Friday, August 24, 2012

PSEC/Forest City Bond Redemption/Added 70 GDV at $16.19

I would remind everyone that the Bush tax cuts expire at the end of this year. If Obama is reelected and the GOP retains control over the House of Representatives, a failure to extend those cuts is more than a mere possibility. I really do not see any common ground that could form the basis for a compromise.

The GOP will not agree to extend the tax cuts unless their wealthy donors are included, while Obama is not going to agree to another extension that includes people viewed as rich by the Democrats. If the Bush tax cuts expire, the highest marginal tax rate will apply to dividends, and the long term capital gain rate will rise from 15% to 20% with a 18% rate applied for assets held for more than five years and acquired after 12/31/2000. The highest marginal rate will increase to 39.6% from 35%. For wealthy taxpayers who are at the highest marginal tax rate, the dividend tax rate would go from 15% for qualified dividends to 39.5%. WSJ

I will certainly experience a raise in my tax bill due to the loss of the 15% maximum tax rate currently applicable to dividends and long term capital gains. I am heavily dependent on those sources of income. Dividends would instantly become less attractive to me. Equity preferred stocks, which currently pay qualified dividends, would certainly become less appealing given the loss of their favorable tax rate. Long term capital gains would still be relatively attractive from a taxation perspective, compared to other types of income other than municipal bonds.

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The ETF Database has compiled a list of the 100 lowest cost ETFs. A number of the Vanguard ETFs are among the lowest cost ETFs. Vanguard brokerage customers do not pay commissions when buying and selling Vanguard ETFs. The two lowest cost Vanguard ETFs are the Vanguard - S&P 500 ETF at .05% and the Vanguard - Total Stock Market ETF at .06%. 

SL Green Realty announced that it will redeem 4 million out of the 11.7M of its series "C" cumulative preferred stock at its $25 par value plus $.3707 per share in accrued dividends. The redemption date will be 9/23/12. During the Near Depression, I was able to buy this security near $10. REIT CUMULATIVE PREFERRED LINKS IN ONE POST/Advantages & disadvantagesBought SLGPRC at $10.5 March 2009Buys of GPOR and SLGPRC at $11.89 February 2009Sold 50 SLGPRC at $24.76 August 2010Sold Remaining SLGPRC at 25.01 September 2010

The BDC Prospect Capital (own) announced its monthly dividends for October and November.

The BDC Ares Capital (own) sold 25.875M shares, raising net proceeds of $427.4 million.  

Bloomberg published a list of the countries with the highest cost gasoline. The most expensive was Norway, a major oil producer, with an average cost of premium gasoline at $10.12 per gallon. The U.S. was at #51.

One worrisome indicator about the economy's health is the steep decline in the velocity of money:


Velocity of M2 Money Stock (M2V) - FRED - St. Louis Fed Simply put, the velocity of money shows how fast money is moving through the economy. The FED can not control the velocity of money. It can only create and pump money into the economy. This chart shows that money is being hoarded rather than put to uses that generate economic activity such as spending and lending. Stocks, Bonds & Politics: Velocity of Money and Money Creation  (December 2011 Post).

Baltic Dry Index is not encouraging either. That index is down almost 60% year to date and is well below the levels prevailing during February 2009.

The manufacturing and inventory numbers coming out of China are also troubling. Reuters  NYT

Marc Faber believes that a worldwide recession is 100% certain. CNBC

Gross believes that there is a 80% chance of QE3. CNBC

New single family home sales increased 3.6% in July over the revised June number. census.gov.pdf The number of new homes for sale was reported at 140,000, the lowest number on record which goes back to 1963.

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Paul Ryan has recently tried to distance himself from Ayn Rand. National Review Online An audio of a speech given by Ryan in the annual celebration of Ayn Rand held by the "Atlas Society". An article published by TheStreet outlines why Ryan remains an Ayn Rand devotee, except on the issue of abortion. 

The latest poll by the WSJ/NBC shows that the Ryan selection has had no impact on the presidential race. Bloomberg The poll also showed the public's disdain for Congress, as 82% disapproved of its job performance.  

One of the false statements made by Romney is that Obama "robbed" 700+ billion from Medicare to help pay for Obamacare. Of course, Ryan's budget plan has the same cuts in spending. As made plain in a NYT article, Romney's promise to restore those 700B+ in spending cuts would actually increase beneficiary premiums  by $342 per year over the next decade and $577 in 2022. The reason is basic. The cuts do not encompass beneficiary benefits, as suggested by Romney. Instead, what Romney and the GOP wants to restore are additional payments to health insurers, hospitals and other health care providers. By increasing Medicare's costs, which are shared by the government and beneficiaries, Romney would be increasing the beneficiaries premiums.

This is not something new for the GOP. The Ryan budget plan, approved by the GOP house with almost no GOP dissent, would require seniors receiving vouchers to purchase private health insurance to pay about $6,000 more than those receiving traditional Medicare on 2022, according to the Congressional Budget Office. GOP's Plan To Bankrupt the Middle Class 

I keep reproducing this snapshot to drive home the foregoing point, which is even made more hideous by the same budget plan granting tax relief to the GOP's wealthy donors:


www.kff.org/medicare.pdf I would emphasize that this GOP plan would without question bankrupt the middle class after retirement. Their only alternative would be to forego health insurance. This plan was supported by 235 GOP votes in the House, and not a single Democrat voted for it. TIME.comNYT The voucher plan would apply to those who were then 55 or under when they became eligible for Medicare in 2022.

Gawker published yesterday allegedly confidential documents from over 20 hedge funds and other investment vehicles that accounted for over $10M of Romney's 2011 investments.

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The CBO estimates that the U.S. government's budget deficit for the F/Y ending this September will be $1.1 trillion. This would mark the fourth year in a row of budget deficits exceeding 1 trillion dollars. CBO | An Update to the Budget and Economic Outlook: Fiscal Years 2012 to 2022 When Reagan first took office, the entire debt of the U.S. government, accumulated since inception, was less than 1 trillion dollars. United States public debt

Without question, we are in one big mess. It will not end well. Ultimately, the sad ending will be the fault of the voters and those who never bothered to vote, aided and abetted by both political tribes in roughly equal amounts.

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1. Forest City (Bond Redeemed Roth IRA Account): I lost earlier this week my Forest City 2015 senior bond to an issuer redemption:

Forest City Bond 2015 Senior Bond Redemption
I did not accomplish anything with this position other than to earn a few months in interest.  Bought 1 Forest City Enterprises 7.65% Senior Bond Maturing 6/1/2015 at 100 This bond was purchased in a Vanguard brokerage account where my commission was $2.

I still own the common as a Lottery TicketFCE-A: 14.81 -0.05 (-0.37%)Bought 30 FCE/A at $11.58 (re-entry as a LT)

2. Added 70 GDV at $16.19 last Wednesday (see Disclaimer): This brings me up to 300 shares of the Gabelli Dividend & Income Trust I am not reinvesting the monthly dividend which is currently 8 cents per share. This purchase was made with recently received cash flow. The last purchase of 30 shares was also made with cash flow, except that add used cash flow to fund small purchases in several CEFs during a market downturn:  Added to CEFs BTZ SWZ GDV and ERH The 30 share buy of GDV was at $14.54. I have sold the entire positions in BTZ and ERH.

I will frequently use that scatter approach during periods of market turbulence. Another example of a scatter buy occurred in November 2008: LATE DAY TRADES: GCI, CBL, FR, SLG, NYT, NWSA In that bunch, SLG, News Corp and CBL proved to be the most rewarding, though I exited all of the positions at a profit. (e.g. Stocks, Sold SLG at 47.5 (a double); Sold: 170 CBL @ 18.04 (includes 40 bought at $3.7 that day);  Sold 120 NWSA at 14.83 (includes 30 bought at $6.65).

I decided to devote the entire cash flow to just one purchase this time, primarily to bring me up to an even round lot of 300 shares.

On the day prior to my purchase, the discount to net asset value was -10.96, based on a net asset value per share of $18.24 and a closing market price of $16.24.

The fund does use leverage as shown in the fund's page at Morningstar.

GDV page at the Closed-End Fund Association

SEC Form N-Q for the period ending 3/31/12

Last SEC Filed Shareholder Report for the Gabelli Dividend & Income Trust (12/31/11)

Assuming no more or less than a 8 cent per share monthly dividend, the yield would be close to 5.92%. The next ex dividend date is 9/12/12.

I would be satisfied to exit the position with a 4% annualized average return on the shares, assuming my net annualized dividend rate would be close to 6%, giving me a 10% annualized total return.

I would characterize this fund's as using a value approach to its investments.

GDV: 16.08 -0.14 (-0.86%)

3. Prospect Capital (own common and bond): The BDC Prospect Capital reported second quarter net investment income of $64.2M or 51 cents per share, up from 31 cents in the 2011 second quarter. Net asset value per share was reported at $10.83, up $.47 from the year ago quarter. The current annualized yield of PSEC's portfolio was 13.6%. As of 6/30/12, the debt to equity ratio stood at less than 44% and less than 36% after subtraction of cash and cash equivalents. The BDC currently has no borrowings under its bank credit facilities.

Common Shares:PSEC: 11.47 -0.15 (-1.33%)
Exchange Traded Senior Bond: PRY: 24.88 +0.10 (+0.40%) 

4 comments:

  1. I don't follow your numbers. In my view it is as follows:

    "If I buy 100 shares of a CEF for $10 per share,"
    TOTAL INVESTED= $1000

    " and the fund pays me a return of capital dividend of $1"
    RECEIVED= $100

    " If I sell the security after one year for $10,"
    RECEIVED = $1000

    " I recognize a $1 per share long term capital gain or $100 and would pay 20% of that amount"

    PAYED=$20
    TOTAL RECEIVED= $100+$1000-$20 = $1080
    YOU MADE $80 FROM YOUR INVESTMENT,

    " leaving me with $980 after taxes."
    PLUS THE $100 YOU RECEIVED, TOT= $1080

    " I have in effect lost $20 of my original investment."
    I SEE YOU EARNED $80, NOT LOST $20.

    If the fund had paid me nothing at all, I would be at break-even at $10.
    THIS IS CORRECT.

    WHERE YOU LOSE $20 IS IF IT PAYS YOU $100 RET. CAP AND THEN THE NAV OF THE FUND IS NOT $10 BUT $8.8: $1000 -$100 - 100*8.8 BUT NOW YOU HAVE A $20 LOSS TO CLAIM FOR TAXES
    "Now, if I reinvest that $100 return of capital dividend to buy more shares at $9 (11.11 shares), and then sold those reinvested shares at $10, I could cut that total return loss of $20 some, but I am still not better off by that fund paying me my own capital as a dividend."

    IF YOU REINVEST THE $100 BUYING 11.11 SHARES AT $9 AND THEN SELL ALL AT $10, YOU RECEIVE
    111.11 * $10 = $1111.11 AND YOU NOW HAVE tO PAY $22.22, YOU STILL HAVE MADE $89.
    OR DID I NOT UNDERSTAND SOMETHING?

    ReplyDelete
  2. You are correct. I did not add back that $100.

    So I am not good at math. I will take down that section and leave the comments.


    ReplyDelete
  3. In fact, it seems to me that the ret. of cap. is a very good deal if the taxes change, and assuming that the nav's fund when you sell has not declined proportionatelly to its returns of capital.

    And the latter assumption is a big IF:
    How many funds are there with large return of capitals and with continously decreasing navs?

    ReplyDelete
  4. A fund that continually returns capital in the form of dividends is destroying its asset base, thereby making it harder to earn its way back.

    The problem in my example is that the fund that pays a $1 per share return of capital now has 10% less in assets, assuming all investors take the distribution in cash. It has partially destroyed its asset base by the amount paid out in cash that was supported solely by a return of capital.

    By doing that repetitively, it would have difficulty returning back to its original net asset value. So, in practice, that fund would have trouble going back to $10 from $9 with a lower asset base. And that issue involving destruction of its asset base would become worse as more return of capital distributions are made over the years. So in practice, that serial payor of return of capital dividends will likely produce much lower NAVs over time than the fund that has never destroyed its asset base in this fashion.

    Possibly, you will start to see a major divergence in reality, when there is a long term secular bull market and a fund like ADX, which never pays out dividends supported by returns of capital, still has its assets to invest in the long term secular bull market, whereas a fund like GUT has substantially depleted its asset base.

    GUT is a long time serial payor of return of capital dividends.

    There would be cases where a fund has received distributions from its holdings sufficient to cover the distribution paid out its shareholders, but that distribution to its shareholders is classified as a return of capital for reasons that have something to do with arcane tax issues. An example might be YMLP. Its return of capital distributions would not be a destructive return of capital since the fund appears to be receiving distributions from its holdings sufficient to cover the dividend paid to its shareholders. The fund has not paid out part of the investors capital as a dividend in that example but the distribution is classified as a return of capital which reduces the cost basis by an equivalent amount.

    Possibly I need to think about this issue more.

    ReplyDelete