Big Picture Synopsis
Stocks:
Stable Vix Pattern (bullish)
Short Term: Hoping for a 10% Correction
Intermediate and Long Term: Bullish
Bonds:
Short Term: Slightly Bearish
Intermediate Term: Slightly Bearish (Bearish For Treasuries)
Long Term: Extremely Bearish
What can I say about last week except that I took a licking and kept on ticking.
Stocks needed a correction. I would much prefer to avoid all of this drama, as I recently stated in a SA comment, and just have the S & P 500 go up 6% per year, adjusted for inflation and with dividends reinvested, with the precise and equal increment in price to achieve that result over the course of a year determined by a panel of our most skilled nerd machines. Is that going to happen?
I have been calling for carnage in bond land, not due to a rise in inflation expectations which have been declining, but due simply to interest rate normalization.
A lot of people want to argue with me about that really simple concept, apparently due to a failure to remember history, as in the last century of pricing, yield and inflation data used by investors prior to the FED interjecting itself into the credit markets.
What can I say about last week except that I took a licking and kept on ticking.
Stocks needed a correction. I would much prefer to avoid all of this drama, as I recently stated in a SA comment, and just have the S & P 500 go up 6% per year, adjusted for inflation and with dividends reinvested, with the precise and equal increment in price to achieve that result over the course of a year determined by a panel of our most skilled nerd machines. Is that going to happen?
I have been calling for carnage in bond land, not due to a rise in inflation expectations which have been declining, but due simply to interest rate normalization.
A lot of people want to argue with me about that really simple concept, apparently due to a failure to remember history, as in the last century of pricing, yield and inflation data used by investors prior to the FED interjecting itself into the credit markets.
The chief investment officer at TCW for fixed income noted in an interview published by Morningstar that the recent rise in interest rates were a "dress rehearsal for the end of QE" and the end of QE will cause a "sea change in valuations". He also refers to the possibility of institutions starting to front run the FED that could lead to a rapid increase in rates.
In a free market uninfluenced by QE, I have mentioned that 2.5% is an average spread over the anticipated inflation rate for the 10 year treasury. That is simply a well known rule of thumb. Someone could go back and see how that number compares with past data using this process. The market is dynamic so the forecasts will change above and below that level based on other considerations besides the inflation forecast, such as flight to safety or the level confidence in the inflation forecasts.
I would generally expect the ten year nominal yield spread to move close to 2% during periods where the CPI numbers and 10 year inflation forecasts are running fairly consistently in the 2% to 2.5% range. The spread would then start to move up when actual CPI numbers start to accelerate toward 3% and above, causing the inflation expectations to move higher and possibly increasing the uncertainty component. And the spread range could move below 2% with persistent readings below 2% in the inflation rate.
As investors have more uncertainty due to accelerating inflation numbers, consistently higher than the previous range, then more protection against inflation, manifested by a larger spread number, would be needed to allay those concerns. Inflation has been consistently modest since the FED started to sell 10 year TIPs that would cause the spread to be closer to 2% than over 2.5%.
2007
Daily Treasury Real Yield Curve Rates
Daily Treasury Yield Curve Rates
10 Year TIP 1/03/07 2.38%
10 Year Nominal 4.68%
Average Annual Inflation: 2.3%
Spread to Inflation=2.38%
10 Year TIP 6/1/07 2.57%
10 Year Nominal 6/1/07 4.95%
Average Annual Inflation Forecast: 2.38
Spread to Inflation= 2.57%
2006
Daily Treasury Real Yield Curve Rates
Daily Treasury Yield Curve Rates
10 Yield TIP Yield 1/3/06= +2.03%
10 Year Nominal Yield 1/3/06= 4.37%
Average Inflation Prediction 2.34%
10 Yield TIP Yield 12/12/06= 2.16%
10 Year Nominal Yield 12/12/06= 4.49%
Average Annual CPI=2.33%
Spread to Inflation= 2.16%
2004
Daily Treasury Yield Curve Rates
Daily Treasury Real Yield Curve Rates
10 Year TIP Yield 1/2/04 2.06%
10 Year Nominal 1/2/04 4.38%
Average Annual CPI 2.32%
Spread to Inflation: 2.06%
In a free market uninfluenced by QE, I have mentioned that 2.5% is an average spread over the anticipated inflation rate for the 10 year treasury. That is simply a well known rule of thumb. Someone could go back and see how that number compares with past data using this process. The market is dynamic so the forecasts will change above and below that level based on other considerations besides the inflation forecast, such as flight to safety or the level confidence in the inflation forecasts.
I would generally expect the ten year nominal yield spread to move close to 2% during periods where the CPI numbers and 10 year inflation forecasts are running fairly consistently in the 2% to 2.5% range. The spread would then start to move up when actual CPI numbers start to accelerate toward 3% and above, causing the inflation expectations to move higher and possibly increasing the uncertainty component. And the spread range could move below 2% with persistent readings below 2% in the inflation rate.
As investors have more uncertainty due to accelerating inflation numbers, consistently higher than the previous range, then more protection against inflation, manifested by a larger spread number, would be needed to allay those concerns. Inflation has been consistently modest since the FED started to sell 10 year TIPs that would cause the spread to be closer to 2% than over 2.5%.
2007
Daily Treasury Real Yield Curve Rates
Daily Treasury Yield Curve Rates
10 Year TIP 1/03/07 2.38%
10 Year Nominal 4.68%
Average Annual Inflation: 2.3%
Spread to Inflation=2.38%
10 Year TIP 6/1/07 2.57%
10 Year Nominal 6/1/07 4.95%
Average Annual Inflation Forecast: 2.38
Spread to Inflation= 2.57%
2006
Daily Treasury Real Yield Curve Rates
Daily Treasury Yield Curve Rates
10 Yield TIP Yield 1/3/06= +2.03%
10 Year Nominal Yield 1/3/06= 4.37%
Average Inflation Prediction 2.34%
10 Yield TIP Yield 12/12/06= 2.16%
10 Year Nominal Yield 12/12/06= 4.49%
Average Annual CPI=2.33%
Spread to Inflation= 2.16%
2004
Daily Treasury Yield Curve Rates
Daily Treasury Real Yield Curve Rates
10 Year TIP Yield 1/2/04 2.06%
10 Year Nominal 1/2/04 4.38%
Average Annual CPI 2.32%
Spread to Inflation: 2.06%
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Recent Economic Reports:
The FHFA reported that Fannie and Freddie completed almost 460,000 refinances in March 2013, with nearly 100,000 completed under the HARP program. The two GSEs completed almost 1.4 million refinances in the 2014 first quarter. March 2013 Refinancing Report From 4/1/09, Freddie and Fannie have refinanced 16,185,748 mortgages.
CPI rose .1% in May on a seasonally adjusted basis with the core rising .02%. Consumer Price Index Summary Over the 12 month period ending in May, CPI has increased 1.4% before seasonal adjustment.
PPI for finished goods rose .5% in May seasonally adjusted. Producer Price Index News Release text
The FED says that it "sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall" FRB: Press Release--Federal Reserve issues FOMC statement --June 19, 2013 I take that statement to be consistent with a reduction in asset purchases later this year. This was a major change in my opinion from the prior statement that the FED "continues to see downside risks to the economic outlook". FRB: Press Release--Federal Reserve issues FOMC statement--May 1, 2013
While the market reacted negatively to the signal that QE will end, there was nothing surprising to that development.
The following has been known before the Fed statement and Bernanke's news conference:
QE will end.
The Fed will taper QE before ending it.
Intermediate and long term treasuries yields will rise to normal levels over the next 1-2 years, as investors start once again to price those securities using traditional criteria including inflation expectations.
The reset process for interest rates across the entire bond spectrum began in early May 2013 as some investors started to front run the inevitable end of QE.
Importantly, the FED lowered its forecast for unemployment in 2014 and 2015 and increased slightly its Real GDP forecast for 2014:
If the unemployment forecast proves prescient, then the FED will likely start to increase the federal funds rate before 2015.
HSBC's manufacturing PMI index for China slid further into contraction territory with a 48.3 reading in June, down from 49.2 in May.
The Markit flash June U.S. manufacturing PMI, which has been running higher than the comparable ISM index, was reported at 52.2, with the new order component increasing slightly to 53.7.
The Philly reported that its regional manufacturing rose to 12.5 in June, the highest reading since April 2011 from a -5.2 reading in April. Any number over zero indicates expansion. June 2013 Business Outlook Survey - - Philadelphia Fed The new orders component increased from -7.9 to 16.6.
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China's Credit Bubble:
Early last week, there was a report from a Fitch analyst that China's growth was fueled by a credit bubble, unlike anything seen in history. It is unusual for an already large economy to grow continuously at high levels without having a really severe contraction. FITCH I am more worried more about China than Europe.
The analyst argues first that China's shadow banking was so opaque that no one really knew what was happening, but then seems to know with certainty that credit has jumped 75 percentage points to 200% of GDP over the past five years.
I suspect that she is close to being right that additional debt has lost its punch, as she estimates that a Yuan of borrowing produces only .15 of GDP growth, down from .85 four years ago. While those numbers could easily be off by a lot, the trend would be in the direction claimed by the analyst.
Government debt to GDP is low: China Government Debt To GDP
There were also several reports last week that China was engineering a liquidity crunch by allowing interest rates to spike for its "shadow banking" market. Reuters; Forbes A Forbes columnist claims that China's overall credit has grown from $9T to $23T since Lehman's failure in September 2008. Forbes
The cover story in Barrons highlights some of the aforementioned problems.
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Continued Carnage In Bond Funds-DURATION RISK IN BOND FUNDS:
The declines are not adjusted for any dividend payments. Duration numbers are from the ETF sponsors.
PIMCO ETFs - Funds - PIMCO 25+ Year Zero Coupon U.S. Treasury ETF
5/1/13: $113.31 ZROZ Historical Prices
6/21/13: $92.67
Decline: -18.22% (longest duration)
Duration:
iShares Barclays 20+ Year Treasury Bond Fund (TLT)
5/1/13: $124.01 TLT Historical Prices
6/21/13: $108.4
Decline: -12.59%
Duration: 16.63 years
How many years of dividends have been wiped out by a 12.59% decline in price?
TLT owns treasuries with an average maturity of 27.55 years and a duration of 16.63 years. I attempted to calculate an estimated loss using the rise in yields for the 20 and 30 Year Treasury Bonds between 5/1/13 and 6/21/13 using the rule of thumb of multiplying the rise in rates by the duration. I came very close to calculating the actual loss in TLT.
20 Year Treasury Yield 5/1/13= 2.44%
20 Year Treasury Yield 6/21/13= 3.26%
Increase in Yield=.82%
Multiply .82 x. 16.63 years=13.64% Loss
30 Year Treasury Yield 5/1/13= 2.83%
30 Year Treasury Yield 6/21/13=3.56%
Increase in Yield= .73%
Rule of Thumb Estimate of Loss: .73 x. 16.63 years=12.14% Loss
The maturity of the bonds is closer to 30 years at 27.55 than to the 20 year treasury so a slight increase over the 12.14% was expected given the greater rise in yield for the 20 year.
BABS - SPDR Nuveen Barclays Build America Bond ETF
5/1/13: $62.99 BABS Historical Prices
6/21/13: $55.35
Decline: 12.12%
Duration: 12.89 years
LWC - SPDR Barclays Long Term Corporate Bond ETF
5/1/13: $41.94 LWC Historical Prices
6/21/13: $36.87
Decline: 12%
Duration: 13.29 years
Investment Grade Corporate Bond Fund (LQD)
5/1/13: $122.31 LQD Historical Prices
6/2113: $112.21
Decline: -8.26%
Duration: 7.55 years
JNK - SPDR Barclays High Yield Bond ETF
5/1/13: $41.48 JNK Historical Prices
6/21/13: $39.14
Decline: -5.64%
Duration: 4.59 years.
A story published in Barrons on 6/13/13 noted a $3.3 billion outflow from junk bond funds in the prior week. Another Barrons.com post published a week later noted the huge outflow from bond funds.
Get to know your bond fund: Duration| Vanguard
Duration—What an Interest Rate Hike Could Do to Your Bond Portfolio - FINRA
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Revised 10 Year Treasury Yield Forecast:
For a long time now, I have been forecasting that the 10 year treasury will hit 3.5% within a year and 4.5% in two years.
After studying the 10 year TIP and nominal pricing between 2003-2007, I now view it unlikely that investors will demand a 2.5% spread to the anticipated inflation, given the current low average ten year CPI forecasts embodied in the 10 year TIP price and the recent declines in both the CPI and PCE price index.
I have consequently lowered my range to 4% to 4.25% within two years. That reduced forecast will still cause significant losses even to the buyer of the ten year note last Friday at 2.5% (about 15.5% or so at a 4.25% yield), assuming my future forecast proves to be prescient. Future forecasts are inherently subject to error, but I need to assign probabilities to my future scenarios in order to make intelligent asset allocation decisions now.
I will only weight my allocation decisions based on probabilities. A 50% to 70% chance of an event happening will cause a larger shift than say 30% to 40%. It would be rare for me to shift completely out of either bonds or stocks, coming really close to a 100% shift out of stocks only in 1999 since I reinitiated stock purchases in July 1982 after at least a four year hiatus.
Since I viewed an increase in rates due to rate normalization to be a high probability event, I reduced both my bond duration and my bond allocation. However, I am far less certain on the decree of increase so I still own individual bonds and bond funds.
Break-Even as of 6/21/13 for the 10 Year Treasury Note:
Daily Treasury Real Yield Curve Rates
+ .59% (up from negative -.64 on 5/1/13)
Daily Treasury Yield Curve Rates
2.52%
Break-even: 1.93%
The inflation forecast was close to 2.5% at the start of this year.
The decline in inflation expectations is something that needs to be monitored everyday now, since the market is flashing a yellow light on deflation. A continuation of this lowering trend will likely have an impact on my bond allocation, as in moving up rather than down.
Yield Curve Is Steepening as Short Rates Remained Anchored by ZIRP:
Chart Daily Treasury Yield Curve: US Department of the Treasury
You can see how the curve has steepened by checking the box "select to compare dates" and enter May 1, 2013.
Chart: 30-Year Treasury Constant Maturity Rate
Chart: 10-Year Treasury Inflation-Indexed Security
Chart: 10-Year Treasury Constant Maturity Rate
Chart: 5-Year Treasury Constant Maturity Rate
Chart: 2-Year Treasury Constant Maturity Rate
Chart: 1-Year Treasury Constant Maturity Rate
I noted earlier that the path to interest rate normalization would be difficult and so far that has been an accurate forecast. The Difficult Path to Interest Rate Normalization I also discussed the problem in a number of recent SA comments including the various chapters in this Instablog: Seeking Alpha
Ask yourself this question? If an institution bought a 10 year treasury at par with a 1.75% coupon, would it wait for rates to normalize to say 4% within the next two years before selling that low yielding security?
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Travelport 2014 Bond Redemption:
Travelport was one of the junk issuers where I had enhanced credit concerns. Travelport redeemed by 2014 senior bond at par plus accrued interest, removing any future concern about that one:
That turned out fine. I received about 10% in interest for slightly over 2 years and three months. This 9.875% coupon bond was purchased on 3/7/2011.
I still own two outstanding Travelport bonds.
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Mutual Fund Reinvestment:
I own a few mutual funds. It is the one investment category where I always reinvest the dividend. I will sometimes engage in widespread eliminations and parings, which was the case in 2007, and thereafter establish new positions which was the case in 2009-2010.
One of the new positions started in 2009 was the Matthews Asian Growth & Inc Investor Fund (MACSX)(rated 5 stars)
Item # 1 Bought Matthews Asian Growth and Income (MACSX)
I recently reinvested the dividend to buy more shares:
Snapshot of Position as of 8/3/12 can be found in Item # 4 Stocks, Bonds & Politics.
1. Added 50 RDS/A at $65.99 (see Disclaimer): I was able to buy this stock for my 90 year mother at two dollars less per share last Friday, proving once again that she is a better trader than me when buying for my personal account.
Royal Dutch Shell PLC ADS Cl A is one of the largest corporations in the world with a market capitalization of close to $207B based on last Friday's closing price.
Snapshot of Trade:
I discussed this company recently and have nothing much to add to that earlier discussion. Item # 1 Bought 50 RDS/A at $68.93
I am reinvesting the dividend. So far I have avoided the Dutch withholding tax by reinvesting the dividend to buy additional shares.
I know own RDS/a in two separate accounts. This last purchase was made in the main taxable account and I may add more shares in that account on further weakness.
The prior purchase was made in a satellite taxable account where preservation of capital is a primary objective. Prior to 2008, I only had a savings account at that firm used to buy CDs. As those CDs matured, I refused to roll them over at the then current ridiculously low interest rates and instead opened a link brokerage account to buy stocks like Royal Dutch Shell. I am not a long term holder of any stock bought in that account. Instead, I am just trying to earn some money until rates normalize by purchasing dividend paying stocks at reasonable multiples;
Key Statistics at YF as of 6/21/13
Trailing P/E= 7.76
Forward E.P.S. 2014: $8.22 from Reuters.com
P/S=.44
P/B=1.13
YF does not have earnings estimates for Royal Dutch so I pulled that data from Reuters. The analyst are not forecasting any earnings growth from 2013 to 2014. I would not put much weight into future forecasts for large integrated oil companies giving the volatile prices for their products and their many moving parts.
Profile at Reuters
Key Developments Page at Reuters
This is a link to a Seeking Alpha published in June which contains some recent data points. I would agree that Shell's natural gas exposure has contributed to mediocre results lately, but I do expect a super cycle in natural gas demand to occur.
It is only a question of when the demand will cause a sustainable increase in price, soaking up the excess supply, independent of weather issues. Sorry, do not know when that will happen, but the demand will be increasing significantly in the coming years, with substantial increases in demand coming from electric utilities increasingly using natural gas as a fuel for baseload generation (running 24/7), rather than the long standing temporary use of gas turbines to meet peak demand.
Long Term Chart: Henry Hub Gulf Coast Natural Gas Spot Price (Dollars/Mil. BTUs)
See Discussion at Item # 4 Bought 50 FCG at $15.84 and to a far lesser extent at Item # 4 Bought 50 MLPG at $31.26-ROTH IRA
The one year chart shows a lot of chop between $64 to $72. RDS-A Interactive Chart
Currency Risk: RDS-A is an ADR. Its value will be determined by the ordinary share's price in Euros converted back into USDs. One ADR equals two ordinary shares. The ordinary shares closed in Amsterdam at €24.24 -0.14 (-0.57%).
Based on last Friday's currency conversion, the NYSE price for the ADR was $64.19 worth about €48.93 (or €24.24 x 2=€48.48=$63.6). Sometimes, the pricing is off due to Europe's earlier close. The USD gained value later in the day on Friday and the S & P 500 and the DJIA rallied some in the last two hours of trading while the Amsterdam market decline into its close. AEX.AS
USD/EUR Currency Conversion Chart
To do a more precise calculation, it would be necessary to compare the prices when both stock markets are open and then take the currency conversion rate then in effect:
5:00 Amsterdam= €24.24 x. 2=€48.48
11:00 NY=$63.67
Exchange Rate: About .7568
.7568 x. $63.67= $48.19
The movement in the ordinary shares and the exchange rate will cause temporary differences in pricing between the two markets. I would have to be plugged into the exchange with a computer programmed to take advantage of temporary price dislocations to pick up the ADR at a €.29 per share discount to the ordinary share price.
Friday's Close: RDS-A: $64.19 -0.10 (-0.16%)
2. Added 50 FFBC at $14.65 (REGIONAL BANK BASKET STRATEGY) (see Disclaimer): I noted in my previous post dealing with the Google Search box that several regional bank stocks were rising last Thursday when the major market averages were diving deep into the red. My basket ended up close to break-even for that day.
Last Friday, when the S & P 500 rose .27%, my regional bank basket rose $647.08 or 1.35%. That sector was one of my few bright spots from last week.
I decided to show that move by taking a snapshot normally reserved for my monthly update of this basket:
(usual caveats about this table: I do not include reinvested dividends and the dividend yield is at last Friday's closing price rather than at my cost per share number. The unrealized gain, excluding any gains on shares purchased with dividends, is over $3,500 as of 6/21/13, with the realized gain totaling $12,295.92, see snapshots at Stocks, Bonds & Politics: REGIONAL BANK BASKET STRATEGY GATEWAY POST)
While determining cause and effect is always uncertain and subject to reasonable disagreements and to error, I suspect that the market views the rise in rates to be a positive for my regional banks.
The rates paid to depositors will remained anchored near zero for savings accounts and short term CDs, while the bank can charge more on its new mortgage loans, a large part of their business, and other types of consumer loans. That trend will increase their net interest margins. The main negative is that securities available for sale have decreased in price, lowering or even eliminating that potential profit segment, but that problem from rising rates is generally more troublesome and problematic for the large banks than most of the smaller regional banks. (see discussion of that the rise in rates impacts the 25 largest banks at Bloomberg)
I addition to adding 50 shares to my FFBC position, I added a 50 share lot to another one that I will briefly discuss when I update the regional bank basket table.
Snapshot of Trade:
Security Description:
As previously noted, FFBC is paying both an ordinary and special dividend at the current time, but may discontinue the special dividend after this year based on its prior guidance. The special dividend is the difference between the regular dividend amount and the earnings per share, resulting in a 100% dividend payout ratio.
The last quarterly dividend payment consisted of the regular 15 cent per share dividend and a special dividend of 9 cents which was paid on 7/1/13.
First Financial Bancorp Profile Page at Reuters
First Financial Bancorp Key Development's Page at Reuters
Prior Trades: I am slightly under water with this one. My next trade would most likely be the sell of 50 shares over $16. I am reinvesting the dividend.
I have sold my highest cost shares at a small profit. Bought 50 FFBC @ 16.85-Sold 50 FFBC at $17.51.
Prior to this last 50 share add, I bought the following in open market purchases: Added 50 FFBC at $15.95; ADDED 50 FFBC at $14.87
My last add was discussed in my December 2012 update for the regional bank basket: Added 30 FFBC at $14.24
My dividend reinvestments are all over the place.
The general idea with this kind of trading is to simply wait for a recovery in the share price to over $17 and then unload my two highest cost share lots ($15.95 & $14.87 along with all intervening shares purchased with dividends)
Recent Earnings Release: 1Q13 Earnings release
The earnings numbers for the last quarter were unsatisfactory. The bank did incur $2.9M in unusual pre-tax expenses relating to its "efficiency initiative", offset in part by $1.5M in realized gains from selling securities. The net negative impact was $.02 per share. As one would suspect, an efficiency initiative includes a reduction in employees.
All of the following numbers are in need of improvement but I will withhold criticism until I see results in the 2014 first quarter which should reflect the "efficiency initiative", an improved net interest margin and hopefully no further unusual expenses that impact negatively the metrics that are important in my evaluation.
2013 1st Quarter vs. 2012 1st Quarter
Net Income: $13.824M/16.994M
E.P.S.: $.24/ $.29
Net Interest Margin: 4.04%/4.51%
NPL Ratio: 2.38%/2.79% (at least moving in the right direction)
Coverage Ratio: 62.57% (prefer over 100% before purchasing)
Net Charge Offs to Average Loans: .32%/.87% (moving in the right direction)
Return on Average Assets: .88% (much prefer over 1%)/1.05%
Return on Average Tangible Equity: 9.24%/11.37% (9.96% adjusted for items)
Capital Ratios are good:
The bank repurchased 249,000 shares in the first quarter at an average cost of $15.39, down from the 460,500 shares bought in the 2012 4th quarter at an average cost per share of $14.78.
Q1-10Q-2013.3.31
Friday's Close: FFBC: $14.70 +0.18 (+1.24%)
3. Sold 100 of the Balanced ETF INKM at $31.2 (see Disclaimer):
Snapshot of Trade:
Snapshot of Profit:
BOUGHT 100 of the Balanced ETF INKM at $30.05
Security Description: The SPDR SSgA Income Allocation ETF Fund is a world balance ETF focused on income generation.
INKM Page at Morningstar
Sponsor's website: INKM - SPDR SSgA Income Allocation ETF
The fund sponsor shows the dividend yield at 3.98% as of 6/20/13.
Rationale: As readers are aware, I am negative on bonds. This ETF has a significant exposure to the long bond ETFs/
As of 6/20/13, this ETF had a 48.62% weighting in several bond ETFs and one "preferred stock" ETF.
Holdings: INKM
Future Buy: I will likely buy one this one back when I am more comfortable that the interest rate normalization is near an end. The bond part of the portfolio is generally high quality investment grade. I do not have a target price for re-entry, but would consider a buy when and if the dividend yield crosses 4.5%.
Friday's Closing Price: INKM: 29.82 +0.02 (+0.07%)
4. Sold 50 FVL at $15.53 (The $500 to $1,000 Flyers Basket Strategy) (see Disclaimer): The First Trust Value Line (R) 100 Fund Fund is an ETF that owns the 100 stocks that are given by Value Line its top rating for timeliness.
Sponsor's Website: FVL
Snapshot of Trade:
Snapshot of Profit:
Bought 50 FVL at $12.95
Rationale: The main rational was just to take a profit in an immaterial position. As noted when I bought the shares, this is a momentum based ETF that has not performed well over the past several years. I may come back to it at a price lower than my last purchase.
Morningstar Page for FVL (rated 2 stars, up from 1 star when I made my 50 shares purchase)
Future Buys: Probably only a small 50 share lot below my last purchase price.
Friday's Closing Price: FVL: $14.89 -0.02 (-0.13%)
5. Bought 100 NMFC at $14.28 (see Disclaimer):
Snapshot of Trade:
Security Description: New Mountain Finance is a business development corporation that purportedly focuses on "defensive growth companies". Annual Report at page 1
New Mountain Finance is a holding company that owned, as of 3/31/13, a 73.5% interest in an operating company known as New Mountain Finance Holdings, L.L.C. (Operating Company) with the remaining interest in the Operating Company owned by AIV Holdings.
A known hazard for BDC owners is a primary share offering, where the BDC raises additional capital for its own use. The risk increases when a selling shareholder unloads shares at the same time as the primary. This happened to the unfortunate owners of New Mountain, including me, who awoke last Tuesday to this announcement: New Mountain Finance Corporation Announces Pricing of Primary Offering of 2,000,000 Shares of Common Stock and Secondary Offering of 4,000,000 Shares of Common Stock on Behalf of Selling Stockholder The shares were price at $14.55
It is AIV Holdings who sold the 4 million shares. Before that offering, AIV was reported to own 16.221+M shares of New Mountain or 40%. (Prospectus at page 143) That prospectus has the effect of registering the remaining shares own by AIV and certain individuals.
In the Prospectus, the company stated that it "believed" that the net asset value per share was $14.31 on 6/17/13, which "includes the dividend distribution which will be paid on June 28, 2013 (p. S-5). That dividend payment will be $.34 per share. The net asset value per share was $14.31 as of 3/3113. 10-Q at page 2 New Mountain expects adjusted net investment income for the current quarter to be between $.33 to $.35. The estimate is currently $.34. NMFC Analyst Estimates
Day of Announcement: NMFC: 14.30 -0.57 (-3.83%)
This BDC is discussed in this Seeking Alpha published in March.
Prior Trade: My initial purchase was made recently and discussed in Item # 4 Bought 50 NMFC at $15.03 in the Roth IRA
Rationale: As usual, I am hoping for a 10% annualized return after holding the security for over one year, with the dividend providing almost all of the total return. I see some appreciation potential at this last purchase price, more at the lower closing price last Friday, but the outer limit would probably be at best a to $15.3 to $15.5 within 12-24 months. NMFC Interactive Chart
Risks: If someone really wants to know about BDC risks, a good place to start would be the Annual Report for one. The risk section is an eye opener and I doubt that many individuals buying BDCs have ever read the firm's own descriptions of risks. Annual Report at pp. 24-57. It takes me a long time to read 33 single spaced pages.
Future Buys: Not Likely
Closing Price Last Friday: NMFC: $14.10 -0.01 (-0.07%)
6. Bought 50 FAM at $14.94-Roth IRA (see Disclaimer): It is hard to muster now the nerve to buy 50 shares of a leveraged bond CEF. Nonetheless, I found the courage yesterday, possibly not measurable in any objective sense, to bring my Roth IRA position in FAM up to 100 shares. With the plunge in emerging market currencies and bonds over the past few weeks, this bond CEF has highlighted its downside risks.
Snapshot of Trade:
Recent History Snapshot: I only took 1 snapshot so I did not capture my entire Roth IRA history for this security, which has been negligible anyway. After brining my position up to 100 shares, I did change the distribution option to reinvestment from payment in cash. This history shows the prior purchase of 50 shares at $16.79, back in November 2012, and a sell at $17.99 shortly before that purchase.
Item # 5 Bought 50 FAM @ 16.79-ROTH IRA November 2012 (more lengthy discussion can be found in that post); Sold 50 FAM at $17.99 September 2012- Bought 50 FAM @ 17.37 in Roth IRA November 2010
Sold 150 of 200 FAM at $18.64 October 2012 (see snapshot)-Bought 50 FAM @ 17.37 and Bought 100 FAM @ 17.9 (November 2010).
Security Description: The First Trust/Aberdeen Global Opportunity Income Fund is a leveraged closed end international bond fund.
Dividend: This fund pays a monthly distribution of $.13, supported in part by a return of capital. CEFConnect (distributions tab). At that rate, the dividend yield would be about 10.43% at a total cost of $14.95 per share.
Credit Quality as of 4/30/13: The fund is weighted in investment grade securities.
Performance as of 5/51/13 and Top Ten Holdings as of 4/30/13:
Duration: Not Shown at the Website (an important omission)
Leverage: 25.32% as of 617/13
CEFConnect Page for FAM
Morningstar Page for FAM (currently rated 3 stars)
Sponsor's webpage: First Trust/Aberdeen Global Opportunity Income Fund (FAM)
2012 Dividends Per Share=$1.318+ (of which $.24 return of capital): Tax Letter
Day Before Purchase (Thursday 6/20/13)
Closing Net Asset Value Per Share: $15.97
Closing Market Price= $14.98
Discount -6.2%
Day of Purchase (Friday 6/21/13):
Closing Net Asset Value Per Share: $15.94
Closing Market Price=$14.96
Discount -6.15%
Average Discounts as of 6/21/13
1 Year= .94%
3 Years=-2.54%
5 Years= -6.52%
CEFConnect
Rate of Decline From 4/30/13/-6/21/13-Add Back $.26 Dividends
Net Asset Value $18.16 to $16.2 ($15.94 +.26)= -10.79%
Price: $17.86 to $15.22 ($14.96 +.26)= -14.78%
Rationale: It is all about the income. The downdraft in price since my last purchase enhanced the yield considerably. The credit quality is good. The discount to net asset value, which is not large for a bond CEF, has expanded beyond its 1 and 3 year averages and slightly below the 5 year average which included 2008 and 2009 when the discounts exceeded 15% routinely and had spiked over 25% at times.
If the CEF bond fund is competently managed, the wild swings in local currency pricing can be mitigated simply by holding the bond to maturity, assuming no default of course. So if a Brazilian government bond maturing in 2016 is owned by the fund, and its value has sunk well below par value due to the recent turmoil, the manager of bond CEF has the option of holding that bond to maturity to collect the original principal amount. Currency risk would remain in that scenario however.
The CEF manager does not have to sell a bond at an inopportune time in order to meet redemptions like managers of bond mutual funds and ETFs will need to do when faced with persistent net outflows.
The currency risk can at least partially be hedged and FAM appears to be doing some hedging.
With this last purchase, I missed the 14.78% decline in the share price since 4/30/13.
Risks: The expense ratio is too high.
A 10.79% decline in net asset value over a few weeks (see Rate of Decline above) is of course significant for a bond fund and does highlight the risks of bonds and the additional risks associated with foreign bond funds.
There is certainly more downside risk, given that U.S. interest rates are rising and are likely to continue doing so over the next two years due to interest rate normalization. The upward move will be capped by the low inflation expectations currently predicted in the TIPs.
Currency risks are always important in foreign bond funds. Those risks have been highlighted just over the past two months. The Australian Dollar has significantly declined in price against the USD since mid-April, as has the Brazilian Reel and Mexican Peso.
USD/AUD Currency Conversion (Australian Dollar)
USD/BRL Currency Conversion (Brazilian Reel)
USD/MXN Currency Conversion (Mexican Peso)
USD/MYR Currency Conversion Chart (Malaysian Ringgit)
USD/CAD Currency Conversion Chart (Canadian Dollar)
USD/INR Currency Conversion Chart (Indian Rupee)
USD/IDR Currency Conversion Chart (Indonesian Rupiah)
USD/SGD Currency Conversion Chart (Singapore Dollar)
USD/ZAR Currency Conversion Chart (South African Rand)
USD/ARS Currency Conversion Chart (Argentina Peso)
USD/CLP Currency Conversion Chart (Chilean Peso)
The USD has gained a lot of value against these currencies over the past few weeks. The rise in US interest rates will likely place more pressure on those currencies, making foreign bond funds unusually risky over the next several months.
This fund has some exposure to countries such as Argentina where country risk is a matter of concern. There are also the usual interest rate and credit risks associated with bonds, but the credit risks is more subdued given the investment grade bond weightings including the significant exposure to bonds rated "A" or higher.
Closing Price Last Friday: FAM: $14.96 -0.02 (-0.13%)
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I will discuss a couple more transactions from last week in the next post. This one is plenty long as it is, particularly with the very long introduction segment.
CPI rose .1% in May on a seasonally adjusted basis with the core rising .02%. Consumer Price Index Summary Over the 12 month period ending in May, CPI has increased 1.4% before seasonal adjustment.
PPI for finished goods rose .5% in May seasonally adjusted. Producer Price Index News Release text
The FED says that it "sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall" FRB: Press Release--Federal Reserve issues FOMC statement --June 19, 2013 I take that statement to be consistent with a reduction in asset purchases later this year. This was a major change in my opinion from the prior statement that the FED "continues to see downside risks to the economic outlook". FRB: Press Release--Federal Reserve issues FOMC statement--May 1, 2013
While the market reacted negatively to the signal that QE will end, there was nothing surprising to that development.
The following has been known before the Fed statement and Bernanke's news conference:
QE will end.
The Fed will taper QE before ending it.
Intermediate and long term treasuries yields will rise to normal levels over the next 1-2 years, as investors start once again to price those securities using traditional criteria including inflation expectations.
The reset process for interest rates across the entire bond spectrum began in early May 2013 as some investors started to front run the inevitable end of QE.
Importantly, the FED lowered its forecast for unemployment in 2014 and 2015 and increased slightly its Real GDP forecast for 2014:
If the unemployment forecast proves prescient, then the FED will likely start to increase the federal funds rate before 2015.
HSBC's manufacturing PMI index for China slid further into contraction territory with a 48.3 reading in June, down from 49.2 in May.
The Markit flash June U.S. manufacturing PMI, which has been running higher than the comparable ISM index, was reported at 52.2, with the new order component increasing slightly to 53.7.
The Philly reported that its regional manufacturing rose to 12.5 in June, the highest reading since April 2011 from a -5.2 reading in April. Any number over zero indicates expansion. June 2013 Business Outlook Survey - - Philadelphia Fed The new orders component increased from -7.9 to 16.6.
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China's Credit Bubble:
Early last week, there was a report from a Fitch analyst that China's growth was fueled by a credit bubble, unlike anything seen in history. It is unusual for an already large economy to grow continuously at high levels without having a really severe contraction. FITCH I am more worried more about China than Europe.
The analyst argues first that China's shadow banking was so opaque that no one really knew what was happening, but then seems to know with certainty that credit has jumped 75 percentage points to 200% of GDP over the past five years.
I suspect that she is close to being right that additional debt has lost its punch, as she estimates that a Yuan of borrowing produces only .15 of GDP growth, down from .85 four years ago. While those numbers could easily be off by a lot, the trend would be in the direction claimed by the analyst.
Government debt to GDP is low: China Government Debt To GDP
There were also several reports last week that China was engineering a liquidity crunch by allowing interest rates to spike for its "shadow banking" market. Reuters; Forbes A Forbes columnist claims that China's overall credit has grown from $9T to $23T since Lehman's failure in September 2008. Forbes
The cover story in Barrons highlights some of the aforementioned problems.
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Continued Carnage In Bond Funds-DURATION RISK IN BOND FUNDS:
The declines are not adjusted for any dividend payments. Duration numbers are from the ETF sponsors.
PIMCO ETFs - Funds - PIMCO 25+ Year Zero Coupon U.S. Treasury ETF
5/1/13: $113.31 ZROZ Historical Prices
6/21/13: $92.67
Decline: -18.22% (longest duration)
Duration:
iShares Barclays 20+ Year Treasury Bond Fund (TLT)
5/1/13: $124.01 TLT Historical Prices
6/21/13: $108.4
Decline: -12.59%
Duration: 16.63 years
How many years of dividends have been wiped out by a 12.59% decline in price?
TLT owns treasuries with an average maturity of 27.55 years and a duration of 16.63 years. I attempted to calculate an estimated loss using the rise in yields for the 20 and 30 Year Treasury Bonds between 5/1/13 and 6/21/13 using the rule of thumb of multiplying the rise in rates by the duration. I came very close to calculating the actual loss in TLT.
20 Year Treasury Yield 5/1/13= 2.44%
20 Year Treasury Yield 6/21/13= 3.26%
Increase in Yield=.82%
Multiply .82 x. 16.63 years=13.64% Loss
30 Year Treasury Yield 5/1/13= 2.83%
30 Year Treasury Yield 6/21/13=3.56%
Increase in Yield= .73%
Rule of Thumb Estimate of Loss: .73 x. 16.63 years=12.14% Loss
The maturity of the bonds is closer to 30 years at 27.55 than to the 20 year treasury so a slight increase over the 12.14% was expected given the greater rise in yield for the 20 year.
BABS - SPDR Nuveen Barclays Build America Bond ETF
5/1/13: $62.99 BABS Historical Prices
6/21/13: $55.35
Decline: 12.12%
Duration: 12.89 years
LWC - SPDR Barclays Long Term Corporate Bond ETF
5/1/13: $41.94 LWC Historical Prices
6/21/13: $36.87
Decline: 12%
Duration: 13.29 years
Investment Grade Corporate Bond Fund (LQD)
5/1/13: $122.31 LQD Historical Prices
6/2113: $112.21
Decline: -8.26%
Duration: 7.55 years
JNK - SPDR Barclays High Yield Bond ETF
5/1/13: $41.48 JNK Historical Prices
6/21/13: $39.14
Decline: -5.64%
Duration: 4.59 years.
A story published in Barrons on 6/13/13 noted a $3.3 billion outflow from junk bond funds in the prior week. Another Barrons.com post published a week later noted the huge outflow from bond funds.
Get to know your bond fund: Duration| Vanguard
Duration—What an Interest Rate Hike Could Do to Your Bond Portfolio - FINRA
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Revised 10 Year Treasury Yield Forecast:
For a long time now, I have been forecasting that the 10 year treasury will hit 3.5% within a year and 4.5% in two years.
After studying the 10 year TIP and nominal pricing between 2003-2007, I now view it unlikely that investors will demand a 2.5% spread to the anticipated inflation, given the current low average ten year CPI forecasts embodied in the 10 year TIP price and the recent declines in both the CPI and PCE price index.
I have consequently lowered my range to 4% to 4.25% within two years. That reduced forecast will still cause significant losses even to the buyer of the ten year note last Friday at 2.5% (about 15.5% or so at a 4.25% yield), assuming my future forecast proves to be prescient. Future forecasts are inherently subject to error, but I need to assign probabilities to my future scenarios in order to make intelligent asset allocation decisions now.
I will only weight my allocation decisions based on probabilities. A 50% to 70% chance of an event happening will cause a larger shift than say 30% to 40%. It would be rare for me to shift completely out of either bonds or stocks, coming really close to a 100% shift out of stocks only in 1999 since I reinitiated stock purchases in July 1982 after at least a four year hiatus.
Since I viewed an increase in rates due to rate normalization to be a high probability event, I reduced both my bond duration and my bond allocation. However, I am far less certain on the decree of increase so I still own individual bonds and bond funds.
Break-Even as of 6/21/13 for the 10 Year Treasury Note:
Daily Treasury Real Yield Curve Rates
+ .59% (up from negative -.64 on 5/1/13)
Daily Treasury Yield Curve Rates
2.52%
Break-even: 1.93%
The inflation forecast was close to 2.5% at the start of this year.
The decline in inflation expectations is something that needs to be monitored everyday now, since the market is flashing a yellow light on deflation. A continuation of this lowering trend will likely have an impact on my bond allocation, as in moving up rather than down.
Yield Curve Is Steepening as Short Rates Remained Anchored by ZIRP:
Chart Daily Treasury Yield Curve: US Department of the Treasury
You can see how the curve has steepened by checking the box "select to compare dates" and enter May 1, 2013.
Chart: 30-Year Treasury Constant Maturity Rate
Chart: 10-Year Treasury Inflation-Indexed Security
Chart: 10-Year Treasury Constant Maturity Rate
Chart: 5-Year Treasury Constant Maturity Rate
Chart: 2-Year Treasury Constant Maturity Rate
Chart: 1-Year Treasury Constant Maturity Rate
I noted earlier that the path to interest rate normalization would be difficult and so far that has been an accurate forecast. The Difficult Path to Interest Rate Normalization I also discussed the problem in a number of recent SA comments including the various chapters in this Instablog: Seeking Alpha
Ask yourself this question? If an institution bought a 10 year treasury at par with a 1.75% coupon, would it wait for rates to normalize to say 4% within the next two years before selling that low yielding security?
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Travelport 2014 Bond Redemption:
Travelport was one of the junk issuers where I had enhanced credit concerns. Travelport redeemed by 2014 senior bond at par plus accrued interest, removing any future concern about that one:
That turned out fine. I received about 10% in interest for slightly over 2 years and three months. This 9.875% coupon bond was purchased on 3/7/2011.
I still own two outstanding Travelport bonds.
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Mutual Fund Reinvestment:
I own a few mutual funds. It is the one investment category where I always reinvest the dividend. I will sometimes engage in widespread eliminations and parings, which was the case in 2007, and thereafter establish new positions which was the case in 2009-2010.
One of the new positions started in 2009 was the Matthews Asian Growth & Inc Investor Fund (MACSX)(rated 5 stars)
Item # 1 Bought Matthews Asian Growth and Income (MACSX)
I recently reinvested the dividend to buy more shares:
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| Avg. Cost 6.458 Shares=$18.59 |
Snapshot of Position as of 8/3/12 can be found in Item # 4 Stocks, Bonds & Politics.
1. Added 50 RDS/A at $65.99 (see Disclaimer): I was able to buy this stock for my 90 year mother at two dollars less per share last Friday, proving once again that she is a better trader than me when buying for my personal account.
Royal Dutch Shell PLC ADS Cl A is one of the largest corporations in the world with a market capitalization of close to $207B based on last Friday's closing price.
Snapshot of Trade:
I discussed this company recently and have nothing much to add to that earlier discussion. Item # 1 Bought 50 RDS/A at $68.93
I am reinvesting the dividend. So far I have avoided the Dutch withholding tax by reinvesting the dividend to buy additional shares.
I know own RDS/a in two separate accounts. This last purchase was made in the main taxable account and I may add more shares in that account on further weakness.
The prior purchase was made in a satellite taxable account where preservation of capital is a primary objective. Prior to 2008, I only had a savings account at that firm used to buy CDs. As those CDs matured, I refused to roll them over at the then current ridiculously low interest rates and instead opened a link brokerage account to buy stocks like Royal Dutch Shell. I am not a long term holder of any stock bought in that account. Instead, I am just trying to earn some money until rates normalize by purchasing dividend paying stocks at reasonable multiples;
Key Statistics at YF as of 6/21/13
Trailing P/E= 7.76
Forward E.P.S. 2014: $8.22 from Reuters.com
P/S=.44
P/B=1.13
YF does not have earnings estimates for Royal Dutch so I pulled that data from Reuters. The analyst are not forecasting any earnings growth from 2013 to 2014. I would not put much weight into future forecasts for large integrated oil companies giving the volatile prices for their products and their many moving parts.
Profile at Reuters
Key Developments Page at Reuters
This is a link to a Seeking Alpha published in June which contains some recent data points. I would agree that Shell's natural gas exposure has contributed to mediocre results lately, but I do expect a super cycle in natural gas demand to occur.
It is only a question of when the demand will cause a sustainable increase in price, soaking up the excess supply, independent of weather issues. Sorry, do not know when that will happen, but the demand will be increasing significantly in the coming years, with substantial increases in demand coming from electric utilities increasingly using natural gas as a fuel for baseload generation (running 24/7), rather than the long standing temporary use of gas turbines to meet peak demand.
Long Term Chart: Henry Hub Gulf Coast Natural Gas Spot Price (Dollars/Mil. BTUs)
See Discussion at Item # 4 Bought 50 FCG at $15.84 and to a far lesser extent at Item # 4 Bought 50 MLPG at $31.26-ROTH IRA
The one year chart shows a lot of chop between $64 to $72. RDS-A Interactive Chart
Currency Risk: RDS-A is an ADR. Its value will be determined by the ordinary share's price in Euros converted back into USDs. One ADR equals two ordinary shares. The ordinary shares closed in Amsterdam at €24.24 -0.14 (-0.57%).
Based on last Friday's currency conversion, the NYSE price for the ADR was $64.19 worth about €48.93 (or €24.24 x 2=€48.48=$63.6). Sometimes, the pricing is off due to Europe's earlier close. The USD gained value later in the day on Friday and the S & P 500 and the DJIA rallied some in the last two hours of trading while the Amsterdam market decline into its close. AEX.AS
USD/EUR Currency Conversion Chart
To do a more precise calculation, it would be necessary to compare the prices when both stock markets are open and then take the currency conversion rate then in effect:
5:00 Amsterdam= €24.24 x. 2=€48.48
11:00 NY=$63.67
Exchange Rate: About .7568
.7568 x. $63.67= $48.19
The movement in the ordinary shares and the exchange rate will cause temporary differences in pricing between the two markets. I would have to be plugged into the exchange with a computer programmed to take advantage of temporary price dislocations to pick up the ADR at a €.29 per share discount to the ordinary share price.
Friday's Close: RDS-A: $64.19 -0.10 (-0.16%)
2. Added 50 FFBC at $14.65 (REGIONAL BANK BASKET STRATEGY) (see Disclaimer): I noted in my previous post dealing with the Google Search box that several regional bank stocks were rising last Thursday when the major market averages were diving deep into the red. My basket ended up close to break-even for that day.
Last Friday, when the S & P 500 rose .27%, my regional bank basket rose $647.08 or 1.35%. That sector was one of my few bright spots from last week.
I decided to show that move by taking a snapshot normally reserved for my monthly update of this basket:
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| Regional Bank Basket as of 6/21/13 (includes 50 share purchase not yet discussed) |
While determining cause and effect is always uncertain and subject to reasonable disagreements and to error, I suspect that the market views the rise in rates to be a positive for my regional banks.
The rates paid to depositors will remained anchored near zero for savings accounts and short term CDs, while the bank can charge more on its new mortgage loans, a large part of their business, and other types of consumer loans. That trend will increase their net interest margins. The main negative is that securities available for sale have decreased in price, lowering or even eliminating that potential profit segment, but that problem from rising rates is generally more troublesome and problematic for the large banks than most of the smaller regional banks. (see discussion of that the rise in rates impacts the 25 largest banks at Bloomberg)
I addition to adding 50 shares to my FFBC position, I added a 50 share lot to another one that I will briefly discuss when I update the regional bank basket table.
Snapshot of Trade:
Security Description:
As previously noted, FFBC is paying both an ordinary and special dividend at the current time, but may discontinue the special dividend after this year based on its prior guidance. The special dividend is the difference between the regular dividend amount and the earnings per share, resulting in a 100% dividend payout ratio.
The last quarterly dividend payment consisted of the regular 15 cent per share dividend and a special dividend of 9 cents which was paid on 7/1/13.
First Financial Bancorp Profile Page at Reuters
First Financial Bancorp Key Development's Page at Reuters
Prior Trades: I am slightly under water with this one. My next trade would most likely be the sell of 50 shares over $16. I am reinvesting the dividend.
I have sold my highest cost shares at a small profit. Bought 50 FFBC @ 16.85-Sold 50 FFBC at $17.51.
Prior to this last 50 share add, I bought the following in open market purchases: Added 50 FFBC at $15.95; ADDED 50 FFBC at $14.87
My last add was discussed in my December 2012 update for the regional bank basket: Added 30 FFBC at $14.24
My dividend reinvestments are all over the place.
The general idea with this kind of trading is to simply wait for a recovery in the share price to over $17 and then unload my two highest cost share lots ($15.95 & $14.87 along with all intervening shares purchased with dividends)
Recent Earnings Release: 1Q13 Earnings release
The earnings numbers for the last quarter were unsatisfactory. The bank did incur $2.9M in unusual pre-tax expenses relating to its "efficiency initiative", offset in part by $1.5M in realized gains from selling securities. The net negative impact was $.02 per share. As one would suspect, an efficiency initiative includes a reduction in employees.
All of the following numbers are in need of improvement but I will withhold criticism until I see results in the 2014 first quarter which should reflect the "efficiency initiative", an improved net interest margin and hopefully no further unusual expenses that impact negatively the metrics that are important in my evaluation.
2013 1st Quarter vs. 2012 1st Quarter
Net Income: $13.824M/16.994M
E.P.S.: $.24/ $.29
Net Interest Margin: 4.04%/4.51%
NPL Ratio: 2.38%/2.79% (at least moving in the right direction)
Coverage Ratio: 62.57% (prefer over 100% before purchasing)
Net Charge Offs to Average Loans: .32%/.87% (moving in the right direction)
Return on Average Assets: .88% (much prefer over 1%)/1.05%
Return on Average Tangible Equity: 9.24%/11.37% (9.96% adjusted for items)
Capital Ratios are good:
The bank repurchased 249,000 shares in the first quarter at an average cost of $15.39, down from the 460,500 shares bought in the 2012 4th quarter at an average cost per share of $14.78.
Q1-10Q-2013.3.31
Friday's Close: FFBC: $14.70 +0.18 (+1.24%)
3. Sold 100 of the Balanced ETF INKM at $31.2 (see Disclaimer):
Snapshot of Trade:
Snapshot of Profit:
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| 2013 Sold 100 INKM +$99.05 |
BOUGHT 100 of the Balanced ETF INKM at $30.05
Security Description: The SPDR SSgA Income Allocation ETF Fund is a world balance ETF focused on income generation.
INKM Page at Morningstar
Sponsor's website: INKM - SPDR SSgA Income Allocation ETF
The fund sponsor shows the dividend yield at 3.98% as of 6/20/13.
Rationale: As readers are aware, I am negative on bonds. This ETF has a significant exposure to the long bond ETFs/
As of 6/20/13, this ETF had a 48.62% weighting in several bond ETFs and one "preferred stock" ETF.
Holdings: INKM
Future Buy: I will likely buy one this one back when I am more comfortable that the interest rate normalization is near an end. The bond part of the portfolio is generally high quality investment grade. I do not have a target price for re-entry, but would consider a buy when and if the dividend yield crosses 4.5%.
Friday's Closing Price: INKM: 29.82 +0.02 (+0.07%)
4. Sold 50 FVL at $15.53 (The $500 to $1,000 Flyers Basket Strategy) (see Disclaimer): The First Trust Value Line (R) 100 Fund Fund is an ETF that owns the 100 stocks that are given by Value Line its top rating for timeliness.
Sponsor's Website: FVL
Snapshot of Trade:
Snapshot of Profit:
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| 2013 Sold 50 FVL +$113.08 |
Bought 50 FVL at $12.95
Rationale: The main rational was just to take a profit in an immaterial position. As noted when I bought the shares, this is a momentum based ETF that has not performed well over the past several years. I may come back to it at a price lower than my last purchase.
Morningstar Page for FVL (rated 2 stars, up from 1 star when I made my 50 shares purchase)
Future Buys: Probably only a small 50 share lot below my last purchase price.
Friday's Closing Price: FVL: $14.89 -0.02 (-0.13%)
5. Bought 100 NMFC at $14.28 (see Disclaimer):
Snapshot of Trade:
Security Description: New Mountain Finance is a business development corporation that purportedly focuses on "defensive growth companies". Annual Report at page 1
New Mountain Finance is a holding company that owned, as of 3/31/13, a 73.5% interest in an operating company known as New Mountain Finance Holdings, L.L.C. (Operating Company) with the remaining interest in the Operating Company owned by AIV Holdings.
A known hazard for BDC owners is a primary share offering, where the BDC raises additional capital for its own use. The risk increases when a selling shareholder unloads shares at the same time as the primary. This happened to the unfortunate owners of New Mountain, including me, who awoke last Tuesday to this announcement: New Mountain Finance Corporation Announces Pricing of Primary Offering of 2,000,000 Shares of Common Stock and Secondary Offering of 4,000,000 Shares of Common Stock on Behalf of Selling Stockholder The shares were price at $14.55
It is AIV Holdings who sold the 4 million shares. Before that offering, AIV was reported to own 16.221+M shares of New Mountain or 40%. (Prospectus at page 143) That prospectus has the effect of registering the remaining shares own by AIV and certain individuals.
In the Prospectus, the company stated that it "believed" that the net asset value per share was $14.31 on 6/17/13, which "includes the dividend distribution which will be paid on June 28, 2013 (p. S-5). That dividend payment will be $.34 per share. The net asset value per share was $14.31 as of 3/3113. 10-Q at page 2 New Mountain expects adjusted net investment income for the current quarter to be between $.33 to $.35. The estimate is currently $.34. NMFC Analyst Estimates
Day of Announcement: NMFC: 14.30 -0.57 (-3.83%)
This BDC is discussed in this Seeking Alpha published in March.
Prior Trade: My initial purchase was made recently and discussed in Item # 4 Bought 50 NMFC at $15.03 in the Roth IRA
Rationale: As usual, I am hoping for a 10% annualized return after holding the security for over one year, with the dividend providing almost all of the total return. I see some appreciation potential at this last purchase price, more at the lower closing price last Friday, but the outer limit would probably be at best a to $15.3 to $15.5 within 12-24 months. NMFC Interactive Chart
Risks: If someone really wants to know about BDC risks, a good place to start would be the Annual Report for one. The risk section is an eye opener and I doubt that many individuals buying BDCs have ever read the firm's own descriptions of risks. Annual Report at pp. 24-57. It takes me a long time to read 33 single spaced pages.
Future Buys: Not Likely
Closing Price Last Friday: NMFC: $14.10 -0.01 (-0.07%)
6. Bought 50 FAM at $14.94-Roth IRA (see Disclaimer): It is hard to muster now the nerve to buy 50 shares of a leveraged bond CEF. Nonetheless, I found the courage yesterday, possibly not measurable in any objective sense, to bring my Roth IRA position in FAM up to 100 shares. With the plunge in emerging market currencies and bonds over the past few weeks, this bond CEF has highlighted its downside risks.
Snapshot of Trade:
Recent History Snapshot: I only took 1 snapshot so I did not capture my entire Roth IRA history for this security, which has been negligible anyway. After brining my position up to 100 shares, I did change the distribution option to reinvestment from payment in cash. This history shows the prior purchase of 50 shares at $16.79, back in November 2012, and a sell at $17.99 shortly before that purchase.
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| Recent History FAM Roth IRA |
Sold 150 of 200 FAM at $18.64 October 2012 (see snapshot)-Bought 50 FAM @ 17.37 and Bought 100 FAM @ 17.9 (November 2010).
Security Description: The First Trust/Aberdeen Global Opportunity Income Fund is a leveraged closed end international bond fund.
Dividend: This fund pays a monthly distribution of $.13, supported in part by a return of capital. CEFConnect (distributions tab). At that rate, the dividend yield would be about 10.43% at a total cost of $14.95 per share.
Credit Quality as of 4/30/13: The fund is weighted in investment grade securities.
Performance as of 5/51/13 and Top Ten Holdings as of 4/30/13:
Duration: Not Shown at the Website (an important omission)
Leverage: 25.32% as of 617/13
CEFConnect Page for FAM
Morningstar Page for FAM (currently rated 3 stars)
Sponsor's webpage: First Trust/Aberdeen Global Opportunity Income Fund (FAM)
2012 Dividends Per Share=$1.318+ (of which $.24 return of capital): Tax Letter
Day Before Purchase (Thursday 6/20/13)
Closing Net Asset Value Per Share: $15.97
Closing Market Price= $14.98
Discount -6.2%
Day of Purchase (Friday 6/21/13):
Closing Net Asset Value Per Share: $15.94
Closing Market Price=$14.96
Discount -6.15%
Average Discounts as of 6/21/13
1 Year= .94%
3 Years=-2.54%
5 Years= -6.52%
CEFConnect
Rate of Decline From 4/30/13/-6/21/13-Add Back $.26 Dividends
Net Asset Value $18.16 to $16.2 ($15.94 +.26)= -10.79%
Price: $17.86 to $15.22 ($14.96 +.26)= -14.78%
Rationale: It is all about the income. The downdraft in price since my last purchase enhanced the yield considerably. The credit quality is good. The discount to net asset value, which is not large for a bond CEF, has expanded beyond its 1 and 3 year averages and slightly below the 5 year average which included 2008 and 2009 when the discounts exceeded 15% routinely and had spiked over 25% at times.
If the CEF bond fund is competently managed, the wild swings in local currency pricing can be mitigated simply by holding the bond to maturity, assuming no default of course. So if a Brazilian government bond maturing in 2016 is owned by the fund, and its value has sunk well below par value due to the recent turmoil, the manager of bond CEF has the option of holding that bond to maturity to collect the original principal amount. Currency risk would remain in that scenario however.
The CEF manager does not have to sell a bond at an inopportune time in order to meet redemptions like managers of bond mutual funds and ETFs will need to do when faced with persistent net outflows.
The currency risk can at least partially be hedged and FAM appears to be doing some hedging.
With this last purchase, I missed the 14.78% decline in the share price since 4/30/13.
Risks: The expense ratio is too high.
A 10.79% decline in net asset value over a few weeks (see Rate of Decline above) is of course significant for a bond fund and does highlight the risks of bonds and the additional risks associated with foreign bond funds.
There is certainly more downside risk, given that U.S. interest rates are rising and are likely to continue doing so over the next two years due to interest rate normalization. The upward move will be capped by the low inflation expectations currently predicted in the TIPs.
Currency risks are always important in foreign bond funds. Those risks have been highlighted just over the past two months. The Australian Dollar has significantly declined in price against the USD since mid-April, as has the Brazilian Reel and Mexican Peso.
USD/AUD Currency Conversion (Australian Dollar)
USD/BRL Currency Conversion (Brazilian Reel)
USD/MXN Currency Conversion (Mexican Peso)
USD/MYR Currency Conversion Chart (Malaysian Ringgit)
USD/CAD Currency Conversion Chart (Canadian Dollar)
USD/INR Currency Conversion Chart (Indian Rupee)
USD/IDR Currency Conversion Chart (Indonesian Rupiah)
USD/SGD Currency Conversion Chart (Singapore Dollar)
USD/ZAR Currency Conversion Chart (South African Rand)
USD/ARS Currency Conversion Chart (Argentina Peso)
USD/CLP Currency Conversion Chart (Chilean Peso)
The USD has gained a lot of value against these currencies over the past few weeks. The rise in US interest rates will likely place more pressure on those currencies, making foreign bond funds unusually risky over the next several months.
This fund has some exposure to countries such as Argentina where country risk is a matter of concern. There are also the usual interest rate and credit risks associated with bonds, but the credit risks is more subdued given the investment grade bond weightings including the significant exposure to bonds rated "A" or higher.
Closing Price Last Friday: FAM: $14.96 -0.02 (-0.13%)
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I will discuss a couple more transactions from last week in the next post. This one is plenty long as it is, particularly with the very long introduction segment.
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