Thursday, April 23, 2015

Bought: 50 EROL at $24.45 and 50 AMNB at $22.07/Reality Creations Made by Politicians, Citizens and Investors and the Profound Negative Consequences Flowing Therefrom

I excerpted the discussion of the EPOL purchase for publication as an Instablog.  I have a long introduction section in that Instablog discussing investment strategy that is not found here.  

Bought IShares MSCI Poland Capped ETF (EPOL) With An Investment Strategy Discussion Introduction - South Gent | Seeking Alpha


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

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Recent Developments:

Existing-Home Sales Spike in March | realtor.org

I left a comment at SeekingAlpha today discussing the obstacles to interest rates being set by the market using traditional criteria such as inflation and inflation expectations and how the FED is now in a box. The abnormal central bank policies worldwide have both current and potential negative repercussions.

Seeking Alpha

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Reality Creations: 

While many may differ, I have noticed over the past 40 years that most individuals engage in a constant stream of reality creations and false memories about important issues. It is only a  question of decree.

The political ideologues who engage in fact creation to confirm their beliefs will do the same when investing their money. And when I read what they have written and corrected facts that are clearly wrong with citations to original source material, they refuse to look at the material or just dismiss it and resort back to their own created reality. The false reality is more comfortable psychologically and fits into an ironclad belief system that will never be questioned by them no matter how much contradictory evidence is placed before them.

The observation that I have noticed over 40+ years is that facts do not matter to them. Facts are false whenever they do not confirm their carefully drilled round hole since any fact having a different shape is per se false or at best classified as unimportant by those whose brains have not yet calcified by 100%.

While ideologues of all stripes are frequently reality distorters, the most prevalent reality creators in our society are the right wing reactionaries who adopt the gospel according to the Fox propaganda machine, Rush Limbaugh, Glen Beck, Ann Coulter and other zealots. They are not in any sense conservative, but the antithesis of true conservative values.

I see the same reality creation even when the subject is investing, an area where it is just patently obvious that individuals need to cleanse their mind of all pre-existing ideologies, particularly those that are based on political or social issues that are likely to cause the most errors when transferred into the investing arena. Instead of reality creations and the psychologically related emotionally driven impulse decisions,  the objective of an investor has to be the collection of all relevant data and then allow the facts to form the opinion rather than the opinion forming the facts.

At SA, I have repeatedly corrected reality creations hatched normally by individuals whose political beliefs are not open to dispute.

Even if I cite a bevy of factual data contradicting a statement made by them, they will ignore it and then make the same easily disprovable statement over and over again.  Facts do not matter and never will.

I saw an example of how beliefs create reality rather than the more productive path of facts creating opinions, when reading the comment sections to a WSJ articles, one of the many places where reality creators hang their shingles.

I am doing investment research of psychological abnormalities that impact investment decisions when reading those comments. The WSJ comment sections are productive laboratories for real time research with subjects eager and willing to provide free of charge material for my research in what one observer called in 1841 Extraordinary Popular Delusions & the Madness of Crowds by Charles MacKay.

There are a lot of similarities between accepting,  even  now, the reasons given for the Iraq Invasion and those type of financial events, including the bubbles in Japanese stocks that developed in the late 1980s and in U.S. stocks in the late 1990s; the parabolic spike in home price in the U.S. between 2002 and 2007, a similar land bubble in Florida during the 1920s; the gold and silver price spikes in the late 1970s and again in 2009-September 2013 (just look at the linked charts); the vast array of Ponzi schemes, and so on until one becomes weary of typing the list.

Maybe I could just type the symbol for infinity to express the time period associated with Extraordinary Popular Delusions and the Madness of Crowds:  ∞

Several commenters were aggressively dismissing a comment made by one of the few rational human beings who, forever reason, decided to leave a factually based comment. That individual was simply saying that the so called mobile biological labs in IRAQ did not exist. I do not make any comments there wishing to maintain my status as an objective observer.

The reality creators were not citing any authority, apparently relying on the pervasive false propaganda that poured from the mouths of those fixing the facts. One noted that those purported biological labs could be placed in operation quickly and could produce a variety of biological weapons to reign down on NYC in another 9/11 attack. I am being fair in that description.

The rational human being was citing an array of actual data that those alleged biological mobile labs, found buried in the desert, were actually for the production of hydrogen gas to fill artillery balloons. From 'Biological Laboratories' to Harmless TrailersIraqi mobile labs nothing to do with germ warfare, report finds

The CIA knew that the primary source of that information was and Iraqi seeking asylum in Germany, and who was justifiably called "Curveball" by his handlers.

Curveball later admitted that he fabricated the story. No one should be surprised that those relying on his tale are not surprised by that admission. Defector admits to WMD liesIraqi  Admits WMD Lies - ABC News'Curveball': I lied about WMD to hasten Iraq war-NBC News

Dick Cheney still believes that those hydrogen gas trailers are biological labs.

The foregoing is just one of many reality creations used to justify the Iraq Invasion.

Other well documented ones include the then known falsity that aluminum tubes intercepted in Jordan were not appropriate for uranium enrichment, as claimed by the administration and the obviously forged Niger yellow cake documents (known to be forgeries before the invasion)

The foregoing is not a political discussion. I would be equally critical of LBJ's rationale for the Vietnam war and its escalation.

As I have said here many times before, going to war decisions are not political but should involve a fact based and truthful assessment (internally formulated and externally expressed to the population) of how the expenditures of large sums of borrowed money and the loss of life (both U.S. soldiers and civilians) furthers, in a rational and objective manner, national security interest that are jeopardized by a failure to act.

Lies and misleading statements are made regardless of party affiliation. For politicians, their power and influence is frequently far more important to them than a real concern (distinguished from the prevalent pretend variety) about  the best course of action for the nation. A failure to disclose details that would undermine or call into the question the rationale for a $2+ trillion expenditure, using borrowed money that will probably have to be refinanced forever,  is no different that an outright lie.

A statement made that the aluminum tubes were for uranium enrichment, based on some non-expert opinion advanced by a guy named "Joe" at the CIA, is not false because Joe made that claim which he did do. The evidence then showed how Joe had repeatedly dismissed the own experts hired to rebut U.S. scientists after they agreed with the U.S. centrifuge experts at our Oak Ridge facility.

The Big Lie was the failure to say that the experts in gas centrifuges at the U.S. Oak Ridge enrichment facility had examined the tubes and found them to be inappropriate for gas centrifuges, a fact known at the highest levels of the Bush Administration before the Invasion and disclosed to members of the Senate's Intelligence Committee and in a brief sentence in a footnote to a security briefing document disclosed only to those politicians who took the time to review it.

Only a few politicos actually reviewed even that abbreviated version, If the politicians had reviewed just that footnote, a bright red flag would have been raised about other false justifications.

For political survival, it is best to say I voted for the Iraq Resolution and there is no paper record that I reviewed that report.

Why did Hillary lose to Obama in the Democrat primaries?  Obama gave a speech opposing the war and Hillary voted for it and too much was then known, during that nomination process by Democrats, about the false factual assertions made to justify the incursion, as well as the costs and loss of life with over 100,000 civilians killed in the conflict and the emergence of Iran as a more powerful regional power.

E.G.  Going to War Decisions: Conservative or Liberal vs. Competent or Incompetent? (12/25/2008 Post)

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Lexington Realty (LXP) Reinvestment Price:

As I noted in an SA Instablog, I moved my entire position in LXP to my Fidelity Roth IRA, the only account that I have where I can receive a 5% discount on the dividend reinvestment price and avoid a tax on the fictitious income created by the IRS based on that discount.

My Fidelity Roth IRA reinvestment price for the last quarterly dividend was $9.2825, below the 52 week low price of $9.49 as of 4/21/15.


For a family member who does not have a Fidelity account, the average was was $9.74. The broker aggregated the LXP dividends received by all of its customers requesting reinvestment and then used those funds to make an open market purchase. That is what is done with all of my brokers, with Fidelity being only a limited exception. The market purchase of shares will of course be without a reinvestment discount available under a corporation's reinvestment program. And, that practice frequently results in significant price differences depending on the timing as I have noted here in the past.

This issues are discussed by me in a SA Instablog: Lexington REIT (LXP) - South Gent | Seeking Alpha

Fidelity does not sign their customers up directly for the company reinvestment plan. Instead, it goes through a Depository Trust program that is limited in scope to participating securities. I currently own one other security that offers a 5% discount through DTC, and that is  Bridge Bancorp (BDGE). I own that position in a taxable account and quit reinvesting the dividend based on valuation issues. I do not know now whether the discount is still being offered by DTC and BDGE. If I buy more BDGE shares, when those valuation concerns no longer exist, the placement will be in the Roth IRA.


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Conclusion of My Effort to Secure the Correct Withholding Rate for the SVNLY Dividend: 

As expected. Fidelity did not change its position that the non-treaty rate of 30% was final, rather than the lawful treaty rate of 15% applicable to me as a U.S. citizen, as clearly spelled out in Article 10 of the Sweden's tax treaty with the IRA and the opinions of Big Eight accounting firms.

I summarized a reply in an addition to this earlier blog:

Scroll to Update April 22, 2015:


Stocks, Bonds & Politics: Update on Svenska Handelsbanken (SVNLY) Dividend Withholding Tax



The importance of this 30% vs. 15% has to do with customers who have to fill out the cumbersome IRS Form 1166 to claim a foreign tax credit due to running over the minimum levels for a simple line entry in the 1040. If Congress had any interest whatsoever in making taxpayers incur more in costs than the benefit to the government from a low or regulation, then the full tax credit should be allowed without filling out that form and creating a nightmare for everyone concerned, but alas that is just irrelevant. Possibly, if some contributor laid out a few million in "campaign" contributions, spread it around in the most productive manner, then someone may actually listen. Otherwise, just forget about it.

Since the dividend is qualified, subject to a maximum rate of 15% for me, that complex form and burdensome form limits my credit to no more than 15%, my qualified rate, which the rate that I would have to pay but for the credit.

A reader of one of my SA articles reproduced a reply from Fidelity on the withholding tax issue for TD's dividend payment into an IRA and how Fidelity decides whether or not to claim the tax treaty exemption.  I would recommend reading its, particularly for investor who have MLPs in an IRA and believe that Fidelity is making the UBTI computations necessary for filling out the IRA Form 990-T:
Link to Reader Comment: Dividend Growth And Large Cap Valuation Strategies: Bought Toronto Dominion Bank - Toronto-Dominion Bank (NYSE:TD) | Seeking Alpha


Link to My Response (quickly made, since I instantly recognized the importance): Dividend Growth And Large Cap Valuation Strategies: Bought Toronto Dominion Bank - Toronto-Dominion Bank (NYSE:TD) | Seeking Alpha

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1. Bought 50 EPOL at $24.45 (see Disclaimer):

Snapshot of Trade:




Security Description: The iShares MSCI Poland Capped ETF (EPOL) attempts to track an index representing Poland's stock market.




MSCI Poland Index.pdf

Sponsor's website: iShares MSCI Poland Capped ETF | EPOL

Sponsor's Fact Sheet as of 3/31/15: EPOL (beta vs. S & P 500=.57; the standard deviation is high at 21.92 over 3 years compared to SPY at 9.56)


I view the expense ratio as high for an ETF at .6%.

Sponsor's Website: iShares International Select Dividend ETF (expense ratio: .5%)

I am not familiar with any of the stocks owned by this fund.

I took a snapshot of the top 15 holdings as of 4/16/15:





The fund at that time owned 45 stocks.

I know nothing about those stocks and would never take the research them for a possible purchase. A few of the top 15 names are at least capable of being pronounced by me.

I just limited myself to looking at the Marketwatch pages for the top two holdings and glanced at their recent earnings reports:


Powszechna Kasa Oszczednosci Bank Polski S.A. Stock Price Today (PKO:WAR)
Financial Reports | Investor Relations | Polish PKO Bank | Bank PKO Polish
ADR Trades in USDs on the Pink Sheet Exchange: PSZKY

Powszechny Zaklad Ubezpieczen S.A. Stock Price Today (PZU:WAR)
Financial Data
Analyst Coverage And Recommendations

One money manager currently calculates the following valuation metrics for Poland's Stock Market based on what was shown as of 4/20/15:


Poland 
Shiller CAPE P/E: 10.2
P/E: 19.8
Price to Book: 1.3
Price to Sales:   .8

Even with three low ratios, I would not have bought this ETF but for the substantial decline in the Polish Zloty's value against the U.S.

Two themes are being played with these small foreign county ETFs: a substantial decline in the ordinary currency vs. the USD and a low Shiller and other valuation ratios.

The Polish stocks have 3 out of 4 of those valuation ratios suggesting only a low valuation. As with any individual stock, there are reasons why investors are not enthusiastic about future prospects, at least when viewed at the current moment in time.

U.S.
Shiller CAPE P/E: 28.8
P/B: 2.9
P/S: 1.7
P/E: 20.6

Global Stock Market Valuation Ratios

The sponsor claims that the P/E ratio was 17.7 as of 3/31/15. It is important to click the "i" next to that number to see how that P/E is calculated. The P/E is based on trailing 12 months earnings but excludes "extraordinary" items, companies with negative earnings and stocks with greater than 60 P/Es. My response is to give me the facts as they are rather than after a massage.

In my article discussing the purchase The Global X MSCI Norway ETF ( NORW), I noted that the Shiller CAPE P/E frequently has no relationship with annual performance numbers.

Some of the worst performing stock markets in 2014 had the lowest CAPE ratios (e.g. Greece and Russia), while some of the higher CAPE ratios performed well into positive territory.

Meb Faber has the CAPE ratios as of 12/31/13 and the 2014 performance numbers.

There are other objective and subjective factors that will have material impacts on overall performance, ranging from rational economic future forecasts to delusions.

Poland had a 12.3 CAPE as of 12/31/13 and EPOL lost 15.34%. The highest CAPE was Indonesia at 26.5 with a +24.05% performance. Those who adhere tightly to Shiller's CAPE will argue that the high CAPE ratio countries will revert to their means, which is established by data since the 1880s for the U.S. stock market.

Poland's Economic Indicators: 

The EU believes that Poland "weathered the economic crisis and its aftermath very well".


Sourced: europa.eu/ poland/ pdf

Poland's unemployment rate is currently high at 11.7%.

Poland's annual GDP growth rate has averaged 4.2% from 1995 until 2014. The 2014 GDP increased by 3.1% compared to the 2013 4th quarter.

On a negative note, Poland's CPI numbers have been negative since June 2014, with a -1.5% reading in March 2015. The average inflation rate was an unhealthy 9.64% from 1992 through 2014. While it is to soon to know, replacing those problematic historical inflation numbers in the rear view mirror and generating low future inflation numbers, would be more positive operating environment. Persistent deflation and problematic inflation numbers are unhealthy

EU Forecasts for Poland's economy:


Sourced: .EC Forecasts as of February 2015/pdf

Prior Trades: None. This is my first purchase.

Dividend History: Dividends are paid semi-annually at variable rates.


The fund paid out $.827638 per share in dividends. If I use that number, the dividend yield would be about 3.39% based on a total cost per share of $24.45.  The actual yield will vary based on future distributions.

Chart: The price peaked in April 2011 near $40 per share and then crashed to about $23.5 within a few months thereafter. A low was hit near $20.9 during May 2012. Since that time, EPOL has been trading in a channel mostly between $24 to $30. The last upward price spike started in June 2013 near $24 and peaked at near $31.5 in November 2013.

All of the foregoing severe up and down spikes contribute to the high standard deviation number. Usually, I prefer far less volatility in a stock or a fund.

Standard deviation is explained in a number of articles  available for review using the internet, including these articles published at Morningstar and StockCharts.

Rationale: I have been buying 50 share lots of foreign country ETFs that have low Shiller P/Es and other ratios, particularly compared to the U.S. stock market, and whose currencies have declined 20% or more versus the USD.

The large decline in the Polish Zloty ("PLN" hereinafter) against the USD makes Polish stocks cheaper for a new buyer of a USD priced ETF that owns stocks priced in PLNs.

A one year chart shows the carnage. The important point is that I missed the decline until the date of my purchase.

One Year Chart PLN/USD:


7/14/14: 1 USD=3.04 PLNs
3/15/15: 1 USD=3.954 PLNs
PLN's Value -30.07%
TOP on Day of EPOL Share Purchase 4/15/15=3.8
% Decline 7/14/14 to 4/15/15: -25%

The USD is at a ten year high against the PLN. USD/PLN Chart The prior spike in the USD topped at 1 USD buys 3.9 PLNs on 2/18/2009. The USD was strong against most major currencies during that post Lehman bankruptcy period. The recent spike high hit 3.954 on 3/15/15.

It remains to be seen whether or not that level will be the top.

In a recent article, I discussed the rationality of the USD spike against major currencies: Added To iShares International Select Dividend ETF-iShares International Select Dividend ETF (NYSEARCA:IDV) | Seeking Alpha

It is impossible to know at what level or the time period of a parabola's peak, up or down.

And, it is possible that the USD's parabola will collapse upon itself using the U.S. Dollar Index (6 currencies weighted in the EURO) or the broader Bloomberg Dollar Spot Index with 10 foreign currencies, while the PLN remains weak against the USD for reasons specific to that country.

The PLN is not included in those two Dollar indexes, where dollar strength is measure when the line moves up. The 5 year charts for the DXY and the Bloomberg Dollar Spot Index clearly shows the USD's current parabola.

Seeking Alpha published an article after my purchase discussing his arguments for PLN to continue its decline against the USD.

There is some dividend support for the ETF.

The $24.45 current price was near the low end of the 2012-April 2014 price channel.


Risks: Currency risk is of course a dominant risk as noted above.

The fund describes the usual risks in the Prospectus (e.g. risks associated with concentration, country, currency, stock, sector risks (e.g. financials), non-diversification, EU, etc.and so on)

Barron's published a negative article about Poland's stock market in November 2014. One of the problems was the overweight in financials that were in the author's view richly priced at the time.

There is certainly concentration risk with this ETF.

I suspect that Poland's stocks are feeling some blowback from Russia's renewed military aggression. Poland borders both the Ukraine and Russia. The Ukraine confrontation appears to have just boiled to a simmer in recent weeks.

And, as we know, Russia had an ongoing military occupation of Poland after WWII.

And the current Ukrainian President claimed that Putin privately threatened to invade Poland, Hungary and the Baltic states. Sounds about right but who knows unless there is a recording and that would need to be forensically examined by impartial experts.

2. Bought 50 AMNB at $22.07 (REGIONAL BANK BASKET STRATEGY)(see disclaimer):

Snapshot of Trade:



Company Description: The American National Bankshares Inc. (AMNB) is a bank holding company for the American National Bank that has 27 branches located in Virginia and North Carolina (8). AMNB's headquarters is located in Danville, Virginia. ( nice building: Google Maps)


Map of Branch Locations

Prior Trade: Item # 5 Sold 50 AMNB at $23.03(profit snapshot=$77.57)- Item # 4 Bought 50 AMNB at $21.16 (9/7/2013 Post)

I chucked this position due to a negative E.P.S. trend which is still continuing. I decided to try again and see whether the bank, which has positive metrics, can receive a lift from a recent acquisition and an improvement in its net interest margin later this year or in 2016.

I am referring to the acquisition of MainStreet Bankshares, the holding company for the Franklin Community Bank, that was consummated on 1/1/15. SEC Filed Press Release This acquisition expands AMNB's territory into the Roanoke, VA. metropolitan area, which I view as a long potential positive development.

Roanoke, Virginia - Wiki

Dividends: The good news is AMNB did not cut is dividend during the Near Depression period or its aftershocks. The bad news is the dividend has remained constant since it was first paid during the 2007 second quarter. Prior to this long dividend increase moratorium, the bank was doing just fine with its dividend growth rate, raising the quarterly rate from $.075 (1st Q. 1996) to that $.23 (2007 2nd Q.). That increase in about 11 years amounts to +206.67%. Calculate Percent Increase

At a $22.07 total cost per share, the current dividend at its long term running in place number is 4.17%, which is pretty good in the sixth year of the FED's Jihad Against the Savings Class.

Chart: The five year chart is not appealing. AMNB Interactive Stock Chart The stock has not gained ground over that period. At least I have not been a long term shareholder going up and down and ending up at the point where I started in one of the largest percentage moves in history and the second longest without a 10% correction.



Just unappealing.

I cast my votes in every annual shareholder's meeting. When looking at that kind of chart, I will vote against the Board of Directors and against any measure requesting approval of their compensation and benefit packages.  I am just calling balls and strikes as I see them.

Results: 2014 vs. 2013 (2015 1st quarter not yet available for review)

This snapshot highlights the problems and is self-explanatory. Suffice it to say that E.P.S. was reported at $1.62 in 2014 and at $2 in 2013:



Earnings are trending down, not up.

ROA and ROE down year-over-year.

Efficiency ratio going the wrong way.

NIM went from 4.1% in 2013 to 3.66% in 2014.

One positive trend is that NPLs decreased year over year and are also good (

Two other positives are a low charge off ratio of .07% in 2014 and a coverage ratio of 302.01%:

There was also some growth in AUM, deposits and loans.



SEC Filed Press Release

Rationale and Risks: This bank's managers and Board are not adding value. The shares are just running in place for the most part in a fairly narrow channel as shown in the preceding chart. The results including in the Y-O-Y snapshot are not going to entice many investors to become shareholders.


Still, the dividend is secure and well above the ten year treasury yield and investment grade corporates maturing in 10 years or less.

Some metrics are positive including the

There is at least some possibility that shareholders will at some point benefit by a takeover.

AMNB discusses risks incident to its operations starting at page 14 of its 2014 Annual Report. 

3. Regional Bank Reports and BHB Dividend Increase: 


A. CNB Financial (CCNE): Actual E.P.S. $.39 vs. Estimate of $.38 (one analyst)



Looks fine to me. Market does not care about this small PA bank.

CNB Financial Corporation Reports First Quarter Earnings for 2015

B. First Bancorp (FNLC): Actual E.P.S. $.39 (No Estimates)

2015 1st Q. vs. 2014 1st Q



"The local economy has rebounded considerably in the past year".

The First Bancorp Reports Record Quarterly Net Income

C. Financial Institutions: Actual E.P.S. $.46 vs. $.44 estimate (2 analysts)






Financial Institutions, Inc. Announces First Quarter Earnings: FISI

D. Bar Harbor raised its dividend again. Bar Harbor Bankshares Increases Quarterly Cash Dividend As noted in that press release, Bar Harbor had increased the dividend by 12% since the 2014 second quarter. The rate is $25 per share. This raises my yield to 4.6% based on a total cost of $21.74 per share.

Snapshot of position is in the latest update: Update For Regional Bank Basket Strategy As Of 4/20/15 - South Gent | Seeking Alpha

Wednesday, April 22, 2015

Svenska Dividend Withholding Update

I summarized Fidelity's response to the 30% withholding rate for the Svenska Handelsbanken AB ADS  (SVNLY) annual dividend, rather than the clear treaty rate of 15% applicable to a U.S. citizen. The response was expected. They blamed the company. 


Scroll to Update Aril 22, 2014: 



I do not like get screwed no matter how much money is involved so I am trying to get to the bottom of why 30% was withheld. Fidelity blames Svenska. 

I sent the an email to Svenska Handelsbanken's investor relations department asking for an explanation, noting in the email Article 10 of Sweden's Tax Treaty with the U.S., the opinions of Big Eight Accounting firms that I was entitled to the 15% rather than a 30% rate applicable to citizens of non-treaty countries,  that I had sworn in my account application that I was a U.S. citizen and that my SS number was correct, and Nordea bank had withheld 15%. I also informed the company that I would republish their reply or lack thereof in this blog. 

I am still waiting for annual distributions from other Swedish companies including Svenska Cellulosa AB ADS  (SVCBY) and Swedbank AB ADS  (SWDBY)

Monday, April 20, 2015

Update on Svenska Handelsbanken (SVNLY) Dividend Withholding Tax

I updating here with Fidelity's response to my inquiry about why a 30% dividend withholding tax was applied to the recent  Svenska Handelsbanken AB ADS (SVNLY) dividend payment. 

Fidelity insists that the correct rate is 30%. If I only looked at the ADR prospectus, which was not linked of course, I could confirm that rate. 

My citations to the Article 10 of Sweden's tax treaty with the U.S., which clearly shows that the rate is 15%, and to large accounting firms saying the same, had no impact whatsoever. 

Scroll to Article 10 



I visited the ADR custodian's page for SVNLY. 


I did find a notice that identified the withholding rate for this payment was 15%, but did mention some other rates at the bottom: 





There is no prospectus for the ADR filed with the SEC.  

There is a Form F-6 filing which is an ADR registration statement. SEC 

After reviewing those documents, I could not locate a single statement asserting that a 30% tax will be applied to the dividend. 

The 30% rate is generally reserved for countries with no tax treaty with Sweden. That does not include the U.S. 

I may be the first person to challenge what has probably been happening for awhile.  This was my first SVNLY dividend. 

The Nordea Bank dividend had 15% withheld, and that is the appropriate rate for a Swedish company. 

I expect them to come back telling me that I am wrong. The problem may simply be a failure to do something like filing a document with the Depository Trust Company showing accounts held by U.S. citizens. Rather than admit to being wrong, and possibly having to redo what has already been done, the broker will simply dig in their heels and continue doing what has been done in the past. I am not saying this is being done by Fidelity for the Svenska dividend, but this is a common problem and may explain the response so far.  


I also referenced the issue in response to a reader who was told by a Fidelity representative that it would withhold Canada's 15% tax for a Toronto Dominion dividend paid into a U.S. citizens IRA, which is unquestionably wrong. 

Comment Trail with Bingy77:

For example, in the first year when the cost basis for dividends had to reported, I downloaded the information into TurboTax. The data identifying what was and was not reported to the IRS was incorrect, and I had to manually enter the information correctly. Fidelity blamed TurboTax and TurboTax blamed Fidelity. The problem did not occur thereafter, so someone fixed it. 

Fidelity and TurboTax Problems-Form 8949 (4/12/2012 Post)

It is really hopeless many times to contact a customer representative about even a clear cut mistake made by the broker. Why? Brokers do not make mistakes.  

I could describe my experiences over the years, but that would be too frightening. My favorite one happened with another broker, lets give them a hypothetical name like, just off the top of my head, TD Ameritrade. 

I will drag and drop a blog discussion here. I still have the documents to prove every word: 

"Several years ago, I noticed that over five thousand had been transferred out of my brokerage account to an account that did not belong to me. I called to complain and the firm then gave me my money back. Then, when I looked at the account the next day, the money had been transferred back out of my account to the same unknown account. I complained again. The money was put back into my account. Then, the same thing happened again before I become more insistent that I did not appreciate Ameritrade giving my money away. Apparently, a husband was attempting to transfer money from his account to his wife's account, and someone made a an error in entering his correct account information. Instead, my account number was entered as the source of funds for the transfer. I did not receive an apology for the inconvenience and was just told that mistakes happen. This highlights the importance of checking every line item in your statements. "


Stocks, Bonds & Politics (6/13/2011 Post)

I did receive three free trades for my trouble and no apology and nothing remotely resembling one other than what I called, when discussing it with another investor, making feel guilty about asking them give my money back to me.

UPDATE APRIL 22, 2014: 

As expected I received a curt reply from Fidelity who repeated a claim that SVNLY will withhold 30%, which would be a violation of the tax treaty between Sweden and the U.S.

Of course, it goes without saying that Fidelity's is not responsible for SVNLY's ALLEGED treaty violation. No suggestion is even made that Fidelity may be responsible in some way, including the possibility that the broker has failed to do something such as making an e-filing with the ADR custodian of their customers'  citizenship or that data with some other agency like the Swedish tax authority that would then result in the treaty rate of 15% rather than 30%.

The 30% rate is the one routinely used for citizens of non-tax treaty countries like maybe Sweden and the Ivory Coast.

The representative specifically stated that Fidelity is "unable to make comments on information that is provided by third party" (sic) She apologized that this would not be done.

The correct word would be third parties like Article 10 of  the Sweden-U.S. tax treaty available at the IRS which specifically shows that I am entitled to the 15% rate and numerous references to big 8 accounting firms saying the same. Yes, best to ignore that material altogether.

This gets back to an age old issue. When a broker is wrong, and can be proven wrong, getting them to make a change that will require them to undue what they have been doing which is contrary to the interests of their customer will not happen. It will only happen when it can be proven, as in the TD case mentioned earlier, that severe repercussions are likely to occur without that change. By severe, I do not mean moving a seven figure account to another broker. I told TD that one more transfer of over $5000 in my account to someone that I did not know would result in a call to the Williamson County District Attorney rather than to them.

Sunday, April 19, 2015

Pared 95 of 200+ CHN Owned in a Taxable Account at $21.73-Still Own Recent ROTH IRA 100 Share Purchase at $18.94/ Added 30 IDV at $34.55-Comission Free at Fidelity

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

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Recent Developments:

The market got the shakes as investor's drank the crazy juice and started to hyperventilate about Greece again with some regulatory changes in China contributing to the downdraft apparently.

Journalists also attributed the selloff to China's new regulations designed to curb "shadow financing" for stock purchases and to expand the "supply of shares for short sellers".  Bloomberg

The Cleveland Fed's median CPI rose .2% in March or at a 2.6% annualized pace. Over the past 12 months ending in March 2014, the median CPI is up 2.2%. Current Median CPI

The BLS reported that the seasonally adjusted CPI and core CPI rose .2% in March. Consumer Price Index Summary Before seasonal adjustment, CPI decreased .1% over a 12 month period largely caused by the crash in energy prices.

Apartment market conditions are becoming stronger for owners. NMHC Quarterly Survey of Apartment Conditions (April 2015) | nmhc.org

The rent to mortgage ratio clearly favors buying rather than renting. Trulia.com - Rent vs. Buy Report

An indicator for future new housing demand-new household formation, has turned sharply up. Reuters

Freddie Mac reported that the 30 year mortgage was at 3.67%. Mortgage Rates Little Changed Remain Near 2015 Lows Holy cow. When I built my current home in 1982, the average 30 year mortgage rate was 16.04% with 2.2 points. Primary Mortgage Market Survey Archives - 30 Year Fixed Rate Mortgages - Freddie Mac I had no choice really other than to pay cash for everything.

China'a central bank cut bank reserve requirements by 100 basis points over the weekend. This move is designed to spur more bank spending and is commonly viewed as a central bank stimulus measure.


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SVNLY: Incorrect Tax Withholding by Fidelity

I received the annual dividend for SVNLY last week, minus a 30% Swedish withholding tax and the $2.5 annual ADR fee that is paid out of the dividend:


I believe that the correct withholding tax is 15% and have already pointed that out to Fidelity. I previously incorrectly noted that the recently paid Nordea dividend had a 15% Norwegian tax withheld, but that is incorrect.  For some reason, I occasionally start to believe Nordea is based in Norway probably because the first three letters are the same. Nordea is a Swedish company subject to Sweden's 15% dividend withholding tax.

See Article 10: www.irs.gov/pub/irs-trty/sweden.pdf

Treaty Rates | Deloitte International Tax Source

A reader notified me recently that a Fidelity representative claimed that a 15% tax would be withhold for a Toronto Dominion dividend payment into an individual IRA account, which is clearly erroneous. Dividend Growth And Large Cap Valuation Strategies: Bought Toronto Dominion Bank - Toronto-Dominion Bank (NYSE:TD) | Seeking Alpha The mistakes that are made by brokerage firms are significant.

Nordea is a bank domiciled in Sweden and the ordinary shares are priced in SEKs rather than NOKs.

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1. Sold 95 out of 200+ CHN at $21.73-Taxable Account (see Disclaimer): The China Fund Inc. (CHN) is a stock closed end fund.

CEFConnect Page for CHN

Since I have discussed this CEF in at least two fairly recent posts, I am not going to discuss it here. Instead, I will simply explain what I doing with this pare as a total return investor who places an emphasis on capital preservation and income generation.

I am going to produce several snapshots to reveal my thought progression on this pare, taking into account the following year end large dividends paid by this fund.



The China Fund, Inc.-Distribution history

I sold my highest cost shares reducing my cost basis from $19.8 to $18.49 without generating much of a taxable gain. 

The name of the game is after tax total returns adjusted for inflation.

CHN's annual distributions go ex dividend in December.

The shares bought in 2011, 2012, and 2013, shown in the snapshots below, would have generated the following per share dividends respectively, provided the shares were purchased prior to the year end ex-dividend date:

Bought Prior to Annual Distribution Ex Dividend Date in
2011 $13.33 per share
2012 $10.33 per share
2013 $  7.08 per share

Ex Dividend Dates: China Fund, Inc. (The) (CHN) Dividend Date & History

The 50 share lot bought on 12/29/14 was after the 2014 ex dividend date for the $3.77 per share distribution. Added 50 CHN at $17.79 and Added to MCDFX (12/30/14 Post) I still own those shares as shown below.


Snapshot of Position Before the Pare: 


Selection of Shares to Be Sold:  


Of the 95 shares sold, only 50.487 was purchased by me in the market. The remainder (44.513 shares) originated from reinvested dividends. I had to sell the fractional shares .487 from a 30 share bought on 5/7/14 simply to get to 95 shares.

Fractional shares can not be sold.

In order to eliminate all of the shares purchased with dividends at between $20.50 through $21.56, the highest cost shares, I had to sell a fractional piece of that lower cost 30 share lot bought at $19.89. (5/24/14 Post). The cost basis is higher for those shares at $20.16 due to the commission cost spread over just 30 shares.


Profit from 95 Shares: 

2015 Taxable Account ST +.72 (fractional shares)-LT +$47.08  
After being hit with 4 consecutive $3 or higher per share year end distributions, mostly long term capital gains, I did not want to create a meaningful tax event selling the shares that contributed to those large, tax inefficient dividends.  I have already paid enough taxes at 15% on those totals.

I managed to sell all shares profitably, thereby harvesting dividends paid in 2011-2013 at a profit.

That simply means to me that the income was harvested at a profit (small taxable gain + dividends=total return).

This pare was a total return harvest that produced insignificant taxable income for 2015.

Given the size of the dividends, the small share profits are an immaterial part of the total return which is significant on a percentage basis given the dividend amounts and the cost of the shares.

The 50 share lot included in this pare was purchased at a total cost, which includes the commission, of $21.36. Added 50 of the Stock CEF CHN at $21.2 (6/2/13 Post)

Taxable Account Position After Pare: 

Taxable Account Position Now at 105+ Shares Average Cost  Per Share=$18.59 

I also still own a 100 share lot, bought recently at $18.94, in my Roth IRA: Added To China Fund (CHN) - South Gent | Seeking Alpha Those shares have popped since my 3/2/15 purchase.

2. Added 30 IDV at $34.55 -Commission Free at Fidelity (see Disclaimer):


Snapshot of Trade:




Security Description: The iShares International Select Dividend ETF  (IDV) owns foreign dividend paying stocks.

I can buy this ETF commission free in my Fidelity accounts.

That is significant for any investor who wants to dollar cost average in small lots. I have bought as few as 5 ETF shares when I am able to do so commission free in one of my brokerage accounts. The low cost Vanguard ETFs are bought in my Vanguard brokerage accounts.

This last purchase brings me up to 50 shares. I am not yet close to being serious about this ETF. iShares ETFs

I decided to buy IDV last year, rather than to keep the ETF DWX for 2 reasons. I liked the holdings in IDV better on a long term basis, and I could average into a position in small lots at Fidelity cost effectively due to the free brokerage commissions.

I eliminated DWX on 4/4/14, which was owned in a Fidelity taxable account, realizing a gain of $235+: Sold: 58+ DWX at $48.75 (4/14/14 Post).

DWX closed last Friday at $44.77, SPDR S&P International Dividend ETF (DWX)

I took a snapshot of the top 10 DWX holdings as of 4/16/15 which highlights IMO the problem:



I took a snapshot of the top 25 IDV holdings:

TOP 25 Holdings as of 4/16/15
Both funds have issues in the weightings and stock selections. The energy weightings have been a drag since the 2014 summer due to the collapse in crude prices. In my opinion, IDV has fewer of those negative issues and I am just more comfortable owning it rather than DWX.

IDV owned 102 stocks as of 4/15/16.



Sourced: Sponsor's Fact Sheet as of 3/301/5.pdf

Currency Risks and Benefits: Both DWX and IDV have also been negatively impacted by the parabolic rise in the USD since last summer which flows into the net asset value of a USD priced fund owning foreign stocks priced in Euros, British Pounds, Canadian and Australian Dollars and other currencies that have declined significantly since the USD parabola started last year.

Parabolic price spikes in any asset category will inevitably collapse upon themselves, taking away a substantial part of gains created during the parabola spike up.

The USD's parabola is clearly shown in a five or ten year Dollar Index (DXY) chart.

I am using my USDs now to buy foreign stocks, which is what I do whenever investors drive my native currency to ten plus year highs against other major currencies based on what exactly. The FED may or may not raise the FF rate by a .25% later this year, or maybe not, and the U.S. did  better in the third and forth quarters of 2014 than many other countries.

Green shoots have been appearing in Europe, particularly as the pick up in export activity accelerates resulting from the Euro's devaluation, as U.S. GDP numbers slow down.

I buy in small lots to build a position after the foreign currency has already suffered a substantial devaluation when converted into USDs. I started to pick up purchases of USD priced ADRs when the local currency had fallen close to 20% or even more in same cases.

USD's Long Term Future: I would simply note that USD strength comes and goes.

Many argue that currency trends are long term. There were in the more distant past some longer trends, perhaps a melt up occurring  over 3 or 4 years and then a meltdown taking 3 or 4 years to find a bottom.

I am not sure what is meant by long term when looking at ten year currency charts.

I can not look at a ten year chart of the Euro per 1 USD and see anything that I would label a long movement. The chart just looks like up and down chop to me, with a parabolic spike in the USD starting last summer clearly shown in that chart.

At page 18 of his annual letter to BRK shareholders, Warren Buffet noted the purchasing power of the USD has declined by a "staggering 87%" during the 1964 through 2014 period. Just looking at the USD's value over the past several decades from a common sense perspective, I see a problem rather than a benefit.

Inflation Calculator: Bureau of Labor Statistics ($7.67 now has the same buying power as $1 in 1964). When discussing what is "gold's fair value", I observed that gold had no intrinsic value that could be determined using standard valuation measures and then conceded that the $20 bills in my wallet do not in "reality have a fixed real value either ...". (introduction section 4/23/13 post:  What is Gold's "Fair Value"?)

Is the newly discovered fondness for the USD take into consideration, for example, the $18.152+ trillion in federal government debt, which amount was less than $1 trillion accumulated since the founding of the nation through 1979, plus the unfunded future liabilities for the baby boomers, and the soon to be reached $1 trillion in annual interest expenses that will be added to the existing debt (interest on that interest then) when rates normalize to something approaching average historical levels.

With historically extremely low rates, the interest cost in the F/Y ending last September was $430.8+ billion A weighted average rate of just 5% on $20T would take us to that $1T in annual interest.

So what am I really saying here.

I am an investor who owns mostly USD priced assets.

I am not enthusiastic about the long term value of the USD.

I am not as pessimistic as David Stockman (e.g. on this topic "Eating The Seed Corn-The Fed’s Calamitous Corruption Of Corporate Finance".)

I find Stockman's comments too full of hyperbole and exaggerations, and some may even  dismiss his warnings as the rantings and ravings of an old man. He is after all a few years older than me. Or, given his popularity at Zero Hedge, which is not held in high esteem among many investors, that linkage has a tendency to diminish what he is saying too.

I am leaning toward the same end result but seeing the end game further into the future. It will likely take more time to undermine what was built over the first 200 years.

The likelihood of a failed series of treasury auctions within 20 years is a significant and growing risk IMO. It is likely to happen when buyers start to cringe at buying treasuries unless the yields significantly increase which adds to the pre-existing problem. That is what some investors call a Black Swan. Sure, the FED may end up buying the debt that can not be sold, but the crater that follows will not be undone by that type of sop up. Might as well hit the U.S. with one of those giant asteroids from outer space.


I am consequently using what other investors are giving me now, until they come to their senses, to buy more assets priced in foreign currencies issued by governments viewed as more responsible than our dysfunctional one. On the one hand, the U.S. will end up spending more than $2 trillion (borrowed of course) on a war of choice (hardly looking so good now either), will likely find another Iraq or Vietnam type endeavor within the next 20 years, and will add costly new programs without bothering to fund long term the ones that we already have. It is a prescription for a train wreck caused by both political tribes in their own ways, each perpetually pointing the finger at the other rather than addressing rationally and fairly the nation's priorities and security interests.  In the last analysts, wearing my investor's hat rather than the one that I wear on election day, I recognize that I have no power to change the likely result and it will not matter when it happens who is to blame. I will just blame the American people for electing the crap now infesting D.C.



Prior Trade: Prior to this purchase, I only owned 20 shares, so I am only gradually moving up to 100+ shares. I am adjusting my purchases based on risk assessment due primarily to valuation, dividends, and currency issues inherent whenever a U.S. investor buys a USD priced fund that owns foreign securities.

I generally do not discuss commission free ETF purchases until I am at 50 or more shares.


Dividends: This ETF makes quarterly dividend payments that are variable. The dividend yield will be decent, but is not capable of being measured due to the variations in quarterly payments.


I have not been reinvesting the dividend and probably will not start doing so until I own at least 100 shares.


Rationale and Risks: I am basically using the current strength of the USD to buy foreign dividend paying securities in anticipation of what I call a twofer down the road. Hard to say when. The twofer is a market price increase due to a rise in foreign currency values against the USD and to rise in value when priced in local foreign currencies.  I may be too early catching that wave.

As shown above, the dividend support is decent.

In addition to the currency risks discussed above, there is the usual assortment of risks associated with stocks, which hopefully needs no further discussion Those kind of risks are summarized in the Prospectus, starting at page S-3. One of the risks mentioned is "industry sector risk" which does not need further explanation for those owning energy stocks over the past several months. A company may reduce or eliminate a dividend. Even a developed nation like Canada has country risks. An example would be what investors call the 2006 Halloween Massacre when the Canadian government announced an end to the favorable tax status of energy royalty trusts in 2011.

The concentration in Australian stocks is another prominent risk. The AUD has been weak against the USD for two years: AUD/USD Chart I noted some other issues relating to Australia's big banks when discussing the purchase of the ADR for Australia & New Zealand Bank Group last February. Since those large Australian pay good dividends, they will generally receive a good weighting in international dividend stock fund, as will the large Canadian banks that have similar issues, as I noted when buying a small lot of Toronto-Dominion Bank (NYSE:TD).

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I have been writing an unusual number of long SA comments this weekend, so I cut this post short.

I need to keep abreast of the news too. I noted that the GOP dominated Tennessee legislature recently passed a law declaring the Bible as the official book for the state, beating back an alternative after much debate that Andrew Jackson's bible should be made the official book to overcome those liberal ACLU types who would challenge the new law in court as being unconstitutional. The later alternative was proposed by the deep thinkers.

There are at least two important provisions in the Bill of Rights for many GOP partisans in Tennessee. One is what I would call a liberal view of the Second Amendment and the other is what I would call a new version of religious freedoms that extends to Christianity only as practiced by reactionaries.

Maybe children can start taking fields trips to the Creation Museum in Kentucky, rather than that liberal science museum expressing corrupted concepts generated by the liberal mass media.

Really what did actually happen in human development? As we all surely most know, unless we are a liberal or a communist,  children played with the dinosaurs as shown at the Museum.

A.A. Gill wrote a classic and humorous piece about that museum that was published in Vanity Fair.

Since gaining control of the legislature, the dominant reactionary forces in the modern day GOP have focused a great deal of attention to passing law allowing for guns in bars, guns in state parks,  guns at work, guns just about everywhere. Possibly, the next law will be to reimburse citizens willing to purchase a gun cabinet filled with guns.

As I recall, and my memory is not what it use to be, the argument for guns in playgrounds and parks was based on a bear scaring a little girl. If the adults were packing, they could have shot the bear, hopefully missing each other, and made the bear really angry so it would charge and kill the little girl rather than snarling and going about its business.

Tennessee's GOP has a different view about religious freedom when it comes to non-Christians. Sure, they will beg to differ notwithstanding to opposing permits to build non-Christian churches or making a really big stink when the conservative GOP governor hired a Muslim. woman and "an openly gay" staff member. County GOP chapters circulate resolutions condemning Haslam | In Session I got news for those guys and gals. They are not conservatives at all. A Conservative, meaning the real deal rather than reactionaries masquerading as conservatives,  actually view the Bill of Rights as embodying true "Conservative" values.

The conservative GOP governor opted out of Obama's expansion of Medicaid, preferred instead to create his own market based version which he did and that legislation is supported by hospitals and healthcare providers throughout the state. However, the GOP dominated legislature will not do anything, preferring instead debates about how far to extend gun "rights" or how many unconstitutional bills that can be passed to generate enthusiasm in their evangelical base.  Perhaps, the next bill will require that youngsters learn the bible in its entirety and repeat it while sitting on a mat with their heads bobbing up and down.

I voted for Senators Lamar Alexander (R) and Bob Corker (R) as well as Haslam (R) for governor. I have not voted for any GOP "conservative" running for a position in the state legislature. I just summarized briefly some of the reasons why a true conservative finds them so appalling.

Wednesday, April 15, 2015

Eliminated VEU at 50.39 and VWO at 43.69 -Roth IRA/Added 50 ARESF at $11.86/Sold 2 Vanguard Resources 7.875% Senior Unsecured Bonds at $96.5-Bought at $86.59

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

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Recent Developments: I do not have time to discuss this topic now. 

Instead, I will just link some data and other material.

FRB: Beige Book - April 15, 2015

NAHB: Builder Confidence Rises Four Points in April

Industrial Production and Capacity Utilization for March (released on 4/15/15)

U.S. Energy Information Administration (EIA) press release (4/15/15)elas

I discuss some recent developments in a few recent SA comments:

Comments on Bullard's Opinion: U.S. Economy About to Enter a Boom Period

Seeking Alpha

Bond Duration Risks:

Seeking Alpha

Seeking Alpha

Bond Fund Redemption Risks:

Seeking Alpha

New Home Construction: Variables in Favor of a Surge

Seeking Alpha

Comments Discussing the relevance of the Reinhardt and Rogoff analysis of long recovery cycles after a severe recessions precipitated by a financial crisis and American household debt numbers to excessive reliance on Shiller P/E Valuations for U.S. stocks:

Seeking Alpha

Seeking Alpha

Seeking Alpha

Seeking Alpha

Seeking Alpha

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Borden Chemical elected to redeem its 8.375% senior bond, maturing on 4/15/16, early:




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1. Sold 2 Vanguard Resource 7.875 Senior Unsecured Bonds Maturing in 2020 at 96.4 (high risk junk bond strategy)(see disclaimer): 


Snapshot of Order Page: 


Order Page

Snapshot of Trade: 

Order Execution

Snapshot of Profit: 


Profit +$180.78
Bought 2 Vanguard Natural Resources 7.875% Senior Unsecured Bonds Maturing 4/1/20 At 86.59 - Vanguard Natural Resources, LLC (NASDAQ:VNR) | Seeking Alpha

Interest Received Calculation: 

Interest Received 4/1/15=$78.75


Accrued Interest Paid by Buyer to Me: +$6.56
Interest Received: $78.75
Accrued Interest Paid By Me to Seller: -$56.44 (adjustment in 2015 Sch. B)

Total Net Interest: $28.87

Total Return: $209.65 or 12.01% (holding period about 2 months)

Just another example of small ball.





Rationale: As I have said here and at SA many times, I can not acquire any comfort level with junk E & P bonds, particularly those issue by MLPs that are paying out distributable cash flow to junior security owners, including the common unit owners and the equity preferred stock owners.

Consequently, I am in a trading mode for them. 


Future Buys: I will need a re-entry price below my last purchase with a material change in credit risk before considering another purchase.  

2. Added 50 ARTIS (ARESF) at $11.86 (Equity REIT Common and Preferred Stock Basket Strategy)(see Disclaimer): 

This add was part of my equity REIT basket strategy last updated in a SA Instablog: Update For REIT Basket Strategy As Of 3/19/15 - South Gent | Seeking Alpha A snapshot of my then current holdings can be found in that blog.

I frequently use basket strategies for industry sectors and rotated into both equity REIT common and preferred shares after they were plastered in 2013.

The Vanguard REIT ETF (VNQ) fell $.62 (4/15/15) to close at $81.97. I believe that most of my Canadian REITs rose in price looking at both the ordinary shares priced in CADs and as converted into USDs (one was unchanged and another lost C$.01, both gaining in USDs). The gains in USDs was significantly higher due to the CAD rising in value on 4/15/15 against the USD due most likely to a surge in crude prices. US crude rises 5%

I include a number of Canadian REITs in my REIT basket. All of them, except for Artis, were purchased in Toronto using my CAD stash. All Canadian REITs that I own now, and have owned in the past, make monthly distributions.

I have discussed a few purchases here at SA.

REIT Basket Strategy: Added 100 Northwest Healthcare Properties REIT At C$8.3 - NorthWest Healthcare Properties REIT (OTCMKTS:NWHUF) | Seeking Alpha

Equity REIT Basket Strategy: Added 200 Of The Canadian REIT Dream Industrial At C$9.03 - Dundee Real Estate Investment Trust (OTCMKTS:DREUF) | Seeking Alpha

Equity REIT Basket Strategy: Bought 200 Agellan Commercial REIT At C$9.13-Toronto Exchange - South Gent | Seeking Alpha

Added 200 DRG:CA At C$8.92 - South Gent | Seeking Alpha

Of the foregoing securities, I currently own 500 shares of Northwest Healthcare, Dream Industrial and Dream Global and 200 of Agellan.


Snapshot of Trade: Unlike most other Canadian REITs whose ordinary shares are traded only in the U.S. Grey Market, where bid and ask prices are not displayed and volume is close to non-existent, the USD priced Artis shares trade on the U.S pink sheet exchange that has more volume and bid/ask prices are displayed to the investor. Artis Real Estate Investment Trust (ARESF)-OTCMarkets.com A symbol ending in "F", rather than "Y", indicates that the investor is buying the ordinary shares priced in USDs.

Added 50 ARESF at $11.86
This add brings me up to 100 ARESF shares. I will be dragging and dropping part of my earlier discussion here, updating the information where appropriate with developments since my last purchase: Bought 50 ARESF at $12-REIT Basket Strategy (12/13/14 Post).

That post was reproduced as a SA Instablog and then as an article: Equity REIT Basket Strategy: Bought 50 Units Artis Real Estate Investment Trust (ARESF) At $12 - South Gent | Seeking AlphaEquity REIT Basket Strategy: Bought 50 Units Artis Real Estate Investment Trust At $12 | Seeking Alpha

The ordinary shares closed at C$14.9 on 4/10/15. That closing price converted into about $11.85 (4/10/15) and at $12.15 on 4/15/15, as the CAD gains some since my purchase.



Currency Converter

Security Description: Artis Real Estate Investment Trust  (ARESF) is a diversified Canadian REIT that owns office, retail and industrial properties in Canada and the U.S., with a focus on Western Canada. 

As of 12/31/14, Artis had 246 properties in its portfolio with 25.8M square feet of leasable space. Portfolio occupancy stood at 96%. Page 5 Q4-14 Investor-Presentation.pdf

On a net operating income basis, Artis had a 51.9% weighting in office buildings, 23.6% in industrial properties and 23.6% in retail properties. The U.S. properties provided 22.6% of net operating income.

U.S. properties are concentrated primarily in Minneapolis and Phoenix and a few other localities as noted below. Those properties accounted for  approximately 22.9% of net 2014 operating income. The company intends to grow its U.S. portfolio to 30% of net operating income. (pages 4-5 of 2014_Annual_Report.pdf)

It owns 44 properties in Minneapolis consisting of 5 office (100% leased), 7 retail (100% leased) and 32 industrial (100% leased) properties. Property-Listings-Q4-14/PDF 

The company owns 6 office and 1 industrial property in Phoenix.

Three office buildings were owned in Denver and one in NY and Florida both 100% leased. Two of the 3 Colorado offices are only 50% leased. 


For assets owned in the U.S., the U.S. funds are converted back into Canadian Dollars which produces "largely unpredictable foreign exchange gains and losses on our income statement" which impacts "results from operations, as well as the other comprehensive income".  For the three months ending 9/30/14, Artis booked an unrealized gain in "other comprehensive income of $32.5 million, a large number due to the size of our U.S. portfolio".

A list of properties, with occupancy rates can be found at pages 6-7, 2014_Financial_Report.pdf.

The weighted average rental increase on renewals was 7.2% in the 4th quarter, page 11 Q414_-Investor Presentation.pdf.  

As of 12/31/14, the weighted average interest rate was 4.04%. The weighted average term was 3.9 years. Total debt to gross book value stood at 48.4%. The interest coverage ratio was 2.8 times. Page 12, Q4-14 Investor-Presentation.pdf

Q4-14_-Investor-Presentation .pdf

Distributions: The monthly distribution rate is currently C$0.09 per share. It is not accurate to call the distribution a dividend. A distribution paid by a Canadian REIT into a U.S. investor's IRA is not eligible for the "dividend" exemption under the U.S.-Canadian Tax Treaty. 

The distribution will be converted from CADs to USDs after a 15% Canadian withholding tax. At the exchange rate from 4/10/15,  C$.09 would buy $.0716 before the adjustment for the Canadian tax.

For owners of ARESF, and assuming the distribution rate remains constant at C$.09, it is important to keep in mind that a decline in the CAD after a purchase results in a dividend cut, while an increase in the CAD's value operates as a dividend increase.

Given the currency fluctuations, it is impossible to compute a dividend yield. The dividend yield would be about 7.24% at a total cost per unit of $11.86, assuming no dividend change and a constant currency exchange rate that produces a $.0716 monthly rate for ARESF unit holders. The actual annualized yield will depend on the conversion rate for each monthly dividend payment.

It is a futile exercise to actually calculate the yield for ARESF due to the fluctuations in the exchange rate. Last Wednesday (4/15/15), the CAD rallied as oil prices surged and the C$.09 closed that day at USD$.0732 raising the yield to 7.4% assuming a total constant cost at $11.86 per unit and a constant exchange rate as of 4/15/15.


Prior Trades: My prior trades were made on the Toronto exchange which requires an explanation of how profits are reported by my broker, an issue that is avoided when the investor buys the ordinary shares using USDs on the U.S. pink sheet exchange.

For a U.S. taxpayer, the taxable profit reportable on a 1099 by the broker will not be determined by the investor's profits in CADs. Instead, both the cost basis and the proceeds will be converted from CADs into USDs. If the CAD declines in value against the USD during the period of ownership, the U.S. taxpayer will realize a lower taxable profit than the amount actually realized in CADs. Different permutations of that scenario could also apply. The investor might have a profit in CADs and a loss in USDs, for example, or a loss in CADs and a profit in USDs.

Since I sold a number of Canadian REITs earlier this year, my reportable tax profit was less than my CAD profit due to the decline in the CAD during my ownership period.

One example is provided by my disposition of 300 Artis shares bought on the Toronto exchange using my CADs. I sold those shares in Toronto and received C$397 more than I used in CADs to make that purchase. My reportable USD profit was $6.92. The accounting related to currency conversion for tax reporting purposes eliminated about C$390 in profits.



Prior to the foregoing round trip, I had flipped two 100 share units back in 2011, realizing a total gain of $281.27 (snapshot in both prior linked posts).

Annual 2014 Earnings: All amounts are in Canadian Dollars.

For 2014, FFO was reported at C$1.41 and AFFO was $1.23 with an AFFO payout ratio at 87.8% down from 89.3% in 2013.  That 2014 payout ratio is still high but moving in the right direction for a distribution increase at some future time. Property net operating income increased 5.4% and revenues rose by 8% compared to 2013.




Rationale: Both the dividend yield and valuations are good in my opinion, particularly compared to U.S. REITs which do not have the currency risk for U.S. investors.

Using the CAD closing price on 4/10/14 of C$14.9, and based on 2014 annual results, the TTM P/FFO was at the time of purchase 10.49 and the P/AFFO was 12.11.

I would use the P/AFFO number since that is a better measure of free cash flow than FFO.

The average P/FFO for American REITs was 19.4 in February 2015, page 3 Lazard_US RealEstate Indicators Report


Risks: (1) Currency Conversion Issues: The following discussion is fairly typical whenever I buy a foreign security.

The CAD has already lost a lot of its value against the USD over sdthe past 2+ years as shown in this 5 year CAD/USD chart: CAD/USD Interactive Chart In July 2011, 1 CAD bought USD$1.05 for awhile. On 4/10/15, 1 CAD would buy about $.79, roughly a 25% decline in the CAD's value since that peak exchange rate in July 2011. That decline flows through into the USD price of a Canadian stock traded on U.S. exchanges.

The ARESF price is linked to the ordinary share price priced in CADs as converted into USDs. If the CAD continues to decline against the USD, the ARESF shares will underperform the ordinary shares traded in Toronto and priced in CADs. The CAD has been declining in value, so I would expect to see ARESF underperforming the Toronto listed shares priced in CADs which is the case as shown by this two year chart:

Putting side all other currency conversion issues, the buyer of ARESF would want the CAD to rise against the USD after purchasing shares.

The worst scenario for the ARESF owner, which I simply call the double whammy, is for the CAD to continue declining against the USD and for the ordinary shares priced in CADs to decline in price at the same time.

The best scenario is for the CAD to increase in value after the purchase and for the ordinary shares priced in CADs to increase in price at the same time.

In my opinion, I prefer to buy foreign securities when the USD has significantly risen in value against the relevant foreign currency and the ordinary shares have declined significantly in local currency terms for non-fundamental reasons.

Both of those conditions have now occurred with ARESF, unless one believes that Canada is in for a long term economic decline.

Comparison Chart ARESF vs. AX-UN.TO 



The two shares are both the same ordinary shares. The difference is that the shares traded in Canada are priced in CADs and ARESF is priced in USDs.


The current declines in the CAD and the ordinary shares priced in CADs may not be over too. I can not predict the future. When and if I believe that I can, I would hope my family appoints a conservator to manage the money. 



(2) Investor Perception about the Canadian Economy: As noted earlier, the Canadian REIT sector decline gathered momentum as energy prices accelerated their decline. A persistent long term decline in crude oil prices will have a negative impact on Canada's GDP. I suspect more of that negative impact would be felt in the Alberta and Saskatchewan provinces.

It is just hard to say whether the recent energy price spurt is the real deal or another head fake. 


For the Ontario and Quebec provinces, the overall impact would probably be positive as consumers have more money to spend due to lower heating and gasoline costs.  

Recessions will take a toll on REITs. It remains to be seen whether Canada will slip into a recession. Recent economic numbers are generally positive but not exciting:  Canada | Economic Indicators


3. Company Description of Risks: Every company that I buy regularly produces a summary of risk incident to its operations. Generally, an investor can find those risks in an Annual Report. Artis describes those risks in its 2014 annual report: 2014_Annual_Report.pdf

Future Buys: I may buy up to 100 more ARESF shares at or below $11. 


3. Sold 25 VWO at $43.69 and 25 VEU at $50.39-Commission Free in Roth IRA (see Disclaimer): 

Snapshots of Trades:

2015 ROTH IRA SOLD 25 at $43.69

2015 Roth IRA Sold 25 VWO at $50.39
Snapshot of Profits: 


VEU +$52.73 and VWO +$34.55
Security Description: I am not going to discuss these low cost Vanguard ETFs again until I elect to buy them back. 

I did recently discuss VEU in a 2/2015 blog: Bought Roth IRA: The ETF VEU (Commission Free at Vanguard) at $46.96 (2/3/2015 Post)(snapshots of prior realized gains=$1,614.39)


Sponsor's VEU Page: Vanguard 


Rationale: I decided to transition Vanguard stock ETFs solely to a Vanguard taxable account due to risk assessment considerations and the frequently discussed strong emphasis on preservation of capital and income generation through non-taxed favored securities in those accounts, particularly the ROTH IRA accounts where there is no tax on income either when received or when withdrawn.

Future Buys: I will simply look for a mild dip from the current prices before initiating a position in VWO and VEU in a taxable account. I will need a 20% decline before considering a repurchase in the Roth IRA where capital preservation considerations are a dominant and overriding goal.