspect that the sharp decline between October 15 to 16 was due to the fund's heavy exposure to certain sovereign debt securities including the 2037 Portugal bond.  Net asset value per share declined from $20.11 (10/15/14) to $19.85 (10/16/14), but then rebounded to $20.11 on 10/17/14. That tells me something about this fund. The ride will be volatile.

SEC Form N-Q Holdings as of 7/31/14: Legg Mason BW Global Income Opportunities Fund (unrealized gains $5.797M; as noted in that report, the fund does some currency hedging)

Last SEC Filed Shareholder Report-Period Ending 4/30/14: LM BW Global Income Opportunities Fund

Sponsor's Website: Individual Investor (portfolio characteristics as of 6/30/14: effective duration 8.92 Years)

Dividends: BWG is a relatively new bond CEF which started operations back in 2012. The fund started out paying a monthly distribution of $.12 per share, raised that to $.125 per share effective for the June 2014 distribution, and increased the rate to $.13 effective for the September dividend. The fund also paid a capital gain distribution of $.42 per share back in December 2013. CEF Details Distributions|

Morningstar calculates the total return at 13.76% YTD and 10.99% over 1 year through 10/15/14 based on net asset value. There is a material difference when calculating the YTD return based on market price which was 7.75%. That significant disparity between total returns based on net asset value and market price indicates that the market price change has not kept up with the increase in the total return based on net asset value per share. The difference in values is manifested in an increase in the discount to net asset, one of the many known risks and potential benefits associated with bond CEFs.

The credit quality is weighted in investment grade bonds, but the fund has substantial exposure to BB and B junk rated bonds.




Prior Trade: There is a saying that is more than cliche. If you find yourself in a hole, stop digging. That rule is sometimes referred to as THE FIRST LAW of HOLEs.

I am in a hole with BWG, and I am still digging.

My last purchase was at $17.75.

Rationale: The primary reason for investing in any bond CEF is to generate income hopefully without incurring a loss on the shares-another one of those easier said than done predicaments.

Short term borrowing costs for a leveraged bond fund are at abnormally low levels now and for the past six years due to the FED's ZIRP monetary policy. The fund can borrow short term and use those borrowed funds to buy higher yielding longer term bonds, capturing the yield differential that juices the current dividend payments to the fund's owners who are either smart or stupid, or something in between for accepting the leverage risk for a little more current income.

Considering our low yield world, and the lowering of inflation expectations throughout the developed world and even in several emerging markets, the current yield, which is not yet supported by a ROC, is about 9.17% at a total cost of $17.01 per share.  Risks are frequently commensurate with yield. But there are all kinds of risks. One risk is that the investments will not generate a sufficient total return to accomplish an investor's objectives.

Only the very rich can plow their savings into a ten year German government bond yielding .9%, or a ten year TIP with less than a .5% current yield. Daily Treasury Real Yield Curve Rates; DE 10Y Govt Bond Benchmark Bond

I comprehended that risk a long time ago, maybe around 1975 or so, that I would generally describe as the risk of falling short, possibly way short. This is not to say that I will take foolish risks, like investing in internet bubble stocks in 1999, but I needed to take risks to reach the point where I am now.

Risks: (1) Leverage and Bond Value Risks: What is the disaster for the leveraged bond CEF owner? It involves the infamous triple whammy.  Borrowing costs rise as short term rates start to go up while a rise in intermediate and longer term rates cause the value of owned bonds to fall in price, including those bought with borrowed money. The confluence of those two events sends the individual investors who are the predominant owners of these funds scurrying for the exists, buyers disappear, and the discount to net asset value increases as the dividend is cut, bond losses pile up and the net asset value per share declines-not a pretty picture for those who do not know that bonds can actually be in a long term bear market.

The last long term bear market started around 1950 and lasted until 1982. This is a link to a chart that highlights the devastation: CHART

At first, it was like suffering a thousand paper cuts before the coup d'grace was administered in the late 1970s and early 1980s. There was an adage at the time that went something like this: "How do you become a millionaire trading bonds, start out with $2 Million".

(2) Currency Risks:



Any foreign security owned by a fund priced in USDs is going to have this significant risk which can also turn into a benefit when the foreign currencies gain in value against the USD. Recently, several foreign currencies have been declining in value which flows through into the value of the fund's holdings, at least to the extent the currency decline is not hedged and that hedging can cost money too. Maybe the fund makes money on its hedges when the USD is rising in value and then loses money when the USD is falling. Hedging by a fund is not a one way street unless a market timing gift is bestow by the Lord on the fund managers.

Future Buys/Sells: I may average down with 50 share lots. I will definitely sell some of the higher cost shares whenever I have a profit. I can wait. Unadjusted for dividends, including the 2013 capital gain distribution, the price was over $21 back in May 2013: BWG Interactive Chart The rise in rates in the U.S. starting in May 2013 had a widespread negative impact on international bonds, both in terms of price and currency. On 5/1/13, the net asset value per share was $22.97 and the discount was -7.58 based on a close that day at $21.23.


3. Bought 100 APTS at $8.29-Averaged Down (Equity REIT Common and Preferred Stock Basket)(see Disclaimer)

Snapshot of Trade:


Company Description: Preferred Apartment Communities (APTS) is a relatively new REIT primarily focused on apartments with the intention of growing its retail assets to 20% of the total.

I repeatedly lost part of my discussion about recent developments, so I gave up trying to type any extensive discussion of these important developments.

Hopefully, Google will not eliminate the following links that disclose the acquisition of 6 grocery shopping centers and 4 apartment complexes, along with the financing arrangements for those acquisitions. I spent about twenty minutes earlier in the evening typing a description, but Google has lost it twice now:

Press_Release_-_Sunbelt_6_Acquisition

Press_Release_-_Acquisition_of_Dunbar

Key Developments Page at Reuters

APTS is currently paying a quarterly dividend of $.16 per share. Preferred Apartment Communities, Inc. Announces Third Quarter 2014 Common Stock Dividend Assuming a continuation of that rate, the dividend yield at a total cost of $8.29 is about 7.72%.

Since its IPO in 2011, APTs has raised its quarterly dividend several times, starting with a $.125 dividend rate in 2011. (APTS) Dividend Date & History

I left one mostly meaningless comment to a recent Seeking Alpha article on this REIT. I just wanted to point out that the apartment complex that APTs was acquiring in "Nashville" was in Gallatin, TN.

Last Earnings Report: Due to the recently announced proposed acquisitions, the company as configured, prior to the closings of those acquisitions, is not that important or predictive of future results.

Preferred Apartment Communities reported second quarter FFO of $4.091+M or $.25 per share. Normalized funds from operations was given at $.26 per share. AFFO was reported at $.21 per share. Same store rental revenues rose 4.3% during the quarter compared to the second quarter of 2013, while NOI increased by 6.99% on the same basis.

For apartments, the company discussed acquiring 1,397 apartment units in four geographic areas that it describes as Nashville, Kansas City, Dallas, and Houston. The total purchase price is $181.7M which is a huge bite for such a small REIT. That acquisition cost is higher than the current market cap.  I noted in a comment to a recent SA article that it is a bit of a stretch to call the "Nashville" acquisition as being in Nashville. As I mentioned in my comment to the SA article reference above, this apartment complex is near Nashville and may be inside what some would call the greater Nashville metropolitan market, but the address is 2325 Nashville Pike, Gallatin, TN. 37066. (see article about this acquisition in Multi-Housing News Online) That complex has 364 apartments and is located on 30.5 acres. It looks nice.

Google Map Showing Location of "Nashville" Apartment Complex: Stoneridge Farms-Google Maps

Another apartment complex is near "Houston", but is actually located in Katy, Tx.: Vineyards Apartments - Google Maps;  Katy,TX | Vineyards Apartments

The two other apartment complexes appear to be:

Estancia Townhomes in Dallas- Google Maps

Sandstone Creek-Google Maps (just outside of Kansas City); Overland Park, KS-Sandstone Creek Apartments

 Rationale:  

At the current quarterly rate, the dividend yield is about 7.72% at a total cost of $8.29.

An article published in Seeking Alpha back in August contained a chart estimating the market value per share of REIT apartment properties. The estimate then was $10.69 per share. I have no opinion on that valuation, and simply offer it for whatever it may be worth, if anything. The article does contain a good discussion about the supply/demand factors for Apartment REITs.

Risks: One substantial risk involves all of the recently announced acquisitions. Those acquisitions will more than double the REIT's size and will have to be financed successfully. Whenever a company grows this fast, there is always some danger that it will grow too fast or grow too much at the wrong time.

Future Buys/Sells: I may average down in 50 shares lots, but I doubt that more than 50 more shares will be purchased in the IRA due to risk considerations. There could be a downdraft when APTS announces a share offering to help for the previously discussed acquisitions.

4. Sold 361+ BTZ at $13.45 Taxable Account (see Disclaimer):

Snapshot of Trade:




Snapshot of Profit:

2014 Sold 361+ BTZ shares +$116.91

I can not find the links to all of those purchases. Some of the shares were acquired when another Blackrock bond CEF merged into BTZ. Item # 3 Added 50 BTZ at $12.35 (8/31/13 Post)Item # 4 Added 70 BTZ at $12.63 (7/13/13 Post)

Security Description: The BlackRock Credit Allocation Income Trust (BTZ) is a closed end leveraged bond fund that is weighted in investment grade bonds.

I am transferring this position to the Roth IRA. Item # 2 Added 100 BTZ at $13.47-ROTH IRA (9/20/14)Item # 8 Bought 100 BTZ at $13.7-Roth IRA (7/26/14 Post);

Sponsor's Website: Credit Allocation Income Trust | BTZ (number of holdings as of 6/30/14=573; effective duration shown at 5.64 years-Get to know your bond fund: Duration| Vanguard)

Last SEC Filed Shareholder Repot: BLACKROCK CREDIT ALLOCATION INCOME TRUST

Last SEC Filed N-Q: BLACKROCK CREDIT ALLOCATION INCOME TRUST (holdings as of 7/31/14)

Data as of Date of Trade 10/17/14
Closing Net Asset Value Per Share: $15.36
Closing Market Price: $13.39
Discount: -12.83%

CEFConnect Page for BTZ

2014 Second Factsheet.pdf

The fund sponsor has a new website that easier to navigate and prettier than the old one. That site has more up to date information:



The current monthly dividend rate is $.085 per share or $.966 annually. I did own the shares when BTZ went ex dividend on 10/10.

Prior Trades: I do not recall doing it, but apparently I sold some BTZ shares held in a regular IRA earlier this year. Item # 8 Sold IRA: 210+BTZ at $13.62 (3/17/14 Post) One reason for writing this blog is simply to keep track of what I am doing, since I am increasing forgetting what I have done or what I am supposed to do. I noted in that post that those regular IRA shares were sold as part of the transition to shares being owned entirely in a Roth IRA account.

A purchase made within the past year is discussed in the following posts: Item # 3 Added 50 BTZ at $12.35 (8/31/13 Post)(discount then at -14.87%). In that post, I have some snapshots of prior trading profits totaling $413.80. 

Another recent purchase was discussed in this post: Item # 4 Added 70 BTZ at $12.63 (7/13/13 Post)(discount then -13.57%)

Rationale: I am simply transitioning this position to the ROTH IRA, as previously noted in earlier blogs. Since this fund collects interest payments from its bond positions, the dividends paid to its shareholders take on that same non-favored tax status and would be taxed at my highest marginal rate when paid into a taxable account. Dividends paid into my ROTH IRA are not taxable when paid or withdrawn under current law with a very limited exception that is not applicable to my situation. I in effect turn the BTZ taxable "interest" payments into tax free distributions in the Roth.

Future Buys: I will gradually build my IRA BTZ position to 300 shares, buying only when the purchase will lower my current average cost per share in that account.

5. Bought 50 AINV at $7.94 Roth IRA (see Disclaimer): 

I lost a great deal of my discussions involving this purchase and the one noted in Item # 5.  I saved the material, but it disappeared nonetheless. I will try to expand my discussion of AINV by writing a SA Instablog tomorrow. I can not spend anymore time typing and re-typing at Google's Blogger site.  

Snapshot of Trade:



Company Description Apollo Investment (AINV) is one of the largest and oldest BDCs.

Sponsor's website: Apollo Investment Corporation

Apollo Investment Corporation Portfolio

Prior to the Near Depression, AINV stock traded over $23 in 2007 and then made a swan dive into the low single digits which simply highlights the risks. AINV Interactive Chart Since August 2011, the stock has moved mostly in a narrow channel between $6.5-$9.

AINV was paying a quarterly dividend of $.52 per share in 2008 and then slashed it $.26 effective for the 2009 first quarter. The dividend was slashed again to $.2 in the 2012 first quarter and has thereafter remained at that level. Apollo Investment Corporation (AINV) Dividend History Needless to say, I view that dividend history most unfavorably.

Let me emphasize the potential loss by summarizing some historical net asset values per share data.

Data Taken From  AINV 10-Q Filings

6/30/2007: $19.09 Form 10-Q
3/31/09: $9.82 Form 10-Q
6/30/2011: $9.76 Form 10-Q
6/30/12: $8.3 Form 10-Q
6/30/2013: $8.16 10-Q
3/31/14: $8.67
6/30/14: $8.74 AINV-2014.6.30-10Q

Talent? Competence? Incentive Fees for incinerating money?

I would emphasize that these Masters of the Universe are being paid 2% of total assets plus an incentive fees for this performance. (page 79, AINV-2014.3.31-10KBDC Fees: Seeking Alpha)

Given my disdain for externally managed BDCs, which I view as amply supported by their history, I am content to harvest their dividends and to escape with whatever profit is possible.

Last  February, Apollo sold 12M shares at 8.69. The net asset value per share was reported at $8.67 per share as of 3/31/14. 

Prior Trades: I am buying back 50 of the 155+ shares sold a few weeks ago. Sold 155+ AINV at $8.81-ROTH IRA (8/20/14 Post)-Bought Roth IRA: 100 AINV at $8.68 I averaged down soon after that purchase at $8.68 by buying a 50 share lot at $8.06, as shown in the snapshot discussing the sell of that shares.

I currently own 100 shares in a taxable account. Bought: 100 AINV at $7.95 (5/10/14 Post)

Apollo Investment SEC Filings

Link to Upbeat Seeking Alpha published in August.

Related Trade: I still own 50 shares of Apollo's exchange traded senior bond:  Bought Roth IRA: 50 AIY at $24 (4/5/14 Post)

Quote: Apollo Investment Corp. 6.875% Senior Notes due 2043 (AIY)

Last Earnings Report: My discussion of the earnings report, rationale and risks continues to be deleted and I have given up trying to write it again. This picture survived Google's malfunctions. 





Q1 2015 Results - Earnings Call Transcript | Seeking Alpha

Rational And Risks:

Future Buys and Sells: I have AINV on a very short leash. While the recent history does now show net asset value destruction, there was an annihilation between 2007-2010.

6 Added 50 IF at $9.29 (see Disclaimer): 

Snapshot of Trade:



Security Description: The Aberdeen Indonesia Fund (IF) is a small and unleveraged closed end fund that invest in Indonesia's stocks.

Data from Day of Trade: 10/21/14
Closing Net Asset Value Per Share: $$10.35 
Closing Market Price: $9.26 
Discount: - 10.53%
1 Year Average Discount: - 10.53%
3 Year Average Discount: - 9.95%
5 Year Average Discount: - 9.17%

CEFConnect for IF

Last SEC Filed Shareholder Report (period ending 6/30/14; net unrealized appreciation $32.633+M on net assets of $100.52+M)

Factsheet as of 8/31/14

Indonesia just elected a new President, Joko Widodo, who claims to be a reformer.  CNBC When he was elected in July, Indonesia's stock index surged to 1-year.

Recent Distributions:  

Aberdeen Indonesia Fund, Inc. (IF) Dividend History

In 2013, I received two dividend payments amounting to $1.42018 per share. Tax Information I owned then 100 shares. Of that amount the fund classified $1.32227 per share as long term capital gains. The ordinary dividends were classified as qualified and represented the remainder of those distributions. I would not expect much in annual ordinary income dividends.

Another distribution of $.1099 per share was just paid and represented almost entirely long term capital gains.

10 Year Annualized Total Returns to 10/20/14: 16.14% (based on net asset value)

The past 1 and three years have been far more subdued: 2.12% for 1 year and 5.47% for 3 years.


Aberdeen Indonesia Fund Page at Morningstar (currently unrated)

JKSE Index Index Chart (Jakarta index was trading below its 50 and above its 200 day SMA at the time of purchase)

Prior Trades: 

My last purchase was back in June 2014: Item # 3 Bought: 50 IF at 9.73 (6/7/14 Post). Besides reinvested dividends, I also currently own the shares bought at $11.23

I have sold only some shares bought in 2013: Item # 5 Sold 100 IF at $12.91 (April 2013)(snapshot of profit=$110.77)-Item # 1 Bought 100 of IF at $11.64 (1/3/13 Post)
CEFConnect for IF  

Prior Trades:  Prior to this trade, I owned 114+ shares. Bought Back IF at $11.23

Item # 5 Sold 100 IF at $12.91 (April 2013)(snapshot of profit=$110.77)-Item #1 Bought 100 of IF at $11.64 (1/3/13 Post)

Rationale: Again, I am playing a long term super cycle involving the parabolic growth of middle class consumers in emerging markets. Indonesia is just one of those markets. This fund has generated an excellent annualized total return over the past 10 years. The past may not be prologue but I believe that Indonesia has better days ahead of it.

"New Indonesian Consumer Class of 2020" Nielson Publication (middle class on track to represent 52% of the total population by 2020)(March 2014)



Risks: There are numerous risks associated with a CEF that invests in stocks from one foreign country. Currency risk was highlighted recently, starting last May, when a spike in U.S. interest rates caused a significant decline in EM currencies, stocks and bonds. Emerging markets can be quite volatile, and can be positively correlated with downside moves in U.S. stocks with much higher betas.

Indonesia Economic Quarterly, July 2014: Hard Choices-World Bank

SA Instablog Published Discussing Regional Bank Basket Strategy and the Recent Add of 50 ONB

Monday, October 20, 2014

SA Instablog Published Discussing Lottery Ticket Strategy and the Purchase of 40 CORR at $7

My update for the Lottery Ticket, REIT and Regional Bank Basket Strategies is published on the last Monday of each month. The next one is scheduled for publication next Monday (10/27/14). I finished writing a discussion of a recent Lottery Ticket purchase and decided to move that discussion to a SA Instablog:  


I am moving toward including more dividend paying stocks in the Lotto basket after taking a couple of near total losses today in non-dividend paying ones. Fortunately, in that basket, a total loss might be anywhere from $100 to $300. I am still up almost $14,000. 

Bought 100 IGI at $20.11/ADDED 20 NSRGY at $68.8/Bought Roth IRA: 50 DPG at $19.64/Added 150 FAX at $5.76/Added 200 DRG:CA at C$8.92

Housekeeping: I am now on an irregular posting schedule after Google lost one of my very long weekly posts shortly before publication. I finished writing a post so here it is. It may be anywhere from 5 to 10 days before I publish another one.

Google is still losing my blog URL which invariably occurs now after I publish a new post. I no longer use the blog URL to access the blog, though I do periodically check to see whether or not it is working. Instead, I am using a bookmark link to the most current month: Stocks, Bonds & Politics: October 2014

Big Picture Synopsis 

Stocks:
Stable Vix Pattern (Bullish)(Requires a Trigger Event To End)                   
Short Term: Market Needs to Correct 10% to 15%               
Intermediate Term: Slightly Bullish (gains to date borrow from the future)
Long Term: Bullish


Bonds:               
Short to Long Term: Neutral to Slightly Bearish Based on Interest Rate Normalization
The Difficult Path to Interest Rate Normalization

I tweaked my bond forecast due to the decline in inflation expectations.

That forecast is known as the break-even spread, the average annual rate of inflation for the owner of the 10 year TIP to break even with the owner of the non-inflation protected treasury.

The break-even spread is calculated by subtracting the yield of the TIP
Daily Treasury Real Yield Curve Rates

From the Yield of the Non-inflation protected treasury
Daily Treasury Yield Curve Rates

The 10 year TIP break-even spread closed last Friday at 1.92% and has been trending down.


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

Recent Developments:

GE's President Jeff Immelt told investors that the U.S. economy is "probably the best we've seen it since the financial crisis" GE U.S. orders for the Q/E 9/30/14 grew 25%. GE anticipates a "very strong" 2014 4th quarter led by an anticipated 40% increase in gas turbine shipments. Q3 2014 Results - Earnings Call Transcript | Seeking AlphaSEC Filed Earnings Press Release I intend to sell my highest cost GE shares profitably, somewhere in the $30 to $35 range, and to keep the remaining shares with an average cost near $15 bought after Lehman's failure. (snapshots at Stocks, Bonds & Politics) My current average cost is $20.13 Snapshot Introduction 4/18/14 Post-531+ shares

As previously noted, OPEC appears to be in disarray on production limits, as Saudi Arabia signaled its willingness to accept prices as low as $80 per barrel for a year or two. CNBC This constitutes an effort to regain market share that has been lost to increased production from non-OPEC members including the explosion in production flowing from U.S. shale and Canadian oil sands. The intent is to make those more expensive production sources less economical which may restrain future capital expenditures and drilling. Another possible reason for the Saudi change may be to enforce production limits as certain cartel members have a tendency to cheat on their assigned quotas. Bloomberg

One reason underlying OPEC's current problem is that one of their largest customers, the U.S., is producing more of its needs. The energy department has charts showing the rapid increase in U.S. oil and gas production




In a Seeking Alpha last Sunday, I discussed the difficulty in predicting oil prices. A number of articles appeared recently about OPEC's disarray and Saudi Arabia's willingness to accept "low" oil prices for a year or two. The reference to low was as low as $80 per barrel.

In October 1973, OPEC announced a 70% in their oil price to $5 per barrel:  Center for Strategic and International Studies

Over the ensuing years, OPEC has been in various states of disarray caused by one or more members cheating on their quotas and then lying about it.

As a swing producer, Saudi Arabia has been the enforcer of OPEC production quotas and has played that role by simply increasing production and/or cutting price at the margin. Whenever there is a price cut at the margin, say from a going rate of $100 to $80 per barrel for 50,000 barrels a day for a few customers, all of the oil is repriced at the new low fairly rapidly, as we have just witnessed.

This causes pain to OPEC members and eventually they kiss and make up, possibly with new production quotas to take into account current demand and non-OPEC production.

A recent article published at Bloomberg argued that discipline was the motive for the Saudi Arabia's recent price cuts and increases in production.

OPEC does have problems, including the usual differences between Sunni and Shiite led countries, supporting different factions in the Syrian civil war, different policies on Iran,  large increases in non-OPEC production, and so on. Cartel member cheating has been a problem for decades and may be the issue now more than any other consideration.

It is really unknowable to say when OPEC achieves cohesion again with adherence to production quotas, possibly aiming for a higher price somewhere in the $90 to $100 per barrel range.

I do know that my 101.912 shares of Conoco (COP), with an average cost of $66.55, went from an unrealized gain of $2,052.51, based on the $86.69 closing price on 7/16/14, to an unrealized loss last week. The stock recovered some last Friday, brining me back into profit territory. I bought 100 shares in two fifty share lot purchases earlier this year, with the last purchase made at $63.68. Bought 50 COP AT $63.68 (2/10/14 Post). Watching a $2200+ swing in a 101+ share lot over a few weeks (with the position held less than a year) is preferable to drinking a gallon of castor oil (constant streaming) or eating 40 hot dogs in ten minutes, Sonya Thomas Women's Champion, but I can not say much of anything more positive than that.

I see that IBM laid an egg this morning. I do not have a position. It is a component of the ETF TDIV which I recently sold. That transaction was discussed at length in the weekly post deleted by Google. Stocks, Bonds & Politics: Weekly Post Was Deleted by Google: I Will Not Write It Again/ Sold: 100 TDIV at $25.63 and 100 HBAN at $9.53/Bought 50 ARCC at $15.41 and 300 ACG at $7.53/Bought 50 BRG at $11.98-Roth IRA

First Trust NASDAQ Technology Dividend Index Fund (TDIV)(IBM weighted at 8.2% as of 10/17/14)

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

1. Bought 100 IGI at $20.11 (see Disclaimer): This is not what I would call a compelling investment. IGI is a low yielding bond CEF. I am just playing with it, hoping to earn some cash compared to the .01% being paid by the money market fund used to fund this purchase.

Snapshot of Trade:

2014 Bought 100 IGI at $20.11

Security Description: The Western Asset Investment Grade Defined Opportunity Trust  (IGI) is an unleveraged closed end fund that invests primarily in investment grade bonds.

Dividends are paid monthly at the current rate of $.10 per share. Distributions for the Months of September, October and November 2014

The next ex dividend date is 10/22/14 according to Marketwatch. .

IGI will be liquidated on or about 12/2/2024. This gives the fund one of the characteristics of owning an individual bond, the promise to pay a specific sum at a future date. Unlike an individual bond, however, there is no promise to pay a fixed sum (i.e. par value). The investor in IGI will receive their pro-rata share of the liquidation proceeds, which may be more or less than the current net asset value per share. Hopefully, the managers will keep that liquidation date in mind when selecting bonds to own.

Data as of Tuesday 10/14/14 (Day of Purchase):
Net Asset Value Per Share= $21.74
Market Price= $20.1
Discount: -7.54%

Prior to May 2013, the fund had been selling mostly at a premium to its net asset value since May 2011. The premium went over 6% at times. The shares have been trading mostly at a 6% to 8% discount to net asset value per share since May 2013, which has brought the 3 and 5 year averages into a slight discount. In other words, the rate spike starting May 1, 2013, which took the ten year treasury from 1.66% that day to 3.04% (Daily Treasury Yield Curve Rates), altered the premium pricing to a persistent range bound discounts to net asset value even as the ten year treasury retreated in yield during 2014. The ten year treasury closed at a 3% yield on 1/2/14 and fallen to a 2.21% yield when I purchased the IGI shares on 10/14/14.

Just to highlight the lack of consistency, I went back in time to 10/11/11, when IGI was selling at a 6.84% premium to its then net asset value of $20.62 and the ten year treasury closed that day with a 2.18% yield.

Average for 1 Year:  -6.17%
Average for 3 Years: .-1.28 %
Average for 5 Years: -1.6%

CEFConnect Page for IGI

IGI closed last Friday at $20.04, with a net asset value per share of $21.73, creating a discount at that time of -7.78%.

Morningstar Page

Sponsor's webpage: Individual Investor

As of 6/30/14, the sponsor claims that the "effective duration" was 6.52 years.

"Duration—What an Interest Rate Hike Could Do to Your Bond Portfolio" - FINRA

The credit quality is weighted in BBB and A rated bonds:



(located under "portfolio characteristics" at sponsor's website; CEFConnect provides this information also)

Last SEC Filed Shareholder Report: Western Asset Investment Grade Defined Opportunity Trust (period ending 5/31/14)(cost of $202.992+M vs. value of $236.210+M-reaping some of those unrealized short and/or long term capital gains can support the dividends without ROC which was the case for the June 2014 distribution: IGI-Distributions-June-August-2014.pdf)

This fund also releases a quarterly report on its financial position. The last quarterly report showed undistributed net income of $.28 per share. Western Asset Investment Grade Defined Opportunity Trust Inc. Announces Financial Position as of August 31, 2014 

Prior Trades: I have repeatedly flipped this one for small gains. Item # 2 Sold 100 IGI at $20.2 (12/31/13 Post)(profit snapshot=$76.56)-Item # 3 Added 100 IGI at $19.28 (10/14/13 Post)

I sold IGI and bought GDO as part of a paired trade. Item # 7 Paired Trade: Sold 100 IGI at $20.22 in Roth IRA (10/24/13 Post)(snapshot of profit $65.36)-Item # 3 Bought Roth IRA: 100 IGI at $19.43 (9/7/13 Post)

Snapshots of trading profits ($462.07) prior to 2013 can be found in Item # Item # 3 Bought Roth IRA: 100 IGI at $19.43 (9/7/13 Post)

Other trades to date include the following: Item # 3 Bought 100 CEF IGI at $19.89 in IRA February 2010; Item # 2 Added 100 of the CEF IGI at $19.79 February 2010; Item # 5 Sold 100 IGI at 21.26- IRA (June 2010); ITEM # 3 Sold:100 IGI @ $20.75 November 2010; Item # 1 Added 100 IGI at $19.65 March 2011; Item # 3 Sold 100 IGI @ $20.76 May 2011; Item # 5 Bought 100 IGI at $20.7 in Roth IRA July 2011Item # 2 Bought 100 IGI at $20.69Item # 2 Sold 200 IGI at $21.52+ August 2011Item # 3 Bought Roth IRA: 100 IGI at $19.43 September 2013Item # 7  Sold 100 IGI at $20.22 in Roth IRA October 2013Item # 3 Added 100 IGI at $19.28 October 2013

Total Trading Profits=$603.99

In order to generate a profit on the shares, I had to trade this security.

Rationale and Risks: The fund is weighted in investment grade bonds, and I am comfortable with the credit risk associated with a diversified fund owning over 200 investment grade bonds (total # 254 as of 6/30/14)

The two main risks are interest rate risk and the risks associated with bond CEFs. Some of the interest rate risk is mitigated by the relatively short duration and the fund's 2024 liquidation date.

A CEF type risk is illustrated by the 10%+ loss in value associated just with the movement from a 3.55% premium to net asset value, as of 5/6/13, to a discount of 7.71% on 8/29/13. A new buyer missed that loss, but may catch another one with a further expansion of the discount.

When the net asset value per share is declining as the discount to net asset value expands, then that is just known here at HQ as the Double Whammy-Not Good for those unfamiliar with that colloquialism.

Unadjusted for dividends, the net asset value per share declined from $22.63 on 5/6/13 to $21.14 as of 8/29/13, a decline of 6.58%. Yet the market value has gone from $23.43 to $19.51 as of 8/29/13, a 16.73% decline. The difference is to the change from a premium price to a discounted price.

Prior to this last purchase, the net asset value per share, adjusted for dividend payments, has been increasing while the market price has been declining some.

Future Buys/Sells: I am not likely to buy more of this low yielding bond CEF. I am in a trading mode for it and will look for an opportunity to profitably sell the shares after harvesting several dividend payments.

2. Bought 50 DPG at $19.64-Roth IRA (see Disclaimer):

Snapshot of Trade:

2014 Roth IRA Bought 50 DPG at $19.64
Security Description: The Duff & Phelps Global Utility Income Fund (DPG) is a leveraged CEF that invests in utility and telecommunication stocks as well as MLPs.

Sponsor's website: Duff & Phelps Global Utility Income Fund — Home

Holdings as of 7/31/14: Duff & Phelps Global Utility Income Fund (unrealized appreciation of $163.998+M)

Last SEC Filed Shareholder Report: Duff & Phelps Global Utility Income Fund

DPG Page at Morningstar

Data on Date of Trade 10/14/14
Closing Net Asset Value Per Share: $22.45
Closing Market Price: $$19.63
Discount: - 12.46%
Average Discounts
1 Year: - 11.66%
3 Year: -7.75%%

CEFConnect Page for DPG

Subsequent to my disposition, Kinder Morgan (KMI) announced that it wanted going to consolidate its MLPs into KMI and offered a premium price for the units in those MLPs. One of those MLP's, Kinder Morgan Energy Partners (KMP), rose 17.15% to $94.12 in response to that acquisition offer. KMI rose 9%. As of 4/30/14, DPG owned 800,000 shares of KMI and 283,803 shares of KMP. Duff & Phelps Global Utility Income Fund On the day of that announcement (8/11/14), DPG's net asset value per share rose 1.76% to $24.4.

Starting in September 2014, MLPs started to skid badly in price and those declines were the primary cause for the subsequent decline in DPG's net asset value per share.

As I noted in a recent post, DPG also had a significant stake in two electric utilities when they received acquisition offers earlier this year. (introduction section: Stocks, Bonds & Politics: DPG)

When I first bought shares in this stock CEF, I referenced this article published by Morningstar and titled "Looking for Income? Try This Global Utilities-Focused Fund"

Top 5 Holdings By Sector as of 7/31/14:


Prior Trades: I liquidated my Roth IRA position back in August: Item # 8 Sold 100 DPG at $21.19-Roth IRA (8/19/14 Post)(snapshots of profit=$403.07 and total return=$662.61 or 38.1%)-Item # 3 Bought 100 DPG at $17.31 (12/12/12 Post)

Item # 1 Bought 100 of the CEF DPG at $17.3 (12/29/12 Post)Item # 7 Added 100 DPG at $18.58 (2/3/14 Post)

Rationale 

(1) Dividend Yield: DPG has been paying a quarterly dividend of $.35 per share. At a total cost of $19.64, the dividend yield is about 7.13%.

(2) Recent Decline in Price and Expansion of Discount: For reasons that can best be characterized as irrational, utility CEFs will often trade at a premium to their net asset value. Individual investors are generally responsible for that pricing, as they focus on just two words-dividend and utility. 

A prime example of irrational pricing is presented by the Gabelli Utility Trust (GUT), which supports the dividend mostly by returning the investor's own capital back to them in the guise of a dividend. As of 10/15/14, GUT closed at a +18.31% premium to its net asset value per share. According to Morningstar, GUT's average premium was + 24.3% over a three year period.

I will periodically buy Utility ETFs but lack any enthusiasm for pure utility funds selling at net asset value. The ETFs do not use leverage.  {See, e.g.  Bought 100 XLU at $29.14 (11/19/09 Post); Bought:  100 XLU @ 30.83 (11/29/2010 Post). I no longer own that ETF. (Sponsor's webpage:XLU - Utilities Select Sector SPDR Fund  expense ratio .16%; 32 stocks

Vanguard also has a broader ETF in this space with a current .14% expense ratio: Vanguard Utilities ETF (VPU)

Risks: The risks are fairly typical for a leveraged stock closed end sector fund that buys securities worldwide. There will be some currency risks, the normal CEF risks (e.g. expansion of discount after purchase), and the risks associated with leverage (e.g. borrowing costs, buying assets which decline in price with borrowed money adding to the woes, etc.) The fund did not have any emerging market currency exposure. The last shareholder report shows the following:



Future Buys/Sells: Given the volatile market conditions, particularly in the MLP space, I decided to buy back now only 50 of the 113+ shares previously sold in the Roth IRA. I would consider buying another 50 at below $18.5.

3. Added 200 DRG:CA at C$8.92 (Equity REIT Common and Preferred Stock Basket Strategy and Canadian Dollar (CAD) Strategy)(see Disclaimer):

I discussed this trade in my first Instablog published at Seeking Alpha.

Snapshot of Trade:


2014 Bought 200 DRG:CA at C$8.92

Security Description: Dream Global Real Estate Investment Trust (DRG.UN:TOR) is a Canadian REIT that owns property outside of Canada. At the time of my purchase, those properties were located solely in Germany. This is a relatively new REIT that started trading in August 2011. Stock Market Chart Toronto Stock Exchange

As of 6/30/14, Dream Global's portfolio consisted of 286 properties consisting of approximately 15.7M square feet located in Germany. Portfolio | Dream Global REIT

The early history is summarized on page 1 of the 2011 Annual Report. Annual-Report-2011.pdf The Dundee Group initially funded this REIT with $120M and an IPO was completed in August 2011. The initial foray into Germany involved the purchase of a portfolio primarily occupied by Deutsche Post.

Link to October 2014 Investor Presentation:  Dream_Global_Presentation.pdf ("all of our acquisitions have been completed at a 400 bps between cap rate and cost of financing, which equate to to 10%-12% levered return of equity"; gross rental income from Deutsche Post has been reduced to 34% from 85% at the time of the IPO)

Assuming a continuation of that C$.0667 monthly rate per share and a total cost of C$8.92 per share, the dividend yield would be about 8.97%. I would emphasize that no dividend increases are likely in the foreseeable future since this REIT is already paying out over 90% of its AFFO.

Sponsor's website: Dream Global REIT

The Canadian shares traded in Toronto have been in a slide after hitting C$10 on 6/25/14: DRG.UN Stock Chart

Prior Trades: Dundee International REIT changed its name and stock symbol. Dream Global REIT Reports Change in Stock Symbols The new name is "Dream Global REIT" (DRG_UN:CA)

Item # 4 Bought: 300 Dundee International REIT at C$9.27 (3/17/14 Post)

Recent Earnings Report: Dream Global reported a 10% increase in AFFO for the 2014 second quarter compared to the same period a year ago. Occupancy increased to 87.9% from 87.7% at the beginning of the second quarter.

I took some snapshots from the second quarter report that have more details.

Click to Enlarge:

Key Performance Numbers
Financing Effective Rate on Debt=3.68%
Dream-Global-REIT-Q2-Final.pdf

As noted in footnote number one to the preceding table, results are converted from Euros to Canadian Dollars. This creates two currency risk issues for a U.S. investor. I have both the CAD to USD risk and the Euro to CAD risk. In exchange for the currency and other risks, I receive a good monthly dividend and exposure to high quality real estate in Europe's strongest economy without having to buy a European REIT with Euros.

AFFO for the first six months was $.43 per unit. Assuming a continuation of the trend to date, the 2014 AFFO number could reasonably be anticipated to be in the $.86 to $.9 per unit range. The P/AFFO is reasonable particularly compared to the comparable numbers for U.S. REITs. It appears to me that the consensus forecast is C$.87 for 2014. Dream Global REIT-The Globe and Mail The median target price is currently C$10: FT.com

Rationale and Risks:  I am using a basket approach in the REIT sector similar to what I do with other sectors. This purchase gives me exposure to Germany, which improves my geographical diversification, and provides me with a monthly dividend yield of about 8.97%.

The P/FFO or P/AFFO is much lower for Dream Global than the average for U.S. REITs which stood at 16.6 per the Lazard September 2014 REIT report: Lazard_USRealEstateIndicatorsReport.pdf

That dividend yield is far higher than the average 3.4% yield paid  by U.S. office REITs, as of 9/30/14: reit.com.pdf

I mentioned the dual currency risk above.

Needless to say, sitting at a desk in the SUV Capital of the World, I know zilch about the German real estate market.

I did note that the occupancy rate increased to 87.9% as of 6/30/14 from 83.2% on 12/31/12. Occupancy levels, particularly during recessionary times, can be a significant risk for obvious reasons. If this REIT can lease more of its vacant space over the course of 2014, this will increase funds from operations and increase the spread between the dividend payout and AFFO.  

When a U.S. investor buys any foreign security, then there are additional risks that are inherent in that purchase, including currency and country risks.

I am a long term holder of Canadian dollars and consequently I am not concerned about the short or intermediate fluctuations in the CAD/USD exchange rates. The fluctuation will impact my tax reportable gains and losses, however, even though I am buying the securities in CADs and receiving CAD when I sell the security. For tax reporting purposes, the cost and proceeds are converted from CADs to USDs. If the CAD falls in value after the purchase, I would have a smaller gain for U.S. tax reporting purposes than the profit actually realized in CADs. This has happened several times already this year due to the decline in the CAD against the USD.

The ordinary shares for Dream Global may be bought on the U.S. "Grey Market" using USDs. DUNDF Dream Global Real Estate Investment Trust: Chart The symbol ends in an "F" which indicates that the investor is buying the ordinary shares, not an ADR, using USDs rather than the foreign currency used for transactions in the host market.

I prefer to avoid that dark market whenever possible. Some brokerages will charge a fee in addition to the regular commission to buy foreign ordinary shares in that market. No bid or ask quotes are displayed and limit orders are absolutely essential when buying or selling in that market.

To determine the limit price, I would first acquire a quote from the host market. Dream Global Real Estate Investment Trust (DRG.UN:TOR). I would then use a currency converter to find out the value of that foreign currency price in USDs in order to set my limit order for a possible purchase of those ordinary shares in the Grey Market. For example, if the ordinary shares were being traded at C$8.94, and that converted into USD$7.93 at that point in time, I would then have an idea where to set my limit price for a USD priced ordinary share.

I will use the currency converters found at Yahoo Finance and at Bloomberg to make these calculations:

Currency Converter - Bloomberg

Currency Converter - YF

While Germany generally has a strong economy compared to other European nations, GDP growth is slowing to a crawl and may tilt over into a recession. The German government recently downgraded its forecast for GDP growth in both 2014 and 2014. REITs that own offices are particularly vulnerable to economic slowdowns and recessions which result in lower demand for space and the need to offer rent concessions to attract and keep tenants.

Future Buys: Unlikely. I am full at 500 shares. I will consider selling my highest cost shares when and if I can do so profitably after harvesting a year or more of monthly distributions.

4. Added 150 FAX at $5.76-Main Taxable Account (see Disclaimer): After buying these shares, I changed my distribution option to reinvestment based on this fund's unusually large discount to net asset value per share. As with IGI discussed above, this is a trade that will hopefully generate a better than .01% total return.

Snapshot of Trade:


Snapshot of Position after Trade:


Average Cost Per Share Currently at $6.02
Security Description: The Aberdeen Asia-Pacific Income Fund is a leveraged closed end bond fund that owns corporate and government bonds issued by companies and governments located in the Asia Pacific region (Australia, New Zealand, China and HK, Indonesia, India, Malaysia, South Korea, Philippines, and Singapore. The primary weighting is Australian government bonds (provinces and federal) at  % as of  .


Data as of Date of Trade 10/15/14
Closing Net Asset Value Per Share: $6.56
Closing Market Price: $5.76
Discount: -12.2%

Average Discounts:
1 Year -9.35%
3 Years -4.24%
5 Years -4.22

CEFConnect

Sponsor's Webpage: Asia-Pacific Income Fund

October 2014 Fund Commentary

FAX Page at Morningstar (rated 3 stars at the time of purchase)

Aberdeen Asia-Pacific Income Fund: Holdings as of 7/31/14 (unrealized appreciation $43.983+M as of 7/31/14)

Last SEC Filed Shareholder Report-Period Ending 4/30/14: Aberdeen Asia-Pacific Income Fund, Inc.

As of 8/31/14, the fund is weighted in investment grade securities (35.7% in AAA; 15% in AA; 14.7% in A; 17.1% in BBB):

Credit Quality and Maturities as of 8/31/14

The average maturity was 6.9 years as of 8/31/14. Factsheet (annualized return since inception +8.5%/7.1% over ten years)

Top Ten Holdings as of 8/31/14
Dividends are paid monthly. The current monthly rate is $.035, partly supported by a ROC. Aberdeen Asia-Pacific Income Fund, Inc. Announces Record Date And Payment Date For Monthly Distribution

Aberdeen Asia-Pacific Income Fund Dividend Date & History-NASDAQ.com

At that rate, the dividend yield would be about 7.29% at a total cost of $5.76 per share. I am currently reinvesting the dividend and will likely continue doing so as the long as the discount remains above 7%. The fund went ex dividend for its monthly distribution (10/17) shortly after my purchase.

The stock suffered from what I call a known CEF risk recently and last year, when the market price declined at a faster rate than the percentage decline in net asset value per share.

Prior Trades: My most recent purchase was a starter position in the Roth IRA. Roth IRA: Bought 250 FAX at $6.11 (8/29/14 Post)

This 150 share bought in the main taxable account and was an average down. The other shares currently owned were bought at higher prices: Item # 4 Added: 150 FAX at $5.8 (February 2014 Post)Item # 2 Bought: 200 FAX at $6.08 (10/24/13 Post)Item # 6 Bought 100 FAX at $6.35 (6/15/13).

As noted in the last linked post, I was able to buy this bond fund at a greater than 30% discount to its net asset valuer per share during the Dark Period. I purchased 200 shares at $3.39 in October 2008 and quickly sold those shares for a $241.81 profit (see snapshot in Item # 6 Bought 100 FAX at $6.35 (6/13/13 Post); Some Nibbles Got Filled: JZE, PJS, INZ and FAX (10/10/08)

Rationale: (1) Monthly Income Generation: The current monthly dividend is $.035 per share. At a total cost of $5.76 per share, that would result in a dividend yield of about 7.29%.

Given the quality of the bonds, and the current interest rate environment, I would view that yield favorably.

(2) Bond Diversification: There is something to be said for a U.S. citizen owning higher quality foreign bonds, particularly AAA rated bonds issued by foreign governments such as Canada and Australia that are rational and more fiscally responsible than our own.

Brett Arends' identified both Canada, New Zealand and Australia has three countries whose debt is rated AAA. Australia's government debt to GDP ratio is 20.48% in 2013, while the U.S. is at 101.53% and growing fast.

My lack of confidence in the U.S. government's ability to address its long term fiscal problems is the main source for this kind of diversification.

(3) The factors that caused the recent price decline can reverse. Interest rates started falling again in 2014. Yet, the discount remains at historically high levels and could narrow creating an "artificial" gain in the shares even when net asset value per share remains constant.

Risks: This kind of fund has the usual interest rate, credit, leverage, currency and CEF risks inherent in a leveraged closed end bond fund that owns foreign bonds. I am not currently concerned about the credit quality given the fund's diversification and the credit quality of its bonds.

The fund has exposure to bonds in several different currencies.

USD/AUD Currency Conversion Chart (Australian Dollar)(42.7% as of 8/31/14)
USD/INR Currency Conversion Chart (India's Rupee)
USD/IDR Currency Conversion Chart (Indonesia Rupiah)
USD/SGD Currency Conversion Chart (Singapore Dollar)

There was a significant weighting in U.S. dollar denominated foreign bonds (38.5% as of 8/31/14).

Interest rate, currency, leverage and CEF risks have been pronounced recently as the market price slid from $7.76 on 4/25/13 to $5.86 on 8/6/13. In addition to the rise in rates during 2013, the Australian dollar was declining in value against the USD during that period. USD/AUD Currency Conversion Chart In April 2013, one AUD would buy more than 1 USD. By 8/6/13, 1 USD would buy AUD$1.12. This fund owns a lot of bonds denominated in AUDs. As the rise in interest rates and currency decline issues took a toll on net asset value, the use of leverage to buy more assets declining in value added to the decline.

When net asset value turns south in that fashion, the discount to net asset value per share will likely expand by a significant amount making the losses even worse. On 4/25/13, FAX closed at a premium to net asset value per share of .52%. The closing net asset value per share that day was $7.75. When I purchased shares on 10/16/13 at $6.08, the shares were selling at a 11.94% discount to a $6.87 net asset value per share.

Unadjusted for the monthly dividends, the net asset value per share had declined 11% but the market price per share had declined by 21.65%. The greater decline in the market price was due to the expansion of the discount to net asset value from a premium to a 11.94% discount.

I intend to sell within the next year my position in a taxable account. I am transitioning this security to ownership solely in the Roth IRA. In anticipation of that future transition, I started a position in the Roth with this 250 share purchase. FAX will own bonds, and consequently its dividends will not be classified of course as qualified dividends. I prefer to own bond CEFs in a Roth IRA, but will own several of them in taxable accounts periodically for their income generation.

The goal for this security is to harvest dividends for a year or two and exit the position with a 5%+ gain in the shares after commissions. The objective is a 8% to 10% annualized total return, mostly provided by the dividend.

To achieve that kind of return now for the shares owned in the taxable account, I would need for the discount to shrink significantly as the net asset asset value increases by a few percent.

Future Buys/Sells: I changed my distribution option to reinvestment given the current discount to net asset value per share. I intend to liquidate the FAX shares held in the taxable account whenever I have a net profit. I am transitioning the position to the Roth IRA which shelters the non-tax favored FAX income from taxation.

5. Added 20 NSRGY at $68.8 (see Disclaimer): While this was a small add, I wanted to discuss Nestle again to highlight one of my investing problems. We all have personality issues that need to be controlled, as much as humanly possible, in order to succeed as investors long term.

One of my problems is selling a high quality stock, bought at a highly opportune time, for a quick profit. What makes the mistake worse is that I know that I am making the mistake when I make it. That is why I call it a personality quirk rather than a mistake based on a rational analysis.

The best time to buy or add to a consumer staple is after a catastrophic stock market event. I know that to be true, so I was buying consumer staple stocks in March and April 2009. I purchased Nestle shares in two small lots during that period:

2009 NSRGY 100 Shares +$493.90
Bought Nestle Late Today at $33.88 (4/16/09 Post)

I will give myself a "A" on those purchases. I was doing what I was supposed to do. I was buying several consumer staple stocks that had been smashed in price. If I had held onto those shares, I would now have a dividend yield of over 6%, plus a 100%+ increase in the share price. Assuming a historical dividend growth rate, my dividend yield would likely be over 12% in another 6 to 8 years from now.

But that is not to be. Why? Left Brain sold the shares for a quick $493.9 profit on 6/23/09 shortly after their purchase, no doubt saying at the time that no one goes broke taking a profit, one of its favorite sayings consistent with its myopic tunnel vision.

So, what am I doing now. I am building up a position again at much higher prices than my June 2009 sale's price. Stupid is one word to describe it.


Snapshot of Trade:



Snapshot of Quote Before Trade:


Closing Prices on Date of Trade:

NSRGY: $68.88 -1.87 (-2.64%)-Pink Sheet Exchange Priced in USDs
NESN.VX: CHF64.95 -2.00 (-2.99%)-Ordinary Shares-Swiss Exchange-Priced in CHF




I will be mostly dragging and dropping an earlier discussion here:

Company Description:  NSRGY is an ADR traded on the U.S. pink sheet exchange. NSRGY Nestle S.A

1 ADR=1 Ordinary Share

Recent Nestle Dividend History (adjusted for stock splits):




Dividends | Nestlé Global 

Brands | Nestlé Global (e.g. NESCAFE, Nestle Pure Life Water, Perrier, Pet Food (e.g. Purina brand products, Alpo, Friskies), Lean Cuisine and Stouffer's, Hot Pockets, Boost, Carnation, Ice Cream (Dreyer's, Nestle, Haagen-Dazs, and  Edy's), Gerber, Butterfinger, Nestle Crunch)

Nestle also expanded it skin health care business by buying L'Oreal's 50% interest in Galderma, giving Nestle a 100% ownership interest in that company.  Dermatology Company Galderma – Specialist on skin medical solutions Nestle paid for this acquisition with 21.2 million L'Oreal shares that it owned, Strategic Transaction Approved by Boards of Nestlé and L’Oréal | Nestlé Global. As part of the same transaction, Nestle sold 27.2M shares L'Oreal to L'Oreal for €3.4B. Following this transaction, Nestle's stake in L'Oreal will be reduced from 29.4% to 23.29%. OR:EN Paris Stock Quote - L'Oreal SA - BloombergLRLCY:OTC US Stock Quote - L'Oreal SA - BloombergLRLCY L'Oreal Co (1 ADS=.2 Ordinary)

NSRGY 2013 Earnings Report:




Nestle released its 2014 first half earnings report last August: First Half 2014: 4.7% organic growth in a volatile trading environment, CHF 8 billion share buy-back

Rather than typing a summary, I just took a snapshot of the main points:


Nestle's senior debt is rated AA+ by Fitch.

Recent Report: The price was knocked down, as noted above, when I purchased this 20 share lot due to this Nestle press release: Nestlé nine-month sales: broad-based organic growth of 4.5% in a volatile environment

Some investors place a lot more emphasis on revenues after currency conversion than I do. I believe that Nestle stock sold off based on these two sentences in the report summarizing the first nine months: "Sales were CHF 66.2 billion, impacted by a substantial negative foreign exchange of -7.5%, and divestitures, net of acquisitions, further reduced sales growth by .01%. As a result the total evolution of sales was -3.1%".  The emphasized in bold lettering that it is still "aiming for organic growth of around 5% for 2014 with improvements in margins, underlying earnings per share in constant currencies and capital efficiency"

I am really only interested in revenues and earnings on a currency neutral basis, recognizing that the currency adjusted numbers move up and down and the revenues and profits are usually not actually converted back into Swiss Francs anyway except for accounting purposes.

Rationale: Nestle is a high quality, financially stable company that is likely to grow earnings, revenues and dividends at a relatively consistent pace over a long period of time. While no company is immune from misfortune that leads to a dividend cut, the likelihood of one occurring for a mega cap consumer staple is remote. Even during the recent Near Depression period, Nestle and other large consumer staple companies continued to raise their dividends every year.

It is impossible to actually calculate a forward dividend yield for a foreign stock since the conversion value into USDs will impact the amount. If the Swiss Franc goes up in value, that is in effect a dividend increase for the U.S. owner of NSRGY (i.e. the Franc buys more dollars). The converse is also true. A decline in the CHF/USD exchange rate results in effect to a dividend cut even if the rate is rising in CHFs.

I can calculate the historical dividend yield using the 2014 payment of $2.029756 per share. NSRGY History I would not vouch for that number which may be after the Swiss withholding tax that reduced the net amount, since 1 CHF would buy more than 1 USD throughout 2014 and the dividend in CHFs was 2.15. In any event, the per share number is close so I will use it for the purpose of calculating a dividend yield. At a total cost of $68.8 per share, a dividend of $2.029756 would result in a dividend yield of 2.95%.

Having noted this discrepancy and desiring an explanation, I went digging into my account history and found this dividend payment for a 50 share lot made this year:


The Swiss withholding tax was at a 15% rate applied to the total.

The total dividend paid, before reduction for the withholding tax and a ADR fee, was $120.87 or $2.4174 per share which makes more sense given the exchange values prevailing at that time. The net was $101.49 or 2.0298 per share which is the number shown above. Voila, figured it out.

So, recalculating the dividend yield based on $2.4174 per share, I arrive at 3.51%.

The foreign tax collected for a dividend paid into a TAXABLE ACCOUNT is recoverable to the extent provided by the Internal Revenue Code and explained in this Schwab Publication: Foreign Taxes If the dividend is paid into a retirement account, then it is not recoverable.

I will take the currency risk with Swiss Francs under the current and reasonably foreseeable circumstances.

There is only one reason why the USD has risen against the CHF since the 2011 summer. The Swiss National Bank has embarked on a massive QE program designed to lower the CHF's value. This is accomplished by creating a vast amount of new CHFs, converting them into Euros and then buying European sovereign bonds with those Euros. SNB.book.pdf The purpose is to weaken the CHF which has been successful looking at a conversion chart starting in the 2011 summer. CHF/EUR Currency Conversion Chart

Eventually, this kind of beggar their neighbor money printing has to stop. I would not hazard a guess when that will happen.

I did go back to the five year peak price in the CHF vs. the USD, which occurred around 8/9/11 when 1 CHF would buy USD1.31+.  I then wanted to know what would be the value of CHF64.95, the closing Nestle price on my day of purchase assuming the conversion rate was the same as 8/9/11 (more than wishful thinking at the present):


Needless to say, $86.15 is a much higher than the conversion value of $68.88 as of my last purchase date. That highlights the currency risk issue.

However, it is hard to see the SNB driving down the Franc more in value, so maybe the current conversion rate is hopefully close to a low.

Risks: Given the quality of this company, a major risk could simply be described as multiple contraction from the current elevated level. Recessions and bear markets will be tough on consumer staple stocks. I did buy Nestle at $33.38 back in April 2009. The stock had traded over $50 in March 2008. NSRGY Interactive Chart It took about two years before the stock consistently traded over $50. A buyer in March 2008 needed to avoid panicking and selling in the low 30s.

For a company like Nestle, the dividends and price will rise over a long period of time, with occasional drama to the downside, and it is mainly important to avoid significantly overpaying for purchases. An example of overpaying would be a purchase of KO stock in 1998 at a split adjusted $42, higher than the current price in 2014. KO Interactive Chart

There is always currency and country risks for multinationals. I also have currency risk inherent in the purchase of any ADR. 


The spread of ebola in Africa may have a negative impact on Nestle's sourcing of cocoa.

One respected fund manager, David Giroux who manages the balanced T. Rowe Capital Appreciation fund (PRWCX), recently stated in a Morningstar interview that he had sold both Nestle and General Mills for the same reasons. His rationale is that consumer staple stocks are selling at higher than normal valuations at a time when their products are under pressure from store brands. The later issue has been ongoing for a long time and would generally fall under the category of "brand substitution". Personally, I just see that issue as a long term headwind for all consumer stocks which will vary according to the product. I am not going to buy a Kroger brand of Cheerios or Vanilla Ice Cream to save a few pennies. I will generally buy a name brand product like Cheerios when I see a markdown (plus a coupon), or when I am out of the product and have to accept full price with a coupon.

Future Buys: The next buy would be a 30 share lot when and if the price sinks below $65 which will bring me up to 100 shares in the main taxable account.