Tuesday, April 23, 2013

What is Gold's "Fair Value"?/Reinhardt and Rogoff Challenged/Sold 100 ASEA at $17.8/Added 50 BWG at $20.55/Sold 100 APF at $16.4/Sold 100 IF at $12.91/Sold 50 SANPRA @ $21.72-ROTH IRA/Sold 100 GSPRD @ $23.89/Sold 50 PIE @ $20.06/Sold 100 EWS @ $13.91/MSFT & INTC/LBAI/Bought 50 FAM at $17.51

Big Picture Synopsis

Stocks:
Stable Vix Pattern
Vix Asset Allocation Model Explained Simply
The Use of the VIX as a Timing Model
Short Term: Slightly Bearish
Intermediate and Long Term: Bullish


Bonds:
Short Term: Neutral
Intermediate Term: Bearish
Long Term: Extremely Bearish

As previously noted, Goldman Sachs believes that 2013 will be the transition year to significantly higher rates. Barrons.com I agree with that assessment which is reflected in my Big Picture Synopsis for bonds.

Even without a significant pick up in inflation, rates are abnormally low now due to intervention of the Federal Reserve in the bond market. The FED is the main buyer of treasury securities and does not want a market rate for those purchases. Unlike other buyers, the FED wants the lowest yield.

The current pricing of the 10 year TIP is predicting an average inflation rate of 2.4% to 2.5% over the next ten years, yet the 10 year nominal treasury rate is hovering now near 1.7% (the 10 year TIP yield is negative of course: Daily Treasury Real Yield Curve Rates; note the negative yield on the five year TIP). The market rate would be more like 3% to 3.5% for the 10 year treasury with that current inflation forecast. Virtually all "A" rated securities maturing within 10 years would have a negative real rate of return with an average inflation rate at 2.5%.

When the market becomes convinced that the FED is going to cease its intervention, rates will likely start to rise to market levels. It is not just that the treasury market has lost its main purchaser of newly issued treasuries, who desires the highest price and worst yield possible. The other issue, and people will start asking this question when the time draws near, what is the FED going to do with $4 trillion of that paper?  Some of it will have to be sold, and the buyers will want the market rate rather than an abnormally low and artificial rate.

The current holdings by security and maturity can be found at the NY FED's website (just click the relevant tab to see the maturity dates):

System Open Market Account Holdings - Federal Reserve Bank of New York


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CPI

The government reported last week that consumer prices fell .2% on a seasonally adjusted basis, lower than the consensus forecast of no change. The gasoline index fell 4.4%. Core CPI rose a less than expected .1%.

On a non-seasonally adjusted basis, CPI increased by 1.5% over the last twelve months.

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INTEL (own)-Microsoft (own)-IBM (do not own)

Intel (own) reported 2013 first quarter net income of $2 billion or $.4 cents per share on $12.6B in revenues. The company generated approximately $4.3B in cash from operations, using $533M to buy back shares and paying another $1.1B in dividends.

Revenues declined by 2.5% from the 2012 first quarter.  E.P.S. declined 24.5% on a diluted share basis, with Intel earnings $.53 per share in the year ago quarter compared to $.4 in the 2013 first quarter. Gross margin declined 8 percentage points Y-O-Y. The margin decline was at least in part due to increased production of the new Haswell line of processors in advance of their qualification for sale.

The data center group revenue was down sequentially but up 7.5% Y-O-Y. The PC Client Group revenue declined 6% Y-O-Y. Given the weakness in PC sales during the 1st quarter, this slowdown was within expectations.

The company currently estimates that 2013 capital spending will be $12B, plus or minus $500M, down $1B from its prior forecast.

Intel ended the quarter with $10.021B in cash and short term investments. Long term debt was at $13.143B. The debt is low cost (see  FINRA list)

The company is predicting a return of growth in the second half. (page 3: Earnings Call Transcript - Seeking Alpha)

Subsequent to the earnings release, Dimitra Defotis attempted to make a case for owning Intel in her Barrons' column. The main thrust of her argument is that investor's are being paid "handsomely" to wait for Intel's investment in new products to pay off. I would generally agree with her theme with this caveat. Intel is not going to do a moon shot even if those new products take off. An investor in Intel stock has to have reasonable expectations for total return.

Possibly, Intel will do a moon shot, similar to what happened in the 1980s and 1990s, rising from around $.30 per share to over $70 by 2000 on a split adjusted basis, when and if it invents a microprocessor that can be implanted in the OG's brain, capable of communicating with, and replace when need be, the mush that remains.

I currently own 276+ shares at an average cost of $17.85 per share. At that total cost number and the current quarterly dividend of $.225 per share, my yield is 5%. Intel Corporation - Dividend Summary

I started to reinvest the dividend again with the last payment but may quit in the event the shares move above $23 consistently. I took the dividend in cash starting in 2011 4th quarter. I changed the distribution to reinvestment earlier this year and bought 2.975 shares at a total cost of $20.68 with the first quarter dividend.

I am supposed to sell 80 shares between $26 to $28 that were bought at a total cost of $16.04 (50 shares) and at $14.73 (30 shares). Both of those purchases were made in October 2008. Stocks, Bonds & Politics: SPECIAL POST ON LB'S INTEL LECTURE (12/18/12 Post)

If I am able to sell in that range, which I forgot to do earlier, I will consider buying the shares back at below $20. I call this channel trading, a technique that I use for stocks that have limited upside and a decent dividend yield. The general idea is to generate a 10% annualized return with the dividend.

Yesterday's Closing Price: INTC: 22.88 +0.44 (+1.96%)

Microsoft (own) reported a better than expected net income of $6.06B or $.72 per share for the 2013 fiscal  third quarter. The forecast was for $.68. Operating income was reported at $7.612B. Press Release As of 3/31/13, Microsoft had $74.483 billion in cash, cash equivalents and short term investments. Net cash from operations for the last quarter totaled $9.666B.

Tiernan Ray gives a good summary of how the analysts responded to MSFT's report: Barrons.com

MSFT received a lift yesterday after CNBC reported that ValueAct Capital had taken a $2 billion stake, which was later confirmed by the ValueAct CEO. Reuters

Yesterday's Closing Price: MSFT: $30.83 +1.07 (+3.58%)

The earnings report from IBM was disconcerting. First quarter revenue declined 5% Y-O-Y to $23.41B, below the consensus estimate of $24.7B. Adjusting for currency, revenues fell 3%. If a company can not grow the top line, sooner or later the bottom line will turn south too. Even sales in the "growth market" which includes the BRIC nations declined 1%. Services revenue declined 4%. Software revenue was flat. IBM reported an adjusted E.P.S. of $3, missing the consensus estimate of $3.06. ‎SEC Form 8-K (press release) The stock reacted badly to this report last Friday: IBM: $190.00 -17.15 (-8.28%)

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Gold's Price: Is There a "Fair Value"?

I read an article by Mark Hulbert, summarizing a research report by a Duke finance professor and a former commodities portfolio manager, that the "fair value" of gold is below $800. MarketWatch The report is also summarized in Hulbert's Barrons column.

Apparently, these two gentleman have studied the historical relationship between gold and CPI, "going back as far as they were able to obtain data" and found that the "average" ratio was a 3.2 to 1 ratio to the CPI index.

That formula would put the fair value of gold at $744.87 per ounce, based on the March 2013 non-seasonally adjusted number of 232.773. ‎research.stlouisfed.org

There is at least one glaring problem with that analysis. U.S. CPI data goes back to at least 1913 (Consumer Price Index, 1913- | The Federal Reserve Bank of Minneapolis), but the price of gold was fixed for a prolonged period until the early 1970s. A long term chart of the London P.M. gold fix, which goes back to 1833, shows that gold was at fixed prices until 1971. (this link which shows the yearly average gold price may not work: London Fix Historical gold)

As a result of the Bretton Woods agreement in 1944, the U.S. agreed that one USD was convertible into gold at $35 per ounce. Nixon ended that convertibility by Executive Order in 1971.

It was even illegal for U.S. citizens to own gold bullion between 1933, when FDR issued Executive Order 6102 and January 1, 1975.

FDR devalued the USD in 1933 by almost 70% by raising the fixed price of gold convertibility to $35 per ounce from $20.67.

I fail to see how any data before 1/1/75 could be used to prove anything. I would be very suspicious of anyone using prior data to support any argument about gold's "fair value". Personally, I think that anyone attempting to discover gold's definitive "inherent value" is chasing their tail.

A similar type of research paper, published at Minyanville, places fair value at less than $800 per ounce, using historical comparisons with inflation, stocks, wages and real estate. According to that author, (Minyanville), fair value for gold is around $616 when comparing gold to historical stock prices since 1800, which is so ridiculous that is just laughable. I would not even trust any of the stock data as being remotely reliable before around 1920 or so.

Barry Ritholz dismisses all arguments in favor of gold and argues that the justifications for owning gold are consistent only with the beliefs of a religious cult. The Big Picture

If anyone is actually serious about attempting to determine gold's inherent value by making comparisons with other asset classes or inflation, I would suggest, at a minimum, starting with data series since 1/1/1975.

I am certainly no gold bug. Personally, I view anyone's attempt to compute a fair value for gold as an exercise in absurdity. Gold has no clearly ascertainable fair or intrinsic value. It has no P/E, P/S, P/B, P.E.G or any other financial ratio used to determine value. It produces no income stream.

Gold is simply a currency, a store of value, whose daily value is determined by the laws of supply and demand, generated by fallible human beings, particularly those who are concerned about the value of paper currencies backed by the "full faith and credit" of irresponsible governments who engage frequently in periodic debasements of their own currencies.

Gold is the non-government currency. As such, it has value and can be used as a medium of exchange. It has been viewed that way by humans over the centuries without question. The reason for the allure and status is not as important as the fact of their existence, since the allure and status undeniably exist  and have existed for well over 2,000 years.

Gold has a timeless presence and reminds me of my relatively short period of life. When I was 13, for example, I bought a U.S. gold piece minted in the 1880s with money made one summer mowing lawns at $2 per lawn with hand clipping and sweeping with a broom included in that princely sum. The gold piece was bright and shiny at the time of purchase. Unlike its then and current owner, it has not aged a single minute and looks exactly as it did when struck over a 100 years ago. That is just part of the allure.

The price of gold started to rise in the U.S. when the government effectively devalued the USD by removing its convertibility into gold at $35 per ounce.

Between 1971 to September 2011, the gold price did go up from $35 per ounce to over $1,900. I would not argue with the gold bugs too much about "intrinsic" value or "fair value" given that historical record. Individuals are obviously willing to trade paper money backed by the full faith and credit of a sovereign for gold.

While I do not believe that the gold price is tied to the S & P 500, there is a long term correlation (i.e. 1971 to present) between the gold price per ounce and the S & P 500 index level. In August 1976, gold was mostly trading in the $105 to $115 per ounce range. The S & P 500 was then mostly trading in a narrow range of 102-104, Historical Prices | S&P 500 Index The S & P 500 is now near 1560. Even after the recent plunge gold was close to $1425 per ounce yesterday.

In a debate between Doug Kass and and the gold bug Peter Schiff, Kass argued that gold was an unproductive asset whose value was based on beliefs rather than any "intrinsic value". A dollar bill in my wallet is an unproductive asset too. Gold is not an apartment building or farmland, a stock or a business. All currencies are unproductive assets in that sense. The problem is that gold has no fixed and or clearly ascertainable value as a currency.

I used the calculator at the The Federal Reserve Bank of Minneapolis and found that it would take almost $95 to buy the same goods or services that $20 would buy in 1974, so maybe that $20 bill does not in reality have a fixed real value either as a matter of fact.

Another correlation that is almost perfect is the percentage rise in gold over the last decade compared to the percentage increase in my waist size.

As readers are aware, I sold my junk silver coins in September 2011 and January 2012:

The Road to Political Power: Lying Works/Recent Gold and Silver Sales (September 2011 with snapshots)

Stocks, Bonds & Politics: Snapshots of Coin Sales In January 2012

I had missed the opportunity to sell the junk silver coins at about the same price before Ronald Reagan was elected President. The price went as high as $55 per ounce. Nelson Bunker Hunt - Wikipedia


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Europe:

Sentiment was not helped last week after Germany's top central banker stated that the debt crisis could take a decade to overcome.  MarketWatch

The Europeans statistical agency reported that home prices in the Euro area declined 1.8% Y-O-Y in the 2012 4th quarter. eurostat.ec.PDF

Construction declined by .8% in February: eurostat.PDF

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Reinhardt and Rogoff Challenged with Their Own Data

One historical justification offered by the proponents of austerity, particularly in Europe, is the conclusion reached by Reinhardt and Rogoff in their seminal study "Growth in a Time of Debt" published in January 2010. They later published a book on the subject titled This Time Is Different: Eight Centuries of Financial Folly: Carmen M. Reinhart, Kenneth Rogoff.

Another study used the same data and undermined the central conclusion made by Reinhardt and Rogoff.  (downloadable at A Critique of Reinhart and Rogoff) That study is summarized in recent articles published by WSJ and the NYT.

In that paper, which focuses on a shorter time span starting in 1946, the authors claim that they found "coding errors, selective exclusion of available data, and unconventional weighting of summary statistics" that led to "serious errors". As a consequence, the authors claim that Rogoff and Reinhardt draw inaccurate conclusions about the relationship of a government's public debt and GDP growth among the 20 largest economies.

Reinhardt and Rogoff claim that GDP growth slows to -.1% when the public debt to GDP ratio is over 90%. BloombergThe Global Debt Bomb - Forbes.com The authors of the critique found that the data actually shows growth of 2.2%. That number was, however, 1% lower than for countries with lower than 90% debt to GDP ratios.

The general thrust of this critique is that a 90%+ public debt to GDP ratio restrains growth, compared to lower than 90% ratios, but there is still meaningful GDP growth rather than a contraction.

Reinhart and Rogoff admit to their coding error in excel but dispute the other conclusions.

Reinhard and Rogoff go farther back in time, as in eight centuries, which is one of their defenses.

I would view data for at least 700 of that 800 year time span to be inherently unreliable. Reliance on unreliable data will lead to erroneous conclusions. If the point can not be supported with data post WWII, then the conclusion is at a minimum highly suspect.

A similar type issue has been raised in criticisms of Jeremy Siegel's work.

Jeremy Siegel goes back to 1802 to support his argument for stocks, contained in his book titled Stocks for the Long Run: The Definitive Guide to Financial Market Returns & Long Term Investment Strategies.

The data for most of that period, particularly for the 19th century, is just not reliable and/or relevant, as pointed out by Barry Ritholtz in a column published at The Big Picture and by Jason Zweig in his WSJ column.

In addition to those criticisms, I question the relevance for an individual investor when the conclusion is based on a data series going back to 1802. People do not live to be 200, which seems like an obvious point, and face numerous situational risks that would require the expenditure of funds invested in stocks, possibly at the most inopportune times.

Most individuals have a very narrow time span where money can be saved and invested in significant amounts and can consequently be inordinately impacted by a long term secular bear market in stocks that typically lasts for 15 years or more, especially when governments make policy mistakes which was the case during the Great Depression. Stocks, Bonds & Politics: To Professor Siegel: Time for a Re-ThinkStocks, Bonds & Politics: WSJ Exposes Jeremy Siegel

If Reinhart and Rogoff can not make their case with data since WWII, then their conclusions are undermined in my opinion. The data needs to be examined by competent people with no axe to grind or books to sell.

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Small Recent Raise in Cash Allocation:

I have engaged in some selling over the past week and hope to buy back all, or most of what I have sold at prices below my prior purchases. If I am wrong about a correction being in progress, then I will have left some profit on the table.

Whenever I become concerned about a market correction, I will sell stock ETFs and CEFs to lower my overall stock allocation. The purpose is mostly psychological. If a correction ensues, I will take a lot of hits since my stock exposure remains high. However, I am more inclined to buy the dip after raising some cash even if the amount is relatively insignificant to me in the scheme of things.

One reason for selecting ETFs and CEFs focused on Asia has to do with recent economic data.

Another reason for selecting these securities is that they do not produce much income.

Some of the weak data includes the following:

Singapore reported that its GDP actually declined in the last quarter. GDP declined at an annualized 1.4% during the March 2013 quarter. Credit Suisse lowered its growth forecast for Singapore GDP to 1.5%.

China released recently a lower than expected 7.7% increase in GDP Y-O-Y for the first quarter. The number is suspected by many to be too high anyway and is at least partly based on construction in ghost cities.

Unemployment in Australia rose to 5.6% in March from 5.4%.  Labour Force, Australia, Mar 2013

The ETF for emerging market stocks (EEM) broke below its 50 day moving average on 4/15/13. The 200 day moving average was pierced to the downside earlier-around 2/20/13. EEM retested that line in early March and was unable to break above it and then started a slide from $44 to a $41.04 close on 4/18/13.

I am also in general agreement with Scott Minerd, the chief investment officer of Guggenheim Partners. In an interview published by Barrons, Minerd noted the breakdown in the transports (a leading indicator), the prolonged sluggishness in Europe likely to continue longer than previously expected, and other recent economic data when forecasting that the market is at the "brink of a fairly healthy correction in equities", probably around 10% and possibly more. I also agree with his general prognosis for the U.S. and U.S. stocks when he stated that a large number of positive factors are lining up for a 10-15 year Age of Prosperity, with U.S. stocks substantially higher in the intermediate and longer term.

If I was certain that the market was going to have at least a 10% correction, I would be selling more equities. No one can have any certainty about the future. It would not be surprising to see the market continue to rise and then correct 10+% at much higher levels. So a prediction for a correction is more of a feel based on a large sample of data points rather than a firm forecast.

Consequently, I have only pared my stock exposure only by a tad, mostly focusing on lower yielding securities. I also threw into the cash raise a couple of floating rate equity preferred stocks where I am an active buyer and seller.

I may start to substitute higher yielding common stocks for the stock CEFs and ETFs that have been recently sold. An example would be a 50 share add of Royal Dutch shares, RDS/A, that I recently bought at higher levels. Bought 50 RDS/A at $68.93 (ex dividend after purchase: RDS.A Stock Quote). No decision has been made on the substitutes. I would buy back what was sold at lower prices too.

I would note also that I recently initiated the minimum $3,000 investments in two Vanguard mutual funds: Item # 5 Initiated Position in Vanguard Capital Opportunity (VHCOX) (4/9/13 Post); Initiated Position in Vanguard Wellington Fund (VWELX)(4/2/13 Post)

1. Sold 50 of the Stock ETF PIE at $20.06 (see Disclaimer): The PowerShares DWA Emerging Markets Technical Leaders (PIE) is a stock ETF that selects securities based on technicals (e.g. relative strength)

Sold 50 PIE at $20.06  

With slowing growth in several emerging markets, I thought that this momentum based ETF for a small profits was due for a correction. The trigger was a decline in the ETF iShares MSCI Emerging Index Fund ETF below its 200 SMA on 4/15/13.

2013 Sold 50 Shares PIE  +$133.12

I bought the shares last September. Item # 2 Bought 50 PIE at $17.08

This was my second round trip in this ETF. Item # 2 Sold 150 PIE at 16.76 & Bought 100 PHB at 18.15Bought 50 PIE at $10.01Bought 50 PIE at $14.04 in 2/2010

Yesterday's Closing Price: PIE: 20.60 +0.19 (+0.93%)

2. Sold 100 of the Stock CEF APF at $16.4 (see Disclaimer): The Morgan Stanley Asia-Pacific Fund (APF) is a closed end stock fund that invests in companies based in the Asia-Pacific region, including Japan, India, Australia, Indonesia and China.

Sold 100 APF at $16.4
In addition to emerging market stocks, APF has a large allocation to Japan, with close to 38% weighting in that country. Japanese stocks have experienced a robust move following the Japanese government and the BOJ decided to weaken the YEN and to combat deflation with money printing. The BOJ intends to double its monetary base by the end of 2014 by buying government bonds.

The NIKKEI 225 Index has risen from 8665 in November 2012 to over 13,200 last Monday or over 52% in about five months. While the index could continue to move up in a parabolic fashion, I will generally sell into that kind of move, finding more often than not that it is not sustainable.

I still have some exposure to Japan's stock market through other funds where the weighting is less. I own, for example, the Vanguard FTSE All-World ex-US ETF, which has a .15% expense ratio and about a 12.5% weighting in Japan as of 12/31/12:

VEU Weightings as of 12/31/12

I also have a 480+ share position in the Matthews Asian Growth and Income Fund, which had a 9.1% weighting in Japan as of 3/31/13.

By selling APF, I reduced my overall indirect exposure to Japan. I have no direct exposure with individual names.

I realized a gain of $169.07 on this 100 share lot:

2013 APF 100 Shares +$169.07
Bought 100 APF at $14.55 (December 2012)


This brings my total trading gain for APF, excluding dividends, up to $616.83. The largest annual gains were from three 100 share lots traded in 2011:

2011 APF  +$340.16 ($292.86 LT; $47.3 ST)
Sold 100 of APF at 17.32 (April 2011)-Added 100 of APF at 15.64 (April 2010); SOLD 100 APF @ 17.47 (July 2011)-Bought Back 100 APF at 16.84 (June 2011); Bought 100 CEF APF at 15.08 (March 2010)- Sold 100 APF at $16.65 (March 2011)

I realized a smaller gain in 2012:

2012 APF 100 Shares +$40.16
Bought 100 APF at $13.58 (August 2012). There was a large capital gains distribution paid in December 2011 of $1.121 per share.

I also flipped 100 shares in the ROTH IRA in 2010: Item # 4 Bought 100 of the CEF APF at $15-ROTH IRA (March 2010):

2010 Roth IRA 100 APF +$67.44


APF page at CEFConnect.

Yesterday's Closing Price: APF: 16.54 +0.01 (+0.08%)

3. Sold 100 EWS at $13.91 (see Disclaimer): The iShares MSCI Singapore (Free) Index Fund Fund is a country stock ETF.

Sold 100 of the Stock ETF EWS at $13.91
I realized a small short term capital gain on these shares purchased last September plus one dividend payment of $34.63 .

2013 EWS 100 Shares +$79.22
Bought 100 EWS at $12.96 (September 2012 Post)

EWS page at Morningstar

Sponsor's webpage: iShares MSCI Singapore Index Fund (EWS)

I had previously bought and sold this ETF: Item # 1 BOUGHT 100 ETF EWS AT $10.9 (February 2010)-Sold EWS at $11.55 (June 2010). As noted in that last linked post, EWS was sold at that time, along with other securities, in what I call a "de-risking process". I would have been better off just keeping the shares bought in February 2010, based on what subsequently happened, but I will confess to all concerned that I can not really predict the future.

I will consider buying back this ETF at below $12.75.

Yesterday's Closing Price: EWS: 13.88 -0.07 (-0.50%)

4. Sold 100 ASEA at $17.8 (see Disclaimer): The Global X FTSE ASEAN 40 ETF is another Asia focused ETF. This was part of my risk off trade and a temporary reduction in my overall allocation to Asia's stock markets.


Sold 100 of the Stock ETF ASEA at $17.8

I bought this ETF earlier this year:

2013 ASEA 100 Shares +$55.16
Bought 100 of the ETF ASEA at $17.09 (January 2013 Post)

ASEA Global X FTSE ASEAN 40 ETF page at Morningstar

I will consider buying this ETF back at below $16.9.

Yesterday's Closing Price: ASEA: 17.96 -0.06 (-0.32%)

5. Sold 100 of the Stock CEF IF at $12.91 (see Disclaimer):

Sold 100 IF at $12.91
I bought these shares in January 2013: Bought 100 of IF at $11.64


I realized a short term capital gain of $110.77 or close to 10% at my total cost $1,172.36:

2013 100 Shares of IF +$110.77

I will consider buying the security back at or below my last purchase price.

Yesterday's Closing Price: IF: 12.95 -0.01 (-0.08%)

6. Sold 100 GSPRD at $23.89 (see Disclaimer): The Goldman Sachs Group Inc. Dep. Pfd. Series D (GS.PD:NYSE) is a floating rate equity preferred stock that pays qualified dividends at the greater of 4% or .67% above the three month Libor rate on a $25 par value. Prospectus

Sold 100 GSPRD at $23.89-Satellite Taxable Account

I bought these shares in January 2013: Bought 100 GSPRD at $21.18 and Sold 50 GSPRA at $21.73. As noted in that post, I sold another Goldman Sachs floating rate equity preferred stock, GSPRA, in order to buy GSPRD. This is what I would call a relative value trade of functionally equivalent securities. I have traded both preferred stocks multiple times.

This is a snapshot of my recent GSPRD trading history in this account taken before I sold these shares:




I realized a short term capital gain of $257.24 on this trade:

2013 GSPRD 100 Shares +$257.24


Stocks, Bonds & Politics: Floaters: Links in One Post

I have traded this security repetitively:

Bought 50 GSPRD at 21.58Sold 50 GSPRD @ 22.72Bought 50 GSPRD at $18.6Sold 50 GSPRD at $20.47Bought Back GSPRD at $18.9Sold 50 GSPRD at $20.03Bought 50 GSPRD at $20.6Pared Trade: Bought 100 GSPRD at $21.18 and Sold 50 GSPRA at $21.73Bought 100 GSPRD at $21.38Sold 100 GSPRD at $23.71-Roth IRA.

This bring me down to just 50 shares of GDPRD bought in December 2012: Stocks, Bonds & Politics: Bought 50 GSPRD at $20.6

This transaction is primarily motivated by profit taking and a healthy respect for downside risk of equity preferred stocks issued by heavily leveraged financial institutions. Anyone buying, selling or just owning this type of security during the recent financial crisis does not need to be told twice about the downside risk. I also do not find them particularly appealing as they approach par value.

Given their many disadvantages, I have elected to trade them and have not been a long term holder of any non-cumulative equity preferred stock.

Snapshots of my trades in this category can be found at the end of this post: Stocks, Bonds & Politics: Advantages and Disadvantages of Equity Preferred Floating Rate Securities

Yesterday's Closing Price: GS-PD: $23.51 -0.21 (-0.89%)

7. Sold 50 SANPRD at $21.72 Roth IRA (see Disclaimer): The Santander Finance Preferred S.A. Unipersonal Floating Rate Gtd. Pfd. Series 6 (SAN.PB) is a floating rate equity  preferred stock issued by Santander Finance that pays qualified dividends at the higher of 4% or .52% above the three month Libor rate on a $25 par value. Banco Santander guarantees payment only as provided in the Prospectus.


This is a snapshot of my recent SANPRA trading history in the ROTH IRA taken shortly before I sold this security.



I realized a gain of $225.47 on this 50 share lot:

2013 ROTH IRA SANPRB 50 Shares +$225.47
Bought 50 SANPRB at $16.93-Roth IRA (October 2012 Post)

I have bought and sold this floating rate equity preferred stock in other accounts  and currently own just 80 shares with a total average cost of $14.7. Bought: STDPRB at $13Added 50 STDPRB at $15.44 (symbol change to SANPRB later).

This is a snapshot of my unrealized gain in the remaining 80 SANPRB shares in this satellite taxable account taken later in the day:


Stocks, Bonds & Politics: Advantages and Disadvantages of Equity Preferred Floating Rate Securities

Stocks, Bonds & Politics: Floaters: Links in One Post

Yesterday's Closing Price: SAN-PB: 21.30 -0.05 (-0.23%)

8. Lakeland Bancorp (own): I discussed my purchase of 100 LBAI shares in my last post and wanted to update that recent post with the first quarter earnings:

Lakeland Bancorp Reports First Quarter Results Nasdaq:LBAI

2013 1st Quarter / 2012 1st Quarter

Net Income: $5.1M/$4.4M
E.P.S.: $.17/ $.16
Adjusted E.P.S. $.19  (up 19%; excludes Somerset merger expenses)
Consensus Estimate=$.19
Net Interest Margin: 3.71% / 3.76%
Efficiency Ratio: 59.85%/57.71%
Return on Average Tangible Equity: 10.59% / 12.83%
Annualized Return on Average Assets: .72% / .71%
Tangible Common Equity to Tangible Assets: 6.98% / 5.6%
NPL Ratio: 1.15% / 2.03%
NPA Ratio: .89% / 1.52%
Annualized Net-Charge Offs: .47% / .83%
Total Risk Based Capital Ratio: 12.85% / 12.37%

LBAI is in the process of acquiring Somerset Hills Bancorp. That bank reported a decline in first quarter earnings even on an adjusted basis: Somerset Hills Bancorp Reports 2013 First Quarter Earnings (SOMH). As of 3/31/13, SOMH's NPA ratio was .21%; the coverage ratio was 428%; the efficiency ratio was at 64%; and the net interest margin was at 3.37% (down from 3.84% as of 3/31/12).

LBAI did rise slightly in response to this release: LBAI: 9.35 +0.04 (+0.43%) The S & P 500 declined .67% that day.

9. Added 50 of the Bond CEF BWG at $20.55 (see Disclaimer): I discussed this bond CEF in my last post. I decided to initiate a position in a taxable account by buying 50 at $20.55 last Friday and then average down with another 50 share buy at or below $20. In the meantime, I will reinvest the dividend to buy more shares. At a total cost of $20.55, the current dividend yield is around 7%.

Item # 4 Bought 100 of the Global Bond CEF BWG at $20.87-ROTH IRA

Since that purchase in an IRA, BWG has gone ex dividend for a $.12 monthly dividend. The following is a snapshot of my last purchase:

Bought 50 BWG at $20.55
When I placed this limit order, BWG was selling about 10 cents higher.

This is the relevant data points as of the 4/19/13:

Closing Net Asset Value Per Share: $22.46
Closing Market Price: $20.5
Discount to Net Asset Value- 8.73%

Last SEC Filed Shareholder Report

BWG page at CEFConnect

Yesterday's Closing Price: BWG: 20.53 +0.03 (+0.15%)
Closing Net Asset Value Per Share on 4/22/13: $22.52
Discount: -8.84%

10. Bought 50 FAM at $17.51 (see Disclaimer): I will keep my exposure to this bond CEF to a minimum due to its disadvantages. The major disadvantage is the high expense ratio shown as 1.7% at CEFConnect before interest expense.



The sponsor's webpage shows a 1.71% expense ratio, excluding leverage expenses, on a percent of net assets and 1.3% as a percent of managed assets, both as of 12/31/12. First Trust/Aberdeen Global Opportunity Income Fund (FAM)

The fund does use leverage which is beneficial when the assets purchased with borrowed money go up in value and the short term borrowing costs are sufficiently low to generate a meaningful spread between the borrowing cost and the yield generated by the bonds bought with those borrowed funds.

FAM page at CEFConnect

FAM page at the CEFA

FAM Page at Morningstar (rated 3 stars, average 3 year discount 2.75%)

Last SEC Filed Shareholder Report: ‎www.sec.gov (period ending 12/31/12)

Since this fund invests in foreign bonds, currency risk is important. Changes in the relative value of a foreign currency can wipe out the value of the bond's interests payments, or add value to those payments.  Currency risk adds a third major risk item to a bond fund which already has interest rate and credit risks. In the credit risk category, I would highlight the 4.9% weighting in Republic of Venezuela bonds and 1.6% in Republic of Argentina bonds, both as of 12/31/12.

Another negative is that recent dividend payments have in part been supported by a return of capital. I would prefer that a bond CEF support the dividend entirely with earnings. I would want to see most of the dividend covered by interest payments received by the fund and will not look unfavorably upon capital gains providing an insubstantial support.

The fund at least has the option of supporting the dividend with capital gains at the moment. As of 12/31/12, the balance sheet shown $56+M in unrealized net gains.

I would not rely on a third party service to accurately provide details about returns of capital. Instead, I would go directly to the sponsor's website first and then to the shareholder reports when the sponsor does not provide that information.

For FAM, the sponsor does provide three years of tax information at its website. (see links under "Tax Letter" under "News and Literature" tab at First Trust/Aberdeen Global Opportunity Income Fund (FAM) There was less than a penny return of capital in 2011 with $1.55 paid out in dividends. There was no return of capital in 2010. In 2012 however, $.24192 per share in dividends paid per share were nontaxable return of capital.

On the positive side, I would highlight the following:

(1) FAM pays monthly dividends at the current rate of $.13 per share. At a total cost of $17.51, the yield would be approximately 8.91%.

(2) The credit weighting is in investment grade bonds:



3. The average three and five year annualized returns are good at 12.49% and 12.4% respectively, based on the share price and through 3/31/13. The cumulative five year total return through 3/31/13 was 79.39% based on the share price and 61.88% based on net asset value.

4. I have harvested a number of dividends from this security in the past, while being able to exit the position at a profit. The $.13 monthly rate has been in force since early 2005. FAM Dividend History

In 2012, for example, I was able to generate a realized gain of $227.54 on 200 shares. I held 100 of those shares for almost two years and another 100 for over a year. That is what I view as a successful bond fund investment.

2012 FAM Profit $227.54

Sold 150 of 200 FAM at $18.64 (October 2012 Post); SOLD 50 of 100 FAM at $17.9 (November 2012); Bought 50 FAM @ 17.37 (November 2010); Bought 100 FAM @ 17.9 (November 2010);  Item # 4 Added 50 of the Bond CEF FAM at $16.08 (October 2011);

I also currently own 50 shares in the ROTH IRA that I bought during one of the periodic downdrafts in this security.

Item # 5 Bought 50 FAM @ $16.79-ROTH IRA (November 2012).


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

This post is long enough. No one is likely to seriously dispute that statement. I will discuss some more purchases and sales made last week in the next post. I been unusually active as of late. 

2 comments:

David said...

"If Reinhart and Rogoff can not make their case with data since WWII, then their conclusions are undermined...."

Yes, that's true; and analyses of the corresponding data from WWII onwards will be no better, and for the same reason.

Data analyses such as these work on what is essentially an experimental model: Ideally, you have one independent variable and one dependent variable - or, at worst, a very few independent variables and one dependent variable. You then jiggle the independent variable, or watch how it got jiggled in reality, and watch how the dependent variable jiggles in response, EVERYTHING ELSE BEING EQUAL. Then, if you have a hypothesis as to why this change in IV produces the corresponding change in DV, you should have a theory of their relationship, which you hope can predict their future relationship.

Unfortunately, this is nothing like any model we can build for capital markets. If we start from WWII, at least the economic changes caused by soldiers coming home, and then the baby boom, created a rapidly changing economic background, not one in which all parameters except for two variables remained static over the period. So we start from 1950? Do we really want to claim that the continued unraveling of the great European empires and the gradual economic recovery of Europe and Japan allowed for a static background? 1960? Even if we want to ignore the technological revolutions of the 1960s onwards, or to use a Ouija board to predict that they will have exactly the same effects on capital markets as the technological revolutions we may face in the future, do we really want to base our 'scientific' predictions for the next fifty years on ONE data set covering the last fifty years? And do we really want to assume a priori that the enormous population squeeze which Levy-Strauss saw beginning in the 1940s will have no economic effects as it comes home to roost in the 20-whatevers, so that we can continue to claim that 'all else remains equal'?

Does that mean that no mathematical model for the behavior of capital markets over any significant period will work? Probably. Let's not forget that the most famous and 'scientific' model of securities price behavior, Black-Scholes, worked only for the period from which they took their data, and a very few years afterwards. By the time Long Term Capital Management, with Dr. Scholes and his Nobel-sharer Dr. Merton as active directors, imploded, the most famous model had become rather, uh, problematic.

Sanjay "John" Gandhi said...

Very nice post on Gold. We should connect-please have a look at my blog (in profile). I also saw your comment on Seekingalpha, which is what made me come to your blog.

I also write comments on seekingalpha sometimes.

Sanjay