Stocks:
Stable Vix Pattern (a bullish pattern)
Short Term: Praying 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
*************
I have a question for my readers that confounds large segments of the SeekingAlpa readership. Is an investor better off selling GE at $57 in 2000 (close to a 50 P/E and valued at the 2000 price at 31.32 times the consensus 2014 E.P.S of $1.82), and then buy the shares back at $25 in 2002 with the proceeds from that prior sale or is it better to keep the shares because GE is a good company and pays a dividend? I wish that I could put more emphasis on the 31.32 times the 2014 estimated E.P.S. using the 2000 high price!!!
Many disagreed with my argument that KO had to be sold at $42 in 1998 when the P/E was well over 40 (close to 50) and then buying the shares back at $20 in 2002. If I owned 200 shares and sold at $42, I could then use that $9,000 to buy 450 shares at $20. You would think that was a no brainer. But you would be wrong. I was trying use those comments to highlight the interplay of situational risks and/or inflation on investment decisions made during prolonged bear markets or at the blow-off phase of a long term secular bull market. I will take this subject up again in next week's blog since it is an important one.
Of course, I do not even view the choice between those two alternatives as debatable. Who wants to take the side of holding the obviously ridiculously over priced stock in order to receive the dividend, anyone?
But what is the underlying theme in this choice between two alternatives? It is simply about increasing your pile in an intelligent manner. Most people are not rich and have to be concerned about doing whatever they can to make a more limited pile grow to the point of meeting their goals particularly their retirement planning goals.
Every dollar for most investors (at least 90% in my opinion) becomes a precious and limited asset, and needs to be used in an intelligent fashion to achieve as optimum a result as possible. An optimum result would not be achieved by holding GE at anywhere near $57 in 2000, let along buying shares during that period. Instead, without question, a sensible individual would use that parabolic and insane price rise to sell, not to buy, and then use the proceeds when rationality returned to buy that stock or some other after the inevitable 50+% decline back to something close to sanity. Someone who bought GE in 1999 and then sold the shares in 2002 at $25 has just gone in the wrong direction in growing a limited pile into a larger one.
I would emphasize another point for those who insist on holding stocks that are without question insanely overvalued. The share price correction will happen soon as shown by the 49.1% S & P 500 decline in 2000-2002 or the really fast 44.1% decline in 1974. The most brutal, of course, was the -86.2% drop after the 1929 crash.
See Doug Short Charts of the 4 Bears:
The Four Totally Bad Bears
Frequently, and this is unfortunate, what I view as a really simply point still flies way over the head of someone. I was discussing how inflation and situational risks can combine to result in a bad outcome for an investor in a good stock. An example would be an investor who bought KO stock in 1966 and then had to sell in 1982. The nominal stock price declined over an 18 year period identified in my comment, but that was just one point that I was clearly making, the inability of most investors to make it to the promised land after eighteen years of a stock going nowhere. The other point, clearly made, was that inflation would tremendously erode the value of the proceeds received from the inopportune sell of KO stock. It would take $3.11 in 1982 to buy $1 worth of goods and services in 1964. Inflation Calculator: Bureau of Labor Statistics
Seeking Alpha
There are readers who understand my points, so I am not talking about everybody. Some of those writing comments appear to me to be investors eager to learn and capable of handing their own money. There are unfortunately many others who need a conservator appointed for them.
*************
Risks in Bond Funds:
There are obvious risks to bonds now that go beyond the usual credit and interest rate issues. The interest rate risk issue was highlighted with emphasis when the ten year treasury rose from a 1.66% to a 2.17% yield between 5/2/13 to 6/7/13. The decline in price was sufficient to offset several years of interest payments at the abnormally low yield of 1.66%, projected by the market to produce at significant negative real rate of return based on the inflation forecast embodied in the 10 year TIP price on 5/2.
I have highlighted throughout this blog another important risk. The investment chosen by the investor will simply not produce the income needed to fund retirement making it likely even probable that the individual will outlive their retirement savings. What exactly would a 1.66% ten year treasury generate in income before inflation and taxes? On a hefty one million dollars, the income would be about $16,000. About 90+% of retirees do not have that million and $16,000 does not go very far nowadays. In some jurisdictions, it might be enough to pay property taxes on a middle class home with enough left off to fill up a car a few times. Forget about the premiums for medicare and health insurance, home insurance, car insurance, necessary repairs to the home, food, gas, etc.
An article in the NYT discussed the risk to retirees and those nearing retirement caused by the abnormally low interest rates now, aptly titled "Why Many Retirees Could Outlive a $1 Million Nest Egg" - NYTimes.com It is a horrendous situation caused by the Federal Reserves Jihad Against the Saving Class that has first substantially reduced their incomes to practically nothing for risk free savings but has now placed those folks in the precarious position of having to sell bonds to pay expenses as those bonds lose value due to nothing other than interest rate normalization. Stocks, Bonds & Politics: The Difficult Path to Interest Rate Normalization A return to normal rates, based on the market's forecast for inflation rather than rates based on FED intervention and manipulation, will cause devastation to those who own bond funds and have to sell shares to pay expenses, at least until the rate normalization period comes to an end. Getting from point A to B will be a difficult path for those now owning those funds.
Frequently, I hear arguments from bond fund sponsors that investors need not fret about interest rates going up. The bond managers can hold the bonds to maturity and then invest the proceeds into higher yielding instruments.
There are several major flaws in that argument. First, current bond fund net asset values include a very large number of bonds selling at premiums. Today, those bonds could be sold for a profit and many are being sold. Those profits are already started to diminish and those lower valuations are reflected in net asset value. Now, if the bond manager sells or waits to sell, the proceeds will be lower and the net asset value would be permanently negatively impacted and continue to be negatively impacted as the premium price melts to par at maturity. That is not even the major problem.
The major problem, applicable to bond mutual funds and bond ETFs, flows from the risks associated with investor redemptions. When prices start to decline in a non-temporary fashion, the funds will transition from net inflows to net outflows, causing the fund managers to sell something that locks in a lower price while the funds fly out the door and consequently can not be reinvested in a higher yielding bond. That process perpetually locks in lower net asset values per share due to selling bonds at ever lower prices, possibly at a loss rather than at a diminishing gain. At some point, the herd will change direction and start to pull money out of those funds.
Closed end funds do not have that type of redemption risk. With incompetent managers, the decline in bond prices may be met nonetheless with a lot of inopportune selling that has the same negative impact on net asset value per share as selling by mutual funds to meet redemptions when prices are declining.
The more substantial risk for bond CEFs, assuming competent management, is that the discount to net asset value will increase substantially during periods of market turmoil, at a far greater rate than the percentage decline in net asset value per share. That phenomenon may cause individuals, who are the primary owners of those funds, to see at the worst possible times, either due to panic or to margin calls. Eventually, the expansion of the discount at a faster rate then the decline in net asset value will stop as more sophisticated investors see an opportunity to acquire a $1 worth of bonds for $.85 or $.8 or even in one of my buys in October 2009 at $.58 on the dollar. As the discount increases, the yield increases too.
There are in my opinion a large number of richly compensated and incompetent bond and stock fund managers. I consequently would prefer low cost ETF investing but will invest in CEFs based on their discounts to net asset value presenting opportunities for trades or longer term investments.
***********
Jim Rogers on Bonds:
Rogers is in the camp that bonds are in a bubble and will start to rise in yield no matter how many bonds the FED buys. MarketWatch I seriously doubt that will be the case until the government starts to report a series of higher and higher CPI numbers. There will be a lot of drama in bond land, causing movements up and down, as the market undergoes the long process toward rate normalization.
Rogers was responding to an article written by Jon Hilsenrath, the WSJ reporter who covers the FED, that Bernanke wants to soothe market fears next week. I thought that this article once again made the clear distinction between QE and ZIRP. The FED will taper and then end QE long before raising the federal funds rate, which is what I have been saying for a long time now.
*************
IRS and 2013 Refunds
Normally I do not fool with asking for tax refunds and just apply whatever is overpaid to the next year's tax obligation. I do not want to confuse the I.R.S. by asking for part of the overpayment to be applied to the next year's tax obligation with the remainder refunded to me. However, this process can reach the point where I have already covered 100%+ of the payments due for the subsequent year with the accumulated overpayments and then I will ask for a refund of just a bit of that excess over 100%.
I filed my return before April 15, 2013 this year and requested a refund. Unlike a large number of citizens, I do not need that refund to meet expenses such as a car payment. I have just read horror stories about people losing their cars to repossession because the IRS has simply failed to timely send a refund back to the taxpayer in anything remotely close to a timely manner.
There is a IRS site called "Where is My Refund". Where's My Refund - It's Quick, Easy and Secure. Yes it was quick and easy. I just entered by SSN, my filing status and the amount of the refund. The site was short on an answer however. This is the reply given to me:
Well, thanks for that information. I already knew that the IRS had my tax return. I wanted to know where the f*** was my refund?
I know that I did not make any math mistakes that might cause a delay since I use TurboTax and allow their software program to perform the computations. The only other legitimate reason for a 2 month delay would be a failure to sign the d*** thing, which it is not inconceivable for the Old Geezer but the LB prepares that return and will readily tell anyone that it has never made a mistake.
Intermediate and Long Term: Bullish
Bonds:
Short Term: Slightly Bearish
Intermediate Term: Slightly Bearish (Bearish for Treasuries)
Long Term Extremely Bearish
*************
I have a question for my readers that confounds large segments of the SeekingAlpa readership. Is an investor better off selling GE at $57 in 2000 (close to a 50 P/E and valued at the 2000 price at 31.32 times the consensus 2014 E.P.S of $1.82), and then buy the shares back at $25 in 2002 with the proceeds from that prior sale or is it better to keep the shares because GE is a good company and pays a dividend? I wish that I could put more emphasis on the 31.32 times the 2014 estimated E.P.S. using the 2000 high price!!!
Many disagreed with my argument that KO had to be sold at $42 in 1998 when the P/E was well over 40 (close to 50) and then buying the shares back at $20 in 2002. If I owned 200 shares and sold at $42, I could then use that $9,000 to buy 450 shares at $20. You would think that was a no brainer. But you would be wrong. I was trying use those comments to highlight the interplay of situational risks and/or inflation on investment decisions made during prolonged bear markets or at the blow-off phase of a long term secular bull market. I will take this subject up again in next week's blog since it is an important one.
Of course, I do not even view the choice between those two alternatives as debatable. Who wants to take the side of holding the obviously ridiculously over priced stock in order to receive the dividend, anyone?
But what is the underlying theme in this choice between two alternatives? It is simply about increasing your pile in an intelligent manner. Most people are not rich and have to be concerned about doing whatever they can to make a more limited pile grow to the point of meeting their goals particularly their retirement planning goals.
Every dollar for most investors (at least 90% in my opinion) becomes a precious and limited asset, and needs to be used in an intelligent fashion to achieve as optimum a result as possible. An optimum result would not be achieved by holding GE at anywhere near $57 in 2000, let along buying shares during that period. Instead, without question, a sensible individual would use that parabolic and insane price rise to sell, not to buy, and then use the proceeds when rationality returned to buy that stock or some other after the inevitable 50+% decline back to something close to sanity. Someone who bought GE in 1999 and then sold the shares in 2002 at $25 has just gone in the wrong direction in growing a limited pile into a larger one.
I would emphasize another point for those who insist on holding stocks that are without question insanely overvalued. The share price correction will happen soon as shown by the 49.1% S & P 500 decline in 2000-2002 or the really fast 44.1% decline in 1974. The most brutal, of course, was the -86.2% drop after the 1929 crash.
See Doug Short Charts of the 4 Bears:
The Four Totally Bad Bears
Frequently, and this is unfortunate, what I view as a really simply point still flies way over the head of someone. I was discussing how inflation and situational risks can combine to result in a bad outcome for an investor in a good stock. An example would be an investor who bought KO stock in 1966 and then had to sell in 1982. The nominal stock price declined over an 18 year period identified in my comment, but that was just one point that I was clearly making, the inability of most investors to make it to the promised land after eighteen years of a stock going nowhere. The other point, clearly made, was that inflation would tremendously erode the value of the proceeds received from the inopportune sell of KO stock. It would take $3.11 in 1982 to buy $1 worth of goods and services in 1964. Inflation Calculator: Bureau of Labor Statistics
Seeking Alpha
There are readers who understand my points, so I am not talking about everybody. Some of those writing comments appear to me to be investors eager to learn and capable of handing their own money. There are unfortunately many others who need a conservator appointed for them.
*************
Risks in Bond Funds:
There are obvious risks to bonds now that go beyond the usual credit and interest rate issues. The interest rate risk issue was highlighted with emphasis when the ten year treasury rose from a 1.66% to a 2.17% yield between 5/2/13 to 6/7/13. The decline in price was sufficient to offset several years of interest payments at the abnormally low yield of 1.66%, projected by the market to produce at significant negative real rate of return based on the inflation forecast embodied in the 10 year TIP price on 5/2.
I have highlighted throughout this blog another important risk. The investment chosen by the investor will simply not produce the income needed to fund retirement making it likely even probable that the individual will outlive their retirement savings. What exactly would a 1.66% ten year treasury generate in income before inflation and taxes? On a hefty one million dollars, the income would be about $16,000. About 90+% of retirees do not have that million and $16,000 does not go very far nowadays. In some jurisdictions, it might be enough to pay property taxes on a middle class home with enough left off to fill up a car a few times. Forget about the premiums for medicare and health insurance, home insurance, car insurance, necessary repairs to the home, food, gas, etc.
An article in the NYT discussed the risk to retirees and those nearing retirement caused by the abnormally low interest rates now, aptly titled "Why Many Retirees Could Outlive a $1 Million Nest Egg" - NYTimes.com It is a horrendous situation caused by the Federal Reserves Jihad Against the Saving Class that has first substantially reduced their incomes to practically nothing for risk free savings but has now placed those folks in the precarious position of having to sell bonds to pay expenses as those bonds lose value due to nothing other than interest rate normalization. Stocks, Bonds & Politics: The Difficult Path to Interest Rate Normalization A return to normal rates, based on the market's forecast for inflation rather than rates based on FED intervention and manipulation, will cause devastation to those who own bond funds and have to sell shares to pay expenses, at least until the rate normalization period comes to an end. Getting from point A to B will be a difficult path for those now owning those funds.
Frequently, I hear arguments from bond fund sponsors that investors need not fret about interest rates going up. The bond managers can hold the bonds to maturity and then invest the proceeds into higher yielding instruments.
There are several major flaws in that argument. First, current bond fund net asset values include a very large number of bonds selling at premiums. Today, those bonds could be sold for a profit and many are being sold. Those profits are already started to diminish and those lower valuations are reflected in net asset value. Now, if the bond manager sells or waits to sell, the proceeds will be lower and the net asset value would be permanently negatively impacted and continue to be negatively impacted as the premium price melts to par at maturity. That is not even the major problem.
The major problem, applicable to bond mutual funds and bond ETFs, flows from the risks associated with investor redemptions. When prices start to decline in a non-temporary fashion, the funds will transition from net inflows to net outflows, causing the fund managers to sell something that locks in a lower price while the funds fly out the door and consequently can not be reinvested in a higher yielding bond. That process perpetually locks in lower net asset values per share due to selling bonds at ever lower prices, possibly at a loss rather than at a diminishing gain. At some point, the herd will change direction and start to pull money out of those funds.
Closed end funds do not have that type of redemption risk. With incompetent managers, the decline in bond prices may be met nonetheless with a lot of inopportune selling that has the same negative impact on net asset value per share as selling by mutual funds to meet redemptions when prices are declining.
The more substantial risk for bond CEFs, assuming competent management, is that the discount to net asset value will increase substantially during periods of market turmoil, at a far greater rate than the percentage decline in net asset value per share. That phenomenon may cause individuals, who are the primary owners of those funds, to see at the worst possible times, either due to panic or to margin calls. Eventually, the expansion of the discount at a faster rate then the decline in net asset value will stop as more sophisticated investors see an opportunity to acquire a $1 worth of bonds for $.85 or $.8 or even in one of my buys in October 2009 at $.58 on the dollar. As the discount increases, the yield increases too.
There are in my opinion a large number of richly compensated and incompetent bond and stock fund managers. I consequently would prefer low cost ETF investing but will invest in CEFs based on their discounts to net asset value presenting opportunities for trades or longer term investments.
***********
Jim Rogers on Bonds:
Rogers is in the camp that bonds are in a bubble and will start to rise in yield no matter how many bonds the FED buys. MarketWatch I seriously doubt that will be the case until the government starts to report a series of higher and higher CPI numbers. There will be a lot of drama in bond land, causing movements up and down, as the market undergoes the long process toward rate normalization.
Rogers was responding to an article written by Jon Hilsenrath, the WSJ reporter who covers the FED, that Bernanke wants to soothe market fears next week. I thought that this article once again made the clear distinction between QE and ZIRP. The FED will taper and then end QE long before raising the federal funds rate, which is what I have been saying for a long time now.
*************
IRS and 2013 Refunds
Normally I do not fool with asking for tax refunds and just apply whatever is overpaid to the next year's tax obligation. I do not want to confuse the I.R.S. by asking for part of the overpayment to be applied to the next year's tax obligation with the remainder refunded to me. However, this process can reach the point where I have already covered 100%+ of the payments due for the subsequent year with the accumulated overpayments and then I will ask for a refund of just a bit of that excess over 100%.
I filed my return before April 15, 2013 this year and requested a refund. Unlike a large number of citizens, I do not need that refund to meet expenses such as a car payment. I have just read horror stories about people losing their cars to repossession because the IRS has simply failed to timely send a refund back to the taxpayer in anything remotely close to a timely manner.
There is a IRS site called "Where is My Refund". Where's My Refund - It's Quick, Easy and Secure. Yes it was quick and easy. I just entered by SSN, my filing status and the amount of the refund. The site was short on an answer however. This is the reply given to me:
Well, thanks for that information. I already knew that the IRS had my tax return. I wanted to know where the f*** was my refund?
I know that I did not make any math mistakes that might cause a delay since I use TurboTax and allow their software program to perform the computations. The only other legitimate reason for a 2 month delay would be a failure to sign the d*** thing, which it is not inconceivable for the Old Geezer but the LB prepares that return and will readily tell anyone that it has never made a mistake.
1. Added 50 TICC in Taxable Account at $9.85-Average Down (see Disclaimer): This BDC went ex dividend for its quarterly dividend after my purchase. I am averaging down from an earlier purchase made in the taxable account. This is another stock that I have discussed recently so I will just be briefly discussing some more recent news. I did buy this one below net asset value per share, based on the March earnings report, after failing to follow that simple objective previously, which goes to show that the OG sometimes does practice what he preaches except when there is a brain malfunction, an unfortunate event occurring more frequently now, or a temporary dominance in trading decisions by the NIT WIT RB.
Snapshot of Trade:
Security Description: TICC Capital is a Business Development Corporation (BDC) that provides capital primarily to small and medium size private technology companies.
TICC Capital Profile Page at Reuters.
Key Developments Page at Reuters
Prior Trades: Bought 100 of the BDC TICC at $9.8-ROTH IRA, and brain malfunction event at Item # 5 Added 100 TICC at $10.30.
I now own 150 in a taxable account and 100 in the ROTH IRA which I may sell if there is a pop above $10.5 within the next twelve months.
After purchasing those shares, I suffered a typical adverse event, the issuance of common shares. As noted in the prospectus for this issuance of 3M shares, the price was $10.46 per share before the announcement. Prospectus Overall, TICC issued 3.45M shares in March 2013 at $10.2 and another 6.325M in February at $10.36 (Page 48 10-Q) At least those issuances were above NAV.
Last Earnings Report: For the March 2013 quarter, TICC reported core NII of $.24 and there were two loans on non-accural status. The ratio of net investment income to average net assets was reported at 9.4%, down from 10.32% as of 3/31/12. SEC Filed News Release
Net Asset Value Per Share as of 3/31/13: $10.02, up from $9.9 on 12/31/12
A list of investments can be found starting at page 9 of the last filed 10-Q. Most individual investors, including me, are in no position to evaluate those private companies and all of us are relying on the expertise of TICC's highly compensated managers to make sound investment choices.
TICC Capital Profile Page at Reuters.
Key Developments Page at Reuters
Prior Trades: Bought 100 of the BDC TICC at $9.8-ROTH IRA, and brain malfunction event at Item # 5 Added 100 TICC at $10.30.
I now own 150 in a taxable account and 100 in the ROTH IRA which I may sell if there is a pop above $10.5 within the next twelve months.
After purchasing those shares, I suffered a typical adverse event, the issuance of common shares. As noted in the prospectus for this issuance of 3M shares, the price was $10.46 per share before the announcement. Prospectus Overall, TICC issued 3.45M shares in March 2013 at $10.2 and another 6.325M in February at $10.36 (Page 48 10-Q) At least those issuances were above NAV.
Last Earnings Report: For the March 2013 quarter, TICC reported core NII of $.24 and there were two loans on non-accural status. The ratio of net investment income to average net assets was reported at 9.4%, down from 10.32% as of 3/31/12. SEC Filed News Release
Net Asset Value Per Share as of 3/31/13: $10.02, up from $9.9 on 12/31/12
A list of investments can be found starting at page 9 of the last filed 10-Q. Most individual investors, including me, are in no position to evaluate those private companies and all of us are relying on the expertise of TICC's highly compensated managers to make sound investment choices.
Rationale: (1) It is all about the income with limited capital appreciation potential My goal each year in a taxable account is to increase my aggregate value by 6%+ after inflation and adjusted for taxes. That is one hard bogey to hit consistently and is made easy only in long term bull markets for major asset classes. The really tough part comes during long term secular bear markets for one or worse both major asset classes (1966 to 1982) When I start out with a dividend yield close to, or in excess of 10%, that individual selection has done its part in achieving that result with minimum appreciation in the share price
TICC is currently paying a $.29 per share quarterly dividend. TICC Capital Corp. | Investor Relations At that rate, the yield is approximately 11.78%. Please note that this BDC cut its dividend repeatedly after the 2008 first quarter. The 2008 first quarter payment was $.36 per share, seven cents more than now, and was cut thereafter to $.3, and then to $.2 before bottoming at $.15 in the March 2009 quarter. The dividend was then raised to $.2 in the 2010 second quarter and several subsequent raises took the quarterly dividend to its current level of $.29. That history is a significant negative.
Risks: The risks of BDCs are discussed throughout this blog. The company goes into great detail about risks in its Annual Report at PAGES 23-43, SINGLE SPACED PAGES: 2012 Annual Report
Whenever I read that kind of statement, it reminds me of those television commercials about a drug when the announcer goes into a long list of potential adverse side effects. Sometimes, I ask that announcer "are you saying that this drug is worst than whatever problem it is allegedly designed to help".
Closing Price Last Friday: TICC: 9.56 +0.08 (+0.84%)
2. Added 50 PSEC at $10.15 (see Disclaimer): I have discussed Prospect Capital throughout this blog and do want want to rehash my analysis of the risks and advantages. My most recent discussion is in a post where I bought 100 shares in the ROTH IRA: Item # 3 Pared Trade: Sold 50 PRY @ $25.51 & Bought 100 PSEC @ $10.2-Roth IRA Instead, I will just briefly discuss a few news items since that purchase.
Snapshot of Trade:
Prospect Capital Profile Page at Reuters
Prospect Capital Key Developments Page at Reuters
Prospect Capital Corporation-Company Website
I will generally try to buy a BDC stock on a downdraft caused primarily by non-fundamental reasons. A typical cause for such a downdraft is a large share issuance, frequently below net asset value, that causes a significant decline in the share price. The last published NAV was $10.71 as of 3/31/13, down from $10.83 on 6/30/13.
My last purchase in the ROTH IRA, linked above, was just after once such occurrence. PSEC is in my opinion a serial issuer of shares and a number of those issuances have been below net asset value. I just have a negative view of that approach and would note that the manager's are compensated in part on the size of the portfolio.
Another non-fundamental reason for a sharp decline is a temporary market correction or some other kind of turmoil and volatility in the market. In both cases, most or all BDC stocks will react more negatively than the S & P 500. I noted recently in a SA comment that PSEC declined almost twice as much as the S & P 500 in the May to August 2011 stock market correction, with a notable plunge of almost 35%. The closing price was $12.11 on 4/29/11 and $7.71 on 8/10/11. PSEC Historical Prices So, if you are going to play in this volatile space, an investor has to get use to these swings and understand the many risks associated with that high dividend. The PSEC dividend yield was calculated by Marketwatch at 12.7% using the closing price on 6/14/12: PSEC Stock Quote Needless to say, that kind of yield does not come without a bevy of risks. And those risks have to be understood before buying your first share.
I always look down before I look up and gaze wishfully at the blue sky and the snow covered mountaintops. I might just step into a hole, break my leg, and in up in a hospital room staring at beige walls and cheap furniture.
Prospect Capital raised last week it NII guidance for the June quarter to $.31 to $.35 per share. Prospect Capital Announces $112 Million First-Lien Senior Secured Investment and Increases Current Quarter Net Investment Income Estimate to 31 to 35 Cents per Share, Providing a Current Stock Price Net Investment Income Yield of 12.2% to 13.8% On the day of that news release the stock did rise on a down day for the market on above average volume indicating that institutional investors, on balance, viewed the information as favorable.
The previous guidance given in the earnings call for the March quarter was $.26 to $.31: (Comment by John Barry: Earnings Call Transcript - Seeking Alpha)
Another positive new development is embodied in this press release: Prospect Capital Reports Sale of Wolf Energy Assets and Receipt of Net Profits Interest Cash Distribution for a Combined Gross $66 Million, Boosting Prospect's Net Asset Value by Over $0.06 per Share and Reducing Prospect's Non-Accrual Rate to 0.2%
Prospect Capital pays monthly dividends and has been raising that dividend slightly every monthProspect Capital Declares Its 58th, 59th, 60th, and 61st Consecutive Cash Distributions to Shareholders As I pointed out, the dividend was reduced when PSEC went from paying quarterly dividends to monthly distributions. Just as an aside, one SA reader questioned my statement on that matter using four monthly interest payments to compare with one quarterly payment. Brilliant, another one of the geniuses caught one of my idiotic and stupid mistakes. I simply had no choice but too inform that reader as kindly as possible that quarter contains three months, not four.
Writing comments for me at SA is actually a good exercise since it gives me a great deal of information about the competence of individual investors who are making decisions in securities that I own.
A negative take on the last March earnings report can be found in this Seeking Alpha article.
Closing Price Last Friday: PSEC: $10.41 +0.12 (+1.17%)
3. Bought 100 of the Municipal Bond CEF BKK at $15.93-Sold 100 BKK at $16.92 (see Disclaimer): My target price for BKK was hit in just a few days. This is probably first time that I have discussed the purchase and the sell of a security in the same post. I knew last Friday that this CEF had to selling at a premium to net asset value per share which will likely cause me to sell the CEF.
For long time readers, it is known that I am negative about bonds and have adopted an active trading strategy for bond CEFs. I will try to buy them at greater than historical average discounts over the past 1 and 3 years and then sell them when that discount narrows to below that average at a time when the net asset value had increased and certainly when the market price had risen to a premium over the net asset value. All of the BKK share price increase was due to the market price moving from a 4% discount to NAV to a 2.2% premium. This CEF also went ex dividend for its monthly distribution during my brief period of ownership.
Snapshot of Purchase:
Snapshot of Sell:
Snapshot of Profit:
I would have preferred to receive about a year of dividends before this CEF went to a premium valuation. I will now buy another one.
Security Description: The Blackrock Municipal 2020 Term Trust (BKK) is a leveraged closed end fund that owns tax free municipal bonds and is scheduled to liquidate on or about 12/31/2020. The fund owns a number of municipal bonds that mature in 2019-2021, but it also has some longer and shorter maturities.
The sponsor claims that the levered fund duration is 6.56 years (information under "portfolio" tab)
Sponsor's Website: BKK : Fund Profile
Credit Quality as of 3/31/13:
Last Filed Form N-Q Holdings as of 1/31/13: sec.gov As of that date, the fund's investments had a value $501+M purchased at a cost of $471+M or a net unrealized appreciation of $30+M. As of 10/31/12, the fund had a small loss carryforward of $1.864+M.
The leverage is currently being provided by very low cost auction rate preferred shares. Interest rate costs ranged from a low of .23% to a high of .38% during the last fiscal year, see Annual Report at page 60 (bad for the owners of those securities who got stuck after auctions failed starting in February 2008, but good for the owners of BKK)
Last SEC Filed Shareholder Report (period ending 10/31/12): SEC Filing
Data as of Friday May 31, 2013:
Closing Net Asset Value Per Share= $16.59
Closing Market Price= $16.13
Discount= -2.77%
Data as of Tuesday June 4, 2013
Closing Net Asset Value Per Share: $16.57
Closing Market Price: $16.03
Discount= -3.26
Data as of the Day of Purchase: Wednesday June 5, 2013
Closing Net Asset Value Per Share: $16.58
Closing Market Price: BKK: $15.90 -0.13 (-0.81%)
Discount: -4.1%
Data on Date of Sale Friday June 14, 2013
Closing Net Asset Value Per Share: $16.39
Closing Market Price: $16.75
Premium: +2.20%
On the day of my purchase, net asset value per share rose $.01 with the shares declining 13 cents.
BKK Page at CEFConnect
The pricing history shows an erratic pattern of trading both below and above net asset value per share over the past five years. Most of the time over that period, this CEF is trading at a premium to net asset value. The only substantial discount occurred during the Dark Period in 2008 which was typical for all leveraged bond CEFs. CEFConnect (pricing history tab-select 5 year time frame) The average over five years through 6/4/13 was a price 1.31% above net asset value per share.
The portfolio is weighted in investment grade municipal bonds, but there is a significant weighting in "BBB" rated bonds.
The fund pays monthly dividends at the current rate of $.0623 per share. At that rate, the yield would be about 4.69%. The tax equivalent yield, based on a marginal tax rate of 35%, would be approximately 7.17%.
Prior Trade: Bought 200 BKK @ 14.71 November 2010- Sold 200 BKK @ 14.98 May 2011
Rationale for Purchase and Sell:
Like other bond CEFs, the BKK price suffered a swift declined in May. The BKK share price went quickly from $17.01 on 5/10 to my purchase price of $15.93 on 6/5, a 6.5% decline unadjusted for one monthly dividend of $.0623 per share or 5.98% on an adjusted basis. BKK Interactive Chart Adjusted net asset value declined .0094%, using the data at CEFConnect.
I reached my limited objective in less than 9 days. I will be looking for another trade in the municipal bond CEF space next week.
Risks: First, the recent carnage in the bond CEF space highlights one of their disadvantages. During times of turmoil, volatility, stress and/or downdrafts in asset values, the market price of CEFs can go down much faster than their net asset values. Second, the existence of leverage, even at a very low cost, will accelerate that decline simply due to the assets purchased with borrowed money adding to the decline that would otherwise exist for that fund without any leverage.
All bond funds face interest rate risks and risks associated with interest rate normalization which is currently a significant risk for them.
Closing Price Last Friday: BKK: $16.78 +0.45 (+2.76%)
4. Sold 50 GJT at $18.9 (See Disclaimer): The Synthetic Fixed-Income Securities Inc. STRATS Trust for Allstate Corp. Securities, Series 2006-3 (GJT) is a Synthetic Floater in the Trust Certificate legal form of ownership, one category of Exchange Traded Bonds, that pays monthly interest payments at a .8% float over the three month treasury bill on a $25 par value, up to a maximum of 8%. The underlying security owned by the trust is a fixed coupon senior Allstate bond maturing in 2036. www.sec.gov
Snapshot of Recent History:
I have now liquidated all of my synthetic floaters that pay a float of a short term rate and have no minimum coupon. This liquidation is based on my view that ZIRP will continue well into 2015 and that the FED will likely thereafter raise the federal funds rate at a snail's pace, unlike the June 2004-July 2006 rise from 1% to 5.25%. That forecast which may end up being wrong means that I can no longer justify these securities as holdings since it may be another three years before there is any increase in the current coupon rate which is for all practical purpose the spread rate since the short term treasury bill is about as close to zero as it can get.
Chart 1954 to Date: Effective Federal Funds Rate (FEDFUNDS) - FRED - St. Louis Fed
Data for Federal Funds Rate
Chart: 3-Month Treasury Constant Maturity Rate
Chart: 3-Month London Interbank Offered Rate (LIBOR)
Closing Price Last Friday: GJT: $19.00 +0.10 (+0.53%)
5. Bought 58 shares NPI at $13.4 and 42 at $13.17 (See Disclaimer): The first order was a partial fill on a 100 share limit order at $13.4 where I did not place a AON restriction. With that restriction, the market market is under no obligation to display the order to the market. Consequently, the order may not fill when there is a temporary downdraft below the limit order. To deal with the possibility of a partial fill I will set my limit price sufficiently below the then current bid price to compensate me for the brokerage commission.
Odd lot orders are not displayed to the market either. 17 CFR 242 : REGULATIONS In case you are interested, "CFR" stands for "Code of Federal Regulations", a multi-volume set much larger and somewhat less boring than the Internal Revenue Code. That may be the only CFR regulation that most investors need to read.
After noticing the partial fill, I checked the high and low price for the day. The high/low was $13.65/$13.42. Odd lots will not even show up when the orders sets a new intra-day low or is the only shares traded on a particular day which I have observed on a few occasions where I had an odd lot fill when no round lots were traded during the day.
The CEF then went ex dividend for its $.072 per share monthly dividend. Nuveen Closed-End Funds Declare Monthly Distributions After a further decline in price, I went ahead and rounded the lot up to 100 shares by buying 42 at $13.17.
The dividend rate was lowered in November 2012 from $.0765%.
CEFConnect shows the annualized performance numbers under the "performance" tab which assumes reinvestment of all dividends. As of 6/14/13, the 5 year annualized return is 7.48% at net asset value and slightly higher at market value.
Snapshot of Trades:
Description of Security: The Nuveen Premium Income Municipal Fund is a leveraged closed end municipal bond fund.
The fund is weighted in "A" or better rated bonds.
Sponsor's webpage: NPI - Nuveen Premium Income Municipal Fund
NPI Page at Morningstar (rated 3 stars)
NPI Page at CEFConnect
Data as of Monday 6/10/2013 (Day Before Purchase)
Closing Net Asset Value Per Share= $14.91
Closing Market Price= $13.65
Discount; - 8.45%
Data as of Tuesday 6/11/13 Date of 58 Share Purchase:
Closing Net Asset Value Per Share= $14.81
Closing Market Price= $13.52
Discount to NAV= -8.71
Ex Dividend Wednesday 6/12/13 for 7.2 cents per share
Data as of Thursday 6/13/13 Date of 42 Share Purchase
Closing Net Asset Value Per Share= $14.66
Closing Market Price: $13.4
Discount to NAVat Closing Price: -8.59%
Distribution Rate at Closing Price= 6.51%
Tax Equivalent Yield at Closing Price (Federal at 35%)= 10.01%
Discount to NAV at $13.17 Price: 10.16%
Average Discounts as of 6/13/13
1 Year=2.27%
3 Year=2.23%
5 Year=-3.84%
During 2008, there was a brief spike to over a 25% discount and longer trading the the 10% to 15% range. (Pricing History Tab at CEFConnect: 5 Year History).
The Nuveen site contains information under the distribution tab that shows the earnings to distribution ratio.
Prior Trades: None
Rationale: The municipal bond CEFs tanked over the past month, many rising to 10% discount to net asset value and providing close to 10% tax equivalent yields (35% marginal federal tax rate), far higher than most leveraged taxable bonds CEFs adjusted for taxes. An example would be the bond CEF BTZ, which I own, that tanked in price too but the yield before taxes at last Friday's close was 7.2%. BlackRock Credit Allocation Income Trust Stock Price Today (BTZ)
RISKS: See the risk section in BKK above.
Closing Price Last Friday: NPI: $13.65 +0.25 (+1.87%)
6. Bought 100 FAX at $6.35 (see Disclaimer):
Snapshot of Trade:
Security Description: The Aberdeen Asia-Pacific Income Fund is a leveraged closed end bond that focuses on bonds issued by companies and governments in the Asia Pacific region with more than a 40% exposure to Australian corporate and government bonds.
Sponsor's Website: Asia-Pacific Income Fund
Last Filed SEC Form N-Q Holdings as of 1/31/13: Aberdeen Asia-Pacific Income Fund, Inc. (Australian government bonds then at 36.9% weighting)
I took a snapshot of the credit quality as of 1/31/13 from that N-Q filing:
Last SEC Filed Shareholder Report: Aberdeen Asia Pacific Income Fund, Inc.
FAX Page at CEFConnect
Data Day of Purchase (6/12/13):
Closing Net Asset Value Per Share: $7.08
Closing Market Price= $6.28
Discount: -11.3%
Average Discounts/Premiums:
1 Year= +.7%
3 Year= -2.17%
5 Year= 4.57%
Unadjusted for any monthly dividend, the share price closed at $7.72 on 5/2/13 and at $6.28 on 6/12/13, a decline of 18.65%. The net asset value declined from $7.66 to $7.08 or 7.57%, obviously a significant amount but nonetheless far less than the decline in the market price. That kind of action, where the market price decline far exceeds the net asset value drop, is typical for CEFs during periods of declining asset prices, turmoil and/or stress. It can present an opportunity but there is a risk that the trend will continue unabated which will increase the investor's losses (i.e. the so called "falling knife')
The current monthly distribution rate is $.035 per share. CEFConnect At that rate, the yield would be about 6.6%. The relatively low yield compared to other alternatives is another reason for the small purchase. I am primarily playing a hoped for bounce in the AUD against the USD but I lack confidence in that happening anytime soon.
The average annualized performance for the past five years is +9.01% based on price and 8.17% on NAV. CEFConnect
Prior Trades: There have been some prior trades. I noted in October 2008 buying 200 shares when the discount was close to 42%: Some Nibbles Got Filled: JZE, PJS, INZ and FAX All of the buys that day were off the charts good. JZE, bought at $12.5 was later redeemed by the call warrant at $25; PJS bought at $7.2 was later sold at ; and the ING hybrid INZ was bought at $7.4.
I just took a snapshot of that October 2008 purchase and my total trading profit for that year, rather than digging it all out when I only just purchased 100 shares:
Just glad to have one in profit territory that year. Some of those shares were bought in 2007.
I decided to buy only 100 shares for now because I could not find the duration number anywhere, and found that disturbing.
Rationale: This fund is going to be impacted by the currency exchange involving primarily the Australian Dollar and some other foreign currencies. The AUD has lost significant value against the USD after trading over 1.05 USDs for 1 AUD in April, closing last Friday at around .95 USDs for 1 AUD. AUD/USD Currency Conversion Chart
Another security adversely impacted by this decline is the WisdomTree Australia & New Zealand Debt Fund Fun (AUNZ), which closed at $21.03 and recently hit a 52 week low at $20.41. I sold that security back in January noting at the time "that I am somewhat concerned about a potential correction in the Australian Dollar that could wipe out the meagre interest payments made by this fund". Sold 100 of the Bond ETF AUNZ at $22.89 That turned out to be a legitimate concern as the shares slide 8.13% from my sale's price to last Friday's closing price, wiping out well over 2 years worth of interest payments.
So at least some of the currency and interest rate risks have already happened before my purchase. I would not speculate on the AUD/USD currency exchange rate but would not be surprised to see AUD weakness continue for as long as commodity prices remain under pressure. I also believe hedge funds are attacking the currency. In my opinion, the Australian government is far more responsible than our own and its debt is rated at AAA. That nation does not have the same kind of long term fiscal problems as the U.S. originating from unfunded entitlement programs. So, long term, I have more confidence in the value of the AUD than the USD. Australian government debt to GDP is far lower than the U.S. Australia Government Debt To GDP; United States Government Debt To GDP.
The fund is weighted in "A" or better rated bonds.
Closing Price Last Friday: FAX: 6.66 +0.22 (+3.42%)
Risks: The decline in both the FAX and AUNZ net asset value had the same origin, the double whammy from both interest rate and currency risk coming into play at the same time. There is is also credit risks but the portfolio is heavily weighted in investment grade bonds as noted above.
7. Sold 100 LF at $10.01 ($500 to $1,000 Flyers Basket Strategy)(see Disclaimer):
Snapshot of Trade:
Snapshot of Profit:
Item # 2 Bought 100 LF at $7.86 (December 19, 2012 Post). I noticed when looking at that post that I have sold now everything purchased and discussed in it except for the exchange traded bond KWN which is still owned in the Roth for its income generation.
When I bought these shares, I had a target price of $10 within 12 months, but failed to sell the shares earlier when that target was reached and did not overlook what I was supposed to do again. I am not married for sure to any stock that produces no income. I am 98% an income investor, allowing myself to buy a few insignificant non-income producing securities in my Lottery Ticket Basket Strategy and in the Flyers Strategy.
Closing Price Last Friday: LF: 9.67 -0.18 (-1.83%)
*********
I bought some other bond CEFs last week which I am not going to discuss now simply because I am tired of writing this post. I will reference those purchases when I post my next update of the CEF Portfolio in about two or three months.
Last Update: Stocks, Bonds & Politics: Closed End Fund Portfolio as of 5/8/13
TICC is currently paying a $.29 per share quarterly dividend. TICC Capital Corp. | Investor Relations At that rate, the yield is approximately 11.78%. Please note that this BDC cut its dividend repeatedly after the 2008 first quarter. The 2008 first quarter payment was $.36 per share, seven cents more than now, and was cut thereafter to $.3, and then to $.2 before bottoming at $.15 in the March 2009 quarter. The dividend was then raised to $.2 in the 2010 second quarter and several subsequent raises took the quarterly dividend to its current level of $.29. That history is a significant negative.
Risks: The risks of BDCs are discussed throughout this blog. The company goes into great detail about risks in its Annual Report at PAGES 23-43, SINGLE SPACED PAGES: 2012 Annual Report
Whenever I read that kind of statement, it reminds me of those television commercials about a drug when the announcer goes into a long list of potential adverse side effects. Sometimes, I ask that announcer "are you saying that this drug is worst than whatever problem it is allegedly designed to help".
Closing Price Last Friday: TICC: 9.56 +0.08 (+0.84%)
2. Added 50 PSEC at $10.15 (see Disclaimer): I have discussed Prospect Capital throughout this blog and do want want to rehash my analysis of the risks and advantages. My most recent discussion is in a post where I bought 100 shares in the ROTH IRA: Item # 3 Pared Trade: Sold 50 PRY @ $25.51 & Bought 100 PSEC @ $10.2-Roth IRA Instead, I will just briefly discuss a few news items since that purchase.
Snapshot of Trade:
Prospect Capital Profile Page at Reuters
Prospect Capital Key Developments Page at Reuters
Prospect Capital Corporation-Company Website
I will generally try to buy a BDC stock on a downdraft caused primarily by non-fundamental reasons. A typical cause for such a downdraft is a large share issuance, frequently below net asset value, that causes a significant decline in the share price. The last published NAV was $10.71 as of 3/31/13, down from $10.83 on 6/30/13.
My last purchase in the ROTH IRA, linked above, was just after once such occurrence. PSEC is in my opinion a serial issuer of shares and a number of those issuances have been below net asset value. I just have a negative view of that approach and would note that the manager's are compensated in part on the size of the portfolio.
Another non-fundamental reason for a sharp decline is a temporary market correction or some other kind of turmoil and volatility in the market. In both cases, most or all BDC stocks will react more negatively than the S & P 500. I noted recently in a SA comment that PSEC declined almost twice as much as the S & P 500 in the May to August 2011 stock market correction, with a notable plunge of almost 35%. The closing price was $12.11 on 4/29/11 and $7.71 on 8/10/11. PSEC Historical Prices So, if you are going to play in this volatile space, an investor has to get use to these swings and understand the many risks associated with that high dividend. The PSEC dividend yield was calculated by Marketwatch at 12.7% using the closing price on 6/14/12: PSEC Stock Quote Needless to say, that kind of yield does not come without a bevy of risks. And those risks have to be understood before buying your first share.
I always look down before I look up and gaze wishfully at the blue sky and the snow covered mountaintops. I might just step into a hole, break my leg, and in up in a hospital room staring at beige walls and cheap furniture.
Prospect Capital raised last week it NII guidance for the June quarter to $.31 to $.35 per share. Prospect Capital Announces $112 Million First-Lien Senior Secured Investment and Increases Current Quarter Net Investment Income Estimate to 31 to 35 Cents per Share, Providing a Current Stock Price Net Investment Income Yield of 12.2% to 13.8% On the day of that news release the stock did rise on a down day for the market on above average volume indicating that institutional investors, on balance, viewed the information as favorable.
The previous guidance given in the earnings call for the March quarter was $.26 to $.31: (Comment by John Barry: Earnings Call Transcript - Seeking Alpha)
Another positive new development is embodied in this press release: Prospect Capital Reports Sale of Wolf Energy Assets and Receipt of Net Profits Interest Cash Distribution for a Combined Gross $66 Million, Boosting Prospect's Net Asset Value by Over $0.06 per Share and Reducing Prospect's Non-Accrual Rate to 0.2%
Prospect Capital pays monthly dividends and has been raising that dividend slightly every monthProspect Capital Declares Its 58th, 59th, 60th, and 61st Consecutive Cash Distributions to Shareholders As I pointed out, the dividend was reduced when PSEC went from paying quarterly dividends to monthly distributions. Just as an aside, one SA reader questioned my statement on that matter using four monthly interest payments to compare with one quarterly payment. Brilliant, another one of the geniuses caught one of my idiotic and stupid mistakes. I simply had no choice but too inform that reader as kindly as possible that quarter contains three months, not four.
Writing comments for me at SA is actually a good exercise since it gives me a great deal of information about the competence of individual investors who are making decisions in securities that I own.
A negative take on the last March earnings report can be found in this Seeking Alpha article.
Closing Price Last Friday: PSEC: $10.41 +0.12 (+1.17%)
3. Bought 100 of the Municipal Bond CEF BKK at $15.93-Sold 100 BKK at $16.92 (see Disclaimer): My target price for BKK was hit in just a few days. This is probably first time that I have discussed the purchase and the sell of a security in the same post. I knew last Friday that this CEF had to selling at a premium to net asset value per share which will likely cause me to sell the CEF.
For long time readers, it is known that I am negative about bonds and have adopted an active trading strategy for bond CEFs. I will try to buy them at greater than historical average discounts over the past 1 and 3 years and then sell them when that discount narrows to below that average at a time when the net asset value had increased and certainly when the market price had risen to a premium over the net asset value. All of the BKK share price increase was due to the market price moving from a 4% discount to NAV to a 2.2% premium. This CEF also went ex dividend for its monthly distribution during my brief period of ownership.
Snapshot of Purchase:
Snapshot of Sell:
Snapshot of Profit:
 |
| 2013 BKK 100 Shares $73.07 |
Security Description: The Blackrock Municipal 2020 Term Trust (BKK) is a leveraged closed end fund that owns tax free municipal bonds and is scheduled to liquidate on or about 12/31/2020. The fund owns a number of municipal bonds that mature in 2019-2021, but it also has some longer and shorter maturities.
The sponsor claims that the levered fund duration is 6.56 years (information under "portfolio" tab)
Sponsor's Website: BKK : Fund Profile
Credit Quality as of 3/31/13:
Last Filed Form N-Q Holdings as of 1/31/13: sec.gov As of that date, the fund's investments had a value $501+M purchased at a cost of $471+M or a net unrealized appreciation of $30+M. As of 10/31/12, the fund had a small loss carryforward of $1.864+M.
The leverage is currently being provided by very low cost auction rate preferred shares. Interest rate costs ranged from a low of .23% to a high of .38% during the last fiscal year, see Annual Report at page 60 (bad for the owners of those securities who got stuck after auctions failed starting in February 2008, but good for the owners of BKK)
Last SEC Filed Shareholder Report (period ending 10/31/12): SEC Filing
Data as of Friday May 31, 2013:
Closing Net Asset Value Per Share= $16.59
Closing Market Price= $16.13
Discount= -2.77%
Data as of Tuesday June 4, 2013
Closing Net Asset Value Per Share: $16.57
Closing Market Price: $16.03
Discount= -3.26
Data as of the Day of Purchase: Wednesday June 5, 2013
Closing Net Asset Value Per Share: $16.58
Closing Market Price: BKK: $15.90 -0.13 (-0.81%)
Discount: -4.1%
Data on Date of Sale Friday June 14, 2013
Closing Net Asset Value Per Share: $16.39
Closing Market Price: $16.75
Premium: +2.20%
On the day of my purchase, net asset value per share rose $.01 with the shares declining 13 cents.
BKK Page at CEFConnect
The pricing history shows an erratic pattern of trading both below and above net asset value per share over the past five years. Most of the time over that period, this CEF is trading at a premium to net asset value. The only substantial discount occurred during the Dark Period in 2008 which was typical for all leveraged bond CEFs. CEFConnect (pricing history tab-select 5 year time frame) The average over five years through 6/4/13 was a price 1.31% above net asset value per share.
The portfolio is weighted in investment grade municipal bonds, but there is a significant weighting in "BBB" rated bonds.
The fund pays monthly dividends at the current rate of $.0623 per share. At that rate, the yield would be about 4.69%. The tax equivalent yield, based on a marginal tax rate of 35%, would be approximately 7.17%.
Prior Trade: Bought 200 BKK @ 14.71 November 2010- Sold 200 BKK @ 14.98 May 2011
Rationale for Purchase and Sell:
Like other bond CEFs, the BKK price suffered a swift declined in May. The BKK share price went quickly from $17.01 on 5/10 to my purchase price of $15.93 on 6/5, a 6.5% decline unadjusted for one monthly dividend of $.0623 per share or 5.98% on an adjusted basis. BKK Interactive Chart Adjusted net asset value declined .0094%, using the data at CEFConnect.
I reached my limited objective in less than 9 days. I will be looking for another trade in the municipal bond CEF space next week.
Risks: First, the recent carnage in the bond CEF space highlights one of their disadvantages. During times of turmoil, volatility, stress and/or downdrafts in asset values, the market price of CEFs can go down much faster than their net asset values. Second, the existence of leverage, even at a very low cost, will accelerate that decline simply due to the assets purchased with borrowed money adding to the decline that would otherwise exist for that fund without any leverage.
All bond funds face interest rate risks and risks associated with interest rate normalization which is currently a significant risk for them.
Closing Price Last Friday: BKK: $16.78 +0.45 (+2.76%)
4. Sold 50 GJT at $18.9 (See Disclaimer): The Synthetic Fixed-Income Securities Inc. STRATS Trust for Allstate Corp. Securities, Series 2006-3 (GJT) is a Synthetic Floater in the Trust Certificate legal form of ownership, one category of Exchange Traded Bonds, that pays monthly interest payments at a .8% float over the three month treasury bill on a $25 par value, up to a maximum of 8%. The underlying security owned by the trust is a fixed coupon senior Allstate bond maturing in 2036. www.sec.gov
Snapshot of Recent History:
I have now liquidated all of my synthetic floaters that pay a float of a short term rate and have no minimum coupon. This liquidation is based on my view that ZIRP will continue well into 2015 and that the FED will likely thereafter raise the federal funds rate at a snail's pace, unlike the June 2004-July 2006 rise from 1% to 5.25%. That forecast which may end up being wrong means that I can no longer justify these securities as holdings since it may be another three years before there is any increase in the current coupon rate which is for all practical purpose the spread rate since the short term treasury bill is about as close to zero as it can get.
Chart 1954 to Date: Effective Federal Funds Rate (FEDFUNDS) - FRED - St. Louis Fed
Data for Federal Funds Rate
Chart: 3-Month Treasury Constant Maturity Rate
Chart: 3-Month London Interbank Offered Rate (LIBOR)
Closing Price Last Friday: GJT: $19.00 +0.10 (+0.53%)
5. Bought 58 shares NPI at $13.4 and 42 at $13.17 (See Disclaimer): The first order was a partial fill on a 100 share limit order at $13.4 where I did not place a AON restriction. With that restriction, the market market is under no obligation to display the order to the market. Consequently, the order may not fill when there is a temporary downdraft below the limit order. To deal with the possibility of a partial fill I will set my limit price sufficiently below the then current bid price to compensate me for the brokerage commission.
Odd lot orders are not displayed to the market either. 17 CFR 242 : REGULATIONS In case you are interested, "CFR" stands for "Code of Federal Regulations", a multi-volume set much larger and somewhat less boring than the Internal Revenue Code. That may be the only CFR regulation that most investors need to read.
After noticing the partial fill, I checked the high and low price for the day. The high/low was $13.65/$13.42. Odd lots will not even show up when the orders sets a new intra-day low or is the only shares traded on a particular day which I have observed on a few occasions where I had an odd lot fill when no round lots were traded during the day.
The CEF then went ex dividend for its $.072 per share monthly dividend. Nuveen Closed-End Funds Declare Monthly Distributions After a further decline in price, I went ahead and rounded the lot up to 100 shares by buying 42 at $13.17.
The dividend rate was lowered in November 2012 from $.0765%.
CEFConnect shows the annualized performance numbers under the "performance" tab which assumes reinvestment of all dividends. As of 6/14/13, the 5 year annualized return is 7.48% at net asset value and slightly higher at market value.
Snapshot of Trades:
 |
| 2013 Bought 58 NPI at $13.42 |
 |
| 2013 Bought 42 NPI at $13.17 |
Description of Security: The Nuveen Premium Income Municipal Fund is a leveraged closed end municipal bond fund.
The fund is weighted in "A" or better rated bonds.
 |
| Credit Quality as of 5/31/2013 |
Sponsor's webpage: NPI - Nuveen Premium Income Municipal Fund
NPI Page at Morningstar (rated 3 stars)
NPI Page at CEFConnect
Data as of Monday 6/10/2013 (Day Before Purchase)
Closing Net Asset Value Per Share= $14.91
Closing Market Price= $13.65
Discount; - 8.45%
Data as of Tuesday 6/11/13 Date of 58 Share Purchase:
Closing Net Asset Value Per Share= $14.81
Closing Market Price= $13.52
Discount to NAV= -8.71
Ex Dividend Wednesday 6/12/13 for 7.2 cents per share
Data as of Thursday 6/13/13 Date of 42 Share Purchase
Closing Net Asset Value Per Share= $14.66
Closing Market Price: $13.4
Discount to NAVat Closing Price: -8.59%
Distribution Rate at Closing Price= 6.51%
Tax Equivalent Yield at Closing Price (Federal at 35%)= 10.01%
Discount to NAV at $13.17 Price: 10.16%
Average Discounts as of 6/13/13
1 Year=2.27%
3 Year=2.23%
5 Year=-3.84%
During 2008, there was a brief spike to over a 25% discount and longer trading the the 10% to 15% range. (Pricing History Tab at CEFConnect: 5 Year History).
The Nuveen site contains information under the distribution tab that shows the earnings to distribution ratio.
Prior Trades: None
Rationale: The municipal bond CEFs tanked over the past month, many rising to 10% discount to net asset value and providing close to 10% tax equivalent yields (35% marginal federal tax rate), far higher than most leveraged taxable bonds CEFs adjusted for taxes. An example would be the bond CEF BTZ, which I own, that tanked in price too but the yield before taxes at last Friday's close was 7.2%. BlackRock Credit Allocation Income Trust Stock Price Today (BTZ)
RISKS: See the risk section in BKK above.
Closing Price Last Friday: NPI: $13.65 +0.25 (+1.87%)
6. Bought 100 FAX at $6.35 (see Disclaimer):
Snapshot of Trade:
Security Description: The Aberdeen Asia-Pacific Income Fund is a leveraged closed end bond that focuses on bonds issued by companies and governments in the Asia Pacific region with more than a 40% exposure to Australian corporate and government bonds.
Sponsor's Website: Asia-Pacific Income Fund
Last Filed SEC Form N-Q Holdings as of 1/31/13: Aberdeen Asia-Pacific Income Fund, Inc. (Australian government bonds then at 36.9% weighting)
I took a snapshot of the credit quality as of 1/31/13 from that N-Q filing:
Last SEC Filed Shareholder Report: Aberdeen Asia Pacific Income Fund, Inc.
FAX Page at CEFConnect
Data Day of Purchase (6/12/13):
Closing Net Asset Value Per Share: $7.08
Closing Market Price= $6.28
Discount: -11.3%
Average Discounts/Premiums:
1 Year= +.7%
3 Year= -2.17%
5 Year= 4.57%
Unadjusted for any monthly dividend, the share price closed at $7.72 on 5/2/13 and at $6.28 on 6/12/13, a decline of 18.65%. The net asset value declined from $7.66 to $7.08 or 7.57%, obviously a significant amount but nonetheless far less than the decline in the market price. That kind of action, where the market price decline far exceeds the net asset value drop, is typical for CEFs during periods of declining asset prices, turmoil and/or stress. It can present an opportunity but there is a risk that the trend will continue unabated which will increase the investor's losses (i.e. the so called "falling knife')
The current monthly distribution rate is $.035 per share. CEFConnect At that rate, the yield would be about 6.6%. The relatively low yield compared to other alternatives is another reason for the small purchase. I am primarily playing a hoped for bounce in the AUD against the USD but I lack confidence in that happening anytime soon.
The average annualized performance for the past five years is +9.01% based on price and 8.17% on NAV. CEFConnect
Prior Trades: There have been some prior trades. I noted in October 2008 buying 200 shares when the discount was close to 42%: Some Nibbles Got Filled: JZE, PJS, INZ and FAX All of the buys that day were off the charts good. JZE, bought at $12.5 was later redeemed by the call warrant at $25; PJS bought at $7.2 was later sold at ; and the ING hybrid INZ was bought at $7.4.
I just took a snapshot of that October 2008 purchase and my total trading profit for that year, rather than digging it all out when I only just purchased 100 shares:
 |
| 2008 Bought 200 FAX at $3.39 |
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| 2008 FAX Trades +$241.81 |
I decided to buy only 100 shares for now because I could not find the duration number anywhere, and found that disturbing.
Rationale: This fund is going to be impacted by the currency exchange involving primarily the Australian Dollar and some other foreign currencies. The AUD has lost significant value against the USD after trading over 1.05 USDs for 1 AUD in April, closing last Friday at around .95 USDs for 1 AUD. AUD/USD Currency Conversion Chart
Another security adversely impacted by this decline is the WisdomTree Australia & New Zealand Debt Fund Fun (AUNZ), which closed at $21.03 and recently hit a 52 week low at $20.41. I sold that security back in January noting at the time "that I am somewhat concerned about a potential correction in the Australian Dollar that could wipe out the meagre interest payments made by this fund". Sold 100 of the Bond ETF AUNZ at $22.89 That turned out to be a legitimate concern as the shares slide 8.13% from my sale's price to last Friday's closing price, wiping out well over 2 years worth of interest payments.
So at least some of the currency and interest rate risks have already happened before my purchase. I would not speculate on the AUD/USD currency exchange rate but would not be surprised to see AUD weakness continue for as long as commodity prices remain under pressure. I also believe hedge funds are attacking the currency. In my opinion, the Australian government is far more responsible than our own and its debt is rated at AAA. That nation does not have the same kind of long term fiscal problems as the U.S. originating from unfunded entitlement programs. So, long term, I have more confidence in the value of the AUD than the USD. Australian government debt to GDP is far lower than the U.S. Australia Government Debt To GDP; United States Government Debt To GDP.
The fund is weighted in "A" or better rated bonds.
Closing Price Last Friday: FAX: 6.66 +0.22 (+3.42%)
Risks: The decline in both the FAX and AUNZ net asset value had the same origin, the double whammy from both interest rate and currency risk coming into play at the same time. There is is also credit risks but the portfolio is heavily weighted in investment grade bonds as noted above.
7. Sold 100 LF at $10.01 ($500 to $1,000 Flyers Basket Strategy)(see Disclaimer):
Snapshot of Trade:
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| 2013 Sold 100 LF at $10.01 |
Snapshot of Profit:
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| 2013 Sold 100 LF +$199.1 |
Item # 2 Bought 100 LF at $7.86 (December 19, 2012 Post). I noticed when looking at that post that I have sold now everything purchased and discussed in it except for the exchange traded bond KWN which is still owned in the Roth for its income generation.
When I bought these shares, I had a target price of $10 within 12 months, but failed to sell the shares earlier when that target was reached and did not overlook what I was supposed to do again. I am not married for sure to any stock that produces no income. I am 98% an income investor, allowing myself to buy a few insignificant non-income producing securities in my Lottery Ticket Basket Strategy and in the Flyers Strategy.
Closing Price Last Friday: LF: 9.67 -0.18 (-1.83%)
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I bought some other bond CEFs last week which I am not going to discuss now simply because I am tired of writing this post. I will reference those purchases when I post my next update of the CEF Portfolio in about two or three months.
Last Update: Stocks, Bonds & Politics: Closed End Fund Portfolio as of 5/8/13
