Saturday, September 20, 2014

Bought Taxable Accounts: 50 KRE at $39.55, 200 SWZ at $13.97, 50 PBF at $25.61, 20 IEUR at $48.24/Sold 155+ AINV at $8.81, Bought 50 KKR at $22.59 and Added 100 BTZ at $13.47-ROTH IRA

I have noticed that access to my blog has been slow over the past few days. Today, Google Crome will simply not connect to the blog's web address. Instead, it will simply note that the site is unavailable.

If you click "blogger help" in that message, it will take you to my blog with a message that the page,, does not exist. Yes, it does exist. The problem is Google.

To the right of that message, there is a list of the posts and the newest one can be accessed from that list. Also, links to individual posts will work just find when Google is unable to find its URL for my blog published at its website.

It is just amazing to me how many mistakes are made by Google in operating this blog site, and the frequent problems encountered in its Google search box.

These kind of routine type problems may even have some relevance for Google's ability to maintain its position against competitors in the coming years. It just strikes me as incompetent for a company in this kind of business. After all, Google Crome is the Google Browser and Blogger is the Google blog website. It might not be incompetent for a site run by amateurs who are just learning about the internet.

While I was having trouble connecting to the main URL using Safari, Firefox and Internet Explorer earlier today, the URL link to the blog was working late in the day, but was easily the slowest connection to any website that I have visited today. I have probably been to several hundred today.

In any event, a link to an individual blog rather than the blog's URL has been the main way that I have gained access to the blog today.

Big Picture Synopsis: 


Stable Vix Pattern: Bullish
Short Term: Market Needs a 15% Correction
Intermediate Term: Slightly Bullish (2013 to Date Gains Borrow from the Future)
Long Term: Bullish

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

This forecast assumes that the market is correctly forecasting the average annual CPI rate over the next ten years.

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

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

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

Bonds rallied last Thursday and Friday after the Fed's monetary policy announcement last Wednesday.

Last Friday's Closing Prices:

TLT: $114.60 +1.44 (+1.27%) : iShares 20 Year Treasury Bond ETF
IEF: $102.95 +0.39 (+0.38%) : iShares 7-10 Year Treasury Bond ETF
LQD: $117.99 +0.46 (+0.39%) : iShares Investment Grade Corporate Bond ETF
BABS: $60.72 +0.30 (+0.49%) : SPDR Nuveen Barclays Build America Bond ETF

Leverage bond CEFs have performed poorly over the past several weeks, as the ten year treasury rose in yield from 2.34% (8/28/14) to 2.63% (9/18/14). The bond funds that own foreign securities also suffered some losses due to the strength of the USD. Whenever there is a quick upward spurt in yields, the market price for leveraged bond CEFs will generally go down faster than the decline in net asset value per share which results in some expansion of the discount to net asset value per share.

My bond CEFs were a drag on my 2013 total return and have contributed to positive total returns in 2014 until a few weeks ago when their market prices started to decline in response to the rise in rates.

My largest bond CEF positions are in ERC and GDO. Both pay monthly dividends and have some foreign bond exposure denominated in local currencies.

Quote: Wells Fargo Advantage Multi-Sector Income Fund (ERC)(yield 8.43% at the $14.23 close)

Quote: Western Asset Global Corp Defined Opportunity Fund (GDO)(yield 7.52% at the $18.11 close)

The USD has been strong over the past few weeks, as shown in the Dollar Index chart: U.S. Dollar Index (DXY) Interactive Index Chart An upward movement in this index indicates USD strength against a basket of 6 currencies weighted in the Euro.

Recent Developments:  

The Fed continued to state that "it will likely be appropriate to continue its current target range for FF (that is ZIRP) "for a considerable period of time". The continuation of that abnormally low rate will be dependent on the progress made toward "maximum employment" and 2 per cent inflation.  Federal Reserve issues FOMC statement--September 17, 2014 The FED reduced its asset purchases by $10B to $15B per month starting in October, with $10B of that amount devoted to treasury purchases.

The FED's projections for real GDP growth for both 2014 and 2015 were slightly lowered from the previous forecast made in June:

FRB: September 17, 2014: FOMC Projections materials, accessible version PCE price inflation projections remain subdued, with the 2015 range changed slightly to 1.6%-1.9% from June's forecasted range of 1.5% to 2%. If those projections for PCE inflation prove accurate for 2014 through 2017, I would view that result as a long term supporting factor for stocks.

Although the FED kept the "considerable time" language, I do not view that phrase as consistent with the projections made by FED members on the likely FF rates in 2015. Fifteen FED members, an overwhelming majority, believe that the first FF increase will occur in 2015. Of those 15 members, 11 believe the FF rate will end 2015 at over 1%.

CPI declined .02% in August on a seasonally adjusted basis. Over the past 12 months, CPI rose 1.7% on a non-seasonally adjusted basis. Consumer Price Index Summary Core CPI was unchanged which was the first time this index showed no increase since October 2010.

The N.Y. Fed's Empire manufacturing survey for September was reported at 27.5, with the consensus estimate at 15.9. The new orders component rose to 16.9 from 14.1. Empire State Manufacturing Survey (overview) - Federal Reserve Bank of New York

Some recent China data evidenced a mild economic growth slowdown, as investment led growth fueled by housing and infrastructure development lose some steam. The Y-O-Y growth in industrial production slowed to 6.9% in August from July's 9% rate. Retail sales slowed to 11.9% from 12.2% and housing sales declined 10.9% in the first 8 months of 2014.

The OECD cut its 2014 growth forecast for the eurozone to .8% from 1.2% and its 2015 forecast to 1.1% from 1.7%. Economics Department - OECD Their forecast for the U.S. is for 2.1% this year and 3.1% in 2015. GDP growth in China is currently estimated at 7.4% in 2014 and 7.3% in 2015.


1. Bought 50 KRE at $39.55 (see Disclaimer):

Snapshot of Trade: 

Security Description: The SPDR S&P Regional Banking ETF  (KRE) is a regional bank ETF.

Sponsor's webpage: KRE-SPDR S&P Regional Banking ETF (expense ratio .35%; holdings 82)

KRE was rated 4 stars by Morningstar when I bought this lot.

While I have zero training in technical analysis, the stock appeared to have formed a triple bottom in choppy trading this year after gaining 47.5% in 2013: KRE Total Returns

Snapshot of Some of the Top Holdings: 

This snapshot had to be taken of an XLS download which is why it looks funky.

I already have positions in a number of banks that are owned by this ETF. In the preceding snapshot, I own in the regional bank basket HBAN and UBSI, two banks in the top 10, and SUSQ, VLY, FNB, FNFG, TRMK near the bottom of that list. Other owned positions, further down in the weightings, are ONB, BPFH, FMER, FFBC, NBTB, and CBU. I also own FHN and FCF as Lottos, with the later worthy of an upgrade on risk, but I am not interested in buying at the current price.

Prior Trade: None. I am active in the selection of regional bank stocks. REGIONAL BANK BASKET STRATEGY GATEWAY POST I update my regional bank basket once a month. The last update was on 8/25/14: Update for Regional Bank, REIT and Lottery Ticket Basket Strategies

Rationale: Although there is a fair amount of overlap with my regional bank basket, and a significantly lower yield with KRE compared to my basket, I do pick up some diversity in a relatively low cost ETF. I will sell this one when and if it pops due to the overlap however.

This is nothing more or less than a trade, with a goal of harvesting a 10% annualized total return when and if that goal is hit.

Risks: After enjoying a robust year in 2013, KRE has been churning in price this year, going nowhere.

The long term chart highlights some potential risks. The share price was over $50 in early 2007 and cascaded down to $15 before stabilizing in March 2009. SPDR S&P Regional Banking ETF Chart

Regional banks are facing tailwinds and headwinds now. Headwinds include a compression in net interest margins, due largely to the FED's abnormal monetary policies, and an increase in regulatory costs. The tailwinds include an improving economy that results in fewer loan losses and more demand for loans. A rise in intermediate and longer term rates will relieve the net interest margin compression pressure, assuming short term rates remain near zero and the banks are able to pay almost nothing to their depositors in interest. A rise in longer term rates is not a free lunch, however, and will have several negative effects that will vary among banking institutions, including a possible slowdown in mortgage originations and lower profits or even losses on investment securities.

There are several other ETFs that focus on this sector including the following:

Powershares KBW Regional Bank ETF (KBWR)(expense ratio .35%; 50 holdings)

iShares U.S. Regional Banks ETF | IAT (expense ratio .43%; 57 holdings; holds some larger banks that have substantially lower weightings in KRE, including IAT's weighting in USB at 19.81% (not owned by KRE); 11.88% in PNC (1.36% in KRE); and 7.07% in BBT (1.37% in KRE) as of 9/12/14, all of which are too large for my regional bank basket)

Powershares S & P SmallCap Financials (PSCF)(expense ratio .5%, including acquired fund fees of .21%; 117 holdings and is not a pure regional bank fund, includes REITs and MREITs)

First Trust ABA Community Bank Index Fund (QABA)(net expense ratio=.6%; only Nasdaq listed stocks, which I view as a silly limitation)

Closing Price Last Friday: KRE: $39.67 -0.37 (-0.92%)

2. Added 100 BTZ at $13.47 Roth IRA (see Disclaimer): BTZ went ex dividend for its monthly distribution shortly after this last purchase.

Closed end bond funds have had a difficult several weeks. The funds that own foreign bonds have been hit the hardest due largely to the strength in the dollar.

Snapshot of Trade: 

2014 Roth IRA Added 100 BTZ at $13.47
I recently added 100 shares of BTZ. Item # 8 Bought 100 BTZ at $13.7-Roth IRA (7/26/14 Post) Before the end of this year, I intend to profitably sell the BTZ position in a taxable account, leaving me with only the shares owned in the Roth IRA. I prefer to own a taxable bond CEF in the ROTH since the non-tax favored dividends become tax free when paid into that IRA and will also be tax free under current law (unlike a regular IRA distribution), when and if I withdraw those funds.

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


I have nothing further to add to the 7/26/14 blog discussion other than the data from the last trade:

Data as of Date of Trade 9/8/14
Closing Net Asset Value Per Share: $15.5
Closing Market Price: $13.46
Discount: -13.16%

CEFConnect Page for BTZ

Under the "Portfolio Characteristics" tab at CEFConnect, the fund is weighted in investment grade bonds but has a significant allocation to junk rated securities (as of 4/30/14: BB=21.7%; B=13.8%; CCC=2.7%)

Yield at a Total Cost of $13.47 (assumes no change in rate)= 7.17% 

The current monthly dividend rate is $.085 per share or $.966 annually. BlackRock Credit Allocation Income Trust (BTZ) Dividend Date & History -

Closing Price Last Friday: BTZ: $13.29 +0.05 (+0.38%)
9/19/14: NAV=$15.36; Discount at -13.48%

3.  Liquidated AINV in Roth IRA-Sold 155+ at $8.81 (see Disclaimer):

Snapshot of Trade:
2014 ROTH IRA Sold 155+ AINV at $8.8136

Snapshot of Roth IRA History:

Dividends Reinvested: $50.58

Snapshot of Profit: 

2014 AINV 155+ Shares +$31.27
 Item # 5 Bought Roth IRA: 100 AINV at $8.68

Total Return: $81.65 with 2 quarterly dividend payments

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

Sponsor's website: Apollo Investment Corporation

Apollo Investment Corporation Portfolio

This BDC was discussed in a Seeking Alpha published last April. I do not share that author's positive views of this BDC.

Back in February, AINV sold 12M shares, plus an over allotment option, to underwriters at $8.69 per share. Prospectus So it would not be surprising to see another offering at anytime now.

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

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

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

Rationale: The first 100 shares of this 150 share lot was probably bought at too high a price, even though it was under the then current net asset value per share. By liquidating the position, including the highest cost lot bought at $8.68, I can simply wait for another dip in the price and possibly re-establish a position at a lower average cost per share.

I averaged down with a 50 lot purchase at $8.06 soon after the first purchase which was apparently not discussed in the blog. I then bought a 100 share lot in a taxable account at an even lower price ($7.95), as noted above.

In prior discussions, I have highlighted why this one is kept on a short leash and will simply drag and drop some of those earlier highlights:

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

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

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

3/31/2013: $8.27
3/31/2011: $10.03
3/31/2007: $17.87

Talent? Competence? Incentive Fees-for what exactly?

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

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

Future Buys/Sells: I will consider unloading the other 100 share lot at over $9. I may buy back some of the 155 shares sold when and if the market price is at a greater than 5% discount to net asset value per share. The last reported net asset value per share was $8.74 as of 6/30/14: Page 3 AINV 10-Q

BDCs have been weak over the past several weeks. Many of the externally managed ones are now selling below their last reported net asset values per share.

Closing Price Last Friday: AINV: $8.55 +0.02 (+0.18%)

4. Bought 20 IEUR at $48.24-Commission Free at Fidelity Starter Position (see Disclaimer):

Snapshot of Trade:

Security Description: is a new ETF that attempts to track an index composed of large, mid and small capitalization European equities.

Index Fact Sheet From MSCI: msci.pdf (as of 8/29/14: index Dividend Yield=3.15%, P/E 17.7, Forward P/E 14.06, P/B 1.84)

The fact sheet shows that the three large Swiss firms are in the 1-3 largest weighted positions, with Nestle being the largest weighting at 2.51%. Since this index has a large number of holdings, the top ten positions represent only 16.88% of the index weighting. Others in the top 10 include Novartis at 2.07%, Roche, SNY, GSK, SAN, HSBC, BP, TOT, and RDS.

Sponsor's webpage: iShares Core MSCI Europe ETF | IEUR (expense ratio .14%; 919 holdings)

Rationale and Risks: There are a number of reasons to go easy on a European stock ETF priced in USDs. I will just briefly discuss the risks first. Best to look down before engaging in star gazing, imagining what I will do with all of the riches bestowed upon me by an investment before I even achieve my first dollar in unrealized gains.

1. Currency Risk Is Front and Center Now: The European Central Bank has adopted monetary policies intended to drive the Euro down in value against the USD and other major currencies. So far, that campaign has been successful. EUR/USD Currency Conversion Chart A European stock ETF will also have securities priced in British Pounds, which has also been losing ground recently to the USD. GBP/USD Currency Conversion Chart Hopefully, the Scottish vote against independence may help the GBP to stabilize and rise some. There will also be some exposure to other European currencies including Norway's Krone and the Swiss Franc. The Swiss Central Bank has been selling Francs since the 2011 summer in a successful effort to weaken that currency. CHF/USD Currency Conversion Chart So there are two potential currency headwinds (Swiss Franc and the Euro) that are not likely to improve soon and may even become stronger over the next year or two as the U.S. interest rates start to climb with the ECB still stuck in its version of ZIRP.

In attempting to deal with this kind of risk, I chop my potential 200 share position into multiple small lots and will add to the position during price dips.

The decline in the Euro is a two edge sword. There are benefits to European companies that may offset the currency caused stock decline that will happen to a USD priced security that owns European securities priced in depreciating currencies. The currency decline will give many European exporters a price advantage compared to their competitors located in stronger currency nations and could consequently improve their revenues and profits.

2. Sluggish Growth Even During Recoveries/Increasing Odds of More Frequent Recessions: Most developed nations have a slew of long term structural problems. Europe has more than the U.S. and probably less than Japan. I would anticipate sluggish growth during the best of times and more frequent slippages into recession than in the past.

While growth in European markets will remain challenged, many of the large European companies are multinationals and derive an increasing percentage of their revenues and profits from faster growing markets.

The Prospectus contains the usual discussion of the "principal" risks starting at page S-3. Country risks are rising (moves toward country break-ups, increasing regulation, socialist tendencies). A break-up of the EU and the abandonment of the EURO as a common currency are also a risks.

The rationale for buying this security is primarily diversification, which is achieved at a very low cost given the negligible expense ratio and the ability to buy shares commission free at Fidelity.

Over the long term, I would expect that multinationals in Europe and the U.S. to benefit from growth opportunities in emerging markets, so I want some exposure to those large European multinationals, going beyond Unilever, Nestle and Norvartis which I already own. The dividend yield is higher than SPY too.

Future Buys: With a small starter position, I will simply be looking for an opportunity to average down in small lots, assuming that I can buy those lots commission free. I am currently substantially underweight Europe and small adds to this ETF will not change that positioning.

In my Vanguard Roth IRA, I will be adding 5 share lots in their low cost European stock ETF, using cash flow and profits from my bonds as funding sources. I can buy Vanguard ETFs commission free in my Vanguard brokerage accounts.

I will be buying small lots (5 or 10 shares) of these Vanguard ETFs in my Roth IRA:

Vanguard FTSE Europe (VGK)(expense ratio .12%)
Vanguard FTSE World ex-US (VEU)(expense ratio .15%)
Vanguard FTSE Emerging Markets ETF (VWO)(expense ratio .15%)

I have bought and sold VWO several times. The EM stocks have been tough over the past four or so years. Vanguard FTSE Emerging Markets ETF Chart I sold a 100 share lot at a significantly higher price in 2011than the current price. Sold: 100 of the Stock ETFs VWO at $50.22 (4/12/11 Post)

Closing Price 9/19/14: VWO: $43.97 -0.33 (-0.74%)

I then bought some back at $39.73 (January 2012 Post) I sold that lot, along with another 15 shares, at $41.75. I have not lost any money-yet, but I am not exactly making much progress advancing my net worth in that stock sector either over the past four years.

The primary vehicle for international stock exposure will be VEU with increased regional weightings established with VGK and VWO. For the most part, I will not be discussing these small incremental trades in the blog.

Vanguard Mega Cap-ETF (expense ratio .11%)
MGC Quote

I currently own one other domestic stock Vanguard ETF and another international fund in a Vanguard taxable account. The domestic stock ETF, the Vanguard High Dividend Yield ETF (VYM), was bought at $47.61 back in March 2012: Bought 50 of the Stock ETF VYM at $47.61 (3/6/12 Post).

I have just started to buy small lots in Vanguard FTSE Developed Markets ETF (VEA) in that taxable account.

VYM Quote
VEA Quote

While I am substantially underweight in European stocks, I am overweighted in Switzerland.

Closing Price Last Friday: IEUR: $47.58 -0.17 (-0.36%)

5. Added 200 SWZ at $13.97 (see Disclaimer): With this purchase, I am now over 900 SWZ shares. 

Snapshot of Trade:

2014 Added 200 SWZ at $13.97
Closing Price Day of Trade: SWZ: $14.01 +0.04 (+0.29%)

This last purchase brings my position to over 900 shares.

Security Description: The Swiss Helvetia Fund (SWZ) is an unleveraged stock CEF that invests in companies based in Switzerland. Slightly more than 30% of net assets are invested in Roche, Novartis and Nestle.

Closing Data Date of Trade:
Closing Net Asset Value Per Share: $15.79
Closing Market Price: $14.01
Discount: -11.27%
Average Discounts:
1 Yr. = 11%

CEFConnect Page for SWZ

Fund Sponsor's Website: Swiss Helvetia Fund

Last SEC Filed Shareholder Report: The Swiss Helvetia Fund, Inc. (period ending 6/30/14)

SWZ Page at Morningstar

Top 10 Holdings as of 8/31/14:

During my ownership period, which dates back to 2008, I have received a number of long and short term capital gain distributions: Swiss Helvetia Fund Dividend History Dividends are not supported by a ROC.

Of the top 10 holdings, I currently own Nestle and Novartis.

Prior Trades: I last added to this position in April and July 2014: Item # 4 Added 50 SWZ at $14.32 (4/12/14 Post); Item # 6 Added 100 SWZ at $14.49 The net asset value per share was then $16.25 and the discount was -11.94% based on the closing price of $14.31 on 4/3/14. Other purchases, made in 2012 and 2013, are discussed in these posts: Item # 1 Added 50 SWZ at $12.22 April 2013Item # 3 Added 50 SWZ at $10.64 November 2012

Rationale and Risks:  With this fund, I gain exposure to a number of Swiss blue chips and exposure to assets priced in Swiss Francs.

I discuss other potential benefits and risks in my Item # 4 Added 50 SWZ at $14.32.

The Swiss Central Bank has successfully lowered the value of the Swiss Franc through interventions starting in the 2011 summer. Generally speaking, the owner of SWZ would want the CHF to rise against the USD after buying this CEF priced in USDs, but the Swiss Central Bank is not going to allow that to happen anytime soon.

Without such intervention, I would expect the CHF to be over time a stronger currency than the USD.
CHF/USD Currency Conversion Chart

I am comfortable with this fund's top holdings and investment style.

Future Buys/Sells: Before year end, I may sell my highest cost 200 shares, but only before the ex dividend date for the annual distribution. The decision will be based on a number of factors, including the size of the distribution and the then existing discount to net asset value per share. I will not sell the shares if the discount is over 12%.

As of 6/30/2014, the fund had an unrealized gain of $165.389+M on net assets of $438.387+M. The then existing realized gain was $49.277+M. (page 14,  The Swiss Helvetia Fund, Inc.) Morningstar has the share count at 26.56M, so it looks like another large capital gain distribution is coming later this year. Normally, the year end distribution goes ex dividend in December but is not paid until January. Last year, the LT and ST capital gain distributions amounted to $.983 per share. There was also an income distribution of $.033 per share. I received $515.46 that was used to buy 36.403 shares at $14.1598 (snapshot in introduction-Stocks, Bonds & Politics:  SWZ)

Closing Price Last Friday: SWZ: $13.90 -0.04 (-0.29%)

6. Bought 50 PBF at $25.61 (see Disclaimer): The chart of this oil refiner clearly manifests what is commonly referred to as a falling knife, so I divided a 100 share possible purchase into two 50 share lots, just one risk mitigation technique that is frequently used to deal with that kind of situation. I will consider buying the second lot somewhere in the $22 to $22.5 range.

This is another contrarian value play. When making this kind of investment, it may take awhile before it works out, assuming it works out. The price has already declined by a $1.12 per share since I bought this 50 share lot, and that is after a $.42 per share rally last Friday.

I did note that "Baupost Group" owned 6.38% of the outstanding shares as of 6/30/14. PBF Major Holders

Baupost Group is Seth Klaman's hedge fund.

Snapshot of Trade:

Closing Price Day of Trade: 9/10/14: PBF: $25.82 -0.73 (-2.75%)

All of the refiners were hit on 9/10/14 after the EIA reported a 2.4M increase in gasoline supplies. (third paragraph at

Security Description: PBF Energy Inc (PBF:NYSE) is a new 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 recently announced 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 50.2% of the limited partnership units as of 6/30/14. 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

Prior Trades: None

Recent Earnings Report: For the 2014 second quarter, PBF Energy reported Operating Income of $87.4M, down from $133M in the year ago quarter. Adjusted Pro Forma Net Income decreased to $.35 per share from $.73 per share. A $46.2M or $.28 per share LIFO (Last in First Out) charge is included in the 2014 second quarter results reflecting a "rising commodity price environment during the quarter". For the east coast refineries (Delaware City, Delaware and Paulsboro, N.J.), the throughput averaged 470,400 barrels per day and 146,600 for the Toledo refinery.

Rationale and Risks: Currently, the company is paying a quarterly dividend of $.3 per share. I would not view a dividend paid by a refiner as anything close to safe due to the volatility in earnings and high leverage. At the moment, the dividend yield at a total cost of $25.61 is about 4.69%. 

While I view predicted earnings of a refinery to be highly unreliable, I would note that the consensus E.P.S. forecast was, at the time of my purchase, $2.6 in 2014 and $3.19 in 2015. That number in 2015 might be too low or the company could conceivably report a loss. That is just a hypothetical consistent with the wild historical swings in profits common in this type of business.

An investor can see that volatility by looking at the historical results of Valero. I just pulled up 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.

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)

The explosion in shale based production is resulting in some expansion in existing facilities and small new processing plants. The last major refinery built in the U.S. was in 1976. U.S. Oil-Refineries Bulk Up - WSJ

As noted in a recent CNBC article, the east coast refiners are better suited for the light sweet crude produced from shale than the refineries operating on the Gulf coast who are more suited to refine heavy crude coming from Mexico, Venezuela and Canada. The PBF east coast refineries process mostly medium to heavy and sour crude, with some allocation to sweet crude and other blends. Page 49

Oil production in the U.S. has been rapidly expanding since 2005: U.S. Energy Information Administration (EIA).

In 2013, domestic production satisfied 84% of the total U.S. energy needs: Domestic production-U.S. Energy Information Administration (EIA)

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).

Closing Price Last Friday: PBF: $24.49 +0.42 (+1.74%)

7. Bought 50 KKR at $22.59 Roth IRA (see Disclaimer):

Snapshot of Trade:

Closing Price Day of Trade 9/10/14: KKR: $22.56 +0.02 (+0.09%)

Security Description: KKR & Co. L.P (KKR) is a publicly traded limited partnership that offers a broad range of investment management services. I would generally classify this company in what I call the opportunistic alternative asset management category, same as Apollo (APO) that I discussed last week.

When reading an in depth description of KKR's many businesses found in an Annual Report, 10-K , I did not complete reading the long and boring discussion before I had an irresistible urge to take a nap.

KKR Interactive Chart

KKR & Co LP Profile at Reuters

KKR & Co LP Key Developments

KKR- Bloomberg Data as of Date of Trade:
Based on Closing Price of $22.56

Estimated P/E 2014: 8.84
P/B: 3.26
P/S: .58

KKR Key Statistics

Over the past three years through September 10, 2014, Morningstar calculated KKR's annual total return at 34.93%, compared to the S & P 500 at 22.67%. KKR Those numbers are updated after each market close.

KKR Dividend History - (variable dividend)
Last 4 Quarters: $.67, $.43, $.48 and $.23= $1.81 per unit

The distribution policy is set out in the last earnings press release:

KKR was rated 4 stars by Morningstar at the time of my purchase, with a fair value estimate of $30 and a consider to buy at $18.

S & P rated KKR at 3 stars with a $26 target price. I would be pleased with a $26 exit price after harvesting a year's worth of distributions.

Prior Trades: None

Related Trades: I have bought and sold a preferred stock that is now a KKR obligation after KKR acquired KKR Financial Holdings LLC, formerly traded under the KFN symbol. Roth IRA: Bought 50 KFNP at $24 (November 2013 Post) Added 50 KFN/Pr at $23-ROTH IRA (December 2013 Post)

KKR Financial Holdings LLC Pfd. 7.375% Series A (KFN.P)

Prospectus (optional redemption on or after 1/15/2018; optional redemption after "change of control event")

The preferred stock received an upgrade to investment grade after KKR's acquisition. Fitch Upgrades KKR Financial to 'A-' Following Acquisition by KKR (KFN's equity preferred raised to BBB from BB+)

Recent Earnings Report: For the 2014 second quarter, KKR reported GAAP net income of $178.2M and total distributable earnings of $701M. Economic net income (ENI) was $501.6M or $.62 per unit after taxes. ENI after taxes and "equity-based charges" was $.57 per unit. Return on equity was at 28.7%. Assets under management was reported at $98B. Fee paying assets under management totaled $79.7B. EC Filed Press Release For the 2nd quarter, the company declared a $.67 per unit distribution which included a $.41 of "realized cash carry". The other components of that distribution can be found listed under "distribution" in the press release.

It is best to simply read the press release, which contains a definition of terms near the end. I took a snapshot of KKR's definition of two phrases used in the press release:

Fee Related Earnings and Economic Net Income

Rationale and Risks: With a small 50 "unit" position, I am taking only a slight risk. The potential upside is offered by a combination of price appreciation and distributions. Over the past three years, KKR has given its investors both. The past may or may not be prologue.

The company discusses risk factors incident to its business starting at page 36 of its last SEC filed Annual Report. SEC Form 10-K

Future Buys/Sells: I am not likely to buy more and will consider selling this lot when and if I hit a 10% annualized total return. I will not buy LPs in a taxable account for as long as I prepare my own tax return, since I do not want or need the headaches associated with the K-1s.  When and if I hire an accountant to perform that task, which is possible within the next ten years, I will consider buying some publicly traded limited partnership units. For now, I will buy LPs only in very small amounts in an IRA, recognizing the UBTI issue and the loss of all tax advantages flowing from ownership in a taxable account.

Closing Price Last Friday: KKR: $22.55 +0.03 (+0.13%)

8. Pared NMFC Roth IRA Sold 50 Highest Cost Shares at $15.37 (see Disclaimer): New Mountain Finance Corp. (NMFC) is a BDC that focuses on "acyclical defensive growth" companies. A list of the portfolio investments can be found starting at page 106 of the 2013 Annual Report, 10-k.

I made a mistake in buying this 50 share lot. The purchase was made in May 2013 at a premium to its then existing net asset value per share, a clear trading rule violation for externally managed BDCs. Bought 50 NMFC at $15.03 in the Roth IRA (5/29/13 Post)  The net asset value per share was reported at $14.32 per share as of 6/30/13.

I still own 150 shares after that 50 share lot disposition.

I own 50 shares in another Roth IRA account that was bought on the day New Mountain closed an underwritten public offering of 3.5M shares at $14.57. Item # 3 Added 50 NMFC at $14.2-Roth IRA (4/26/14 Post) The net asset value per share was $14.65 as of 6/30/14, page 3 SEC Form 10-Q The buy at $14.2 was at a 3% discount to the $14.65 net asset value per share as of 6/30/14.

A 100 share lot was purchased in June 2013. Item # 5 Bought 100 NMFC at $14.28-Taxable Account (6/22/13 Post) That purchase was at a slight discount to the $14.32 NAV per share as of 6/30/13.

NMFC Interactive Chart

EDGAR Filings for NMFC

Snapshot of Trade:

2014 Roth IRA Sold 50 NMFC at $15.37

Snapshot of ROTH IRA History:

Roth IRA History 50 Share Lot
All of the dividends were taken in cash. The last dividend shown in the preceding snapshot was a special dividend. I sold the 50 share lot the day before the regular $.34 per share quarterly ex dividend date (9/12/14): NMFC Dividend Date

Dividends=$ 97 or a 12.79% total return since 5/23/13 purchase

I escaped with a $2.99 profit on the shares. For an externally managed BDC, escaping with any profit is viewed as a victory. The idea is always to capture the generous dividends without losing money on the shares, which is easier said than done.

Future Buys and Sells: I am likely to sell the remaining shares when the market price exceeds net asset value by 5%, or close to it, provided I have harvested dividends for at least one year. Since the taxable account 100 share lot was bought in June 2013, I may opt to sell that lot at anytime. I will probably wait for the next quarter's earnings report and/or a price over $15.3. The last report showed an increase in NAV per share to $14.65, as of 6/30/14, from $14.38 as of 12/31/13. Another consideration is that I am well over my standard 20% cash allocation in the main taxable account, and I really do not need or want more cash earning zilch.

Closing Price Last Friday: NMFC: $14.75 -0.06 (-0.41%) 

Saturday, September 13, 2014

Performance Numbers Year to Date/JZJ and MetroPCS Bond Calls/Sold 100 MPW at $14-Regular IRA/Sold: 200 CGI:CA at C$20.66, 471+ IGD at $9.77/Bought Taxable Accounts: 50 APO AT $23.46, 100 GDO at $18.44, 50 RFTA at $25/Bought 30 APO at $23.39-Roth IRA/

Last Friday's Closing Prices:
S & P 500 1,985.54 -11.91 (-0.60%)
Russell 2000:  1,160.62 -11.73 (-1.00%)-Russell 2000 Index Chart

VNQ: $73.86 -2.34 (-3.07%) : Vanguard REIT ETF
XLU: $42.28 -0.75 (-1.75%) : SPDR Select Sector Fund Utility
TLT: 113.38 -1.20 (-1.05%) : iShares 20+ Year Treasury Bond ETF
KRE: $40.01 +0.17 (+0.44%) : SPDR S&P Regional Banking ETF

Commodities and Currencies: 
U.S. Dollar Index (DXY) Interactive Index Chart (USD very strong)
SLV: $17.89 -0.07 (-0.38%) : iShares Silver Trust
GLD: $118.38 -1.09 (-0.91%) : SPDR Gold Trust 
FXC: 89.63 -0.37 (-0.41%) Canadian Dollar ETF
CAD/USD Currency Conversion Chart
AUD/USD Currency Conversion Chart
EUR/USD Currency Conversion Chart
iPath Dow Jones UBS Commodity Chart
iShares GSCI Commodity-Indexed ETF Chart
XLE: $93.54 -$1.44 (-1.52%) : SPDR Select Sector Fund - Energy

Big Picture Synopsis: 


Stable Vix Pattern: Bullish
Short Term: Market Needs a 15% Correction
Intermediate Term: Slightly Bullish (2013 to Date Gains Borrow from the Future)
Long Term: Bullish

I am continuing to pare my stock allocation. Starting with the securities discussed in my 6/14/14 Post through this one, the net reduction is about $71,000. Most of the chopping has been in stock funds. I started to add back to the allocation during the past week, with a few stock fund buys and some dividend paying contrarian stock selections which will be discussed in next week's post.

Given my age, and current and anticipated future financial condition, it is not necessary for me to swing for the fences or to push the envelope. My primary goals are capital preservation and income generation.

Needless to say, I would prefer a money market rate of 4% rather than .01% for my cash allocation, but I will not let the current abnormally low rate for cash and cash alternatives dissuade me from those two primary objectives taking into account the huge gains realized already over the past five plus years.    

Virtually every week now, I read some missive from Professor Shiller warning about the market's valuation.

Shortly after the publication of my last weekly post, I read an article published at Business Insider where Shiller gave another stark warning. That article was simply summarizing an interview conducted by another publication-This is Money-that contains the usual Shiller admonitions.

The frustration expressed by President Truman, who wanted a one handed economist rather than one with two hands, is easily understood simply by listening to a typical Shiller interview. The general thrust of a Shiller interview is to scare the daylights out of the average individual investor, while giving his supporters enough cushion to argue that he really was not predicting a crash. It is consequently okay that stocks continued to soar for years after one of these chicken little type interviews.

A long term chart of the Shiller P/E can be found at that article and is updated regularly in Doug Short's blog.

As of 9/5/14, the Shiller P/E was at 26.3, and the Professor noted that it had been higher only on three other occasions since 1881. Those three other times were just before the great crash in 1929, in 2000 and in 2007. In all three of those examples, the market crashed shortly thereafter. It is not difficult to catch his drift, even with the constant equivocations and caveats, or to predict how many individual investors will react.

The Shiller P/E is clearly at very high levels. As I noted when discussing this P/E ratio in earlier blogs, this backward looking P/E, using the prior ten years of inflation adjusted earnings, will keep investors out of the market most of the time.

In fact, the market has been below the mean number less than 2% of the time since 1990 when the S & P was around 350, now near 2000. Bloomberg

{see also: Lord Abbett Publication Titled-"Is the Shiller P/E Overrated?" and ValueWalk article titled: "Shiller PE: Problems Behind The Broken CAPE Tool"}

Judging from what I have read over the years at SeekingAlpha and other financial websites, Professor Shiller has been successful in scaring investors out of stocks for a very long time. He was sounding cautious when interviewed in February 2009, just before the S & P 500 started its epic 200% run Business Insider I happened to see that February 2009 article and several other interviews with the Professor throughout early 2009. I thought that many individuals would stay out of stocks after listening to him, and many of them sold out of stocks at the worst possible time shortly after Lehman's failure.

Notwithstanding the caution expressed by Shiller in early 2009, the S & P 500 has managed to gain almost 200% since the Professor's warnings (see third chart in Doug Short's blog)

It is far from an intelligent observation to note that the market is no longer at 2009 levels, so the Professor is more likely to be omniscient now than he actually was in early 2009. All P/E measures are elevated and stretched beyond recent historical norms.

And, Mebane Faber, one of Shiller's acolytes, has come up with a list showing how other valuation measures confirm that the U.S. stock market is one of the most highly valued ones worldwide. Meb Faber Research He uses a CAPE type calculation and substitutes book value, dividends and cash flow for earnings. The U.S. market is at #41 out of 43 among the world's stock markets, using the standard Shiller P/E, and in the high 30s using the other three.

I would just note that those other ratios also use cyclically adjusted numbers for the past ten years. That kind of analysis could mean that all of the markets listed are undervalued, fairly valued or overvalued, or that some are less undervalued than others or some are undervalued while others are fairly valued, and so on. And, we are to believe that Greek stocks, #1 on Faber's list, have the same or even better future growth prospects as the major U.S. companies.

As an aside, it is amazing how easy it is to become a stock market guru, no insight or particular skills are required as long as one is a disciple of some other person who has a devoted following of True Believers such as Shiller (who basically borrowed from Ben Graham in developing the Shiller CAPE: Robert Shiller’s CAPE, so it is not even original with Shiller) Another means to financial guru status is to appear on CNBC frequently and to make a lot of predictions. Making lots of predictions improves the chances of being right on one of them. Saying the market is about to crash is one way to stardom. When one prediction hits the mark, then the guru in waiting calls every financial publication to tout their financial prowess, provides a link  to the relevant CNBC video interview, and then reinforces their deserved status as a guru by issuing press releases humbly mentioning that one success while of course ignoring the many failures. Guru status once bestowed by financial news outlets can not be lost by being dead wrong for years thereafter.

A more sensible evaluation about the current market's valuation is given by the well regarded manager of T. Rowe Price's Capital Appreciation Fund in that fund's recently released semi-annual report, which I read last weekend. I would agree with his assessment. I was particularly impressed with that fund's performance in 2000-2002, when it gained 22.17% in 2000, 10.26% in 2011, and .54% in 2002. The S & P 500 declined 49.1% during that period. The Four Totally Bad Bears

The major problem with any cyclically adjusted valuation metric that uses historical data is really easy to comprehend. The market is more concerned with the future than the past, let alone a mean established by data going back to the 1870s. The past only provides some guidance about the future and a value can be assigned to existing plant, products and services, and net cash on the balance sheet.

The market is trying to assess future earnings when valuing companies, including the present value of future net income, an angst filled and perpetually problematic endeavor.

Consequently investors fall back on the present and the past as crutches, and one measure of past performance is the Shiller P/E. The relevance of establishing a mean with data going back to the 1870s is another issue which is just per se asinine, in my opinion.

So, that brings me to the point in this section. What is a reasonable prediction about the future?

Is it reasonable to predict another meltdown in the world's financial system within the next ten years that devastated earnings and has resulted in an abnormally slow recovery?

In their book "This Time is Different", written by Professors Reinhart and Rogoff, the historical parallels suggested that it takes on average of around 8 years to recover to pre-crisis levels of income, with the median at 6.5 years. {The Big Picture-contains a recent 2014 paper from the duo on the historically slow recoveries from a financial crisis) Those who rely on the Shiller CAPE ratio with religious zeal have to be assigning a near 100% likelihood that such an event will occur again soon.

It is possible that another Near Depression will occur within ten years, but I would not view that as likely. My current guess would be less than a 5% possibility. The more likely possibility is a garden variety recession lasting a few months followed by a quick recovery. If an investor believes in that type of forecast, why is current valuation being heavily influenced by a historically rare and past occurrence?

An alternative future scenario is one recently outlined by a Morgan Stanley strategist and economist and outlined in last week's Barron's. In their view, the past five year's has been part of a "repair phase" following a deep recession caused by a financial crisis. Only now is the U.S. economy about to enter an expansion phase which could take the S & P 500 up to 3,000 after five years or so, based on 6% earnings growth and a P/E multiple of 17. So if MS is right about the next five years, then will that be more important than the past ten? I would think so.

The question, as always, is whether that future prediction is rational, supported by the preponderance of the evidence and more likely than not to happen with some variance that would not meaningfully impact the outcome. Make your best guess is all that mere mortals can do.

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

I will make future predictions. Unfortunately, that is necessary in order to manage my portfolio in the present.

I have consistently been saying that the long term secular bull market in bonds, which started in 1982, ended in July 2012 when the ten year treasury closed at a 1.43% yield. The precise date was 7/25/12: (daily closes at Kaput. I sold out of my ten year TIPs back then when the buyer paid such a high price that their current yield was almost a NEGATIVE 1%. Stocks, Bonds & Politics: Sold 3 TIP Bonds Maturing in 2019 at 120.45 I viewed that to be the bond market equivalent of stocks in 1999. The overall trend will be toward higher rates with intermittent rallies going forward.

The last long term bond bear market started around 1949 and lasted until 1982. For about 15 years, it was more like a series of paper cuts to bond investors before the real carnage and bloodletting started in the late 1960s, with the coup d' grace administered in the late 1970s and early 1980s. Can't have a repeat? Why not? History has a way of repeating over and over again, as fallible humans fail to learn much of anything from the past.

The 1949-1982 bond bear market started out really slow. I am sure than many bond investors during the 1950s still viewed the market favorably and may have even called it a continuation of the long term secular bull market in highly rated credits like treasuries that had started in the wake of the 1929 stock market crash. However, while those investors may have believed that they were still in a long term bull phase back in the 1950s, that clearly was not the case: Long Interest Rates, 1790 to Present | The Big Picture It may have taken a decade before the consensus rolled around to believing that there was something seriously wrong in Bond Land.

My outlook forecast assumes that the market is correctly forecasting the average annual CPI rate over the next ten years. If inflation expectations start to trend higher, then I will become more bearish about bonds. Bond losses due to higher inflation on top of losses resulting simply from rate normalization will not be pretty.

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

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

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

Bond yields drifted higher last week. REITs, which have been positively correlated with bonds recently, moved down in price and up in yield last week, thereby maintaining their relatively tight positive correlation with bonds. I have pared my REIT allocation by selling some positions into the bond rally, as previously noted, and have added to my regional banks, which have been showing negative correlation to bonds. I sold 300 Artis last Friday and MPW at $14 discussed below, adding to the overall previous paring. It will be a couple of weeks before I discuss the Artis disposition.

What is causing those correlations?

Many investors have been buying REITs as bond substitutes. While the correlation with bonds has been tight for that reason, there will be days when a REIT stocks act more like a regular stock than a bond substitute and the correlation may break temporarily. That could happen for example when bonds rise during a strong down move in stocks.

Overall REITs have been demonstrating positive correlation with bonds. Bonds and REITs tanked in tandem last year when rates started to rise and then both started to rise this year when rates started to fall. Now, with rates rising over the past week or so, REITs have declined in price as shown by the recent action in VNQ. Vanguard REIT ETF Chart Yesterday, VNQ had a particularly bad day. VNQ: $73.86 -$2.34 (-3.07%)

As for regional banks, investors generally believe that they will be helped by a rise in intermediate and longer term rates, at least when short term rates remained artificially anchored near zero and the banks have to pay their depositors almost nothing for use of their funds. In addition, when rates are rising due to investor's perceptions about an improving economy, then regional banks will likely make more loans and suffer fewer defaults.

Consequently, when rates were rising last year, regional banks had a robust rally (KRE up over 40% in 2013), and I sold into that rally. I plowed some of the proceeds into REITs which I started to buy in September 2013. Over the past several weeks, I have been a net seller of REIT common and preferred shares and have added to my regional bank basket. All of the foregoing is tied to my opinions about the movement in interest rates and relative valuations.

With their robust rally this year, REITs became slightly overvalued as an asset class, though there are exceptions. Generally, in making that kind of determination, I am keying off the average P/FFO historical valuation for REITs as an asset class and I acquire that information from Lazard's quarterly reports that can be found on the internet. (July 2014 Report: USRealEstateIndicatorsReport pdf) According to Lazard, the historical average is 15.7 and the REIT class valuation was at 17.5 times in July.

As another aside, I would note that I am becoming less likely to sell my 300 shares of HLP-UN.TO: 14.10 -0.01 (-0.07%) which is in the process of being acquired by Health Care REIT for C$14.2. Assuming that deal is completed, my CAD profit would be close to C$1,200 based on my recent purchases this year at C$10.2 and at C$10.17. I am anticipating losing this stock one way or the other and have already partially counted it toward my REIT allocation reduction after substituting already 200 NWH_UN:CA at C$10.16 for that 300 unit HLP lot.

I am reluctant to sell the HLP lot now for several reasons. While my profit in CADs is locked due to the C$14.2 cash tender, my reportable USD profit for tax purposes is declining due to the CAD/USD exchange rate. Consequently my taxable profit is being reduced while my potential CAD profit remains the same. I view that trend favorably provided it continues. In addition, my dividend yield is over 8%, paid monthly, so I am receiving decent compensation to wait for the C$14.2 deal price to be paid, rather than to incur a C$19 commission and a lower sale's price now. The danger is that the deal may fall through and I lose my profit and then some depending on the reason. I do not expect that to happen. To avoid that remote outcome, based on what I know now, I may elect to sell soon provided the CAD continues to fall in value and I am entitled to receive one or maybe two more dividends. "Based on what I know now", recognizing of course that what I do not know can and will wreck havoc from time to time.

Performance Numbers YTD Calculated by Fidelity: 

I took a snapshot of the performance numbers YTD for my 4 Fidelity accounts. The calculation is made by Fidelity and is current through 8/31/14. The first two numbers are taxable accounts and the last two are a regular and Roth IRA. The largest taxable account, listed first, had close to an average 25% cash allocation during August.

Fidelity also provides returns for other indexes which can be used as yardsticks for the investor's performance numbers. Given the rally in stocks during August, my large cash allocation earning nothing, and my bond allocation, it is not surprising that I started to fall behind the S & P 500 during August. I am surprised about the outperformance of the IRAs which are free of common stocks other than a few REITs and BDCs.

I have to compute my number for my Vanguard accounts. The Vanguard Roth IRA was up 11.18% Y-T-D through 8/31/14. That is surprising to me also since it is managed in the same way as the two Fidelity IRAs.

The Vanguard Mutual fund accounts continued to be led by the outperformance of the Vanguard Health fund which was up 19% Y-T-D through 8/31/14: Vanguard - Health Care Fund Investor Shares - Price & Performance My position in the Vanguard Equity Income Fund, the largest in this grouping, was up +8.69%; while the second largest position, Vanguard Star was up 7.03%. A small position in the Vanguard Capital Appreciation Fund had the second best YTD percentage gain at +13.25% through 8/31/14. I invested in that fund when it temporarily opened to new investors, just to get my foot in the door. Initiated Position in VHCOX (4/9/13 Post)

Performance numbers through May 2014 were published in this post: Performance Numbers YTD

Other performance updates include the following:

Portfolio Management Goals-Snapshots of Performance Numbers: YTD and 5 Year Cumulative (April 2014)

Main Taxable and Regular IRA Accounts Performance Numbers Calculated by Broker: 1, 3 and 5 Years (12/13/11Post)

I will take more risks in my taxable accounts than in my IRAs. Even in the taxable accounts, preservation of capital and income generation are the primary goals. I am not swinging for the fences.

As previously noted, the portfolio design is intended to avoid 75% of a greater than 1% daily decline in the market.


Recent Developments:  

The government reported that seasonally adjusted retail sales rose .6% in August. Excluding autos, sales increased by .3%. gov/retail.pdf The government revised the July number to show a .3% gain from unchanged. June sales were revised up to .4% from .2%.

The Fed's recently released survey of consumer finances for the period 2010-2013 provides more evidence of the growing income disparity. During the period, median family income fell 5%. The top 3% of the families collected 30.5% of all income in 2013, up from 27.7% in 2010. The top 3% owned 54.4% of the wealth, up from 44.8% in 1989 (pages 10-11 and Figure B at page 11). The percentage of families that directly owned stock fell to 13.8%.

Before Tax Median and Mean Family Income
Mean income is the amount obtained by dividing the aggregate income of a group by the number of units in that group, whereas the median is the amount that divides the income into two equal groups, half having income above the median and the other half below. The mean or average household income gain between 2010-2013 was 4% but that was generated by surging incomes at the very top. Mean income per family rose to $87,200 while the median household income fell 5% to $46,700.

Overall debt burdens declined, with only 8.2% of households devoting in excess of 40% of income to debt payments, the lowest rate since the mid-1990s.

The ration of deb to income fell to 104.6%in 2013 from 124.7% in 2010 (Table 5 at page 29).

The Census Bureau has income data, dividend into quintiles, going back to 1967. The data also adjusts for inflation. Historical Income Tables - Households - U.S Census Bureau The pertinent file is "Table H-3 All Races". The "mean" middle quintile's income was $51,179 in 2012 $51,715 in 1989 adjusted for inflation.

General Electric (own):

GE agreed to sell its appliance business to Electrolux for $3.3B. The transaction will generate an approximate after tax gain of $.05 to $.07 per share at closing which is expected in 2015.

Notice of Redemption: MetroPCS Wireless (own 1 senior bond): 

In a recurring routine, I received last week a notice that MetroPCS will be redeeming its 7.875% senior unsecured bond, maturing in 2018, on 10/6/14. The notice states that the redemption price will be 103.938 or $1,039.38 for one $1,000 par value bond. I will also be paid accrued interest to the redemption date:

Final Prospectus Supplement (optional redemption price at page S-31)

MetroPCS was acquired by T-Mobile (TMUS) on 5/1/13. T-Mobile just sold $1.3B in 6% senior notes maturing in 2023 and $1.7B in 6.375% senior notes maturing in 2025. Prospectus One purpose of that offering was to redeem the 2018 MetroPCS note, see page S-19.

Bought 1 MetroPCS 7.875% Senior Bond Maturing 9/1/2018 at 98 (8/26/11 Post)

Unilever (Own Both UN an UL):

My UL shares were acquired in March 2009 at $18. I recently bought the UN shares in a satellite taxable account. Item # 2 Bought 100 Unilever at $38.10+ (9/21/13 Post) I included in that last linked post some snapshots of some trading gains in UN shares.

The Unilever group, Unilever PLC and Unilever NV, is a large consumer staples company operating in 190 countries.

Unilever has two sets of common shareholders that originate from its history. Unilever PLC is based in the UK and Unilever NV is from the Netherlands.

{A similar type of situation and history exists for Royal Dutch Shell with its RDS/A and RDS/B shares Difference between A and B shares - Shell Global}

Unilever NV (UN) Profile at Reuters

There is a unity of shareholder's rights agreement that makes the Unilever PLC and Unilever NV shares equivalent.

Understanding NV & PLC shares | Unilever Global

However, there are some important differences.

The U.K. does not withhold a tax from UL's dividend:

UL Dividend: No Tax Withheld 
The Netherlands does withhold a tax from UN's dividend (which occurred even when I instructed the broker to reinvest the dividend):

UN Dividend $39.04 (15% tax withheld=$5.85)
Some individual investors have claimed that no dividends are withheld when it is reinvested to buy more shares, which has not been the case for me. I have bought UL in a tax advantaged account, rather than UN, due to that tax withholding difference. A U.S. investor can not recover a foreign dividend tax when that dividend is paid into a retirement account, so 15% of the UN dividend would just be lost forever when that share class is held in an IRA.

Another important difference is the UL ordinary shares are traded in London and are price in British pounds, whereas the UN shares are priced in Euros. The NYSE shares will track the ordinary price converted into U.S. dollars. That will create a variable causing differences in the prices, as will the disparity in foreign withholding, even though each share class has the same claim on earnings and dividends.

Recently, both the Euro and the British Pound have been weak against the USD for different reasons. The ECB has embarked on a deliberate effort to weaken the Euro whereas the pound has suffered some due to the uncertainty about the upcoming vote on Scotland's independence.

GBP/USD Currency Conversion Chart

EUR/USD Currency Conversion Chart

The recent decline in both of those currencies have had a negative impact on the NYSE listed UN and UL.

Closing Prices Last Friday:
UN: $41.32 +0.02 (+0.05%)
UL: $43.75 +0.14 (+0.32%)

Notice of Full Redemption: JZJ

The owner of the call warrant has given notice of its intention to redeem JZJ at its $25 par value plus accrued interest of $.5269+ per trust certificate. Notice of CONDITIONAL PARTIAL Redemption Corporate Backed Trust Certificates, AT&T Note-Backed Series 2003-18 Trust 960,000 $25 Par ($24,000,000 Certificate Principal Amount) Class A-1 Certificates Due November 15, 2031 CUSIP No. 21988K503* (NYSE: JZJ), $24,000,000 Notional Amount Class A-2 Certificates Due November 15, 2031 CUSIP No. 21988KAE7*

Prior to this full call, the owner of the call warrant had partially called the JZJ trust certificates on two prior occasions.

2014 JZJ Partial Call 94 Shares +$488.17

2010 JZJ Partial Call 82 Shares +$567.44
I also lost the functionally equivalent JZE to a full call (100 shares +$1,242.), as shown in the preceding snapshot.

I received the redemption proceeds today, plus the accrued interest payment:


1. Sold 471+ IGD at $9.7743 (See Disclaimer): This underperforming stock CEF was selected for elimination due to poor performance and to meet my ongoing stock allocation reduction goals.

Snapshot of Trade:

2014 Sold 471+ IGD at $9.77+
Snapshot of Position Before Trade: 

While the profit reportable on a 1099 will be over $500, as shown in the preceding snapshot, the monthly dividend payments were supported in large part by a return of capital. Consequently, there was a significant downward adjustment in my cost basis.

I did not calculate a total return number due to the difficulty associated with ROC. I can not simply add the dividend received to the profit. An approximate total return number can be calculated using the performance numbers shown below.

Security Description: The ING Global Equity Dividend & Premium Opportunity Fund (IGD) is a buy-write worldwide stock CEF. 

Data on Date of Trade: 8/27/14
Closing Net Asset Value Per Share: $10.09
Closing Market Price: $9.78
Discount: -3.07%

CEFConnect Page for IGD

IGD Page at Morningstar (rated 2 stars at the time of disposition, rated 4 stars at the time of my last purchase)

Performance Numbers as of 8/27/14-Based on Net Asset Value
Total Return
YTD 5.98%
1 Yr 13.71%
Total Return Annualized
3 Yr. 11.62%
5 Yr. 8.32%
Last SEC Filed Shareholder Report: Period Ending 2/28/14

The current monthly dividend, supported mostly by ROC, is $..076 per share.

Prior Trades: Links to Posts Discussing IGD Purchases: Item # 3 Added 100 of the Stock CEF IGD at $8.91 (1/9/13 Post)Added 50 IGD at $8.78 (December 2011)Bought 100 IGD at $10.94 (August 2010)

Rationale: The fund was fired due to underperformance. 

Future Buys: Highly Unlikely. I now have a very negative view of this fund.

Closing Price Last Friday: IGD: $9.45 -0.04 (-0.42%) 

2. Added 100 GDO at $18.44 (see Disclaimer): Bond CEFs declined last week, so I would have been better off waiting to add to GDO.

Snapshot of Trade:

2014 Added 100 GDO at $18.44

Security Description: The Western Asset Global Corp Defined Opportunity Fund (GDO) is a leveraged world closed end bond fund. GDO will liquidate on or about 12/2/2024. This gives the fund one of the characteristics of an individual bond, the promise to return an investor's money at a time certain. However, unlike an individual bond, there is no promise to pay a fixed sum (i.e. par value). The investor in GDO will simply receive their pro-rata share of the liquidation proceeds, which may be more or less than the current net asset value per share. The current discount to net asset value does provide some cushion.

The current monthly distribution is $.1135 per share, with the next ex dividend date on 9/17/14. Distributions for the Months of September, October and November 2014

Portfolio Composition as of June 30, 2014

Credit Quality: While the fund is weighted in investment grade bonds, it has a substantial exposure to junk rated securities, mostly rated BB or B.

Data as of date of trade 8/29/14
Closing Net Asset Value Per Share: $20.62
Closing Market Price: $18.48
Discount: -10.38%

On the day prior to my trade, the closing market price was $18.52, with the NAV at $20.61, creating a discount at that time of -10.14%.

CEFConnect Page for GDO

Sponsor's website:  Overview (after clicking the "portfolio" tab, I see the average effective duration at 3.96 years with 291 holdings as of 6/30/14)

Last SEC Filed Shareholder Report: WA Global Corporate Defined Opportunity Fund Inc

EDGAR Filings for GDO

Prior Trades: I have frequently bought and sold this leveraged bond CEF for small gains after harvesting its monthly dividends. I liquidated my entire position early in 2013 and started to buy shares back later in the year and into 2014.

Completed Round Trip Transactions:

Bought 100 of the CEF GDO at $18.6 March 2010; Bought 70 of the CEF GDO in Regular IRA at $18.61 March 2010; Bought 200 of the CEF GDO at 18.63 and 18.53 (100 in Roth and 100 Taxable Account respectively) March 2010; Bought 200 of the CEF GDO at 18.63 and 18.53 (100 in Roth and 100 Taxable Account respectively) March 2010;  Bought 100 GDO at $18.57 April 2010; Bought Back 50 shares of GDO at 17.8 in the Roth IRA previously sold at $19.24 December 2010; Sold 100 GDO at $18.72 January 2012Sold 200 GDO at $19.18 June 2012; Sold Remaining GDO in Taxable Account at $19.69 July 2012Bought 100 Shares of GDO at $18.9 November 2012Sold 100 GDO at $20.79 December 2012; Sold 120 GDO at $20.73 (February 2013)Sold 102+ GDO at $18.79-Regular IRA (July 2014)(some snapshots of realized GDO trading gains=+701.62)

With this last purchase, I currently own shares. Item # 4 Added 100 GDO at $18.06 (2/25/14 Post)Item # 7 Bought 50 GDO at $18.03 (11/19/13 Post)Item # 7 Bought 100 GDO at $17.79-Regular IRA (10/24/13 Post); Item # 4 Added 50 GDO at $17.58-Roth IRA (6/29/13)

Rationale and Risks: I am generally comfortable with this fund. Dividends are paid monthly at the current rate of $.1135 per share. At that rate, the yield would be about 7.39% at a total cost of $18.44 per share.  Over the past year, the monthly dividend was first cut from $.12 to $.115 before being raised to $.116 and then cut to $.1135.

As noted above, I liquidated my position in early 2013.  All of the shares previously sold were bought at higher prices, with the exception of one 50 share lot, than my recent buys of shares that are currently owned.

Like other bond CEFs, GDO was hurt by the rise in rates starting in May 2013 and lasting until year end, which caused a decline in net asset value. One known risk for CEFs is that the discount has a tendency to expand during periods of market declines for owned assets, as individual investors flee. The use of leverage aggravates the decline.

On 5/1/13, the net asset value per share was $21.07 and the discount was at -4.79%. The market price close that day was $20.06. From 5/1/13 through this month, the fund has paid $1.158 per share in dividends. The discount has expanded by 6.45% between 5/1/13 and 2/13/14, which is largely responsible for the market price decline.

I discuss other risks in the previously linked posts.

Closing Price Last Friday:  GDO: $18.34 -0.04 (-0.22%)

3. Bought 50 RFTA at $25 (see Disclaimer): This one declined last week as bonds weakened in price and rose in yield. I view the issuer as being a high credit risk.

Snapshot of Trade:

2014 Bought 50 RFTA at $25
Security Description: The RAIT Financial Trust 7.125% Sr. Notes 2019 (RFTA) is a new senior unsecured Exchange Traded Bond issue by RAIT Financial Trust (RAS).

RFTA is scheduled to make quarterly interest payments at the per annum rate of 7.125% on a $25 par value. The bond may be called at the issuer's option on or after 8/30/17.

Prospectus Supplement

This bond is not rated.

If it was rated, it would be in junk territory. I did a FINRA search for bonds maturing in 2019-2020 that had a 7%-7.25% yield. A bond issued by Ruby Tuesday's fell into that range and was rated Caa1 by Moody's and B- by S & P. Bonds Detail Ruby Tuesday 7.625% Maturing 5/15/2020

The first interest payment goes ex interest on 11/12/14 at the penny rate of $.5294 according to Fidelity:

That includes more than one quarter and the yield information shown in that snapshot is obviously incorrect. The quarterly rate will be $.445312 per share. At that rate, the yield at a total cost of $25 per share would be the coupon rate of 7.125%.

EDGAR Filings for RAIT Financial

Prior Trades: None

Related Trades: I recently bought the common stock as a Lotto. Bought as LT: 40 RAS at $7.63 (8/25/14 Post) I also recently bought another RAIT exchange traded bond with a 7.625% coupon maturing in 2024. Bought Roth IRA: 50 RFT at $24.28 (August 23, 2014 Post)

Rationale and Risks: I discuss these issues in the preceding linked post. Rather than buying more of the bond maturing in 2024, I decided to accept about .5% less with a senior bond maturing about five years earlier which mitigates interest rate significantly. While the credit risk will be the same for the two bonds over the next five years, the likelihood of a BK in 5 to 10 years is greater than one in 1 to 5. Credit risk is the main risk with this five year senior bond.

Closing Price Last Friday: RFTA: $24.37 +0.07 (+0.31%)

4. Sold 200 CGI:CA at C$20.66 (Canadian Dollar (CAD) Strategy)(see Disclaimer): This disposition was part of my ongoing stock allocation reduction. I also realized a larger profit in CADs than the broker will report after converting the purchase cost and sale's proceeds into USDs.

Snapshot of Trade:

2014 Sold 200 CGI:CA at C$20.66

Snapshot of Position Before Trade:

Unrealized Gain: C$911 or USD$549.29
Snapshot of Profit:

2014 CGI:CA Reportable Profit USD$532.55
Bought 100 of the CEF CGI:CA at 15.78 CAD-Toronto ExchangeAdded 100 of the Canadian Stock CEF CGI at C$16.03

Reportable Dividends Received: $239.93

Total Taxable Return: $789.22  

CAD Dividends Received Before 15% Withholding: $258
Profit in CADs: C$894
Total Return in CADs: C$1,152

Security Description: The Canadian General Investments (CGI:TOR) is a Canadian stock CEF.

Sponsor's Webpage: Canadian General Investments

Data on Date of Trade 9/2/14:

Net Asset Value: C$29.27
Market Price: C$20.66
Discount: -29.42%

This CEF's market price generally stays near a 30% discount to net asset value per share. There is really no effort made to narrow the discount through an active and significant stock repurchase program. The CEF is also sitting on a large pile of unrealized gains. A more consistent harvesting of profits, resulting in larger than traditional long term capital gain distributions, might narrow the discount. There would obviously be a large gain when and if some determined person or entity forced a conversion into an open end fund selling at net asset value which sometimes happens in the CEF universe.

Rationale: While I am continuing to be a net seller of stocks, my primary reasons for selling this CEF were profit taking and the current weakness in the CAD/USD exchange rate causing a much lower U.S. tax liability than the tax liability at a higher exchange rate.

In the Canadian Dollar strategy, I am interested in increasing my CAD stash for diversification purposes.

I will favor selling a security for a $1000 CAD profit,  but at a $600 USD reportable long term capital gain taxed at 15% due to the decline in the CAD during my ownership period.

I would not want to sell for a CAD loss and a reportable USD tax profit, due to a rise in the CAD/USD exchange rate.

Future Buys/Sells: I may buy this one back after a 15%+ correction in the market price.

Closing Price Last Friday:  CGI.TO: C$20.70 -0.02 (-0.10%)

5. Bought 30 APO at $23.39-Roth IRA and 50 in Taxable Account at $23.46 (see Disclaimer): I noticed that this security was at a 52 week low so I nibbled in a Roth IRA. APO Interactive Chart This is a contrarian value play.

The chart does indicates some souring by institutional investors. WFC downgraded the stock to market perform in mid-August.

Snapshot of  Roth IRA Trade:

2014 Roth IRA Bought 30 APO at $23.39
Snapshot of Taxable Account Trade:

Security Description: Apollo Global Management LLC Cl A (APO) is a global alternative asset manager. Operations are divided into several segments including private equity and credit segments.

List of Private Equity Holdings as of 12/31/13: Page 12,  APO-12.31.2013-10-K

Description of Apollo's Credit Platform: Pages 13-14

A complicated chart showing how APO fits within the Apollo organization structure can be found at page 64.

APO Page at Morningstar (Rated 4 Stars at time of purchase with a consider to buy at $24 or lower and a fair value estimate of $40)

Bloomberg Page for APO (at time of purchase,  2014 Estimated P/E= 10.27; P/B=1.53)

APO Profile Page at Reuters

Apollo Global Management, LLC (APO) Dividend History

EDGAR Filings for APO

Recent Earnings Report: For the 2014 second quarter, APO reported GAAP net income of $72M, up from $59M in the 2013 second quarter. "Total Economic Net Income" was $.52 per share and the company declared a $.46 per share second quarter dividend per class A share. The $.46 per share dividend consisted of a $.15 regular dividend and $.31 "attributable to additional carried interest earned by Apollo funds through realizations and Management Business earnings".  Total assets under management was $167.5B as of 6/30/14. APO Earnings Release 2Q-14

Economic net income is defined at page 67: APO-12.31.2013-10-K

As noted in that press release, Apollo intends to "distribute to its shareholders on a quarterly basis substantially all of its distributable earnings after taxes and related payables in excess of amounts determined by its manager to be necessary or appropriate to provide for the conduct of its business." There is no guarantee or assurance that any dividend will be payable.


Rationale: The primary rationale is income generation and secondarily potential capital appreciation. The Morningstar analyst believes that there is potential for capital appreciation.

The "earnings" estimates made by analysts may be based on the economic net income number rather than the lower GAAP number. I suspect that is the case. The consensus for 2014 is $2.36 per share and $2.54 in 2015. APO Analyst Estimates Based on the 2015 estimate, the P/E is around 9.21 at a total cost of $23.39 per share.

APO Key Statistics

Risks: The company describes risks incident to its business starting at page 22 of its 2013 Annual Report: APO-12.31.2013-10-K

The primary reason for investing in this stock is to generate income, but the dividends will be erratic in amounts depending on income realization.

The objective in the IRA is achieve a 8% to 10% annualized total return.

Closing Price Last Friday: APO: $23.60 -0.08 (-0.34%)

6. Sold 100 MPW at $14-Regular IRA (see Disclaimer): As noted above, I have been paring my REIT allocation.

Snapshot of Trade:

Snapshot of Profit:

2014 Regular IRA Sold 100 MPW +$108.27
Dividend: $21
Total Return: $129.27 or 10% (holding period 5 months)

Item # 2 Bought Regular IRA-100 MPW at $12.76 (4/18/14 Post)

Security Description: Medical Properties Trust MPW) is an equity REIT that owns net-leased healthcare facilities. As of 6/30/14/28/14, MPW's portfolio consisted of 118 properties (56 acute care hospitals, 23 long term acute care hospitals, 31 in-patient rehabilitation hospitals; 2 medical office buildings; and six "wellness centers". 10-Q at page 36

Key Developments at Reuters

Company Website: Medical Properties Trust

Last March, MPW sold 7.7M shares at $13.05, excluding up to 1,245,000 shares in the over-allotment option: Form 8-K, Press ReleaseProspectus.

MPW is currently paying a $.21 per share quarterly dividend, which was raised from $.2 in the 2013 4th quarter. Medical Properties Trust, Inc. (MPW) Dividend Date & History -

The $.20 per share quarterly rate was in effect since the 2008 4th quarter when it was reduced from $.27. I view that dividend negatively for two basis reasons: (1) the dividend was cut 25.9% and (2) after being slashed, it was kept at a constant amount for 5 years before being raised by a penny. Assuming a continuation of that dividend growth rate, I will not live to see a doubling and may not live to see the quarterly rate return to the pre-slash level of $.27.

2013 Annual Report: 10-K

Last Quarterly Report: 10-Q
Debt: $1.64+B, page 17
Medical Properties Trust, Inc. - Press Release

EDGAR Filings for MPW

Brad Thomas published an article about this REIT back in February at Seeking Alpha.

Prior trades: I bought and sold this stock once in an IRA. I was fortunate to buy it at a more favorable price that allowed me to realize a decent percentage profit. Item # 3 Bought 100 MPW at $9.9-ROTH IRA (2/13/12 Post)-Item # 6 Sold 100 MPW at $12.25 (1/3/13 Post)(snapshot of profit=$221.08 & total return of $321.08).

Rationale: I am satisfied with a 10% annualized return achieved in five months. Profit taking in an account where preservation of capital is the prime objective is routine when my objective is hit for a particular security.

Given the dividend history described above, MPW is on a short leash.

Future Buys/Sells: I will consider buying 100 shares back in an IRA at a lower price than my last purchase. That would be less than $12.76. My first purchase, as noted above, was at $9.9 in early 2012.

The shares hit $2.91 in early March 2009: {MPW Interactive Chart; closed at $2.91 on 3/9/09,  MPW Historical Prices)

Closing Price Last Friday: MPW: $13.15 -0.43 (-3.17%)