Wednesday, February 27, 2013

KO/Commonwealth REIT/MOU Ends Annual Period with 10.48% Coupon/Sold 100 JSN at $12.7/Bought 600 EDV:CA at C$1.8/Sold 100 PFK at $28.25/Bought 50 MLPG at $31.26-ROTH IRA/Price Gouging by Hospitals/Sold 1 Knight Ridder 5.75% Senior Note Maturing in 2017 at 99/Sold 100 NBD at $22

I have removed the Google search box that used to be located at the top right corner. That search has been returning abysmally poor and incorrect results. The search box at the top left hand corner will provide adequate results but presents the results by returning an entire post rather than a clip.

Big Picture Synopsis

Stocks:

Stable Vix Pattern
Short Term: Slightly Bearish (possible 5% to 10% correction on the horizon)
Intermediate and Long Term: Bullish


Bonds:

Short Term: Slightly Bearish
Intermediate Term: Bearish
Long Term: Extremely Bearish

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The EC forecasts a .3% contraction in the 17 eurozone countries. NYT

New single family home sales increased by 28.9% in January, compared to a year ago. This was the fastest pace in four years. census.gov/newressales.pdfWSJ.

In his testimony before Congress yesterday, Bernanke defended QE and indicated that the Fed's bond buying spree would continue, arguing that the risks seem minimal to him at the present time. FRB: Testimony--Bernanke, Semiannual Monetary Policy Report to the Congress--February 26, 2013 He also stated that he saw no evidence of an equity bubble. Reuters; Bloomberg

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Commonwealth REIT:

I own about 250+ shares of Commonwealth REIT.  The OG had previously stated that he owned 170, but found another 82+ in an IRA yesterday, with another 170 owned in a taxable account. LB helpfully noted that the OG needed to be retired as HT and sent to the Old Folks Home to play checkers and listen to Frank Sinatra all day and leave the heavy lifting here at HQ to those who are still compos mentis.

 The following snapshots were taken after the close yesterday:

ROTH IRA CWH 82+ Shares as of the close: 2/26/13
CWH 170 Shares Taxable Account:  as of the close on 2/26/13

Apparently, Fidelity has my cost basis as unknown, possibly due to a return of capital adjustment for a small odd lot purchased in 2007, and I am in no mood now to reconstruct the cost basis with historical 1099 and trade confirmations anytime soon, but the shares are profitable now. My last add in that account was 40 shares at $18.35 last August (total cost per share=$18.55) which has already been adjusted down to $18.31 due to returns of capital.



Due to a large increase in price yesterday (+53.94%), I am back into profit territory, which suggests that the Head Trader responsible for this selection has a timing problem. HK inquired whether anyone thought of buying more shares at $16?

Headknocker wanted to know which HT bought CWH. All Head Traders here at HQ denied any connection with the earlier CWH purchases at over $20 per share.

As HK has noted many times, one of the immutable laws of the universe, more universally accepted than the law of gravity by those in the know, is that success has many fathers while failure is an orphan.

RB understood HK's frustration, but would note for the record that CWH pays a dividend, and it is well known, beyond any reasonable doubt, that dividend paying stocks are outside of RB's investment orbit, so it had to be the OG or the Lame Brain who bought CWH.

LB responded that it has advised the OG on Monday that CWH was undervalued at $16, which went in one ear and out the other. The OG was more concerned why he had lost five Hearts games in a row.

Finally, and it is way overdue, hedge funds are challenging the management and Board of Trustees of this REIT. ReutersWSJ.comBloomberg Fire the external management company, REIT Management and Research L.L.C. controlled by Barry and Adam Portnoy who are two of the five trustees (see page 3: 2012 Annual Report-Form 10-K)

Yesterday, Corvex And Related Fund Managment announced that they controlled 9.8% of the common stock. Those entities wrote an open letter to CWH's Board of Trustees detailing their views on how management has destroyed shareholder value. Due to that mismanagement, the shares had closed at $15.85 last Monday after the company announced yet another share offering. CommonWealth-REIT Announces Proposed Offering of 27M Shares CWH also announced a tender offer for some low yielding senior bonds maturing between 2014-2016: CommonWealth REIT Announces Debt Tender Offer

Corvex and Related Fund Management filed this SEC form yesterday: SC 13D

Unless there is a shake up and compliance with the demands being made,  those funds are willing to make an offer for the company a "significant premium to the current market value".

The two hedge funds estimated that the net asset value per share was approximately $40 per share and they had a $50 price target on the shares after several changes were made including a change in the internal management structure and more shareholder friendly capital allocation. I agree with their criticisms of the Board and management, and have no opinion on their value and target estimates.

In a second letter from Corvex and Related, the two hedge funds stated that they were surprised the Board of Trustees had not yet canceled the 31.05M share offering, with the over allotment option and questioned the rationale given by CWH for such a large dilutive offering. This is a very strongly worded letter. The funds also stated that they are initially prepared to acquire the outstanding shares at $25, with "the opportunity to meaningfully increase this offer after completing due diligence".

CWH stated that it will proceed with the dilutive share offering, which will likely cause the shares to sink today. sec.govProspectus

As previously noted, CWH slashed its dividend by 50% to $.25 per share.

There is a poison pill provision outstanding and the Board serves in staggered terms. The only one up for election this year is the alleged independent trustee Joseph Morea. sec.gov I will of course vote against Mr. Morea.

I suspect that the two funds will receive a great deal of support from investors in any effort to oust management and the Board of Trustees or virtually anything else that stops the Portnoy's in their tracks. There should be a large reservoir of discontent with CWH's management that has obviously been tapped by these hedge funds judging from yesterday's price action.

Yesterday's Close (2/26/13): CWH: $24.40 +$8.55 (+53.94%)

In an earlier post, I noted how hostile analysts were in their questioning of the CEO during an earnings conference call, which was amusing to the OG, until the correct brain synapse fired, and a memory gelled for an instant, that he owned the shares.

See also: Commonwealth REIT: FFO and CAD Distinction (in introduction)

Item # 1 CWH (August 2012 Post)

Bought 40 CWH in the Roth IRA at $19.86


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Coca Cola

The Board of Directors of The Coca-Cola Company increased the quarterly dividend by 10% to $.28 per share. This raise brings the annual rate to $1.12 per share, up from $1.02. The company returned $9.1B to shareholders during 2012, through share repurchases and  dividends.

KO is owned under my dividend growth strategy. Item # 6 Common Stock Dividend Growth Strategy

Without adjusting for the 2 for 1 stock split, I computed the historic growth rate of KO's dividends in the comment section to this Seeking Alpha article as follows:

2012 $2.04 8.5%
2011 $1.88 6.8%
2010 $1.76 7.317%
2009 $1.64 7.89%
2008 $1.52 11.765%
2007 $1.36 9.677%
2006 $1.24 10.71%
2005 $1.12 12%
2004 $1.00 13.6%
2003 $  .88 10%
2002 $  .80 11.1%
2001 $  .72 5.8%
2000 $  .68 6.25%
1999 $  .64  

Investors Info: Dividends: The Coca-Cola Company

The stock responded positively to this announcement. (Closing price 2/22/13: KO: $38.52 +0.81 (+2.15%)

The rate of growth does slow down during recessions and then starts to pick up again during economic growth cycles.

KO 265+ Shares: As of the Close on 2/26/13


Coca Cola Closing Price Yesterday: KO: $38.11 +0.39 (+1.03%)

(1) Sold 100 JSN at $12.7 (see Disclaimer)Nuveen Equity Premium Opportunity Fund (JSN) is a buy-write closed end fund that attempts to replicate before fees and expenses the price movements of a 75%/25% combination of the S & P 500 and the Nasdaq 100 index respectively. 

I sold 100 shares:



The fund has supported its dividend with some returns of capital that reduces my cost basis. Fidelity does adjust the cost basis to reflect returns of capital.  

2013 100 JSN +$106.22
I bought those shares in April 2011 and have been paid $145.26 in dividends. The current quarterly dividend rate is $.279 per share. 

I roughly figure that my total return, before any cost basis adjustment and taxes, would be slightly in excess of the dividends.

I purchased the shares sold at $12.7 at $12.51. Item # 4 Added 100 of the Stock CEF JSN @ 12.51 I calculate the total return at 11.55% before taxes. 

I viewed that performance to be inadequate so I sold the shares. I calculated that the S & P 500 return over the same period, using the SPY ETF price unadjusted for dividends, was about 13.24% (SPY closing price value on 4/26/11 was 134.79, SPY Historical Prices, and was 152.63 at the time JSN was sold on 2/20/13) The SPY dividends would make the comparison worse in favor of SPY.  

I realized more of a gain for the shares sold earlier in an IRA where I had an advantageous entry point.   Item # 5 SOLD 209 Stock CEF JSN at $12.49-ROTH IRA (see snapshots therein); Pared JSN-Sold 100 at 12.38 in ROTH IRA

JSN Page at the CEFA

Another reason for selling JSN was the narrowing of its discount to net asset value per share:

JSN Data on 2/19/13 (day before sell)
Net Asset Value Per share= $13.52
Market Price=$12.72
Discount -5.92

I still own 300 shares of JLA, a similar Nuveen buy-write CEF which seeks to replicate the movement of a 50/50 split in the S & P 500 and Nasdaq 100. JLA - Nuveen Equity Premium Advantage Fund

On 2/19/13, JLA closed at a 8.58% discount to net asset value.

2. Bought 600 Endeavor Mining at C$1.8-Toronto Exchange (see Disclaimer): Last Wednesday, Gold had a particularly bad day, with spot gold prices declining $40.3 per ounce. The London P.M. fix was at $1,588.5 on 2/20/13. A gold price chart shows that the most recent high was at $1,784.5 on 9/21/12, and the price has been trending down since that time. The price hit $1,781 in February 2012 before swinging lower and then bottoming in the $1,550-$1,600 range during May-August 2012.

The P.M. London fix was $1,895 on 9/6/11.London Fix Historical gold That is when I made a decision to sell some gold and silver for the first time in my life. Sold Some Gold and Silver (9/7/11 Post);  Snapshot at Item # 1 Recent Gold and Silver Sales (9/15/11 Post); Sold Some Junk Silver Coins Yesterday (9/13/11 Post). I sold some coins in January 2012, generating a $3,421 profit on $5,322.45 in proceeds, when I decided to stop. Those sales will be reported on the IRS Form 8949.

The gold price did pop some yesterday.


Closing Price 2/20/13: EDV.TO: C$1.79 -0.12 (-6.28%)

Over the past two years, the price has spiked down temporarily to around C$1.8 before recovering fairly quickly. The past may not be prologue, but $1.8 per share seemed like a decent entry point looking at a two year chart: EDV.TO Interactive Chart

Company Description: Endeavour Mining Corp. (EDV-TOR) currently owns three operating mines: the   Tabakoto Gold Mine in Mali (ownership: 80%); the Nzema Gold Mine in Ghana (90%) and  the Youga Gold Mine  in Burkina Faso. Gold Operations. Those three mines are producing more than 300,000 ounces of gold per year according to the company.‎ Fact Sheet.pdf The anticipated 2013 margin, based on $1600 per ounce gold, is 230M.

The cash cost per ounce ranges from a low of $760 for the Youga Mine to $850 for the Tabakoto mine.

A 4th mine, the Agbaou Gold Project, is anticipated to commence production in the 2014 first quarter. This mine is expected to have an eight year life and produce 103,000 ounces of gold per year.

All of these mines are in West Africa.

Endeavour Mining profile page at Reuters

Endeavour Mining Key Developments page at Reuters

Endeavour Mining Corporation - Home Page

Key Statistics Page at Yahoo Finance (data as of 2/20/13)
EDV.TO Key Statistics
Forward P/E: 5.11 (est. $.35 E.P.S. in 2013)
Price/Sales: 1.65
Price/Book: .72
Total Cash: 130.59M
Cash Per Share: .53
Total Debt: 100M

Prior Earnings: For the 2013 third quarter, the company reported a net loss of $1.1M, compared to net earnings of $9.6M in the 2011 third quarter. The net loss was primarily the result of a $16M loss on financial instruments. Earnings from operations increased by $5.6M to $20.2M. Operating cash flow from mining operations increased by $25.6M to $40.7M. 2012Q3.pdf

The company has drawn $100M on a $200M credit facility. Cash and marketable securities were at $135.103M as of 9/30/12 including $4.517M of restricted cash.

Rationale: (1) Speculative Capital Appreciation Potential: This company has a lot of shares outstanding. Most likely, I would be a seller in the $2.40 to $2.6 price neighborhood. The company is profitable on an operating basis and has a new mine coming on stream early next year, which will increase Endeavour's gold production by over a 100,000 ounces per year.

Risks: (1) No One Can Predict the Price of Gold: Cash costs for mining are increasing. Needless to say, a major downdraft in gold prices would severely crimp operating profits given the cash costs per ounce, depending on the mine, between $760 and $850 per ounce.

(2) Country Risks are Substantial: One of the mines is located in Mali: Gold Investing News In 2011, there was a civil war in the Ivory Coast  which shut its main port. Second Ivorian Civil War - Wikipedia The new Agbaou mine is located in that country.  The potential for more tax levies on profits is always a potential problem. A flare up of that kind of issue recently occurred in the Ivory Coast Parliament. Bloomberg While that "windfall profits" tax was apparently taken off the table, other avenues for raising government revenues are being considered in that nation. Reuters Nationalization is of course always a possibility.

Closing Price Yesterday: EDV.TO: 1.84 +0.02 (+1.10%)

3. Sold 100 PFK at $28.25 (see Disclaimer): I still own PFK shares in the ROTH IRA.


The Prudential Financial Inc. Prudential Financial Inflation linked Retail Medium Term Nts (PFK) is an exchange traded bond that pays interest monthly, computed at a 2.4% spread to CPI, computed in the manner explained in a prior post. Item # 3 PFK

This note matures on 4/10/2018 at $25. Pricing Supplement No. 122 dated March 31, 2006

I sold at a 13% premium to the 2018 liquidation value after collecting almost four years of monthly interest payments.

I realized a gain of $962.38 on the 100 shares. Item # 7 Bought 100 PFK at $18.466 (6/26/2009 Post)

2013 Sold 100 PFK +$962.38
I would lose over $300 in capital gains by continuing to hold this security until maturity. Most of that gain in excess of the $25 par value would be lost within four years.

With the recent decline in CPI, the monthly interest rate paid by this security has likewise fallen. Over the last 12 months ending in January, the government reported last week that CPI rose 1.6% on a non-seasonally adjusted basis. Consumer Price Index Summary At that inflation rate, it would take about 3 years for PFK to generate $300 in interest income. Taking that CPI rate out to April 2018, when the note matures, I would generate about $200 in net income over five years by holding this security until maturity or roughly $50 per year. That net number is about a 1.77% annual return on $2817+. I can do better than that number by investing the $$2817+ in another security.

I may hold onto to my shares in the ROTH IRA for up to a year more, and then sell the shares provided I can receive over $28 per share.

This snapshot of the PFK position in the Roth was taken on 2/22/13 when the price was $28.1:



PFK is ex interest today for its monthly distribution. The distribution this month is $.08667 per share.

Closing Price Yesterday: PFK: 28.10 0.00 (0.00%)

4. Bought 50 MLPG at $31.26-ROTH IRA  (see Disclaimer):



Security Description: UBS AG E-TRACS linked to Alerian Natural Gas MLP Index 2040 (MLPG) is an exchange traded note issued by UBS that tracks an index of the 20 largest by market capitalization natural gas infrastructure MLPs. Each MLP is equal weighted and earns the majority of their cash flow from the transportation, storage and processing of natural gas and natural gas liquids.

Sponsor's website: ETRACS Alerian Natural Gas MLP Index - UBS Investment Bank

Constituent Weightings:



Distributions will be variable and are paid quarterly. The last dividend was $.4433 per share and went ex dividend on 1/10/13. Based on the last four distributions, the dividend yield would be about 5.67% at a total cost of $31.26 per share.

The annual tracking fee is .85%.

This week's cover story in Barrons is about MLPs.

Rationale: (1) Natural Gas Super Cycle: I discuss the RB's "vision thing" for a multi-decade super-cycle for natural gas demand in a previous post. Item # 4 Bought 50 FCG at $15.84 I mention in that post that I would not likely buy this ETN since I normally have an aversion to assuming both the credit risk of an ETN's issuer and the market risk of the security. I have overcome that aversion by limiting my purchase to just 50 shares. And, this ETN was the most direct way to play the super cycle in the MLP space.

This ETN owns MLPs that transport, store and process natural gas and natural gas liquids.

(2) Total Return Potential: Hopefully, the cash distributions will trend up over time and the existing distribution rate is desirable in a a low yield world.

UBS AG E-Tracs Alerian Natural Gas MLP ETN (MLPG) Chart

(3) The ETN Structure Eliminates the K-1 Hassle: As noted in the sponsor's fact sheet, the distributions are reported as ordinary income in a 1099 and the owner of this security will not receive a K-1 form. This is a major selling point for me since I hate fooling with K-1s at tax time.

Risks: (1) UBS Credit Risk: An ETN is a senior unsecured note. As such, the owner of MLPG is subject to the credit risk of UBS. If UBS goes bankrupt the owner of this security will be in the same position as all other owners of the issuer's unsecured senior debt. While the amount of recovery in such an eventuality is unknowable, I generally would anticipate around 15 to 25 cents on the dollar after a prolonged period in bankruptcy where nothing would be paid to the owners of the issuer's debt.

(2) Concentration and Market Risk. 

Other risks, including the call right, are described in the prospectus and the fact sheet: prospectus_supplement.pdf and ‎ factsheet.pdf

Future Buys and Sells:  I would likely at some point sell this security when and if I can harvest a 10% annualized multi-year total return or 15% total return at any time.

MLPG Closing Price Yesterday: MLPG: 31.27 -0.04 (-0.13%)

5. Update on MOU (own): I last gave an update on this exchange traded PPN in this post: Stocks, Bonds & Politics: Status of Citigroup Funding PPNs: MOU, MBC, MKN, MKZ (2/3/13 Post).

MOU finished its annual period with no Maximum Level Violation and will make a 10.48% annual interest payment on it $10 par value, calculated below:

Russell 2000 Starting Value: 829.23
Russell 2000 Close on 2/22/13: ^RUT: 916.16 +10.76 (+1.19%)
Gain During Annual Coupon Period= 86.93
Divide 86.93 by Starting Value of 829.23= 10.483% Coupon for Annual Period

I own 100 MOU, so I will receive $104.83 on 3/1/13.

I noted at Fidelity that its quote page has the ex interest data as 2/26/13 for $1.0483 per share:



There is just one coupon period remaining before this note matures at its $10 par value.

Data for Current Annual Coupon Period:

Starting Value Russell 2000= 916.16
Maximum Level Violation Number= 1255.14  (1.37 x. 916.16)

Pricing Supplement
Bought 100 MOU at $10.12 (4/2009 Post)

This has been a good one. MOU paid 27.93% for its coupon period ending in February 2011: see snapshot at MBC & MOU. The coupon period ending in February 2012 paid 3.7%: see snapshot at Item #3 MOU.

All of those coupons are substantially more than the YTM of a senior Citigroup fixed coupon bond maturing in 2014 which is close to 1%. FINRA

Closing Price Yesterday: MOL: 10.14 +0.11 (+1.10%) (price adjusted for ex interest payment)

6. Sold 1 Knight Ridder 5.75% Senior Bond Maturing 9/1/17 at 99 (Stocks, Bonds & Politics: Junk Bond Ladder Strategy)(see Disclaimer): I am just glad to make a profit on this one.


It has been rare for any buyer to appear willing to accept a one bond lot, so I jumped at the chance to unload this low coupon Knight Ridder bond near par value. Knight Ridder was acquired by the  McClatchy Company (MNI) after the issuance of this bond.

I still own a lot of junk bonds as part of my junk bond ladder strategy but I am no longer updating prior posts connected with this basket.

I bought this bond in April 2011: Bought 1 Knight Ridder 5.75% Senior Bond Maturing 9/1/2017 at 85

7. Sold 100 NBD at $22 in Main Taxable Account (see Disclaimer): The Nuveen Build America Bond Opportunity Fund (NBD) is a leveraged closed end bond fund that owns taxable municipal bonds. I mentioned in a recent post that I would be selling the shares owned in a taxable account as I transition to owning this fund (and NBB) in retirement accounts. Item # 2 Bought 100 NBB at $20.85-Regular IRA (2/6/13 Post). As noted in that post, I own 200 shares of NBD in the ROTH IRA.

I entered a GTC AON order to sell 100 at $22 which was filled yesterday:



I am in a trading mode for leveraged closed end bond funds. I am attempting to balance their risks with their income generation and hope to own none of them when interest rates start to appreciably rise. The balance is being achieved for now by simply trading them, selling when the discount narrows and/or whenever I have a profit after collecting several monthly dividends. The profit on this recent sale of NBD was negligible after receiving six month dividend payments.

Closing Price Yesterday: NBD: 21.97 +0.09 (+0.41%)

Stocks and Politics:

1. Price Gouging by Hospitals: An excellent article detailing how hospitals drive up health care costs through unconscionable price gouging was recently published by TIME.com. One way to drive down medical costs would be to cap the costs that hospitals can charge for routine items. In the TIME article, one person was billed $24 for a five cent niacin tablet. Another patient was charged a $1.5 for a generic Tylenol pill, available for purchase in 100 tablet bottles at Amazon for $1.49. The list of horrors is endless for anyone willing to delve into it.

Another practice, which should be outlawed, is patient referral for a test conducted by a facility where the doctor has some financial interest.

Another blatant conflict is that Medicare accepts nine out of ten payment recommendations made by the  AMA's Relative Value Scale Update Committee. Bloomberg Why are doctors setting the rates for their own payments?  

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