Wednesday, November 26, 2014

Added 200 of the Canadian REIT DIR_UN:CA at C$9.03/Sold 50 PBF at $29.81

Big Picture: No Change

Stable Vix Pattern (Bullish):


Recent Developments:

The third quarter real GDP growth was revised up to 3.8% from 3.5%. News Release: Gross Domestic Product The consensus expectation was for a downward revision to 3.3%. The "current dollar" GDP, the non-inflation adjusted number, increased at an estimated 5.3% annualized rate.

Singapore's economy grew at 3.1% annualized in the third quarter. The consensus estimate was for 1.3%. The previous growth estimate for the third quarter was 1.2%. Bloomberg


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1. Sold 50 PBF at $29.81 (see Disclaimer): This one turned into a quickie trade, take the money and run. I will do both short term trading and long term investing at the same time. I am not likely to hold a stock like PBF long term given the nature of its business.


Snapshot of Trade:


Yesterday's Closing Price (11/25/14): $29.8 +3.36%

Snapshot of Profit:


2014 PBF 100 Shares +$194.06


Item # 6 Bought Taxable Account: 50 PBF at $25.61 (9/20/14)

Snapshot of One Dividend Received:


Total Return Calculation: $209.06 (or 16.23% with a 2+ month holding period)

Security Description: PBF Energy Inc (PBF) is a company that owns refineries and has an interest, described below, in a publicly traded LP known as PBF Logistics.

Refinery specific information can be found at page 48-49 of the 2013 Annual Report, PBF-2013.12.31.10-K.

PBF Energy Profile Page at Reuters
PBF Energy Key Developments Page at Reuters
PBF Key Statistics Page at Yahoo Finance
PBF Analyst Estimates Page at Yahoo Finance

PBF-Bloomberg Data as of Date of Trade:
Based on $25.82 Closing Price and Then Current Estimates
Current TTM P/E 10.81
Estimated P/E 2014: 9.68
P/B: 1.46
P/S: .064

PBF Energy announced earlier this year that its Board approved the purchase of up to $200M in shares.

PBF Energy has an interest in another firm known as PBF Logistics that was recently spun out from PBF: PBF Logistics L.P. (PBFX) Announces Second Quarter 2014 Earnings Results and Declares Initial Quarterly Distribution

PBF Energy owns indirectly the PBFX general partner and 51.1% of the limited partnership units as of 9/30/14.  PBF Energy-2014/9/30.10-Q at page 12 PBFX currently owns some infrastructure assets associated with the refineries owned by PBF Energy, including a Delaware City rail terminal and a truck terminal at the Toledo refinery. Apparently, the intention is to expand into terminals, pipelines, storage facilities and similar logistic assets. PBF Logistics LP Website The PBFX second quarter earnings release refers to owning "modest" amount of infrastructure assets. Some would quibble with the use of the word "modest".

PBF Logistics LP Announces Closing of Initial Public Offering

PBFX Quote

Rationale: The last earnings report was good and explains in pop the recent pop in the stock price.

However, refiners are benefiting from what may be a temporary condition, representing the increased spreads between the cost of crude and the price of refined products precipitated by the abrupt and significant decline in crude prices since June and the slower decline in refined product prices.

Refining is an inherently volatile business subject to massive swings in profitability. I would note that there is no rush to build large new refineries built in the U.S. anytime soon. The Energy Department shows 150 U.S. refineries in 2009 and 142 now. U.S. Number and Capacity of Petroleum Refineries The existing ones are running near their capacity limits. U.S. Percent Utilization of Refinery Operable Capacity (Percent)

PBF is a relatively new company. To highlight historic earnings volatility, I would refer to Valero, which I have owned in the past but have no position currently. I looked at the 2010 VLO Annual Report showing net income of $4.866B in 2006, a loss of $1.154B in 2008, a loss of $373M in 2009 and a profit of $923M in 2010, Page 22 10-K. That kind of earnings volatility creates risks, as well as significant problems in establishing a fair value for the company.

Refiners face numerous risks, as described by PBF in its last SEC filed Annual Report, PBF-2013.12.31.10K, starting at page 19 and continuing to page 35. I would highlight the environmental and regulatory risks (e.g. pages 26-29).

I will trade the refiners and have owned at various times, as discussed in this blog, Valero, Delek, and Alon. I have also owned Alon and Valero bonds. I view all of the foregoing as trades.

The one year price charts suggest to me at least that these companies are trades only and possibly trades that most individual investors may want to avoid.

DK Interactive Stock Chart

ALJ Interactive Stock Chart

VLO Interactive Stock Chart

2. Added 200 DIR_UN:CA at C$9.03 (see Disclaimer): This security was bought on the Toronto exchange using my existing CAD stash. This purchase was an average down.

With 500 shares currently owned, I am at my current risk limit for this security. A sector basket strategy will generally have a $5,000 limit for each component and a $1,000 minimum.

Snapshot of Trade (Toronto Exchange/Paid for in CADs): 


Closing Price Yesterday (11/25/14): DIR-UN.TO: C$9.10 +0.05 (+0.55%)

Ordinary Shares Priced In USDs-U.S. Grey Market

These units also trade on the U.S. Grey Market and can be bought with USDs in that dark market. DREUF Dream Industrial Real Estate Investment Trust (DREUF) When the symbol ends in "F", the investor is buying the ordinary shares rather than an ADR. The DREUF shares closed yesterday at $8.0581.

I try to avoid the Grey Market, since bids and ask prices are not displayed and volume is usually skimpy or non-existent. If I had no choice but to trade in that market, I would find out the current ordinary share price in its local currency and then do a currency conversion to determine the USD equivalent number. Currency Converter I would then decide on the bid price using only a limit order, probably an AON one.

If an investor elects to buy the ordinary shares traded in USDs, the dividends will be paid in USDs after being converted from CADs and after Canada's withholding tax. While there is a tax treaty between Canada and the U.S. that exempts "dividends" from Canadian tax withholding when paid into a U.S. investor's retirement account,  a REIT distribution is not viewed as a dividend subject to that exemption. While many brokerage firms will secure a 15% tax rate for their customers, some will not file the appropriate documents with the Canadian tax authority which results in a 25% tax rate. "New Canadian Withholding Tax Documentation Requirements": Thomson Reuters Tax & Accounting

Prior Trade: I bought 300 shares earlier this year. Item # 5 Bought: 300 DIR_UN:CA at C$9.53(6/7/14 Post)

Company Description: Dream Industrial Real Estate Investment Trust (DIR.UN:TOR) is a Canadian REIT that owns light industrial properties across Canada totaling approximately 17M square feet of gross leasable space. As of 9/30/14, the company owned 220 light industrial properties. A list of those properties can be found at Dream Industrial Properties.

Occupancy stood at 95.5% as of 9/30/14.

Company Website: Dream Industrial REIT

Investor Presentation October 2014.pdf (includes pictures of some properties)

Distribution History: This REIT is currently paying a monthly distribution of C$.05833 per share. Investors-Dream Industrial REIT That penny rate was last raised from C$.05625 per share effective for the April 2013 monthly distribution. The company went public in 2012, and its first monthly dividend payment was at $.05081. So, at least there have been increases and no decreases yet, though I would have to admit that the raises so far are not going to pay for my nursing home expenses.

At the current penny rate, and assuming a total cost of C$9.03, the current distribution yield would be about 7.75%.

While it is immaterial, this security went ex distribution the day after my purchase, so I will be receiving that monthly payment on the entire 500 shares.

I received a comment yesterday that my total cost per share was not the purchase price. Instead, I was informed that the total cost number included the brokerage commission. I am still more or less compos mentis and somehow, possibly through divine intervention, recognize that the total cost number includes the commission cost, at least I was so aware earlier this morning when writing this post.

Since I started to write a blog back in October 2008, I have expressed dividend yield at the purchase price when discussing a stock, exactly what you would see when looking at a brokerage quote or at a financial website which does not factor in a commission rate. When I take a snapshot of the profit or loss, then that number will include the impact of the round trip commission cost.

Last Earnings Report: All amounts are in Canadian Dollars. Q3-Press Release.pdf

FFO Per Diluted Share: $.233
AFFO Per Diluted Share: $.196
Distributions During Quarter: $.196
FFO Payout Ratio: 73.2%
AFFO Payout Ratio: 89.3%

For the first nine months, the AFFO number was $.592 and the FFO number was reported at $.704 on a diluted basis.

When there is that much difference between the FFO and AFFO number, I will use the lower number in calculating dividend coverage and the price to funds from operations. For ease of calculation, I will use in the P/AFFO calculation an assumed $.20 AFFO number for the current quarter, bringing the yearly number up to $.792. At a C$9.03 price, the P/AFFO is reasonable in my opinion at 11.4.

There has been some growth in AFFO per share over the first nine months compared to the same period in 2013:

2014: $.592
2013: $.551
Up 7.44% which I view favorably

As of 9/30/14, leverage was at 52.8% "with interest coverage of 3 times and a weighted average term to maturity on debt of 4.1 years". The weighted average "face" rate on all debt was 4.11%, with an effective weighted average rate of 3.86%.

REITs have benefited from the abnormally low interest rates when refinancing their mortgage obligations or their debt at the corporate level. Commercial mortgages tend to be around 5 years so the worm will turn the other way down the line.

Canadian REITs will release a comprehensive quarterly report that will be filled with information. This is Dream Industrial's detailed report for the third quarter: Q3-Report.pdf

I took a snapshot of page 31 that shows the adjustments made in FFO to arrive at the lower AFFO number:


One important deduction is the amount set aside for recurring capital expenditures. I would not want to see a REIT funding a dividend out of that money.

Rationale: I have raised my Canadian cash stash to over C$30,000 after harvesting profits on a number of Canadian securities earlier this year, including some Canadian REITs. Those funds earn nothing until I invest them. One purpose in my Canadian Dollar Strategy is to increase my CAD stash through dividends paid in CADs and profits realized in CADs. I am also diversifying my assets some out of USD priced securities for diversification purposes.  I do not want to incur another 1% fee for converting USDs into CADs so I am building up my CAD position through profits realized in CADs and in dividends paid in CADS.

Since I am a long term owner of CADs, I am not concerned about the currency risk. If and when 1 CAD buys $1.25+ USDs, then I will consider transferring some of those CADs back into USDs. Until that time happens, and it may never happen in my lifetime, I am concerned about generating a return on my Canadian Dollar position rather than how many USDs can be bought with those CADs at a particular point in time.

Dream Industrial seems like a well run REIT to me. The dividend yield is good at close to 7.75%, even without any additional raises. The P/FFO is reasonable in my opinion. I have some rational prospect for a capital gain in addition to the dividend stream.

In the following risk discussion, I mention the currency risk issue. Many investors may prefer to avoid that risk altogether and focus solely on U.S. REITs. While currency exposure adds a layer of risk, without question, there is also a potential benefit. The CAD may rise against the USD above where it was yesterday, and consequently contribute to the total return. If one CAD bought 1 USD, a level exceeded slightly back in January 2013, CAD/USD, then the value of the USD price DREUF would be about 12% higher than now with no change in the ordinary share price of C$9.1 as of 11/25/14.

Generally, and it usually depends on a variety of factors, I will become more interested in buying foreign securities when both of the following conditions coalesce: (1) a significant rise in the value of the USD against the foreign currency which makes the foreign asset cheaper to me (assuming I am using USDs to buy the security); and (2) a decline in the value of the foreign security in its local currency for non-fundamental reasons. Stocks, Bonds & Politics: Strong U.S. Dollar + Weak Market=Time to Start Looking Overseas (6/1/2010 Post); Stocks, Bonds & Politics: International Trading and Currency Risks (7/11/10 Post)

I described in 2010 how the purchase of AXA's ADR met both of those conditions. The ordinary shares priced in Euros had declined 27.2% and the Euro had declined in value against the USD, creating an overall 43.33% decline for the period measured in that post.  Stocks, Bonds & Politics: Bought 100 AXAHY at $14.69. If you look at a five year chart of the EUR/USD, then you will see what I saw in the 2010 summer. The Euro had declined from around 1.49 in November 2009 to approximately 1.22 in late May/early June 2010.

Since currency trends can last for awhile, hard to say when there will be a reversal in favor of the foreign currency, I will generally slowly accumulate those foreign securities, possibly averaging down when I view it to be both rational and prudent.



Risks: 

Risks Highlighted by the Chart : The stock has been weak for several weeks and has never really recovered from the downdraft in REIT stocks that occurred last year when interest rates started to rise.

The stock was selling below its 200 and 50 day SMA lines when I purchased shares, though the 50 day SMA line was just slightly above the closing price on the day of purchase. (C$9.16 vs. C$9.10 close on 11/25).

Currency Risks: For anyone buying the USD priced DREUF, currency exchange risk is always an issue. The CAD has been weak against the USD over the past year or so. That negative currency conversion flows into the price of DREUF which has consequently underperformed the ordinary shares priced in CADs by about 11% over the past 52 weeks:


That risk would also apply to an investor who exchanges USDs to buy CADs in order to complete a purchase in Toronto, unless there was the intent and the wherewithal to convert back when there was a profit to be made on the exchange after fees.

Normal Risks for Stocks: Needless to say, the potential for a 10% annualized return, achieved mostly with a 7.75% distribution yield, is not a risk free endeavor. I could lose money on the stock even after holding for a long period of time. The dividend could be cut during a recession or even eliminated during a Depression. Generally, though, I believe that it is probable, though not certain of course, that I can achieve that bogey by simply waiting for the stock to pop after collecting several dividend payments, assuming that I wish to harvest the gain at such a propitious time. Prior to last year's downdraft in the REIT sector, Dream Industrial did hit C$11.6 back in January 2013 or 28.46% above my last purchase price. If I harvested say 3 years of dividends and then could sell anywhere between C$11 to C$11.6, that would be a satisfactory outcome.

Company Discussion of Risk: Corporations will generally describe the risks incident to their operations in an Annual Report. The Dream Industrial 2013 Annual Report has a section, starting at page 32, titled "Risks and Our Strategy to Manage Them".

Tax Risk Issues For Lack of a Better Description: I only know what I have been told by my broker and by those who appear to know the answers. I am buying a Canadian security on the Toronto Exchange using CADs to buy the shares and receiving CADs when I sell the shares. My dividends are paid in CADs. I am a U.S. citizen and taxpayer. The I.R.S. is not interested in reporting profits and income in CADs. Instead, the broker converts the value of the CAD into USDs when I buy and sell. If the value of the CAD declines between those periods, I will have a greater profit in CADs than what is reportable on my tax return, or possibly more of a loss, or somewhere in between including a profit in CADs and a loss for U.S. tax reporting purposes. The CAD dividend is likewise converted into USDs.

The practical implications are shown when I sold two Canadian REITs recently. SOLD: 300 HLP-UN:CA at C$14.17 and 300 AX-UN:CA at C$15.71 In both cases, my reportable tax profit was less than the profit actually realized in CADs. That is just one nit. I also apparently create a tax event when I sell CADs, which now have differing USD costs, to buy a security on the Toronto exchange. So I am creating some issues by electing to buy securities using a foreign currency: 1. the commission rate is higher, 2. there are several tax issues, and 3. fees are normally charged for the initial conversion of USDs into the foreign currency. 

Monday, November 24, 2014

Bought 80 PMOIY at $3.7 -Lottery Ticket Basket/Bought 50 SLRC at $18.38-Flyer's Basket/Bought 50 of the ETF ENY at $13.55

Big Picture: No Change

Stable Vix Pattern (Bullish):


Recent Developments:

Sources told Reuters that China is prepared to cut rates against due to concerns about deflation accelerating debt defaults. 

Markit reported its flash service PMI at 56.3 for November.

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1. Bought 80 PMOIY at $3.7 (Lottery Ticket Basket Strategy)(see Disclaimer): 

Some pundits are predicting that there is a 60% chance that OPEC will cut production during its meeting later this week. I have no idea, and everyone appears to be guessing in my opinion. My guess would be 50/50.

In case there is a production cut, and Brent Crude spikes to over $80, I wanted to have a few Lottery Tickets that might benefit significantly with a change in perception about energy prices.

The share price of Premier Oil has already been smashed in response to the precipitous oil price decline starting in June. The same would be true for my buy last week of 300 WFREF: Bought 300 WFREF at $2.6932

The crude oil price decline was significant, swift, and unexpected, and caused a bone crushing share price decline in energy stocks.



Graph: Crude Oil Prices: West Texas Intermediate (WTI)-St. Louis Fed

When looking at a longer term WTI chart, the most recent decline looks similar to price corrections in 2011 and 2012, and nowhere near as bad as what happened in 2008:


I try to keep things in perspective.

Snapshot of Trade: 

2014 Bought 80 PMOIY at $3.7
1 ADR=1 Ordinary PMOIY Premier Oil plc 

The ordinary shares are priced in U.K. pence: Premier Oil PLC-Bloomberg

100 Pence=1 British Pound

I made the following snapshot of a Bloomberg quote for the U.K. ordinary shares shortly before entering my limit order for PMOIY:


I then used the Bloomberg currency converter to calculate the USD value of 2.38 GBP.


Investor Presentation Made in November_2014.pdf

Reserves in MMBOE (Million Barrels of Oil Equivalent):


Premier Oil Key Developments Page at Reuters

Last week, Premier announced that it was reducing the Falkland Islands' Sea Lion project due to low oil prices. Bloomberg

Dividends: Premier has paid an annual 5 pence per ordinary share during 2013 and 2014. Shareholder Information | Premier Oil At the time of my purchase, 5 pence was worth about USD$.0785. The dividend yield at that conversion rate would be about 2.12% at a total cost of $3.7 per share. The low dividend yield is one reason for the LT classification. 

Chart: In June 2014, this stock traded at over $6. The recent downdraft qualifies this purchase as a "falling knife", a standard criteria for Lottery Ticket selections: 


That is not pretty.  

Recent Earnings Report: This company reports in USDs. Premier Oil reports every six months. The last report was for the six month period ending 6/30/14: Press Release2014-Half-Year-PR.pdf

For the first six months, Premier reported diluted E.P.S. of $.313 per share, up from $.291 per share during the first six months of 2013. The 2013 diluted E.P.S. was $.432



At the time of my purchase, the consensus 2014 E.P.S. was for $.55. PMOIY Analyst Estimates 

Rationale and Risks: According to Bloomberg, the P/E based on estimated 2014 earnings is less than 7, with a price to book of less than 1 using the current estimates and market price per share. The estimated P.E.G. is about .33.

I will frequently make Lottery Ticket purchases based on that type of statistical data that is accompanied by a smashed stock price without thinking too much.

Since the ordinary share are ultimately priced in British Pounds, the decline in GBP will flow through into the USD priced ordinary shares. GBP/USD Interactive Stock Chart The recent decline in the GBP has resulted in the USD priced ordinary shares underperforming the ordinary shares priced in Pence by close to 5% over the past 3 months.

See, generally: Stocks, Bonds & Politics: International Trading and Currency Risks (7/11/2010 Post); Stocks, Bonds & Politics: Strong U.S. Dollar + Weak Market=Time to Start Looking Overseas (6/1/2010 Post)

Future Buys/Sells: I am not likely to buy more shares. I do not have a price target. I would consider selling this 80 share lot when and if the shares return to the $5 to $6 range or after a material deterioration in its operations.

Closing Price 11/24/14: PMOIY: $3.72 -0.03 (-0.80%) 

2. Bought 50 SLRC at $18.38 ($500 to $1,000 Flyer's Basket Strategy With Snapshots of Round Trip Trades)(see Disclaimer): 

I noticed when researching material for my recent post discussing BDCL that Solar Capital was selling at an unusually large discount to its last reported net asset value per share. After researching this company, I placed it in the Flyer's Basket risk category due to its declining weighted average net yield on its income producing investments, the current payout in excess of its net interest income per share, the external management, the prior dividend cut, and the usual assortment of risks inherent in BDCs.

Snapshot of Trade:

2014 Bought 50 SLRC at $18.38
Prior Trades: None

Company Description: Solar Capital Ltd. (SLRC) is an externally managed BDC that targets investments in U.S. firms with EBITDA between $20M to $100M.

The managers are paid a base fee calculated at an annual rate of 2% of Solar's gross assets, plus a generous incentive fee. (see pages 7-11, Form 10-K)

A list of investments can be found starting at page 7 of the last SEC filed Form 10-Q.

One reason for placing this stock in the Flyer's category is the history of realized losses (where are the realized gains?):

Historical Financials Page 57 of 2013 Annual Report
Another reason is yield compression, as the weighted average annualized yield drifts down and has continued to do so in 2014. That is a common problem with BDCs now, and many will reach for yield by making riskier loans further down in the capital structure. Solar appears to be sticking mostly to senior secured loans which may result at some point in a dividend cut.

As of 12/31/13, Solar had 17.9% of its total assets invested in another company called Crystal Capital Financial Holdings LLC (page 15, Form 10-K). A 98% interest in Crystal was acquired in December 2012 for $275M in cash (page 61).

On March 31, 2014, Solar "exchanged" $137.500M of its "equity interest" in Crystal for floating rate senior secured notes issued by Crystal bearing interest at LIBOR plus 9.5% and maturing on 3/31/19 (page 29, Form 10-Q).

I was initially perplexed by that last sentence, since the same document shows the investment in Crystal to be worth $300M as an equity investment based on a $275M cost number with no mention of that senior secured note in the debt section (page 7 lists senior secured loans as of 9/30/14, page 8 lists equity investments:Form 10-Q) The treatment has to do with Crystal being consolidated with Solar, as clarified by the CFO in the last conference call during the question and answer session.

As of 9/30/14, Crystal had investments in 25 companies with a total "par value" of approximately $411.042M. All loans were floating rate with the largest being $30M. Crystal had net income of $21.133M for the nine month period ending 9/30/14. Form 10-Q)

Company Website: SOLAR CAPITAL

Solar Capital Filings with the SEC

Solar Capital Page at Bloomberg (ex dividend date 12/16/14)

Net Asset Value History: Sourced from 10-Q Filings

9/30/14: $22.34
9/30/13: $22.25
9/30/12: $22.7
9/30/11: $21.2
3/31/2010: $22.18 (first 10-Q)
Initial Public Offering February 2010:  Prospectus (priced at $18.5 to the public and $17.205 to the underwriters)

2013 Annual Report: Form 10-K

The last public offering of common stock was made in January 2013 and priced to the public at $24.4 per share: Prospectus Supplement

In 2012, Solar sold $100M in 6.75% senior unsecured notes maturing in 2042: Prospectus SupplementSolar Capital Ltd. 6.75% Sr. Notes due 2042 (SLRA) This is an exchange traded baby bond with a $25 par value which hit a low slightly below $20 last December: SLRA Interactive Stock Chart

In September, Solar announced a joint venture with a fund managed by PIMCO to co-invest in senior "secured unitranche loans originated by Solar Capital". The joint venture, referred to by Solar with the acronym SSLP, will initially consist of $300M provided by Solar and $47M by the PIMCO affiliate, with PIMCO committing to an additional $257 million in a sidecar vehicle to co-invest with the SSLP".  Page 1 Q3 2014-Earnings Call Transcript | Seeking Alpha

Dividend: The quarterly dividend was cut from $.6 to $.4 per share in 2013. This occurred after received $237M in proceeds after monetizing three investments. News Release The company subsequently announced in July 2013 that the Board had approved up to $100M in stock repurchases. Press Release July 2013 After purchasing approximately $17.5M in stock, the stock repurchase program was extended in December 2013. The share repurchase program expired in July 2014 with approximately $56.6M in shares repurchased out of the $100M authorized by the Board.

The dividend yield at a total cost of $18.38 per share is about 8.7%.

Unless there is an improvement relatively soon in the quarterly net investment income per share, I would view a dividend cut as a possibility. Possibly, the new joint venture with PIMCO will increase the NII per share some.

Chart: SLRC's share price is near the 52 week low set in mid-October, and is trading under its 50 and 200 day SMA lines: SLRC Interactive Stock Chart The 200 day line was at $20.57 according to Yahoo Finance's chart as of last Friday. The historical high prices were hit slightly over $25 in March 2011 and again in January 2013.

Last Earnings Report: For the 2014 third quarter, Solar reported net investment income of $16.4M or $.39 per share. SEC Filed Press Release

Net asset value per share was reported at $22.24 as of 9/30/14. Prospectus Supplement The $18.38 purchase price was a 17.8% discount to that last reported NAV per share.

The fair value weighted average yield of Solar's income producing investments was 10.3% at the quarter's end. This number has been trending down, as noted above.

The company had 67.2M in cash and $490M in unused credit capacity as of 9/30/14.

Q3 2014 Results-Earnings Call Transcript-Seeking Alpha (one position on non-accrual representing 1/2 of 1% of portfolio, at page 2; roughly 80% of investments are in senior secured and floating rate investments, pp. 3-4)

Rational: The primary reason for investing in a BDC will be to harvest the dividend and to hopefully escape with a profit on the shares. The general hoped for goal is an annualized total return of 10%+.

The company has not been a serial issue of stock so far, one of the common complaints that I have about several other BDCs. I was looking at one last night that has had four stock offerings in the past 12 months.

I also like this statement made by the COO during the last conference call: "We think many of our peers are taking inordinate risk, taking on structure with no covenants and much higher leverage capital structure", making clear that Solar was not going to follow their competitors down that path. Q3 2014 Results - Earnings Call Transcript | Seeking Alpha

Risks: 

1. Company Discussion of Risks: I would recommend that anyone investing in a BDC read the summary of risks found in an SEC filed Annual Report. Solar discusses risks incident to its operations starting at page 23 of its last SEC filed Annual Report: Form 10-K Among those risks, Solar states that there "are significant potential conflicts of interest which could impact our investment returns" (page 44).

2. Risky Portfolio: This risk is common to BDCs. These companies are basically lending money to mostly private firms that would find it difficult to obtain needed capital from banks. Some of the borrowers may be relatively new with little or no track record, heavily indebted companies that have gone private after a leveraged buyout, or older companies that have fallen on hard times. The loans will generally carry high interest rates and will sometimes have an equity kicker such as a stock warrant. One does not need to be a professional loan officer to recognize the risks.

The risk is mitigated somewhat by focusing more on first lien loans. When reading the transcript for the previous quarter, I noted that Solar and Crystal both had investments in a company called Quantum Foods which was being liquidated apparently in a BK. Of the $75M investment, Solar has received liquidation proceeds of $60M and was pursuing a recovery of more, as of the date of that call which was 8/5/14: Q2 2014 Results -Earnings Call Transcript | Seeking Alpha

3. Always a Potential for a Dividend Cut:  The main reason for buying this security is the dividend. If the portfolio suffers losses and defaults, a dividend cut is certainly a possibility. A recession would increase the odds of a dividend cut. I am concerned about another dividend cut unless Solar can increase its NII per share. The last quarter had a NII of $.39 and a quarterly dividend of $.4.

4. Unfavorable Chart: The chart indicates some dissatisfaction with Solar. Perceptions are sometimes hard to change. Perhaps, the only way for Solar to return to good graces is by posting both increases in NII and net asset value per share. BDCs are dependent on securing and maintaining favor with individual investors, many of whom pay no attention to net asset value per share numbers and focus solely on dividends.

Solar has a relatively low dividend yield compared to other BDCs, partly due to its decision to hold cash after several investments were redeemed, as noted above, and to use some of that cash surplus to buy back stock.

In an exchange with an analyst from Wells Fargo, Gregory Nelson, who inquired why Solar had not invested the surplus cash, the Chairman and CEO Michael Gross made an interesting comment. The external managers had not received an incentive fee in 2014. If they invested the cash in "liquid loans", then the "incremental investment income will effectively flow to our benefit as the investment manager", apparently due to clearing the hurdle for triggering payment of the incentive fees, Q3 2014 Results - Earnings Call Transcript | Seeking Alpha.

Future Buys: I am not likely to buy more. I will consider selling when and if I can harvest a 10% annualized return or there is a material adverse change in Solar's operations.

Closing Price 11/24/14: SLRC: $18.47 0.00 (0.00%)

3. Bought 50 ENY at $13.55 (see Disclaimer): I am not classifying this purchase as part of the Flyer's Basket strategy. Instead, I am just being very cautious with my entry points with this ETF having sold 155+ shares at $17.55. Sold 155+ ENY at $17.55 (7/5/14 Post) I realized a $293.37 gain plus the dividends. If I still owned those shares, I would not have a profit but a loss.

By eliminating the position at $17.55, I now have the luxury of buying shares back at a lower price, a typical small ball approach to investing.

Given the uncertainty about what OPEC might do later this week, I decided that caution was prudent. Investors perceive many Canadian oil sands producers as unprofitable or barely profitable at today's crude prices. If the per barrel prices for WTI and Brent continue to slide down into the 60s, the Canadian energy stocks will continue to suffer.

I sold out of ENY on 6/23/14. This ETF had declined $4 per share since then or 22.79%. That is bear market territory and pretty severe for an ETF in 5 months.

So far, as shown by snapshots in the preceding linked post, I now have realized gains of $617.03 after nibbling at this ETF, sometimes flipping 50 or even 30 shares.  

Snapshot of Trade-Satellite Taxable Account:

2014 Bought 50 ENY at $13.55
Security Description: The Guggenheim Canadian Energy Income ETF (ENY) is an ETF that owns Canadian energy companies.

Sponsor's Website: ETF (net expense ratio for an ETF is high at .71%)
ENY Page at Morningstar (rated 2 stars)

The fund has changed its stripes some since I first bought shares several years ago. The fund now has a significant weighting in storage and transportation stocks at 27.42% as of 9/30/14.  Those stocks would include TransCanada, Enbridge, Pembina, and Inter Pipeline.

ENY Holdings
Holdings With Over a 1% Weighting as of 11/21/14
I have occasionally owned one or more of those infrastructure companies (e.g.:  Bought 100 PBA at $29.21 February 2013)

I am going to wait until OPEC acts to decide whether to average up or down or do nothing. 

Saturday, November 22, 2014

Bought 100 MCQPF at $3.632-Lottery Ticket Basket/Sold 100 PWCDF at $28.07/Bought 40 BDCL at $23.53-Flyer's Basket

Big Picture: No change

Stable Vix Pattern (Bullish):
Trading Strategy Vix Asset Allocation Model Part 2: Hedging In An Unstable Vix Pattern - South Gent | Seeking Alpha


Recent Developments: 

The WSJ reporter who covered China since 2011 wrote a negative article about that nation's future prospects. WSJ He refers to the ghost cities dotting the landscape and the downturn in real estate development that had been a driver for GDP growth. He concludes that "we are witnessing the end of the Chinese miracle", and we "are seeing just how much of China's success depended on a debt-powered housing bubble and corruption-laced spending".

I am more concerned about a hard landing in China than the stagnation in Europe and Japan. I have never expected Japan and Europe to be significant contributors to worldwide GDP growth. The question is usually whether or not those countries are deadweights or minor contributors. Worldwide GDP growth is dependent on continued acceleration in developing countries and 2%-3% real GDP growth in the U.S.  It would certainly be helpful for the Northern European countries, Canada and Australia to grow at about the same rate as the U.S.

Jack Hough wrote an article in Barron's arguing that Intel has 30% more upside. My small position in Intel, with an average cost of $15.52 per share, has become bond like for me. After harvesting profits, I am simply interested now in Intel increasing the dividend which increases my "bond" coupon based on that constant cost number.

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

1. Bought Back 100 MCQPF at $3.632 (Lottery Ticket Basket Strategy)(see Disclaimer): I was allowed to exceed the $300 limit by up to $126.25 due to a prior realized gain.

Snapshot of Trade: 


2014 Bought 100 MCQPF at $3.63
I bought the ordinary shares traded on the U.S. pink sheet exchange using USDs.

CAD Priced Shares:
Closing Price 11/21/14: CSE.TO: C$4.15 +0.04 (+0.97%)

Prior Trade: I bought this stock when it was known as Macquarie Power and Infrastructure:

2010 MCQPF 100 Shares +$126.25

This prior purchase was not a Lottery Ticket. The stock has been demoted to the LT category. The price decline explains why without knowing what caused this stock to go from $7.18 to $3.63 in a strong bull market.

Company Description: Capstone Infrastructure (MCQPF) is a Canadian company that has investments in gas co-generation, wind, hydro, biomass and solar power generating facilities as well as interests in a U.K. water utility (Bristol Water) and a district heating business in Sweden.

The Canadian generation has a capacity of 449 megawatts and Capstone is developing another 79MW of wind generation in Ontario and Quebec. Capstone The largest is the Cardinal Power  plant with a nameplate capacity of 149MW that uses gas turbines. The most recently completed facility is the Skyway 9.48MW wind farm.

A list of those facilities by category can be found at Capstone

Company Website: Home

Capstone has a 50% interest in Bristol Water, a regulated U.K. water utility operating in the Bristol region and serving a population of more than 1.1M people.

The company owns a 33.3% equity interest in a district heating business operating in Sweden and providing power to residential customers in 10 communities. 

The company is currently paying a quarterly dividend of C$.075. 

Chart: The long term chart provides no comfort to investors going long: CSE.TO Interactive Stock Chart

On the positive side, the CAD priced shares stopped cascading down in December 2011, stabilizing just north of C$4.

Over the past two years through 11/21/14, the USD priced shares have significantly underperformed the ordinary shares priced in CADs due to the decline in the CAD's value versus the USD.  That differential highlights the currency risk issue for a U.S. investor using USDs to buy the ordinary shares or converting their USDs to CADs in order to buy shares on the Toronto exchange.  



CAD/USD Interactive Stock Chart

Capstone Infrastructure’s 2013 Annual Report

Dividends: The company is currently paying a quarterly dividend of C$.075 per share. Assuming a continuation of that rate, which is in no way assured, the dividend yield based on a C$4.15 price would be about 7.23%. The dividend is subject to a 15% Canadian withholding tax when paid into a taxable account. If a U.S. investor uses CADs to buy on the Toronto exchange, the dividend will be paid in CADs after the applicable withholding tax. Some brokers will not file the necessary paperwork with the Canadian authorities and consequently Canada may withhold 25%. Thomson Reuters Tax & Accounting

For a U.S. investor who buys the USD priced MCQPF, the dividends will be paid in USDs after conversion from CADs and after the applicable withholding tax. 

Last Earnings Report: All amounts are in Canadian Dollars. The third quarter is seasonally weak for Capstone "because of seasonality factors in the power segment". Revenues did increase 13.9% Y-O-Y. For the first nine months, CSE's dividend payout ratio, as shown in the following table, was at 58% year to date. The goal is to achieve an average payout ratio of between 75% to 80%. CSE Q3_2014.pdf


The company calculates AFFO in the following manner:


This is a summary of the AFFO calculations by power category:




The company reiterated its 2014 estimate adjusted EBITDA target of between $150M to $160M.

Long term debt as of 9/3014 was $887M which included debt owed by Capstone and its proportionate share of debt owed by Bristol Water and power assets.

Q3 2014 Results -- Earnings Call Transcript | Seeking Alpha

Rationale and Risks: The primary reason for owning this security is to harvest the dividend and hopefully exit the position with a profit on the shares.

A long term chart will frequently highlight the risk, which is the case for this stock.

Another similar company has already run into trouble, Atlantic Power (AT), and is currently attempting to sell of some assets. Atlantic Power Corporation Releases Third Quarter 2014 Results I have an unrealized loss for a LT purchase in AT, having gone to the well one too many times. Bought 50 AT at $4.08 (9/30/13 Post) Atlantic Power slashed its monthly dividend last year. AT Dividend History A few weeks ago, AT went from a monthly dividend of $.0333 per share to a quarterly dividend of $.03: Atlantic Power Corporation So one risk is that Capstone will end up following the same path.

The company discusses risks and uncertainties starting at page 74 of its last Annual Report. CSE Fiscal 2013 Annual Report 

Closing Price Last Friday: MCQPF: $3.6752 +0.0432 (+1.19%) 

2. Sold 100 PWCDF at $28.07 (see Disclaimer):

Snapshot of Trade: 


Snapshot of Profit: 

2014 PWCDF 100 Shares $210.03

Prior Trade: The prior trade which resulted in a $138.71 profit, is reflected in the preceding snapshot.  


Total Trading 2014 Trading Profit: $348.74

Company Description:  Power Corp. of Canada  (PWCDF:OTC) is a Canadian holding company that has interests, directly and indirectly, in financial services, communications and other business sectors. Power Corporation of Canada | Home

Profile Page at Reuters

I am trading the ordinary shares traded on the U.S. pink sheet exchange using USDs.

Power Corporation of Canada has a 65.8% interest in Power Financial. Power Financial 2014 1st Quarter Earnings Report (net earnings of C$467M, up from C$394M in the 2013 first quarter).

Power Financial owned 67% of Great West Lifeco's common shares and 58.6% of IGM Financial's common shares. IGM also owned 4% of Great West Lifeco's common shares; and Great-West Lifeco owned 3.6% of the IGM's common shares.

So Power Corporation of Canada directly controls Power Financial and consequently has an indirect controlling interest in Great-West Lifeco and IGM Financial.

Great West Lifeco which operates through a number of companies worldwide including Great-West Life, London Life, Canada Life, Great-West Financial and Putnam Investments. Great-West LifecoGWO 2014 First Quarter Earnings Report (net earnings of C$587M, up from C$417M in the 2013 first quarter)

IGM Financial is a financial management company.

An organization chart can be found at the firm's website: Organization Chart

Power Corporation of Canada is profiled in a recent Motley Fool Article.

The company is currently paying a quarterly dividend of C$.29 per share. Power Corporation of Canada | Dividends

Power's senior debt is rated "A" by S & P: Credit Ratings

2013 Annual Report .pdf (net earnings of C$2.12, up from C$1.78 in 2012)


Rationale: I mentioned when buying these shares that this would be a trade. Eventually, I may buy the ordinary shares on the Toronto exchange and hold for a longer period. 

There is not much that excites me looking at a five year chart. POW.TO Interactive Stock Chart 

Closing Price Last Friday: PWCDF: $28.07 +0.57 (+2.07%) 

3. Bought 40 BDCL at $23.53 ($500 to $1,000 Flyer's Basket Strategy With Snapshots of Round Trip Trades)(see Disclaimer): I am surprised that I even nibbled on this security. BDCL combines several items that I do not like in one security: an ETN that uses leverage to track an index of BDCs. My stomach just became queasy just writing those words all at once. 

Snapshot of Trade: 

2014 Bought 40 BDCL at $23.53
Closing Price Last Friday:  BDCL: $23.52 -0.19 (-0.80%) 

This is a trade. I bought near the close using a limit order. 

Prior Trades: None

Security Description: The 2xLeveraged Linked to Wells Fargo BDC Index ETN (BDCL) is an unsecured debt obligation issued by UBS that provides a monthly compounded two times leveraged long exposure to the Wells Fargo BDC Index. That index is a float adjusted, capitalization-weighted index of all NYSE and Nasdaq listed BDCs that have a market capitalization of at least $100 million at the time of inclusion in the index.

Wells Fargo Business Development Company Index Index Price (WFBDC:NAR) 

This security is an exchange traded senior and unsecured note, otherwise known as an ETN. The owner is exposed to the credit risk of UBS: UBS AG Stock Price; Last SEC Filed UBS Annual Report 20-F.  UBS senior unsecured debt is currently rated A2 by Moody's and A by Fitch according to FINRA. The fact sheet shows the UBS credit ratings, as of 11/30/13, at A2, A, and A by Moody's, S & P and Fitch respectively. 

On the day of my purchase, I took a snapshot of the index components that had a greater than 1% weighting in this index: 


I have relatively small positions in PSEC, ARCC, AINV, FSC, PNNT, BKCC, TICC and KCAP. I will trade those positions under clearly defined rules, where I will at least make an effort to realize a total return greater than the dividend yield at my total cost per share. That goal is far easier said than done. The general rules applicable to externally managed BDCs are to consider buying when the market price falls below the net asset value per share and to consider selling when the market price exceeds NAV per share by 5%. 

I will make exceptions to those general guidelines. 

I will now consider selling PSEC shares when and if the market price approaches NAV per share.  I require now a greater than 10% discount before I will even consider buying more PSEC or TICC shares. And, I am at my limit with 100 shares of KCAP. Bought 100 KCAP at $7.54 (11/1/14 Post)


This ETN is discussed in a Seeking Alpha published last September. 

Dividends: This ETN has been paying a variable quarterly distribution. BDCL Dividend History-NASDAQ.com The four quarterly dividends paid in 2014 total $4.1373 per share. At that rate, the dividend yield would be about 17.58% at a total cost of $23.53 per share.

The 2013 and 2012 dividend payments amounted to $4.0659 and $3.3596 per share respectively. ETRACS 

Rationale and Risks: The main reason for buying this type of security is to harvest one or more dividends and then escape with a profit. If BDCs do improve in price over the coming weeks or months, then I have a cushion to hold onto BDCL longer and to harvest more than one dividend. The best possible outcome from my perspective, as a conservative investor, would be to harvest 4 dividends and to escape with a profit selling the shares.

This is a trade, not a long term investment for me.

This trade is partly based on the fact that the share prices of several BDCs have declined significantly this year, creating larger than normal discounts to net asset values per share for several externally managed ones.

The price downtrend has occurred with interest rates declining, which makes the BDC yields more attractive compared to alternative income investments particularly junk bonds.

The following list is a sample of the current discounts to net asset value per share, based on last Friday's closing price and the last reported net asset value per share made in a 10-Q or 10-K filing:

Closing Market Price 11/21/14/Net Asset Value Per Share as of 9/30/14 (Except for FSC which is as of 6/30/14)/Discount (rounded)

PSEC: $9.60     NAV$10.47    10-Q Discount - 8.31%
FSC: $8.80       NAV  $9.71   10-Q Discount -  9.37%
TICC: $8.68     NAV  $9.4     10-Q Discount -  7.55%
AINV: $8.22    NAV  $8.72   10-Q Discount -  5.73%
BKCC:$8.93    NAV  $9.97   10-Q Discount -10.43
ARCC: $16.18 NAV $16.71 10-Q Discount -  3.17%
PNNT: $10.85  NAV $11.03 10-K Discount -  1.63%
SLRC: $18.47  NAV$22.34 10-Q  Discount - 17.32%

All of the foregoing BDCs are externally managed.

BDCs, particularly the externally managed ones, have been beaten up this year. One reason may be related to being kicked out of the S & P and Russell indexes earlier in the year.

Investors may have also soured on several of them due to persistent share offerings. Persistent weakness in share price can be self-sustaining even when it makes no sense at a certain price level.

Last Friday, for example, the price of TCPC was knocked down 4.12% after that BDC launched a share offering, Pricing Sheet. That BDC has an ATM offering prospectus outstanding for up to $100M, Prospectus TCPC had another large offering back in July 2014, Prospectus, priced to the public at $17.3. Yet another offering was made in December 2013, Prospectus. At least the public offering price in those sales was above TCPC's net asset value per share.

Tax loss selling may also be coming into play just looking at some one year charts:

PSEC Interactive Stock Chart

ARCC Interactive Stock Chart 

FSC Interactive Stock Chart

TICC Interactive Stock Chart

I am hoping that these stock will receive a bounce during the 2015 first quarter, as some of the selling pressure subsides. For externally managed BDCs, it would be most helpful simply for their market prices to converge to their respective net asset values per share. Maybe some of the worst offenders could actually increase their net asset value per share for a few quarters.

The discounts to net asset values has expanded significantly for several of them, including FSC, PSEC, and TICC.

Sponsor Summary of Risks is Very Long: 

The prospectus can be downloaded from the sponsor's website. A summary of the risks starts at page S-20 and ends at page S-31. The sponsor also summarizes risks at its website under the "key considerations" tab.

I view this security as extremely risky which explains why I place it under the restrictions of the Flyer's Basket Strategy.

Leverage Risks: 

BDCL does incur short term borrowing cost. A rise in the 3 month Libor rate, which will happen when the FED starts to raise the federal funds rate, will increase the borrowing costs and negatively impact the total return.

Leverage works both ways. If BDCL successfully goes up twice the value of the index after fees and expenses, it will also go down twice the value of the index's decline.

The decline in the BDC sector has caused BDCL to post poor total returns numbers YTD and over the past year, which include reinvestment of the dividends. Morningstar calculates the YTD and 1 year total  returns through 11/21/14 to be -7.61% and -6.96% respectively. The total annualized return over 3 years is +30.18%.

Based solely on tax considerations, it would make more sense to own this security in an IRA. I did not see any tax information at the sponsor's website, but I am assuming that all of the dividends would be taxed at ordinary income rates rather than at the qualified dividend rate. However, I view BDCL to be too risky for a retirement account and consequently bought the shares in a taxable account.

Net Asset Value Destruction by Several BDCs:

Several externally managed BDCs have a history of destroying the net asset value per share number. This is particularly important for a long term investor since the market price tends to hug the NAV per share number within a few percent above or below.

I have noted that less than stellar management performance in connection with AINV, PSEC and TICC. It applies to others as well.

AINV 10-Q Filings
6/30/07: $19.09 NAV Per Share
9/30/14: $ 8.72  NAV Per Share

PSEC 10-Q Filings
6/30/06: $15.31  NAV Per Share
9/30/14: $10.47  NAV Per Share

TICC 10-Q Filings
6/30/06: $13.81   NAV Per Share
9/30/14: $  9.40   NAV Per Share

BKCC 10-Q Filings
6/30/06: $15.04   NAV Per Share
9/30/14: $  9.97   NAV Per Share

KCAP 10-Q Filings
3/31/07:  $14.78  NAV Per Share
9/30/14:  $ 7.67   NAV Per Share

FSC 10-Q Filings
6/30/08:  $13.3    NAV Per Share
6/30/08:  $  9.71  NAV Per Share

Incentive Fees, for what? Possibly, the decline in market prices for several BDCs this year is based on a growing recognition that the preceding record is far from admirable and certainly not worth the compensation being paid to the managers of those firms.

Some of the internally managed BDCs have a history of increasing their net asset values:

MAIN 10-Q Filings
6/30/08:  $13.08
9/30/14:  $21.08

TCAP 10-Q Filings
6/30/07:  $13.75
9/30/14:  $16.64