Monday, May 6, 2013

JOBS/Dividend Stocks as the New Bonds/Government as Easy Mark for Fraudsters/Sold 50 ARCC at $18.02/Added 50 WBCO at $13.3/RDS-A/JCP 2023 Bond/Sold 1 ArvinMeritor 8.125% Bond Maturing in 2015 at 109/More Problems with Fidelity/Bought Back 100 SGL at $10.57-Roth IRA/Bought Back 50 ONB at $11.9/SOLD 100+ MSFT at $32.83/Management Of Roth IRA

Big Picture Synopsis:

Stable Vix Pattern (Bullish)
Short Term: Slightly Bearish (Expecting a 10%+ correction)
Intermediate and Long Term: Bullish


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


Last Friday, the Labor Department reported that nonfarm payroll employment rose by 165,000 in April. Over the past 12 months, employment growth has averaged 169,000 per month. Professional and business services added 73,000 jobs in April. Average hourly earnings rose 4 cents to $23.87. Employment gains for February and March were revised higher by 114,000. With the revisions, payroll growth is averaging over 200,000 per month for the past six months. Government jobs continued to decline, with 11,000 jobs lost in April. Employment Situation Summary The U-6 number for April was 13.9. The civilian labor force participation rate remained unchanged at 63.3. Table A-15. Alternative measures of labor underutilization

The ADP National Employment Report, which is released before the government's job report, showed 119,000 jobs added in April, down from 131,000 in March. ADP National Employment Report The March estimate was revised down from 158,000. The consensus estimate for April was for 150,000.

Small businesses, defined to mean 1-49 employees, added 50,000, down from 106,000 in January; 84,000 in February; and 60,000 in March. ADP Small Business National Employment Report 

The sequester is causing small firms, who supply the government, to cut jobs. The CBO estimates that the sequester will cost 750,000 jobs over an entire year. It is going to be a tough slog for private demand to pick up the slack for reductions in federal spending.

Last Thursday, the Labor Department reported that initial claims for unemployment decreased by 18,000 to a seasonally adjusted 324,000 for the week ending April 27, the lowest level since January 2008 when the recession was just getting underway. ETA Press Release: Unemployment Insurance Weekly Claims Report I do look at this data but I am more interested in the message sent by a long term chart of initial unemployment claims: 4-Week Moving Average of Initial Claims: St. Louis FedInitial Claims- St. Louis Fed

Ken Griffin, the founder of Citadel, believes that the government is contributing to job losses by increasing the costs of "human capital" through Obamacare. There is some merit to that argument. His other argument is that the FED is contributing to job losses through its ZIRP monetary policy, arguing unconvincingly that ZIRP encourages businesses to use technology to replace workers, a long term trend that would exist irrespective of interest rates. I have not seen any reluctance to replace employees with machines over the past 40 years of observation. 

JCP 2023 Bond

Last week, I saw what had to be an erroneous price for the JCP senior unsecured bond, which has a 7.125% coupon, and matures on 11/15/23. The price was shown at 145. I then went to the FINRA page for this bond and noticed that this price was correct and that the bond had just done a moon shot. FINRA - Investor Information on 2023 Bond

For reasons that escape my comprehension, JCP has launched a tender for all or any of this bond at 130 plus another 5 for an early tender. SEC Filed Press Release Since the bond was trading at around 145, some investors believe that JCP will redeem the remaining bonds at a make whole price after the tender offer is completed.

This is one of the few bonds ever bought where I could not review the prospectus. The bond was initially issued in 1993 and the SEC filings at Edgar start in 1994. So I do not have a clue about any "make whole provision" provision applicable to this bond. {That kind of provision generally requires the issuer to pay the bond owners a sum, calculated to include the principal amount of the bond at maturity and the sum of all future interest payments discounted to present value. The discounting mechanism would generally use a treasury rate for a similar maturity plus a small spread. Since treasury yields are abnormally low, the sum of the principal amount and all future interest payments would be reduced at a very slow rate, thereby juicing the amount that has to be paid by the issuer for an optional redemption. The amount payable would be much lower if the discount rate was say 5% rather than 1%}

Rather than think too much about whether JCP would elect to redeem the remaining bonds or to research the potential price for such an optional redemption, which I could not do anyway due to a lack of data, I elected to sell 1 at 144 and just thank the Lord:
JCP Confirmation @144
1 JCP Bond Profit
Why did JCP make a tender for this 2023 rather than one of the earlier maturities? In the prospectus for the 2017 bond, ‎, there is no optional redemption right but I did not see anything preventing JCP from making a tender. And, provisions in the indenture could be waived with the consent of 66 2/3% of the holders (p.8)

I at least have a question whether some firm may have owned an inordinate amount of the 2023 maturity. If there is one, I would be able to make an educated guess as to the identity.

I own one of the 2017 JCP after selling1: Sold 1 J.C. Penney 7.95% Senior Bond Maturing in 2017 at 105-Bought 1 J.C. Penney 7.95% Senior Bond Maturing on 4/1/17 at Total Cost of $97.5

Bought Back 1 JCP 7.95% Senior Unsecured Bond Maturing in 2017 at $95


Dividend Stocks as the New Bonds

It will take me awhile before I get to the point being made in this section. So, I highlighted the word "point" when I finally arrive at it.

One powerful force behind the rally in stocks this year involves the search for yield. When 10 year treasuries are yielding around 1.7% or less, stocks with dividend yields north of 3% look like viable substitutes, particularly in the consumer stable sector where there is a high reliability of future dividend hikes and a low possibility of a dividend cut.

I own General Mills (GIS), Coca Cola (KO) and Sysco. To highlight the point about investors driving up the price of these stocks in their quest for yield, I will simply point out some data for KO and GIS:

Coca Cola
Price on 12/31/12: $36.25
Price on 5/3/13: KO: 42.24 +0.28 (+0.67%)
Increase Unadjusted for Dividend: 16.52%
Current Trailing P/E: 22.2 as of 5/3/13
KO Key Statistics

General Mills
Price on 12/31/12 $40.42
Price on 5/3/13: $50.72
Increase Unadjusted for the Dividend:
Current Trailing P/E 17.31 as of 5/3/13
GIS Key Statistics

My larger position is in KO shares:

KO Unrealized Gain as of 5/4/13=$4,475.66
Back in March 2010, I noted that a large number of large cap companies had dividend yields greater than their bond yields. Item # 6 Common Stock Dividend Growth vs. Long Term Investment Grade Bond; and see Item # 3 Large Cap Valuation Strategy

I discussed in the dividend growth strategy post referenced above JNJ for example. I referenced a JNJ senior bond, with a 6.95% coupon, maturing  in 2029 that was then selling at $120 with a YTM of around 5.27%. JNJ's stock closed on 3/19/2010 at $65.11 and had a 3% yield at that price. The dividend rate was then $.49 per quarter.

Unlike the fixed coupon bond, however, the common share owner has the reasonable prospects of yield increases due solely to annual dividend rate increases which historically would double the dividend in about 6 years or so. Within a few years, the owner of the common bought at $65.11 would have a greater yield than the buyer of that bond with a YTM of 5.27%. I predicted in March 2010 that the buyer of JNJ at $65.11 would have a higher yield at a constant cost number than the 2029 bond's 5.27% YTM in 2016.

Any buyer of that 2029 bond at 120 has done well up to now. The current price is hovering at around  143, as of 5/3/13, which would produce a current yield of around 4.86% and a much lower YTM of approximately 3.47% due to the premium. Even if an investor bought JNJ at $85 now, the dividend yield would be 3.1% at the current quarterly rate. Within a relatively brief period of time, the dividend yield for a purchaser with an $85 constant cost would exceed the bond's 3.47% YTM due to dividend increases.

In this example, and to illustrate my point in this section, the spread between the 2029 long term bond's YTM and the current dividend yield has almost disappeared since March 2010.

At least, the buyer of the 2029 JNJ had a nice head start in yield over the buyer of the common back in March 2010.

The buyer of the common at $65.11 has also done well with the recent price fluctuating in the $84-$86 area. Closing Price 5/3/13: JNJ: 85.75 +0.59 (+0.69%)

The quarterly dividend is up to $.66 per share, Dividend History for ticker JNJ, a 34.7% increase over the $.49 rate paid in the second quarter of 2009.

At the new rate, the yield at a total cost of $65.11 would be about 4.05%, closing in on that 5.27% YTM for the 2029 bond hypothetically bought at the same time back in March 2010. But, it would take several more years of dividend increases for the common stock yield to surpass the 2029 bond's YTM of 5.27%.

It really does not take much of a dividend yield to beat certificate of deposit rates. This is a link to data on average CD rates by term: Certificates of Deposit -St. Louis Fed The average rate from national banks on a 5 year CD is less than .8%: 5-Year CD: National Rate of Banks and Thrifts - St. Louis Fed

The average yield on a corporate bond, maturing in 1-3 years, was 1.08% as of 5/1/13: BofA Merrill Lynch US Corporate 1-3 Year Effective Yield - St. Louis Fed The average yield on a corporate bond, maturing in 7 to 10 years, was 3.03% as of 5/2/13. BofA Merrill Lynch US Corporate 7-10 Year Effective Yield The average composite yield on corporate bonds rated "AA" was 1.94% as of 5/2/13. BofA Merrill Lynch US Corporate AA Effective Yield- St. Louis Fed

Auto Sales:

GM reported a 11% increase Y-O-Y in U.S. vehicle sales for April. Ford reported a 18% increase with Chrysler bringing up the rear at +11%.

T. Rowe Price Newsletters

I periodically receive an email from T. Rowe Price that provides links to several of their newsletters.  I do not personally own any of their fund. I am the trustee of my late father's testamentary trust and he owned a bunch of them while he was alive that are now part of the trust's assets. The largest position is in the Capital Appreciation Fund (PRWCX). This fund is rated five stars by Morningstar. T. Rowe Price Capital Appreciation - MSN Money

I find several of them to be helpful and they will generally contain information helpful to less experienced investors or for those who have inadequate time to keep up.

This is a link to their recent newsletter on bonds: Rising Rates Bring Risks and Opportunities - T. Rowe Price

This is a link to their economist's commentary: Will 2013 Mark a Turning Point in Fed Policy? - T. Rowe Price

Stephen Giroux is the manager of the T.Rowe Price Capital Appreciation fund. He is both a smart and informed investor. He is interviewed in this recent Price publication: A Broad Look at the 2013 U.S. Market Outlook - T. Rowe Price

A view of Europe's situation can be found in this Price portfolio manager and analyst of European sovereign debt: What's Ahead for the Eurozone—First Quarter Update - T. Rowe Price


ISM Manufacturing Index

The ISM April 2013 manufacturing index decline to 50.7% in April from 51.3%. Any number over 50 shows expansion. The new orders component increased to 52.3 from 51.4. Backlog increased to 53 from 51. The employment component declined to 50.2 from 54.2. The employment decline is consistent with other data such as the ADP report referenced above which showed a 10,000 manufacturing job decline. ADP National Employment Report - April 2013 | NER

The expectation was for 51. 

ISM Service Index (APRIL)

The ISM services index for April was slightly below expectations with a 53.1% reading. The business activity index was at 55%. The new orders component was basically flat at 54.5 compared to 54.6 in March. The employment component fell to 52 from 53.3 in March. Any number over 50 indicates expansion.

Shiller On Home Prices:

In a Daily Ticker at Yahoo, Professor Shiller attributes the recent good news about the housing price recovery to the FED's buying binge of MBS and to ZIRP. He predicts that home prices, adjusted for inflation, will be about where they are now in ten years.

I would be slightly more optimistic than Shiller. I would anticipate rapid home price increases until a given market returns to the long term trendline growth. As noted in the most recent Case Shiller report, the 10 and 20 city composite indexes are now sitting at the same level as prevailing in late 2003.

Once home prices return to trendline, I would expect over a ten year period home prices to increase in aggregate about .5% to 1% annualized over the inflation rate and would call that a long term trendline. The problem was that home prices went substantially out of that trendline in 2001-2007, rising about 100% when an optimal growth rate would be about 4% annually. Price increases are also constrained by the growth in wages.

Of course, there will be markets where the trendline will be below the nationwide aggregate and even negative in some markets. Even in my neck of the woods-Middle Tennessee, there can be wide divergences in growth rates depending on the desirability of specific locations, looking at a number of factors including crime, proximity to shopping and to work, schools, size of lot and seclusion.

Generally speaking, I want to see at least 45% of the households with median incomes being able to buy a median price house in a given geographic region using sensible loan qualification criteria (e.g. total loan payments (including escrow payments for insurance and property taxes) less than 33-35% of after tax income.

I would prefer to see over 50%. In a very large number of localities in 2007, less than 20% of median income households could buy a median price home even with loose loan criteria.

Royal Dutch "A" Class Shares (own):

I forgot that I was supposed to buy another 50 shares of Royal Dutch Shell PLC ADS Cl A shares when the price sank below. Possibly, there was fleeting thought about buying another 50 but I wanted to catch it close to $60 than to $65. The shares did decline intra-day on 4/5/13 to $63.35. RDS-A Historical Prices The close last Friday was at $69.07.

The shares go ex dividend on the 15th:

Bought 50 RDS/A at $68.93 (February 2013) I am reinvesting the dividend and have bought shares with one dividend since this purchase.

Management of ROTH IRA:

As previously noted, this account is managed with income generation as its primary objective, with some emphasis on capital preservation which is reflected both in the types of securities owned and the cash allocation. Last year, this account produced a 10.7% return with virtually no stocks other than a few BDCs and REITs and an average cash allocation greater than $20,000 earning nothing in a money market fund.

I reviewed my April statement from Vanguard and would note the following items of interest. I own no mutual funds but Vanguard includes all of my CEFs in its mutual fund section. Vanguard tallied the yield for those securities, based on their value as of 4/30/13 and their current dividends, to be 8.04%. Those CEFs are BTZ, STK, DPG, EXG, FAM, GGN, IDE, IRR, BWG, NBB, NBD, JLA, GHY, SGL (discussed below), VGI, ERC and GDO.

The next section in the statement lists the ETFs. The yield for these securities is calculated at 5.56%. I could improve that yield some by jettisoning some of the lower yielding ones, such as TDIV and GAL, that are in the portfolio primarily for potential appreciation potential rather than income production. The ETF list includes HGI, TDIV, MDIV, SDIV, REM, AMJ, GYLD, PGX, GAL, MLPG.

I then have a large number of individual holdings that fall into the following categories: BDCs; Equity and Mortgage REITs; Cumulative Equity Preferred Stocks; Exchange Traded Bonds including Baby Bonds, PPNs, Synthetic Floaters in Trust Certificate legal form and fixed coupon Trust Certificates; and individual bonds purchased in the bond market with $1,000 par values.

For the 1,000 par value bonds, the current yield is 8.48% based on the 4/30/13 prices

The other individual securities have a combined yield of 6.91%, also at their respective current prices. Some of those individual securities have large unrealized percentage profits and relatively low yields at their current price. A good example is the CPI floater PFK, a senior bond issued by Prudential that pays monthly dividends based on a spread to CPI and matures in 2018 at its $25 par value. The price was $27.99 as of 4/30/13, and the yield at that price is shown to be 3.56%. The actual yield over a year could be higher or lower based on CPI movements. But I bought that security in two lots with an average cost slightly below $20 and currently have an unrealized gain of over $800. The yield at my constant cost number would be higher which is true for almost all of the securities in this portfolio.

I recently sold 100 PFK in a taxable account for a $962+ profit: Sold 100 PFK at $28.25 (2/27/13 Post)

Another individual security, a PPN, has no current yield but has an unrealized gain of 32%:

Bought 100 SDA at $9.8

The Citigroup funding PPNs are shown at their minimum payment yield of 3%, which could actually end up being much higher.

For 2013 to date, the net realized gain in that account is $2,915.03. The largest single gain was $968.23 realized from selling 100 shares of the relatively low yielding TC IPB back in January 2013, with 50 shares still owned in that account. In this account, I have sold only one $1,000 par value bond, a U.S. Steel note maturing in 2022.

The account is up 7.83% from 1/1/13 to 4/30/13.

I will use the cash allocation to opportunistically buy income securities during downdraft periods. I may start to jettison soon some of lower yielding bond CEFs.


Fidelity Calculation of Account Values:

For reasons unknown, Fidelity is not able to calculate my account values. When I first look at my main taxable account each day, the value can be off by close to $20,000. The "loss" is not due to market fluctuations or a meltdown, but simply to a failure to assign any value to some positions. The following two positions had no value assigned to them on 5/1/13 for example. Anyone in the world who knows how to find a quote could tell Fidelity the current price at anytime during the day or at the close. Nonetheless, the prices for these securities are "not available" for extended periods of time. I have raise  the issue with Fidelity and possibly the problem will be corrected for a week or so before returning to the "not available" status. In my last email, just to give me a run around, the Fidelity customer representative told me to call someone else in the active trader group.

While everyone has different experiences with customer representatives, I give Fidelity a F-. Maybe that is a tad harsh. It has been a waste of my time to contact Fidelity about any problem originating from them since I became a customer in the 1980s, including such matters as their asinine trading prohibitions and any problem that they do not want to fix (e.g. erroneous downloads into the wrong Form 8949 for the 2011 tax year, Stocks, Bonds & Politics: More on IRS Form 8949, Fidelity and TurboTax or inability to find readily available quotes)

I give up.

Of course, it does not matter that I have a large account and generate a lot in fees and commissions.

Positions with no value assigned to them in the Fidelity Portfolio Positions page:

The Fidelity statement for April showed a loss for the month, when I actually had a significant gain, due to the failure to include any value for those two positions which miraculously had an assigned value at the end of March, thereby creating the fictional loss shown on the first page of the statement.

Except Fidelity April 2013 Statement
To help Fidelity find the current value of the larger position, I thought that it wold be helpful to provide the followings links in case someone from that firm reads this post and has the power and desire to correct the problem:

(1) A quote is available for Ishares 1-5 Year Canadian Government Bond at the Fidelity site using the symbol CLF:CA.

(2) If Fidelity is unable to find quote information using its own symbol for trading that ETF, then I would suggest the following sites:

Toronto Stock Exchange: Stock Market Quotes

Marketwatch: CLF Fund Quote - iShares 1-5 Year Laddered Government Bond Index Fund Fund Price Today (CLF:TOR)

Yahoo Finance: CLF.TO: 19.75 +0.01 (+0.05%) : iShares 1-5 Year Laddered Gov

I will just guess everyday about the value of my account and will probably be within ten to twenty grand anyway.

Just to give anyone interested in the absurdity of Fidelity's trading restrictions, I checked again to see whether I could buy HBAPRG, but would not be allowed by Fidelity to buy the functionally equivalent HBAPRF. Both securities are equity preferred stocks that pay non-cumulative dividends at the greater of a minimum rate or a float percentage above the 3 month LIBOR rate on a $25 par value. Both have similar trading volumes and both are from the same issuer.

This is the message that I received when trying to buy HBAPRF at Fidelity. {Quote: HSBC USA Inc. Fltg Rate Non. Cum. Pfd. Series F Stock Price Today (HBA.PF)}:

I would be allowed to buy HSBC USA Inc. Dep. Pfd. (Rep. 1/40th of a share of Fltg. Rate Non-Cum. Pfd. Series G (HBA.PG).

Now, if our LB was allowed to cross-examine the person at Fidelity, who decided to make HBAPRF off limits to Fidelity customers while permitting purchases of HBAPRG, in front of 12 disinterested investors, and that jury was instructed to decide whether the prohibition was either asinine or justified (guilty or innocent so to speak), could there be any doubt about their verdict?

I used  downdraft last week to add some nibbles in my regional bank basket strategy which is a long term strategy that focuses on dividends from mostly small regional banks.

1. Sold 50 ARCC at $18.02 (see Disclaimer): ARCC shares are held in several accounts. I sold the 50 shares bought in a satellite taxable account.

Sold 50 ARCC at $18.02
The shares were bought in January 2011 at $16.3: Bought: 50 of the BDC ARCC at 16.17 and at $16.3 (January 2011). I still own the 50 shares bought at $16.17 in another taxable account. 

50 Share History
These 50 shares generated $169.5 in dividends.

The realized gain was $71.97:

2013 ARCC (Taxable Account) 50 Shares +$71.97

If I realize any gain after collecting several dividend payments made by any BDC, I view that result as positive. It did not take much of a gain in the ARCC shares to bring my before tax total return to over 10% annualized. 

The total return was $241.47 on a total cost of $822 or 29.38% in about two years and three months.   

I recently bought 70 shares of ARCC in the Regular IRA after a downdraft in the price: Item # 2 Bought 70 ARCC at $17.24-REGULAR IRA (April 16, 2013 Post). This post contains my most recent discussion.

I now own just 70 shares in the regular IRA and 50 shares in a taxable account. 

I have also bought and sold a senior ARCC exchange traded bond: Bought: 50 ARY at $24.2Added 50 ARY @ $23.75-Sold 100 ARY @ 24.6

Generally speaking, most of the dividends paid by a BDC will not be classified as qualified dividends.  The reason is that there is no double taxation for the distributions made to the BDC's shareholders. The same is true for REITs. Consequently, while I will buy a BDC in a taxable account, I prefer to own them in small doses in retirement accounts. 

Some of the dividends paid by ARCC to me in 2012 were classified as qualified dividends subject to a maximum tax rate of 15% during that year and for most taxpayers now. I took a snapshot of one 1099 that shows the breakdown for 2012:  

About 5.8% of the 2012 Dividend Distributions Classified as Qualified 
The foregoing is a snapshot of the dividends paid by the 50 shares still owned and bought at $16.17 back in January 2011.

For 2011, the percentage was 5.32%. 

{PSEC had a far higher percentage classified as qualified, and I own more of that BDC in a taxable account}

2. Bought Back 100 SGL at $10.57-ROTH IRA (See Disclaimer):

Security Description: Strategic Global Income Fund is a closed end bond fund that invests in bonds issued by corporations and sovereigns worldwide.

Last SEC Filed Form N-Q: Strategic Global Income Fund, Inc. (Holdings as of 2/28/13)

Last SEC Filed Shareholder Report: Strategic Global Income Fund, Inc. (Annual Report for the Fiscal Year Ending 11/30/12; shows a 182% turnover rate (page 29); and an expense ratio after waivers of 1.17%)

As shown in that report, the fund does a lot of currency hedging and even has some credit default swaps providing sell protection.

I am not much of a fan of this fund for the reasons discussed below and in prior posts. I will occasionally buy a 100 shares to generate some income in a retirement account, when the discount to net asset value per share expands to above normal levels, and then flip the shares for any profit after collecting some monthly dividends.

SGL Page at the CEFA

Morningstar Page on SGL (rated 3 stars; average 3 year discount -5.65%)

Link to the UBS webpage for its closed end funds: Closed-end Funds | UBS United States Overall, I find the UBS site to be the worst among CEF sponsors, mostly due to its failure to provide relevant information such as historical dividend payments and tax information. I find that site to be worthless.

The fund issues a commentary after each quarter. The last commentary can be found at Strategic Global Income Fund, Inc. – Fund Commentary.

Data from Date of Purchase-Tuesday 4/30/13:
Closing Net Asset Value Per Share= $11.54
Closing Market Price=$10.59
Discount=  -8.23

Data from Previous Friday 4/26/13
Closing Net Asset Value Per Share: $11.5
Closing Market Price: $10.62
Discount= -7.65%

The CEFConnect has what I consider relevant information. The average 52 week discount is shown at -5.36%. The fund does not use leverage which will hurt the distribution yield compared to a fund borrowing money at today's abnormally short term rates. However, an unleveraged bond fund has less risk to the downside caused by a spike in interest rates that significantly raise the fund's borrowing costs as the bond's purchased with borrowed funds decline in value. Leverage, of course, works both ways.

The fund makes managed monthly distributions at an annualized rate equal to 6% of the fund's assets, which is a reasonable policy. (Shareholder Report: Strategic Global Income Fund, Inc)

I would not rely on any third party service's numbers on return of capital. They are frequently wrong. I suspect that the error originates from using the monthly section notices, which only contains estimates of the dividend sourcing, that may later be revised in meaningful ways, particularly to account for subsequent capital gains. The CEF site also has a tab for "distributions" which shows some minor ROC  support for some dividends.

There are more reliable sources including the annual reports from the fund. Some fund sponsors have tax information at their website, but I could not find that information for SGL.

The annual report, referenced above, shows the total investment income and capital gains for the year ending 11/30/12 and 11/30/11 at page 28. I took a snapshot to illustrate what I mean:

Total income for the 2012 fiscal year was $17.568755M of which $9.499+M came from capital gains. The total dividends paid equaled $17.687327. So, I do not see the dividend paid in the 2012 calendar year as supported by any ROC. The fund does need a large amount of capital gains to support the dividend however which may result in a ROC distribution in the future with a lower realized gain number for the fiscal year.

Prior Trades: Pared Trade: Bought 50 of the Bond CEF VGI at $18.52 & Sold 100 SGL at $10.71-Roth IRA-Bought 100 SGL at $10.171-ROTH IRA November 2012

Item # 3 Bought 100 SGL at $10.03-Regular IRA (January 2012)-Sold 100 SGL at $10.67 (May 2012)

The total return on the following trade was a net positive of $133.52 or 11.2%, notwithstanding selling the shares below the original purchase amount for 100 shares:

ITEM #1: Bought: 100 SGL @ 11.71 in Roth IRA (November 2010)- Item # 3 Sold 115+ SGL at $11.51 (September 2011)(the additional 15+ shares came from dividend reinvestments including one large capital gain distribution of $1.0882 per share-see snapshot at item #1 Bought 100 SGL at $10.171-ROTH IRA (11/12 Post)

Rationale: (1) Income: The goal with this kind of bond CEF purchase is simply to generate tax free income in the Roth IRA. It makes more sense for me to buy this type of security in a retirement account. If I can successfully exit the position at any profit after collecting several dividends, then I will view this investment as successful, given its limited purpose.

While the monthly dividend rate will move slightly up and down based on the managed distribution policy, and capital gain distributions are possible, I calculated the yield at a total cost of $10.57 per share at roughly 6.58% using an average $.058 monthly distribution rate which may be in the ballpark for the coming year.

I would not be buying this security with money market rates at or above 3%. Investors have to be realistic and to play the hand that is dealt to them. I am not going to receive a 3%+ yield in a money market for several more years, probably not before 2016.

(2) Expense Ratio: Compared to other world bond funds that I own or have owned, the expense ratio for SGL at 1.17% after waivers is lower than other funds.

(3) Capital Gains: I would not want to buy a bond fund with capital loss carryforwards and SGL has none. If a bond manager is losing money in the bond market, it is best to look for an alternative bond fund. Conditions over the past three decades have been as good as they could possibly ever be for a bond manager, a major long term secular bull market in bonds starting in 1982.

Recently, SGL has returned significant capital gains distributions to its shareholders, at least for a bond fund.

As of 2/29/13, the fund had unrealized capital gains of $10.919+M

Risks: (1) Credit Risks (e.g. Argentina and Venezuela Government Debt): As previously discussed, I would prefer that a fund just say no to Argentina's debt. SGL had a 3.99% overall weighting in several bonds issued by Argentina. I am not a fan of Venezuela's debt either. The fund had a 1.59% weighting in one Venezuelan government bond maturing in 2024. This fund has other credit risks, including several junk rated corporate bonds.

(2) Currency Risks and Hedging Issues: This fund has bought a large number of bonds whose value is based in a foreign currency. Interest payments for non-dollar foreign bonds will be paid in a foreign currency and the value of those distributions after conversion into USDs will impact the fund's interest income for better or worse.

While there is an ongoing effort to hedge that risk, the hedging may only be partially successful when foreign currencies are losing value against the dollar and may cause the fund to lose money. There are also costs associated with hedging.

(3) Interest Rate Risks: The value of a bond will go down as interest rates increase. Rates are abnormally low at the present time so there is not much room for further appreciation and plenty of room to the downside.

Future Buys/Sells: I would need a downdraft to near $10 occurring with a significant expansion of the discount to buy another 100 shares. I will flip this security for small gains after collecting several monthly dividends. SGL is one of my least favorite bond CEFs.

3. Sold 100+ MSFT at $32.83 (see Disclaimer): 

Sold 100 MSFT at $32.83

I also liquidated a factional share purchased with one quarterly dividend payment.

Snapshot of Gain:

2013 MSFT 100+ Shares +$290.46
I mentioned in a prior post that my target price was anywhere between $31-$33, a modest goal. (Introduction Section Stocks, Bonds & Politics:  MSFT)

I discussed MSFT after several analysts downgraded the stock after IDC and Gartner released pathetic PC shipment estimates for the first quarter (Introduction Section: Stocks, Bonds & Politics:  MSFT-4-16-2013 Post) I also discussed both Intel and Microsoft in a recent post. I still own Intel. (Introduction Section: Stocks, Bonds & Politics:  MSFT & INTC)

I have avoided losing money in Microsoft shares with a twofold simpleton strategy. First, except for one flip trade in 2008, I did not own any shares between 1998 to 2009. That was an important prong of my MSFT strategy. Second, after the shares were pummeled, I started to trade them and have done okay in that endeavor without risking much money.

For some unknown reason, I started to buy 100 shares, sometimes in increments, every year starting in 2009, and went crazy with the purchase of 142 shares one year, and then I would flip the shares after a short holding period.  I would then repeat the process whenever the spirit moved me to buy the shares back.

2009 MSFT100 Shares  +$527.43
Sold MSFT at $28.11 November 2009ADDED 50 MSFT at $17.79 April 2009; Sold 50 MSFT & Bought CPB at $25.35 April 2009-Microsoft Buy at $19.48

2010 MSFT 100 Shares +$90.46
2011 MSFT 100 Shares +$65.15

2012 MSFT 142+ Shares $405.4
Sold 50 MSFT at $27.91 January 2012-ADDED 50 MSFT at 25.81 March 2011Sold Remaining MSFT at $28.47 January 2012Added 30 MSFT at $25.02 November 2011Added 30 MSFT at $24.92 August 2011Added 30 MSFT at $24.15 May 2011 (frequently, those small odd lot purchases are funded from cash flow)

Total Realized Gains 2009--2013= $1,374.74 (at least that is a positive number)

Just as an aside, I received a Christmas present many years ago of 1 MSFT share, nicely framed with an inscription. The buyer purchased that stock from Buy One Real Share of Stock. While I have lost track, I believe that I now own close to 7 or 8 shares after stock splits and dividend reinvestment.

I also received from the same person 1 share of Disney stock, also nicely framed, which is also a work of art that I have mounted on a wall near HQ's Trading Desk. I now own 3 shares due to a stock split. Owning one share in certificate form did give me entry into the shareholder reinvestment and stock purchase plans. If the spirit moves me, I could buy shares directly from the company. This is of course a very high cost way to buy shares. I have occasionally bought one share as a Christmas gift for youngsters who know nothing about stocks as sort of an entry into the world that I have inhabited since buying HCA stock shortly after its IPO in the late 1960s.

Quote: MSFT Stock Quote

4. Bought Back 50 ONB at $11.9 (REGIONAL BANK BASKET STRATEGY) (see Disclaimer):

This stock was favorably mentioned in this week by Sy Jacobs, a hedge fund manager specializing in financial stocks. He characterizes ONB as a successful acquirer and refers to ONB's acquisition of a failed bank in Evansville, Indiana (Integra Bank-see page 10 FORM 10-Q) and two other healthy banks in Indiana. ONB also recently announced that it will purchase 24 Bank of America branches in northern Indiana and Michigan. SEC Filed Press Release

He also mention Berkshire Hills Bancorp (BHLB), which is also part of my regional bank basket: Bought 50 BHLB AT $21.66 March 2012 He mentions that BHLB has done 4 accretive acquisitions over the past four years, expanding its service territory into northern Connecticut, New York and Vermont.

Company Description: Old National Bancorp (ONB) is the largest financial services company headquartered in Indiana. The operating bank has 176 branches according to the bank's fact sheet:‎ 

Profile Page at Reuters

Key Developments Page at Reuters

Prior Trades: I have previously bought and sold ONB: Item # 1 SOLD 100 ONB at $13 & Bought 100 NBN at $8.7 (August 2012)- Bought 100 ONB at $11.85 (May 2012)

By buying back only 50 of the 100 shares previously owned, I am expressing less confidence in ONB compared to my opinion last May.

Recent Earnings:

Old National Begins 2013 With Strong First Quarter Earnings (press release)
2013 1st Quarter vs. 2012 1st quarter
Net Income: $23.945M vs. $21.723M
E.P.S.= $.24 vs. $.23
Net Interest Margin: 4.04% vs. 4.2%
Efficiency Ratio: 68.34% vs. 70.88% (needs to fall further)
NPL Ratio: 3.23% vs. 2.77% (way too high for me and going in the wrong direction)
Coverage Ratio: .31% vs. .48% (prefer over 100%)
Charge-Offs: .1%/
Tangible Equity to Tangible Assets: 8.96% vs 9.23%
Total Risk Based Capital Ratio: 15.1% vs. 15.4%
Returns on Average Assets: 1.01% vs. 1.02%
Returns on Average Equity= 8.00% vs. 8.04% (in need of improvement)
Current Quarterly Dividend: 10 cents per share vs. $.09

Earnings for the 2013 first quarter had the following extraordinary items: a $1.7 million expense to update BSA/AML compliance (e.g,. catching and reporting money laundering); a $.7M expense related to debt extinguishment and $.6M expense relating to branch optimization expenses and a $2.4M gain from the sale of nine branches. Those netted out to a $600,000 hit to earnings.

As noted in the earnings release, management is targeting a 65% efficiency ratio.

The NPL ratio excludes covered loans acquired in an FDIC assisted acquisition where the FDIC has responsibility for the loan loss. (page 69, FORM 10-Q)

Due to the high NPL Ratio, I only bought back 50 shares of the previous 100 shares sold.

Earnings Call Transcript - Seeking Alpha

Rationale: This bank is expanding its footprint in a prudent manner. It is a possible acquisition candidate for a larger regional bank wishing to expand into the Indiana market. At the current quarterly rate of 10 cents per share, the dividend yield is around 3.36% and was recently increased from 9 cents per share in March 2013 quarter. Dividends - Old National

Risks: The risks are the normal ones for small regional banks that I normally will buy in this basket strategy. The most important headwind is net interest margin compression.  Along with increased regulatory costs and a normal rise in other expenses (e.g. compensation and benefit cost increases, it will be difficult for these banks to grow earnings in the next couple of years. The cause of net interest margin compression is the FED's monetary policies. One of those policies, ZIRP, is likely to continue into 2015. A recent discussion of the preceding issue can be found in this article which mentions ONB and was published by TheStreet after my purchase: "3 Bank Stock Value Plays - TheStreet"

The dividend page referenced above highlights a disadvantage. ONB cut its quarterly dividend from $.23 to $.07 in the 2009 second quarter. This kind of history will always be viewed unfavorably, but it will not disqualify the offender from purchase. The dividend cut would indicate, without even looking, an unfavorable loss and earnings history in 2008-2010, which was the case. (see page 22 of FORM 10-K) Net charge offs to average loans peaked at 1.4% in 2009.

A long term chart shows a downward trajectory in price since roughly December 1998 and December  2004 at $26.42 and $24.75 respectively. ONB Interactive Chart

5. Added 50 WBCO at $13.3 (see Disclaimer): This is my second purchase of WBCO shares in a taxable satellite account where the commission is $6.95.

Company Description: Washington Banking is the holding company for Whidbey Island Bank which has 31 branches in six northwestern Washington counties, concentrated in the metropolitan Seattle area, including Islands in the Puget Sound, and north of Seattle to the Canadian border.

I previously discussed this bank when purchasing a 100 share lot at a slightly higher price: Item # 4 Bought 100 WBCO at $13.46 (11/2/12 Post)

WBCO Long Term Chart: WBCO Interactive Chart (Topped out at over $20 in October 2007)

Profile Page at Reuters

The current quarterly dividend rate is $.15 per share. Whidbey Island BanK Dividend History The bank is current paying a basic dividend of 7 cents per share and a variable dividend that brings the total payout to 50% of the net income per share for the prior quarter. The bank earned $.3 per share in the 2013 first quarter so the next variable dividend will be 8 cents per share, bringing the total to $.15 per share.

One negative is that the bank did cut its quarterly dividend from $.065 per share to $.025 in the 2009 third quarter

A map of the branch locations can be found at Whidbey Island Bank. (PDF of Branch addresses

The stock went ex dividend for its quarterly 15 cent per share distribution the day after this last purchase. Washington Banking Declares its 60th Consecutive Quarterly Dividend I do not mind buying the dividend when the stock declines by more than the dividend's value immediately before the ex dividend date, due to market dynamics rather than anything specifically relating to the company. When I bought the shares last Wednesday at $13.3, the stock had already declined 50 cents or 3.62% from the prior day's closing price of $13.8. Closing Price on Day of Purchase: WBCO: $13.29 -0.51 (-3.70%)

I also changed my dividend option to reinvestment from payment in cash.

The consensus estimate is for an E.P.S. of $1.14 in 2013 and $1.15 in 2014. The perception of a lack of future earnings growth is certainly a negative.  WBCO Analyst Estimates There are a lot of reasons for this problem that are beyond the bank's control including the shrinkage in net interest margin caused by the Federal Reserve's ZIRP and QE monetary policies.

Prior Trade: As mentioned above, I bought 100 shares at $13.46 back in November.

Last Earnings Report: The last earnings report was uninspiring but has a number of positive features relevant to a patient long term investor.

Washington Banking Company 1Q13 Profits Stable at $4.6 Million; Generates Return on Average Equity of 10.18% and Return on Average Assets of 1.11%

2013 1st Quarter vs. 2012 1st Quarter:
Net Income: $4.584M / $4.773M
E.P.S.= $.3 / $.31
Net Interest Margin= 4.84% / 5.81%
Efficiency Ratio: 61% / 59.72%
NPL Ratio: 1.4% / 2.73%
NPA Ratio: 1.03% / 1.42%
Coverage Ratio: 143.05%
Net Charge Offs to Average Loans: .32% / 1.01%
Return on Average Assets=
Tangible Book Value Per Share=$11.5 / $10.85
Tangible Common Equity to Tangible Assets: 10.73% / 9.9%

The capital ratios are excellent:

Rationale: (1) Decent Dividend Yield from a Well Capitalize Bank: I generally like the idea of a bank returning a dividend linked in part to earnings per share. Based on the current level of earnings, the dividend yield is certainly above average for regional banks.

Most of the numbers referenced above are moving in the right direction except for the net interest margin. I am not blaming the banks for the decline in their net interest margin. The WBCO margin is still high compared to other banks however. At the end of the 2012 4th quarter, the average net interest margin for all U.S. banks was 3.37%: Net Interest Margin for all U.S. Banks - St. Louis Fed The small banks, with net assets of less than $1B, had an average 3.88% net interest margin. Net Interest Margin for U.S. Banks with average assets under $1B- St. Louis Fed

It is important that NPLs, NPAs, and charge offs are trending down. Even with an uptick in the net interest margin, the benefit could easily be wiped out by an increase in bad loans

I liked the Y-O-Y change in tangible book value and the tangible equity ratio.

Risks: The most significant problem, visible to me now, is the slowing earnings growth due largely to the decline in interest rate margin. The risks are what I would view as normal ones in the current operating environment.

Future Buys: I may buy up to another 50 shares at below $13.

6. Sold 1 ArvinMeritor 8.125% Senior Bond Maturing in 9/15/2015 at 109 (Junk Bond Ladder Strategy-NO LONGER UPDATING)(see Disclaimer): It is almost impossible for me to believe that this deservedly rated junk bond was bought by someone with a YTM of less than 4%.  This bond is rated B- by S & P and B3 by Moody's.

I am in a liquidation mode for my junk bonds since I view their current yields to be way out of line with their default risks.

BofA Merrill Lynch US High Yield B Effective Yield- St. Louis Fed

BofA Merrill Lynch US High Yield BB Effective Yield- St. Louis Fed

BofA Merrill Lynch US High Yield Master II Effective Yield - St. Louis Fed

Snapshot of Trade:
Sold 1 ArvinMeritor at 109-Satellite Taxable Account (commission $2)

Snapshot of History:

Snapshot of Profit:

Bond Profit= $151

Bought 1 ArvinMeritor 8.125% Senior Bond Maturing 9/15/2015 at $93.5

FINRA Information on 2015 Bond

Prospectus: ArvinMeritor


Politics and ETC

1. Governments as a Easy Mark For Fraudsters 

Throughout my life, I have been amazed that the federal and state governments fail to take obvious steps to reduce fraud.

Whenever the federal government starts handing out significant sums of money to its citizens, for whatever reason, there needs to be a recognition that millions will try to steal some of that money. Policies need to be implemented from the start, and refined over time, to prevent fraud and to significantly reduce the amount lost. And, there needs to be a serious effort to catch and punish those who manage to steal, notwithstanding the difficult hurdles placed in their path.

Tens of billions are lost every year to those willing to bilk the government in a variety of programs. The government is and has been an easy mark for fraudsters, and few are caught and brought to justice.

I discussed an example over two years ago. Rampant Medicare FraudMedicare Fraud: A $60 Billion Crime - 60 Minutes - CBS News The GAO estimated that $70 billion was lost to fraud in 2010 alone, Stocks, Bonds & Politics (September 2011 Post)U.S. GAO - Improper Payments: Reported Medicare Estimates and Key Remediation Strategies

Criminals would set up a firm to bill Medicare. The firm would have no assets and no means to actually purchase medical supplies or to deliver them. Medicare would be billed for products never delivered to anyone and would promptly pay those bills. After a few months, the fraudsters would close that enterprise and start another one. If government was so inclined, this kind of fraud could be easily stopped by a verification/certification program before the payment of the first invoice.

Another money pit is unemployment payments. Fraud in this area takes many forms. The most prevalent category of theft is simply the collection of unemployment benefits while a person is  employed by another company.

I have referenced this problem throughout the blog. In 2011, I noted a story published by USATODAY As noted in that story, the Labor department estimated then that more than 1/2 of the states had improper unemployment payments higher than 10%, led by Louisiana and Indiana with greater than 40%!

Nothing really changes even though politicians from both parties talk about eliminating fraud and waste to win votes from the gullible and naive.

In a recent study released by the St. Louis Federal Reserve,, unemployment fraud cost governments about $3.3 billion. Of that amount, $2.2B was paid out to people who were still working, while the remainder was paid to individuals in prison or who were dead. This just amazes me. 

This post is long enough. I will discuss three trades from last week in the next post including a new mutual fund purchase last Thursday.