Wednesday, January 28, 2015

GATEWAY POST: Main Table of Contents

FINRA has changed its link information so many of my prior links to that site will no longer work.  I changed my link in this post to the main FINRA site since the old one no longer worked due to that change. 

My lack of qualifications for writing this blog are detailed in Stocks, Bonds & Politics: OG's Qualifications and Lack of Qualifications.

For any new readers, RB stands for my Right Brain and LB for my Left Brain, both in a constant state of discord. The Headknocker (HK), the ultimate boss here at HQ, sometimes referred to as the Great Leader with a tinge of sarcasm, is exactly what the name describes, a real hard case, a more enhanced and older version of the young LB sometimes pictured in the profile section of the post. The LB still believes it is 16 years old (or not a day over 21), with a lot of hair, capable of running a mile without drawing a deep breath, without an ounce of body fat, referring frequently to itself as the Young Stock Stud. The LB is the only Focus Machine at HQ.

The Old Geezer (OG) is a more mellow version of the HK, who reads theology and philosophy, and who is at least willing to listen to the RB, but frequently is subject to a case of nerves which has never afflicted the HK for even a nano second. The HK frequently sends the OG to the Old Folks Home for one or more transgressions involving a failure to advance HK's capital position as Head Trader, which is rarely important to the OG, but is the only important matter to the HK.

All of these characters are caricatures of different personality traits of one individual investor, who is finely attuned to all of their voices, now in his fourth decade of managing his own money.

The left brain (LB) is serious, rational, logical, analytical, organized and highly focused, a linear thinker absorbed with details and looking at the parts rather than the big picture. The right brain (RB) is the antithesis of the LB. The RB is subjective, intuitive & led by feelings, impulsive, creative, emotional, unfocused, and capable of seeing the big picture unlike the LB.

Most of these discussions, involving these personalities and brain characteristics, are intended for instructional purposes, and sometimes for humor. The topic of the role played by the brain structure in making investment decisions is explored in Jason Zweig's book : " Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich" Zweig would call my LB the reflective brain and my RB the reflexive. The reflexive brain gets the first crack at decision making, often the only crack for many investors, which would be viewed as a mortal sin here at HQ.

Being a prolific and wordy writer, this blog has expanded in a short time to over 1900 posts since October 2008, mostly long ones. Consequently, the best way to find specific information in this blog now is to use the Google search box on the right hand side rather than the search box at the top left hand side.

I would recommend that anyone interested in Trust Preferred, Trust Certificates or other exchange traded bonds register at the free site That site has links to the prospectuses and has other helpful information including credit ratings and a list of the preferred stocks that pay qualified dividends under current U.S. tax law.

Anyone interested in Bonds needs to become familiar with the free FINRA site.   Company Infomation

FINRA links made prior to mid-2014 or so no longer work due to a change in the links made by Finra.    

To find information about a firm's bonds, just enter the stock symbol, click go, then scroll to bond in the "search box", and then you will be on the bond page for that company.  You can also search for each bond the trades by customized dates at the bottom of each page.

Bond searches can also start at this Finra page: Bonds Home

Some links in this post will cease to work with the passage of time.


Gateway Posts for Asset Allocation Theory and Practice:

Using Volatility as a Risk Management Tool for Equity Preferred Stocks: Embracing Volatility as A Risk Management Tool In the Sub-Asset Class of Equity Preferred Stock

Stocks for the Long Run and Professor Siegel:  To Professor Siegel: Time for a Re-Think  The Roller Coaster Ride of the Long Term Secular Bear Market  Duality of Long Term Risks Long Term Stock Risks and Situational Risk/Managing Lost Opportunity Risk in a Long Term Secular Bull and Bear Markets  1974 or 1982: Start of Cyclical Bull in a Long Term Secular Bear Market or the Start of Secular Bull Market? More on 1982 or 1974  Continued Discussion on 1982 or 1974 Historical VIX Patterns The Importance of Identifying the Underlying Causes of Long Term Bull and Bear Markets LONG TERM SECULAR BULL PATTERN 1950 TO 1966/ Long Term Secular Bear Pattern from The Great Depression VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern Static v. Dynamic Asset Allocation Instability & Volatility in Asset Correlations

Gateway Posts for Bonds, Preferred Stocks and European Hybrids:
Exchange Traded Bonds (9/2009 Post)

ING PREFERRED (Hybrid Securities): ING HYBRIDS: Links in one Post

Junk Bond Ladder Strategy (no longer being updated as of 11/1/2012)
Personal Risk Ratings For Junk Bonds (no longer being updated as of 11/1/2012)
FINRA Links to Bonds in Junk Bond Ladder Strategy
Realized Gains Junk Bond Ladder Strategy(no longer being updated as of of 11/1/2012)
Junk Bond Ladder Table 7/25/12 Post 

Exchange Traded "Principal Protected" Unsecured Senior Notes: Item # 1  Principal Protected Notes; Item # 2  Principal Protected Notes (Links Just to Some of the Posts Discussing Citigroup Funding Notes-Guaranteed by Citigroup as Provided in the Relevant Prospectus: 100 MKZ bought at 9.96Bought 100 MKZ at 9.91 in the Roth IRABought 100 MYP at $10.12Bought 100 MHC at 9.8Bought 100 MOU at $10.12Bought 100 MBC at 9.84Bought 100 MBC at 9.78Bought 100 MKN at 9.85 January 2010Bought 200 MOL at 9.95Sold 100 MOL @ 10.3Bought 100 MTY at $10.03Bought 100 MTY at 10.49)

There are over 1900 posts in this blog and the foregoing are just some of the major stock and bond topics.

Tuesday, January 27, 2015

Exchange Traded Bond and Preferred Stock Table as of 1/27/15

I infrequently update this part of my portfolio since it has been downsized substantially due primarily to redemptions or to bonds reaching maturity (primarily Citigroup Funding "principal protected" senior unsecured notes). I have also engaged in a fair amount of profit taking, including frequent trading of some securities. 

At one time, the exchange traded bonds and preferred stock segment of my portfolio was close to a $150,000 market value, and this allocation is now hovering near $60,000. 

I thought that today was a good one to update the list since this segment rose in value and consequently provided a much needed ballast to the stock market's decline. These securities did what they were supposed to do on a big down day for stocks.  

Overall, my portfolio design accomplished its objective today, with my main taxable account declining just .13%. Stocks, Bonds & Politics: Portfolio Management Goals-Snapshots of Performance Numbers YTD, 3 and 5 Years Cumulative I also had a number of sectors besides bonds rise in price. The REIT basket, for example, was net green today. I also maintain a large percentage cash allocation which has grown from about 20% to 25% over the past several months. I deployed some of that cash today. 

Closing Prices 1/27/15: 

Nasdaq: -1.89%
S & P 500: -1.34%
DJIA: -1.65%

Exchange Traded Bonds and Preferred Stock Portfolio +.37%:

Click to Enlarge: 

Exchange Traded Bond and Equity Preferred Stocks as of 1/27/15

The last update was probably in February 2014: Stocks, Bonds & Politics: Updated Exchange Traded Bonds and Preferred Stock Table as of 2/10/14 Since that update, I have lost several securities to issuer redemptions and have sold others in a periodic profit taking cleansing process. 

Exchange Traded Bonds include the following categories:
Trust Certificates: New Gateway Post (snapshots of gains/losses)
European Hybrids: (e.g. ING HYBRIDS and Aegon Hybrids)
Baby Bonds Usually with $25 Par Values

As noted in the Gateway Post for Trust Certificates, that niche segment was considerably mispriced in 2008-2009. 

I discuss equity preferred stocks in two Gateway Posts:


Those last two linked posts contains snapshots of profits and losses. My losses have been immaterial to date. 

The floaters will reduce the overall yield of this portfolio compared to fixed coupon securities, but provide a measure of inflation protection. I have recently been adding in small 50 share lots to equity preferred floaters:

Equity Preferred Floating Rate Stocks: Added 50 GSPRC At $19.63 - South Gent | Seeking Alpha

Equity Preferred Floating Rate Stocks: Added To MSPRA At $19.87 - South Gent | Seeking Alpha

Stocks, Bonds & Politics: Bought 50 BMLPRJ at $20.25

All of my Citigroup Funding PPNs matured in 2014: MOU, MBC, MTY, MKN, MKZ, MOL 

I am not including ETNs in the foregoing list, even though those instruments are senior unsecured notes. I currently own the following ETNs: 50 AMJ, 40 BDCL and 100 MLPG.

My REIT equity preferred dispositions since September 2013 can be found in this post, along with snapshots of the profits from those trades: Stocks, Bonds & Politics: Gateway Post: Equity REIT Common and Preferred Stock Basket I did buy a number of them in small 50 share lots after their prices were smashed during the rise in interest rates during 2013.

Several of the positions listed in the latest table are vintage.

My average cost for the Trust Certficate KTN is around $14 from the Near Depression period. TRUST CERTIFICATE AON BOND KTN ORDER FILLED 100 shares at $13.1 (October 2008 Post)KTN add at less than $14 November 2008Sold 50 of 150 KTN at $28.17 (September 2010 Post) Most of my trust certificates were redeemed by the owners of the call warrants attached to those certificates.  

I bought SCEDN at $84 in 2009. Stocks, Bonds & Politics: BOUGHT 50 SCEDN AT $84  

Initiated Positions in Two Swedish Companies-Bought: 50 Swedbank at $23.25 and 50 SCA at $22.27/Sold 54 LXP at $11.44 Vanguard Roth IRA-Transitioning Position to Fidelity Roth IRA

Stable Vix Pattern (Bullish):
Links to SeekingAlpha Instablog, Articles and Comments:

South Gent's Instablog | Seeking Alpha

South Gent's Articles | Seeking Alpha

South Gent's Comments | Seeking Alpha


Recent Developments: 

New orders for durable goods in December decreased by 3.4%. Excluding transportation, new orders decreased by .8%.

The stock market is having one of its bad days today, apparently surprised that the USD's strength was going to negatively impact U.S. multinational's earnings and revenues. That is hardly a news flash given that most major currencies have fallen close to 20% in value against the USD over the past 6 months or so.

The Shiller home price indexes for both the 10 and 20 cities continued to show slower growth.  In November 2014, the 20 city composite index was up 4.3% Y-O-Y, down from +4.5% in October Y-O-Y.


1. Sold 54+ LXP at $11.44 in the Vanguard Roth IRA-Transitioning Position to Fidelity Roth IRA (Gateway Post: Equity REIT Common and Preferred Stock Basket)(see Disclaimer):

Snapshot of Trade:

2015 Roth IRA Sold 54+ LXP at $11.44

Snapshot of Profit:

2015 Vanguard Roth IRA LXP 54+ Shares +$64.4

Item # 6 Added 50 LXP at $9.95- Vanguard ROTH IRA (1/13/14 Post)

Recent Reinvestment in Fidelity Roth IRA: 

I am transitioning my LXP position to the Fidelity Roth IRA, where I am currently receiving a 5% discount on the dividend reinvestment price through Fidelity's indirect participation in LXP's reinvestment plan.  By holding the LXP stock in a Roth IRA, I turn a non-qualified taxable dividend into a tax free one, and I avoid the taxation of the discount as explained in this SA Instablog: Lexington REIT (LXP) - South Gent | Seeking Alpha

The reinvestment price was $10.65+ which includes a 5% discount.

In a family's members account at another brokerage company, the reinvestment price was $11.263 per share. Those shares were bought in the market, probably on 1/15/15 at the opening when  the price was $11.26. By buying the shares in the market rather than through LXP's dividend reinvestment plan, the family member did not receive the discount. The timing of the share purchase would also be different.

Security Description: The Lexington Realty Trust (LXP) is a self-administered equity REIT that "owns a diversified portfolio of equity and debt interests in single-tenant commercial properties and land". All of the land leases and a majority of its properties are subject to net leases, where the "tenant bears all or substantially all of the operating costs".

LXP Website: LXP

Lexington Realty Profile Page at Reuters

Lexington Realty Key Developments Page at Reuters

Lexington Realty Trust Dividend History

Prior Trades: I currently own 205+ shares in the Roth IRA: Added 100 LXP At $10.43 - South Gent | Seeking Alpha (10/23/14 Post); Item # 3 Bought Roth IRA 100 LXP at $10.64 (8/23/14 Post)

I sold the LXP position in a taxable account as part of the transitioning to the Fidelity Roth IRA: Sold 101+ LXP at $10.65 (10/28/14 Post)-Item # 1 Bought: 100 LXP at $10.32 (12/3/13 Post)

When transitioning a position, I want to sell the shares being transitioned for a profit and to buy the shares the other account at a lower price.

I have also bought and sold LXP preferred stocks: Stocks, Bonds & Politics: REIT CUMULATIVE PREFERRED LINKS IN ONE POST/Advantages & disadvantages

Rationale: In my Vanguard Roth IRA, I do not receive a 5% discount on the reinvestment price.  A 5% differential on $11 is after all $.55 and that will add up over time, both in terms of the shares bought with the dividend and the shares bought with the dividends paid by shares bought with the dividends.

In a comment to a recent Seeking Alpha article, I noted that LXP was expected to show negative Y-O-Y FFO between 2014-2015, and that the Funds Available for Distribution (FAD) were well below the FFO and AFFO per share numbers. Until LXP can consistently grow FFO in the low single digits, at a minimum, the P/FFO will remain significantly below other REITs in LXP's sector.

Future Buys in Fidelity Roth IRA: When and if I can lower my average cost per share, I will buy another 50 shares in the Fidelity Roth IRA. Currently, the average cost per share is $10.58.

There have been several recent time periods when the market offered a lower price: LXP Interactive Stock Chart

2. Bought 50 Swedbank ADR (SWDBY) at $23.25 (see Disclaimer):

Snapshot of Trade:

2015 Bought 50 SWDBY at $23.25
The ordinary shares are traded in Stockholm and priced in Swedish Krona (hereinafter SEK).

1 ADR=1 Ordinary Share

On the day of my trade, the ordinary shares closed at SEK192.9: Swedbank AB Series A (SWEDA:STO)

I did a currency conversion of that ordinary share price into USDs:

Company Description: Swedbank AB ADR (SWDBY) is the largest bank in Sweden and has an extensive presence in the three Baltic countries of Estonia, Latvia, Lithuania. This bank has 318 branches in Sweden and 170 in the Baltic countries.

The bank has 4.1M retail and 268,000 corporate customers in Sweden, and another 4M retail and 302,000 corporate customers in the Baltic states. Quick facts - Swedbank

Swedbank has a long term debt rating of A+ from S & P and A1 from Moody's: Rating

Company Website: Swedbank

Dividends: Swedbank pays an annual dividend in SEKs that will be converted into USDs for the owners of the ADR SWDBY. The amount of the dividend will consequently depend on the exchange rate at the time of conversion.

The dividend was eliminated in 2008 and 2009 after growing nicely up to 2007. The bank paid out SEK9.9 per share for its last annual dividend, up from SEK 5.3.

The company has not yet declared the dividend rate for 2014 that will go ex dividend later this year.

Given the uncertainty on the amount and the currency conversion rate, I can not estimate a dividend yield.

If I assumed the SEK9.9 rate, converted that amount as of 1/23/15 into USDs, then the yield would be about 5.16% at a total cost of $23.25.

I have my doubts that the bank will continue at a historically high payout ratio.

Foreign Withholding Taxes: I will use the Deloitte website to determine the tax treaty dividend withholding rates.  Treaty Rates | Deloitte I simply check "United States" in the left hand side box, click "active" in step 2, and "dividends" in step 3. I then look for the applicable foreign country. I see that Sweden will withhold 15%.

I can find the tax treaties at the IRS website: United States Income Tax Treaties - A to Z

For the U.S. tax treaty with Sweden, I noted that Article 10 did provide for a 15% rate.

I will not buy a foreign dividend paying security in an IRA when there is a withholding tax. I will buy a foreign dividend paying stock in an IRA where no tax is withheld.  No recovery of the foreign tax is permitted when the dividend is paid into an IRA. A foreign tax credit can be claimed only when the dividend is paid into a taxable account.

The rules governing foreign tax credits are explained in a Schwab publication: Claiming Foreign Taxes: Credit or Deduction? I am certainly no expert on the subject.

Comparison Chart: Due to the weakness in the SEK versus the USD, the ADR share price has underperformed the ordinary shares priced in SEK, particularly over the past 6 months. I took a snapshot of a six month chart comparing the USD priced ADR with the equivalent ordinary share priced in SEK:

Prior Trades: None

Recent Earnings Report: I just took a snapshot of the relevant details:

The return on equity was reported at 16.6 for the third quarter, much higher than the 9.02% average for U.S banks. Return on Average Equity for all U.S. Banks-St. Louis Fed

The Tier 1 capital ratio is excellent:

Large U.S. banks are mostly in the in the 10% to 11% range. Forbes J.P. Morgan had a tier 1 common equity ratio of 10.1% under fully phased in Basel III rules.  Bloomberg

Rationale: Swedbank appears to be a prudently managed bank whose share price has some dividend support. The capital ratios are excellent.

The P/E is reasonable. For the ordinary shares, Bloomberg shows a 12.5 P/E based on estimated 2014 earnings of SEK15.433 and a SEK price of 192.9. Swedbank AB - Bloomberg

The ADR price has already been smashed a lot due to the weakness in the SEK vs. the USD. While that downslide may continue, the SEK's value is already near a 10 year low, so a lot of the currency risk in existence as of last May has been drained out of the risk equation, thereby increasing the potential long term currency exchange benefit.

Risks: An important risk after purchase involves currency exchange rates. A continued decline in the SEK's value versus the USD will have a negative impact on the pricing of the ADR.

I am not concerned about the bank's capital ratios. However, a recession can eat into that capital and cause a bank to cut the dividend.  While this bank did eliminate its payout for two consecutive years, it has recovered back to the pre-2008 dividend level much quicker than large U.S. banks. Still, I always view dividend cuts and eliminations with significant negativity. The fact that Swedbank has eliminated the dividend for two years place a dark cloud over its willingness to continue paying dividends when the going gets rough.  

I am also concerned about the stagnation in Europe generally and less so in the Nordic countries. Net interest margin compression is also a negative item for the foreseeable future.

While it may be remote, a Russian military incursion into the Baltic states is a possibility, as Putin seeks to further expand Russia's border through military aggression.

Future Buys/Sells: I will consider averaging down with another 50 lot purchase. I first want to read the earnings report for the last quarter. I would also want a $1 per share lower price.

I have no target price for selling the shares. If I average down with another 50 share purchase at less than $22.25, preferably closer to $22, then I would be more inclined to sell the highest cost lot on a pop in price and then hopefully buy the shares back when and if the purchase would lower my average cost per share.

3. Bought 50 of Svenska Cellulosa Aktiebolaget ADR (SVCBY) at $22.27 (see Disclaimer):

Snapshot of Trade:

I bought the ADR traded on the U.S. pink sheet exchange and priced in USDs. Svenska Cellulosa AB (SVCBY) A pink sheet exchange symbol ending in a "Y" denotes an ADR.

1 ADR=1 Ordinary Shares

The ordinary shares are priced in Swedish Krona (hereinafter SEK)and trade on the Stockholm exchange. SCA-B.ST

Prior to entering a limit order, I converted the then existing ordinary share price into USDs which is standard operating procedure:

Company Description: Svenska Cellulosa AB ADS (SVCBY) is one of the world's largest personal care and hygiene companies. SCA is the largest private owner of forests in Europe, with approximately 2.6 million hectares of forest land (6.4M acres), and has a variety of forest products.

Personal care and tissue products include diapers, toilet paper, wet wipes, soap, lotion and feminine care products. SCA is the second largest tissue producer in the world with about a 10% share of the consumer tissue market.

SCA's brands and products in the whole world

SVENSKA CELLULOSA Profile at Businessweek (includes detailed description of products)

Company Website: SCA - Svenska Cellulosa Aktiebolaget

The Bloomberg page for the ordinary shares shows an estimate E.P.S. of SEK10.633 in 2014, up from SEK 9.95 in 2013. The five year dividend growth is shown as 6.3%. SCAB:Stockholm-Bloomberg

In 2014, SCA transferred its hygiene business in China to Vinda International Holdings, a company listed on the Hong Kong exchange. SCA’s transfer of Chinese hygiene business to Vinda approved - SCA Corporate The purchase price was SEK 1,000M or HKD1,144M.

3331:Hong Kong Stock Quote - Vinda International Holdings Ltd - Bloomberg

SCA owns about 51.4% of Vinda's shares based on information in SCA's 2013 annual report. SCA China | Vinda

Vinda's market capitalization is about HKD11.681B based on last Friday's closing price of HKD11.7. That translates into roughly USD1.5068B. Assuming no change in the 51.4% stake, the value of SCA's Vinda stake is about USD$774.5M.

Website: Vinda Paper Group (last earnings report: vindapaper.pdf)

During 2014, SCA floated its Australian joint venture, Asaleo Care Ltd, and currently owns 32.5% after the IPO. Based on Asaleo's closing price from last Friday, that stake is worth about 330M Australian Dollars.

In 2012, SCA acquired Georgia Pacific's European tissue business for €1.32B. SCA's acquisition

Based on last Friday's closing price of SEK180, SCA's market capitalization is approximately SEK127.625B or USD$15.244B.

Dividends: Dividends are paid annually in Swedish Krone and then converted into USDs for the owners of the ADR. The dividend yield will fluctuate based on the conversion rate. If the SEK continues to decline in value after my purchase, then the annual dividend will buy fewer USDs, and my dividend yield will consequently be negatively impacted by the SEK's weakness. The converse is also true. My dividend yield, based on my constant total cost number, will go up with a rise in the SEK after my purchase and with any dividend increases.

SCA has a policy of generally paying out 1/3rd of its cash flow in dividends. Dividend for the SCA share - SCA

Annual Dividend Rates in SEK:
2013: 4.75
2012: 4.5
2011: 4.2
2010: 4
2009: 3.7
2008: 3.5

The annual rate was SEK 4.4 in 2007, which was slashed to 3.5 in 2008.

Comparison Chart: The following 6 month chart highlights the potent negative impact of currency exchange on the ADR share price. I am simply comparing the USD priced ADR with the ordinary share SEK price:

That is a profound differential, almost 18%, due solely to currency conversion from SEKs into USDs.

While I will not hazard a guess when the USD will lose its current gusto, experience has taught me that the USD is far from a perpetually strong currency and other developed foreign currencies, including the SEK, will have their day in the sun when the darkness and clouds envelope the USD once again as in the past. I can wait for the worm to turn and for those blue and red lines to converge which recently happened with the USD priced Swiss ADRs. Hopefully the ordinary shares priced in SEKs will have gained in price when the USD falls in value back to buying around 6 SEKs (or thereabouts) rather than 8.34 or so now.

10 Year USD/SEK Chart:

As shown in this chart, the SEK is currently near a ten year low against the USD:

While the USD may continue its parabolic moon shot against other developed country currencies, those type of events have a tendency to collapse upon themselves and are eventually self-correcting. The U.S. economy slows due in part to a strong currency while weaker currency nations enjoy an acceleration in growth. Inflationary pressures decrease for the stronger currency nation and increase for the weaker currency ones who later abandon abnormally low interest rates as inflation turns up with GDP growth and lower unemployment.

A long term Dollar Index chart shows the ups and downs of the USDs value against a basket of six foreign currencies weighted in the Euro: DXY Index Chart The latest rise looks and smells like a typical parabola that will collapse.

The same kind of parabola can be seen in the WSJ Dollar Index and the Bloomberg Spot Dollar chart that include more foreign currencies in the basket: BBDXY Chart -Bloomberg Dollar Spot Index

Prior Trades: None

Recent Earnings Report: For the 2014 third quarter, SCA reported a net profit of SEK 2,106M or SEK2.68 per share, up from SEK 2.06 per share in the year ago third quarter.

Organic sales growth was 3% in the January-September 2014 period compared to 2013 (4% when including Vinda's organic growth)

I took a snapshot of material operating items that are self-explanatory:

The 2014 E.P.S. for the nine month period was SEK 7.35, up from SEK 5.28 in the comparable nine month period in 2013.

Interim Report Q3 2014 - SCA Corporate
More Detailed Report: PDF

Rationale: Earnings and the dividend are both accelerating, and the valuation is reasonable for a consumer products company.

The foothold in China through Vinda is another reason for this purchase. While that stake is currently worth about 5% of SCA's market capitalization, there is certainly growth potential in China and the Vinda investment could become far more valuable in the years to come.

Other than dividend hiccup during the Near Depression, SCA is growing its dividend in the mid-single digits.

Given the huge decline in the SEK's value vs. the USD, I have a long term potential for a currency gain in the ADR when the worm turns against the USD and it will sooner or later. I can afford to wait for that happen.

Risks: As shown in the preceding chart comparing the ordinary and ADR share prices, currency risk is material.

SCA faces formidable competitors including Proctor & Gamble and Kimberly Clark in its personal care and tissue product lines. The quality of those two competitors is a major headwind for SCA in my opinion.

The publication paper business sector is in a long term secular decline.  Some of the other forest products sold by the company are cyclical and more dependent on an economic recovery than the personal care and tissue products with relatively stable inelastic demand.

Future Buys and Sells: I do not have a target price. When buying first a 50 share lot, I am anticipating the possibility of buying another 50 shares at a lower price. I will want a $1 per share lower price than my first purchase at $22.27 or a 4.5% to 5.5% share price decline. 

Saturday, January 24, 2015

Added 50 PNNT at $8.2/Bought Back TRMK at $22.25-Regional Bank Basket Strategy/Sold 100 NBD at $22.22-Taxable Account

Stable Vix Pattern (Bullish):
Links to SeekingAlpha Instablog, Articles and Comments:

South Gent's Instablog | Seeking Alpha

South Gent's Articles | Seeking Alpha

South Gent's Comments | Seeking Alpha


Recent Developments: 

The ECB finally launched a large scale QE program. BloombergReuters I view the devaluation of the Euro as more important to a potential economic recovery in Europe. The ECB's QE program did accelerate the slide in the Euro:

EURUSD Interactive Chart

The index for leading economic indicators rose .5% in December. Conference Board

Swiss Helvetia Fund

I received last Friday the shares purchased with this fund's 2014 year end distribution.

172.472 Shares at $11.47 per Share

SWZ closed at $11.41 last Friday, down $.11.

The net asset value per share was $13.14, creating a discount to net asset value of -13.17%.


1. Added 50 PNNT at $8.2 (see Disclaimer): PNNT is being trashed due to its exposure to E & P loans.  

Snapshot of Trade:

Closing Price Day of Trade 1/20/15: PNNT: $8.52 -0.20 (-2.29%)

The shares traded in a broad range between $8.16 and $8.7. Volume was 2.376+M compared to an average of 540,040 over the prior three months.

PNNT Historical Prices

Security DescriptionPennantPark Investment (PNNT) is an externally managed BDC.

Within a few minutes after my purchase, PNNT issued a press release that apparently gave some investors comfort for about a day. PennantPark Investment Corporation Announces Preliminary Financial Estimates for December 31, 2014

The company estimated that its net asset value per share would be in the $10.4 to $10.5 range as of 12/31/14, down from $11.03 as of 9/30/14. The estimated quarterly net investment income was in the $.25 to $.27 range, slightly below the then consensus estimate of $.28. Those two items were the bad news.

The somewhat positive news was that PNTT was "comfortable" with its energy investments given their "seniority", reserves and "substantial hedges". I assume that the reference to substantial hedges refers to the hedges that the E & P companies have in place.  I am not comfortable with PNNT's exposure as noted below.

The company also assured investors that it would not be selling stock at below net asset value per share, and that it "currently" intends to maintain the quarterly dividend at the $.28 per share rate. "Currently" is one of those meaningless words when used in that context.

Lastly, the company noted that one of its portfolio companies had an IPO in the 4th quarter that will increase PNNT's net asset value by $.08 per share and result in a $.13 per share realized gain. That was real positive news.

I believe that the portfolio company that had a 4th quarter IPO was Patriot National (PC).

Guts of PNNT Press Release
PNNT sold shares last September at a public offering price of $11.63 per share. The underwriter's paid $11.2811 per share. PennantPark Investment Corporation Prices Public OfferingProspectus

PNNT SEC Filings

Since early in 2010, this stock has traded mostly in a narrow channel between $10 to $12 after crashing in 2008 and early 2009. PNNT Interactive Stock Chart The share price crashed below that range late last year due primarily, in my opinion, to its large exposure to energy companies.

Between 4/19/2007 and 1/20/15, the annualized total return with dividends reinvested was +4.38%Calculator  That anemic total return, which includes reinvestment of dividends, clearly illustrates why this stock is not a worthwhile long term investment and needs to be traded to secure an adequate total return. The return also highlights that the reinvestment of dividends can result in the destruction of their original cash value.  

If I start that total return calculation on 1/2/2010, the PNNT annualized return increases to 8.86%. Starting the calculation on March 9, 2009 after the price had cratered to the low single digits, the annualized total return increases to 34.23%.

A buy on 5/13/13 would have generated a -5.53% total return.

In short, the total return numbers will also depend on when you buy and sell. A buyer on 3/9/2009 would have been better off selling on 5/13/13 rather than holding long term. The annualized return for that holding period was +55.03%.

PNNT Net Asset Value Per Share History: 
Sourced 10-K and  10-Qs
9/30/14:     $11.03
6/30/12:     $10.16
6/30/11:     $11.08
6/30/10:     $10.94
6/30/09:     $11.72
9/30/08:     $10.
6/30/07:     $12.83
3/31/07:     $12.08
April 2007: IPO at $15  Prospectus (underwriters paid $14.025)

The external managers are paid 2% of gross assets plus a generous incentive fee.

A list of investments can be found starting at page 61 of the recently filed Annual Report: 10-K

Current Position Taxable Account (150 Shares):

Item # 3 Bought 100 PNNT at $10.47 (12/5/14 Post)

Other Prior Trades: The prior trades are summarized in Item # 2: Bought 100 PNNT at $10.66-Regular IRA This last purchase brings me up to 300 shares.

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.

Dividend: PNNT is currently paying a $.28 per share quarterly dividend.

Assuming no change in that rate, which is certainly a questionable assumption, the dividend yield at a total cost per share of $8.2 is about 13.66%.  

Chart: The chart looks like a falling knife that was dropped in late August 2014: PNNT Interactive Stock Chart

Last Earnings Report: For its 4th fiscal quarter which ended on 9/30/14, PNNT reported core net investment income of $.34 per share. The net asset value per share was reported at $11.03. The weighted average yield on debt investments was 12.5% as of 9/30/14.

As of 9/30/14, this BDC had a significant exposure to subordinated debt, preferred stock and common equity:

SEC Filed Press Release

Q4 2014 Results - Earnings Call Transcript | Seeking Alpha

Rationale:  As with all BDCs, my goal is to harvest a 10% annualized total return and will generally 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 loss.

However, I am not likely to sell the PNNT shares for a loss unless I become spooked about this BDC's performance. The overriding goal is to harvest a total return in excess of the dividend yield.

The current quarterly dividend is $.28 per share. At a total cost of $8.2 per share, and assuming a continuation of that rate which is not an assumption that I would make, the dividend yield would be about 13.66%.

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.

As noted above, the company disclosed within an hour or so after my purchase that book value was likely to be in a range of $10.4 to $10.45 per share as of 12/31/14. I do not know the reason for the decline, but suspect that it involves some loan write-downs. If I take the low end of that guidance, then the $8.2 purchase was at a 21.15%% discount to a $10.4 per share net asset value.

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

The December 2014 purchase was made at below net asset value too, but that did not help me any. My last purchase was at $10.47 about a month ago and the price had declined 21.68% when I purchased this 50 share lot at $8.2.

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.

Risks: As with all BDCs, PNNT has considerable risks summarized in a very long discussion found in its F/Y 2014 Annual Report staring at page 18, 10-K

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 preceding 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 12.5% adequately describes the risk when the ten year treasury is hovering around 1.8.%.

PNNT had about a 9% exposure to the "oil and gas" sector as of 9/30/14. A 8% weighting is in "energy/utilities". Page 74 10-K

The largest exposure appears to be a Ram Energy L.L.C. that PNNT classifies under "energy/utilities" rather than "oil and gas", even though this private company appears to be an E & P only. There is little public information available on this private company.

The CEO noted in the last earnings call that PNNT  purchased a $100 million RAM first lien loan and $1M in stock. The CEO described RAM as "an exploration and production company focused on operation in the Ark-La-Tex and Permian regions". Page 3  Earnings Call Transcript | Seeking Alpha

Why is that company not classified under oil and gas that would bring the total exposure up to 17% from the 9% shown for the "oil and gas" category. The CEO was asked about that position in the Q & A and noted that PNNT "agonized" over it. He further noted the first lien status and that $27M of the exposure was in a 1 year maturity. Page 4 Earnings Call Transcript | Seeking Alpha My question after reading that exchange was how exactly is RAM going to raise funds now to pay off that one year loan.  

MLV & Co. Announces $105.75mm Debt and Equity Financing for RAM Energy L.L.C. (August 2014 press release)

Chaparral Energy Sells Central Basin Holdings to Ram Energy for $48.1M in Cash (May 2014)

I would be curious to hear PNNT's explanation for the "energy/utilities" tag which fooled me for awhile. There is a company called Ram Energy, Inc. that is involved apparently in two foreign geothermal projects, but I see no factual reason to connect the two companies.

Another large investment is the debt issued by New Gulf Resources, L.L.C.,  a company that closed on a $500M loan last May to buy some assets from Halcon Resources Corporation, which was formerly known as Ram Energy Resources, Inc.

That investment is shown as second lien debt with an 11.75% coupon with a value of $45.675M and a cost of $44.615+M as of 9/30/14 (page 61, 10-K) There is shown some subordinated debt at page 62, with a cost of 13.030+M and a value of $10.665M that looks like a 12% PIK note (which I call pretend interest payments, though the correct name is payment-in-kind) PNNT also owns some warrants (cost $495,000, valued at 2.97M as of 9/30/14, page 63) Second lien status for an E & P loan is worrisome. I would assume that the warrants have been written down in value.

Another smaller E & P investment is in a company called Energy & Exploration Partners which filed for an IPO in September 2014. S-1S-1/A The share symbol was shown as ENXP in the prospectus. I believe that this company is still private. The last few months have not been an opportune time to bring an E & P public. There is an amended S-1/A that was filed in December that provides useful information about this company (derivative contracts summarized at page 52 as of 12/4/14).

It is difficult for me to see the shares gaining much upside traction until investors have more clarity on the potential E & P loan losses. Even if those investments went to a zero value today, however, the current market price would still be below the $10.4 to $10.5 estimate as of 12/31/14.

Any investor buying shares now is catching a falling knife.

Future Buys and Sells: I had previously asserted that I would not buy another share after bringing my position up to 300 shares. The spurt down to $8.2 caused me to move slightly off that dime. I do not intend to buy more shares at above $8.2, though I will consider buying another 50 share lot when and if the price slides to $7.5.

I had hoped that most of the BDC weakness late this year was related to tax loss selling, but the selling pressure has continued unabated in 2015 particularly for those BDCs with greater than a 5% exposure to E & P companies.

I hope to sell 100 shares either this year or next, when and if the market price per share returns to a premium to net asset value per share, provided I can sell at break-even or higher.

2. Bought Back 50 TRMK at $22.25 (REGIONAL BANK BASKET STRATEGY)(see Disclaimer):

Snapshot of Trade:

The share price closed at $22.28. Regional banks performed well on the next trading after my purchase, with TRMK closing at $23.36, up $1.08 or 4.85%. The regional bank ETF KRE rose 4.5% that day in a robust rally. With interest rates falling last Friday, the regional banks were back into retreat mode.

Company Description: Trustmark (TRMK) is a bank holding company that operates 207 branches through its wholly owned subsidiary Trustmark National Bank.

TRMK is based in Jackson, MS.

TRMK has been active on the acquisition front, expanding its geographic footprint over the past several years. Two of the recent acquisitions are described at pages 93-94 of the 2013 Annual Report: (1) the 2011 FDIC assisted acquisition of the Heritage Banking Group, Carthage, Mississippi and (2) the 2012 purchase of Panama City's Bay Bank & Trust Co.

Trustmark acquired in 2013 BancTrust Financial Group, headquartered in Mobile, with 32 branches in the southern two-thirds of Alabama, including Mobile, Montgomery and Selma, and 9 branch offices in Florida's Panhandle. SEC Filed Press Release

Trustmark Profile Page at Reuters

Trustmark Key Developments Page at Reuters

Trustmark did participate in TARP. The government's preferred stock was redeemed in 2009 after TRMK sold 6.2+M shares at $18.5. Page 24-10K

SEC Filings for Trustmark

2013 Annual Report SEC Form 10-K

Prior Trades: I have been in a trading mode for this stock, never buying more than 100 shares. My normal buy is just a 50 share lot.

2014 TRMK 100 Shares +$119.1
Sold 100 TRMK at $24.45 (10/28/14 Post)-Item # Bought 100 TRMK at $23.12 (8/9/14 Post)

2014 TRMK 50 Shares +$81.39
Sold 50+ TRMK at $24.63 (7/19/14 Post)-Item # 6 Bought:  50 TRMK at $22.73 (5/10/14 Post)

2013 TRMK 50 Shares +$233.07
Item # 1 Sold 50 Trustmark at $26.52 (7/20/13 Post)-Item # A Bought 50 TRMK at $21.54 (11/16/11 Post)

2012 TRMK 50 Shares +$240.57
Item # 3 Sold 50 TRMK at $24.7 (1/6/12 Post)-Item # 3 Bought 50 TRMK at 19.57 (8/21/10 Post)

Total Realized Trading Gains To Date: $674.13

Dividend: The bank is currently paying a quarterly dividend of $.23 per share. Assuming a continuation of that rate and a total cost per share of $22.25 per share, the dividend yield would be about 4.09%.  

While TRMK did not cut the dividend during the Near Depression period or its aftermath, the dividend has not been raised either since it was increased from $.22 per share in the 2007 4th quarter. TRMK  Dividend  History

Prior to the Near Depression, Trustmark was raising its dividend rate annually. The quarterly rate was raised from $.085 per share in 1998 to $.23 per share in 2007 or 170.59% using an online percentage increase calculator.

Last Earnings Report: For the 2014 third quarter, TRMK reported net income of $33.6M or $.50 per share.

The following table shows quarterly financial information starting with the Q/E 9/30/13 at the far right and moving to the Q/E 9/30/14 numbers on the far left:

In the last quarter, the return on average assets was 1.1% which compares favorably with the national average of 1.02%.  Return on Average Assets for all U.S. Banks-St. Louis Fed

The net interest margin has been trending at over 4%, well above the current national average of 3.09%. That favorable is trend is mostly temporary and due to "accretion" of acquired loan discounts. When a bank acquires loans from another bank, the discount on acquired loans are marked to market value and the difference is accreted to net interest income and hence to net interest margin over the loan's life. TRMK is still receiving benefits to net interest income derived from its prior acquisitions.

"Excluding acquired loans, the net interest margin in the third quarter totaled 3.47%, down eight basis points from the prior quarter, reflecting declining yields on loans held for investment and loans held for sale". SEC Filed Press Release

The following chart shows that net interest margin initially received a boost in 2009-2010 as deposit interest rates (savings accounts and CDs) were repriced down due primarily to the FED's zero federal fund's rate policy. Once that positive cost benefit was largely realized by 2010, net interest margin compressed from around 3.83 in the 2013 third quarter to 3.02% in the 2014 third quarter:

The capital ratios are good:

The new capital rules went in effect on 1/1/15, and TRMK's capital ratios are well in excess of the minimum levels shown the following snapshot:

FDIC Final Rule.pdf

Net-Charge offs for the quarter to total loans was -.03%, indicating a net recovery. The 2014 third quarter average charge-off ratio for U.S. commercial banks was .45%.

Charge-Off Rate On All Loans, All Commercial Banks-St. Louis Fed

The allowance for loan losses to non-performing loans (coverage ratio) was at 79.41% as of 9/30/14.

The non-performing loans to total loans (NPL ratio) was at 1.37%.

Sourced from: SEC Filed Earnings Press Release and 10-Q for the Q/E 9/30/14

Rationale: Trustmark is within a fair value range at my $22.25 purchase price and has good dividend support at that price. The capital ratios are good and net-charge offs have historically been below the average for commercial banks.

The bank remained profitable during the recent Near Depression and its aftershocks:

Historical Data 2007-2011

Page 24 2011 Annual Report SEC Form 10-K

Given that financial institutions were at the epicenter of the Near Depression, I view it as a positive when a bank, such as TRMK, was at least capable of maintaining it dividend and to cover that payout with net income.

I do not like to see Masters of Disaster and Gunslingers running banks for their own personal aggrandizement. The foregoing data from 2007-2011 at least provides me with a yardstick to measure potential downside risk during a major recession, assuming the bank remains prudently managed in the future as during the last major economic downturn.

Risks: One of the key risks for all banks now is net interest margin compression. That risk can become more acute when and if the Federal Reserve starts to raise the federal funds rate, which will increase deposit costs, and there is no offsetting improvement in loan yields and/or yields on investments.

Bank stocks will likely go down more in a recession than the S & P 500 or any other broad index. Even if net interest margin improves, the profit benefit can be overwhelmed by an increase in loan losses.

In general, an investor wants to see an increase in loans and low cost deposits, lower loan losses due to an improving economy and an expansion of the net interest margin due to higher lower and investment yields.

TRMK describes risks incident to its operations starting at page 16 of its 2013 Annual Report.

Another negative is that the consensus E.P.S. forecast for 2015 is $1.72, down from $1.85 in 2014. That decline may be largely due to lower net interest income through loan accretion, which I discussed above.

Management received several analyst questions on the sustainability of accretion income during the last earnings call. Page 4  Earnings Call Transcript | Seeking Alpha

Future Buys and Sells: Until I see improvement in earnings growth and a dividend raise, I will be in a trading mode for this stock. I do not require much of a profit before selling out and then simply waiting for a downdraft to buy back.

I sold my first lot in January 2012 at $24.7 and just bought back 50 shares in January 2015 at $22.25. The trading strategy seems appropriate looking at the stock history over the past five years and will likely remain in force until I see a reason to hold long term.

TRMK Interactive Stock Chart

I have not seen that reason materialize yet.

3. Sold 100 NBD at $22.22 Taxable Account (see Disclaimer)

Snapshot of Trade:

Snapshot of Profit:

2015 NBD 100 Shares +$71.07

Item # 1 Bought Back 100 NBD at $21.35 (11/3/2014)

I held the shares long enough to receive 3 monthly dividends ($.114 per share), with the last one scheduled for payment on 2/2/15.

Total Dividends: $34.2
Share Profit: $71.07
Total Return: $105.27 or 4.91% (2+ months)

Security Description: The Nuveen Build America Bond Opportunity Fund (NBD) is a leveraged closed end bond fund that invests in taxable municipal bonds issued under the Build America Bond program.

This bond CEF is scheduled to terminate on or around 12/31/2020, "distributing the fund's assets to shareholders at that time".

The net asset value on the date of purchase was $23.89 and the discount based on the $21.36 closing price that day (11/3/14) was $21.36, creating a discount to net asset value at that time of -10.59%.

Data on Date of Trade 1/22/15:
Closing Net Asset Value Per Share: $24.16
Market Price: $22.24
Discount:  -7.95%

The discount had shrunk by 2.64% since my purchase with the net asset value per share increasing 1.13% unadjusted for the three monthly ex dividends.

Sourced from CEFConnect Page for NBD

Sponsor's Website: NBD - Nuveen Build America Bond Opportunity Fund

As of 12/31/14, the fund owned 62 securities. The leveraged adjusted duration was then 11.94 years.

Bond Fund Duration-Vanguard

NBB Page at the SEC

Last SEC Filed Shareholder Report for the Period Ending 9/30/14

Prior Trades: Item # 3 Sold 100 NBD at $21.86-Roth IRA (5/29/13 Post)-Item # 2 Bought 100 of the Bond CEF NBD at $21.29-Roth IRA (6/21/12 Post)Item # 7 Sold 100 NBD at $22 (2/27/13 Post)-Item # 2 Bought 100 NBD at $21.8 (9/11/12 Post)

Related Trades: I currently own the functionally equivalent NBB in a Roth IRA where the distributions become tax free. Item # 1 Roth IRA: Added 100 NBB at $20.1

NBB Realized Gains To Date: $307.12

Rational: I clipped three dividends and made a decent percentage return on the shares. I am holding the functionally equivalent NBB in the ROTH, at least for a few more weeks.

While the bond ghouls are not concerned about interest rate risk, I seen almost nothing but that kind of risk in these long duration bonds and bond funds. The risk is so strong that it is blinding to even gaze upon it.

TLT for example has a duration of 17.9 years and a distribution yield of 2.48% as of 1/21/15. iShares 20+ Year Treasury Bond ETF | TLT A 2% rise in interest rates for treasuries with similar maturities would result in about a 36% loss in TLT's value or roughly 14.4 years of dividend payments at a 2.48% yield.

The duration is long, as noted above, so interest rate risk is high. A 1% rise in interest rates for similar duration bonds could result in almost a 12% decline in net asset value per share. I am consequently moving in and out of these long duration leveraged bond CEFs. Eventually, I may have no choice but to sell at a loss after buying back shares one too many times.

Intermediate and long term rates fell last Friday.