Addendum: Added Monday 6/10/13
Based on the price action on Monday, I decided to add a comment to this post published last Saturday. Bond CEFs continue to drift down more with several declining over 2% in value. Treasury prices are continuing to decline and that places pressure on the entire bond complex.
This is the price of TLT: 112.62 -0.54 (-0.48%), the 20+ year treasury ETF, as of about 2:10 C.S.T.
Here are a few more:
TIP: 114.67 -0.77 (-0.67%)
LQD: 116.13 -0.46 (-0.39%)
When dealing with this kind of downdraft, whose length and severity can not be determined until it ends, I will slice and dice my orders into very small pieces and spread them out over time. I bought just few minutes ago 50 shares of a bond CEF that is currently down almost 3.42%. My limit order was placed at about 10 cents below the market price earlier today, when the decline was about 3% and the market just flew through that order to the downside as the CEF made a new 52 week low.
I have a few other small orders that have not been filled even further below the market price.
If the carnage continues tomorrow, I will take a look and maybe buy 50 shares of something else. The one bought a few minutes ago just went over a 10% yield.
I am making selections based in part on historic average discounts to net asset value over the past 1, 3 and 5 years. That information can be found using the "pricing history" after entering the symbol at CEFConnect I generally will want to have a larger discount than the 1 and 3 average. The 5 year average is less important since it includes the period after the Lehman failure when discounts went sky high.
Big Picture Synopsis
Based on the price action on Monday, I decided to add a comment to this post published last Saturday. Bond CEFs continue to drift down more with several declining over 2% in value. Treasury prices are continuing to decline and that places pressure on the entire bond complex.
This is the price of TLT: 112.62 -0.54 (-0.48%), the 20+ year treasury ETF, as of about 2:10 C.S.T.
Here are a few more:
TIP: 114.67 -0.77 (-0.67%)
LQD: 116.13 -0.46 (-0.39%)
When dealing with this kind of downdraft, whose length and severity can not be determined until it ends, I will slice and dice my orders into very small pieces and spread them out over time. I bought just few minutes ago 50 shares of a bond CEF that is currently down almost 3.42%. My limit order was placed at about 10 cents below the market price earlier today, when the decline was about 3% and the market just flew through that order to the downside as the CEF made a new 52 week low.
I have a few other small orders that have not been filled even further below the market price.
If the carnage continues tomorrow, I will take a look and maybe buy 50 shares of something else. The one bought a few minutes ago just went over a 10% yield.
I am making selections based in part on historic average discounts to net asset value over the past 1, 3 and 5 years. That information can be found using the "pricing history" after entering the symbol at CEFConnect I generally will want to have a larger discount than the 1 and 3 average. The 5 year average is less important since it includes the period after the Lehman failure when discounts went sky high.
Big Picture Synopsis
Stocks:
Stable Vix Pattern (Bullish)
Short Term: Hoping for at least a 10% correction
Intermediate and Long Term: Bullish
The hoped for correction in stocks does not appear to be on the horizon. Instead, a possible melt up is possible as institutional investors rotate out of bonds into equities.
Bonds (Durations Greater That 2 Years):
Short Term: Slightly Bearish
Intermediate Term: Slightly Bearish (Treasuries Bearish)
Long Term: Extremely Bearish
I am now making for purposes of clarity a distinction between treasuries notes and bonds and most corporate bonds, and my outlook applies only for bonds with durations greater than two years. As noted in earlier comments, I anticipate that ZIRP will continue to keep short rates abnormally low, providing negative real rates of return.
I have changed my intermediate outlook for corporate bonds to slightly bearish from bearish for most corporate bonds based on recent inflation reports and a decline in inflation expectations. I remain bearish on the "risk free" treasuries with durations greater than two years since I expect better quality bonds to decline more in price during the ongoing rate normalization process. The potential loss for the 10 year treasury bought today with a 2.16% yield would easily exceed 20% with a normalized rate of 4.5% (approximate duration 9.034 years x. 2.34 hypothetical increase in interest rates= approximate loss of 21.14%)
The BLS reported that April CPI declined .4% and up only 1.1% over the past 12 months ending in April 2013. Consumer Price Index Summary The personal consumption price index was up only .7% over the past twelve months. News Release: Personal Income and Outlays For inflation expectations, I am relying on the inflation forecasts embodied in the pricing of 5, 7 and 10 year TIPs when evaluating the risks of intermediate term bonds. As noted in my last post, inflation expectations over those time periods have been declining in recent months.
All of the foregoing support for now a correction in intermediate term bond prices caused by rate normalization only. The Difficult Path to Interest Rate Normalization Once that correction occurs mostly over the near term, bond prices would stabilize with no change in the inflation outlook. Consequently, the short and intermediate term outlook are roughly the same based on the foregoing.
I will generally calculate the inflation forecasts embodied in the 5 to 30 year TIPs once a week using the data provided by the treasury department.
Daily Treasury Real Yield Curve Rates (TIPs)
Daily Treasury Yield Curve Rates (Nominal)
Last Friday, the average inflation forecast per year embodied in the 5 year TIP was 1.89%.
Bonds continued their selloff last Friday:
ZROZ: $98.50 -$2.59 (-2.56%) : PIMCO 25+ Yr STRIPS
TLT: 113.16 -2.06 (-1.79%) : iShares Barclays 20+ Year Treasury
BABS: $59.22 -$0.82 (-1.37%) : SPDR Nuveen Barclays Build America
TIP: $115.44 -$0.68 (-0.59%) : iShares Barclays TIPS Bond Fund
LQD: $116.59 -$0.46 (-0.39%) : iShares iBoxx $ Investment Grade Corporate
IEF: $104.88 -$0.82 (-0.82%) : iShares 7-10 Year Treasury
See Last Week's Post: Stocks, Bonds & Politics: The Difficult Path to Interest Rate Normalization
Again, when rates are this low for quality paper, it does not take much of a decline in price to wipe out an entire year's worth of interest payments, a fact that is not lost on bond investors and may even trigger a stampede out of bonds causing a precipitous decline in prices.
I am now making for purposes of clarity a distinction between treasuries notes and bonds and most corporate bonds, and my outlook applies only for bonds with durations greater than two years. As noted in earlier comments, I anticipate that ZIRP will continue to keep short rates abnormally low, providing negative real rates of return.
I have changed my intermediate outlook for corporate bonds to slightly bearish from bearish for most corporate bonds based on recent inflation reports and a decline in inflation expectations. I remain bearish on the "risk free" treasuries with durations greater than two years since I expect better quality bonds to decline more in price during the ongoing rate normalization process. The potential loss for the 10 year treasury bought today with a 2.16% yield would easily exceed 20% with a normalized rate of 4.5% (approximate duration 9.034 years x. 2.34 hypothetical increase in interest rates= approximate loss of 21.14%)
The BLS reported that April CPI declined .4% and up only 1.1% over the past 12 months ending in April 2013. Consumer Price Index Summary The personal consumption price index was up only .7% over the past twelve months. News Release: Personal Income and Outlays For inflation expectations, I am relying on the inflation forecasts embodied in the pricing of 5, 7 and 10 year TIPs when evaluating the risks of intermediate term bonds. As noted in my last post, inflation expectations over those time periods have been declining in recent months.
All of the foregoing support for now a correction in intermediate term bond prices caused by rate normalization only. The Difficult Path to Interest Rate Normalization Once that correction occurs mostly over the near term, bond prices would stabilize with no change in the inflation outlook. Consequently, the short and intermediate term outlook are roughly the same based on the foregoing.
I will generally calculate the inflation forecasts embodied in the 5 to 30 year TIPs once a week using the data provided by the treasury department.
Daily Treasury Real Yield Curve Rates (TIPs)
Daily Treasury Yield Curve Rates (Nominal)
Last Friday, the average inflation forecast per year embodied in the 5 year TIP was 1.89%.
Bonds continued their selloff last Friday:
ZROZ: $98.50 -$2.59 (-2.56%) : PIMCO 25+ Yr STRIPS
TLT: 113.16 -2.06 (-1.79%) : iShares Barclays 20+ Year Treasury
BABS: $59.22 -$0.82 (-1.37%) : SPDR Nuveen Barclays Build America
TIP: $115.44 -$0.68 (-0.59%) : iShares Barclays TIPS Bond Fund
LQD: $116.59 -$0.46 (-0.39%) : iShares iBoxx $ Investment Grade Corporate
IEF: $104.88 -$0.82 (-0.82%) : iShares 7-10 Year Treasury
See Last Week's Post: Stocks, Bonds & Politics: The Difficult Path to Interest Rate Normalization
Again, when rates are this low for quality paper, it does not take much of a decline in price to wipe out an entire year's worth of interest payments, a fact that is not lost on bond investors and may even trigger a stampede out of bonds causing a precipitous decline in prices.
Recent Economic Reports:
The BLS reported that the economy added 175,000 jobs in May, slightly more than the consensus estimate. There was a 12,000 downward revision for the prior two month. Professional and business services added 57,000 jobs and b6 589,000 over the past year. Employment Situation Summary Job growth in the healthcare sector has averaged 24,000 per month over the past year. I would anticipate that sector to be a source of job growth. Federal government employment declined by 14,000. The U-6 number declined to 13.8%, down from 14.4% at the start of the year. Table A-15. Alternative measures of labor underutilization The unemployment rate ticked up slightly due to more people entering the labor force (420,000 based on the household survey) looking for jobs. The household survey showed a 319,000 gain in jobs.
The BLS reported that the economy added 175,000 jobs in May, slightly more than the consensus estimate. There was a 12,000 downward revision for the prior two month. Professional and business services added 57,000 jobs and b6 589,000 over the past year. Employment Situation Summary Job growth in the healthcare sector has averaged 24,000 per month over the past year. I would anticipate that sector to be a source of job growth. Federal government employment declined by 14,000. The U-6 number declined to 13.8%, down from 14.4% at the start of the year. Table A-15. Alternative measures of labor underutilization The unemployment rate ticked up slightly due to more people entering the labor force (420,000 based on the household survey) looking for jobs. The household survey showed a 319,000 gain in jobs.
The ISM Manufacturing index for May was reported at 49%, the first month of contraction since November 2012. The new order component declined 3.5% to 48.8 from 52.3. Exports declined by 3%, consistent with a slowdown in Europe and in Asia.
Historical Chart for the ISM Manufacturing: PMI Composite Index
The May ISM Services index was reported at 53.7%, up from 53.1% in April, marking the 41st consecutive month of expansion. The business activity index was at 56.5%. The new orders component rose to 56 from 54.5, but employment ticked down to 50.1 from 52.
Historical Chart for the ISM Non-manufacturing: Business Activity Index
Historical Chart for the ISM Non-manufacturing: NMI Composite Index
Historical Chart for the ISM Non-manufacturing: New Orders Index
Historical Chart for the ISM Non-manufacturing: Employment Index
Historical Chart for the ISM Non-manufacturing: Backlog of Orders Index
Labor productivity rose .05% in the 2013 first quarter and .9% Y-O-Y. First Quarter 2013, Revised Non-farm unit labor costs fell fell 4.3% in the first quarter, as hourly compensation fell 3.8% with the .05% increase in productivity. Hourly compensation did rise 2% over the past four quarters but the decline in the last quarter was the largest since the BLS started to compile statistics in 1947.
ADP reported that private employers added an estimated 135,000 jobs in May, lower than the consensus estimate of 165,000. ADP also revised the April number down from 119,000 to 113,000. The service sector provided all of the new jobs with manufacturing shedding 3,000 jobs during the month.
In the Beige Book released last week, eleven out of the 12 FED Districts reported modest to moderate growth for the period between early April to late May, with the Dallas FED reporting strong growth in its district. FRB: Beige Book - June 5, 2013
For the first time in 16 years, U.S. crude oil production exceeded imports over the 7 day period ending May 31. eia.gov/petroleum/supply/weekly/pdf/table1.pdf
The Federal Reserve released its "Z.1" flow of funds last week. This report contains an estimate of household net worth. federalreserve.gov.pdf At the end of the 2013 first quarter, the FED estimated that household net worth increased about $3 trillion, since 12/31/2012, to approximately $70.3 trillion. Household debt declined .6% in the first quarter with mortgage debt shrinking by 2.3%.
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Intel (own):
FBR Capital Markets raised Intel to outperform and increased its price target to $28 from $23. The report is summarized in a Barrons' article.
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Gross June 2013 Newsletter:
In his June newsletter, PIMCO | Investment Outlook - Wounded Heart, Bill Gross makes a convincing case why the FED's monetary policies are now doing more harm than good.
I am willing to overlook another few months of QE for two reasons.
First, one positive long term secular force supporting U.S. growth is the increase in disposable household income resulting initially from mortgage refinancing at abnormally low interest rates and consequently providing more disposal income to spend and/or to save to support a long term recovery. A large segment of households need a continued recovery in home prices in order to refinance since their loans are not owned by Fannie or Freddie and consequently do not qualify for refinancing under the HARP program. Disposable income will then be augmented over time by increases in wage income and income from savings once the FED ends ZIRP.
Second, new home construction is still on life support and the U.S. economy needs this important sector to improve.
However, I also recognize that the positive returns from QE are rapidly diminishing and are probably outweighed now by the negative impacts which are now and have been substantial drags on the economy.
Gross identifies several of the negative consequences.
I view the most important one to be the impact on spending arising from lower interest income from savings. I highlighted that issue in several 2011 posts including this one: Item # 1 The Real Cost of The Federal Reserve's Jihad against the Saver Class I referenced a study that estimated that the FED's abnormal monetary policies were reducing U.S. GDP by about 1.75% per year. Another summary of this study can be found in The Big Picture blog. While the impact can be debated, the overall negative impact on spending from reduced income can not be seriously questioned as being substantial.
There is for example over 1 trillion dollars sitting in money market accounts, owned by individuals and non-profits, earning nothing due to ZIRP. Households and Nonprofit Organizations; Money Market Mutual Fund Shares; Asset
The average five year CD rate for banks and thrifts is less than .8%, 5-Year CD: National Rate of Banks and Thrifts. The 1 year CD rate average for national banks is .1%. 1-Year CD: National Rate of Banks (see Certificates of Deposit -St. Louis Fed for more information on the impact of the FED's Jihad Against the Saving Class)
The Federal Reserve publishes the components of the money supply. Savings deposits as of 5/20/13 were at $6.803 trillion dollars. Small denomination time deposits (less than $100,000) totaled $580+ billion. Institutional money funds total $1.739 trillion. Federal Reserve Statistical Release H.6 - May 30, 2013
In 2011, corporations were sitting on nearly $5 trillion in cash (more now). Why Are Corporations Holding So Much Cash?
In short, there is a ton of money laying around earning nothing. Individual Americans have a proven tendency to spend their income. Unfortunately, the leaders of many American corporations would prefer to hoard cash rather than to invest it in productive enterprises. Possibly they need massive cuts in their pay which has gone way beyond ridiculous for hired help prone to mistakes and modest at best achievements.
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This post will be primarily devoted to describing what I characterize as a pared trade. A pare trade is basically keeping my overall allocation relatively unchanged but switching from one security to one or more other securities. The rational will generally be one or more of the following: (1) better income potential; (2) an assessment of relative valuation, particularly applicable for functionally equivalent securities; and/or (3) a determination about possible capital appreciation potential.
The first part of the trade was to sell my entire position of the Vanguard bond mutual fund VGICX held in a taxable account. The yield on that fund after tax was below 2%. I am paring that sell, just in my mind, with the purchase of several high yielding closed end bond funds and one BDC in the ROTH IRA, where their dividend payments become tax free. Closed end bond funds have been smashed during the recent bond correction. Some of my reasons underlying this pared trade are also discussed in recent comments to this SA article. Yields It would not be surprising to see the bond CEFs continue sliding in price as interest rates continue their path toward normalization.
1. First Part of the Paired Trade: Sold All 459+ Shares of VFICX in a Taxable Account (See Disclaimer):
Snapshot of History: I have held this security for a few years and received a decent return taking into account the conservative nature of this fund. I previously sold 100 shares for a profit, as shown in this detailed history which took two snapshots two display. All of the dividends were reinvested to buy more shares. I also received several short and long term capital gain distributions in addition to the monthly income dividends. Since inception in 2009, those capital gain distributions totaled $310.94.
Snapshot of Profit:
Security Description: VFICX is an intermediate term bond mutual fund that owns investment grade bonds.
The Vanguard Intermediate-Term Investment-Grade Fund Investor Shares (VFICX) had an average duration of 5.3 years as of 4/30/13 and an SEC yield of 2.15% as of 6/3/13. It simply made no sense for me to keep that fund in a taxable account where taxes eat into the meagre yield.
Closing Price on Day of Sale (6/4/13): VFICX: $10.05 -0.02 (-0.20%)
The average duration of the ETF LQD, an intermediate investment grade corporate bond fund, was 7.69 years as of 6/3/13.
The intermediate investment grade bond ETF from Vanguard ((VCIT) has an average duration of 7.5 years as of 4/30/13, with a SEC yield of 2.7% as of 6/3/13.
MIN, the investment grade intermediate bond CEF discussed in the next section, has an effective duration of 3.84 years.
Friday's Close: VFICX: $10.01 -0.04 (-0.40%)
Given the low yield of this fund, it will not take much of a decline to wipe out a year's worth of dividend payments.
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The following discussion is a list of income producing securities bought in the ROTH IRA rather than continuing to hold VFICX in a taxable account. I am not using the funds raised in the VFICX transaction to buy securities in the ROTH IRA where I have plenty of cash earning zero. Instead, I am substituting similar and/or higher yielding securities in an IRA in the approximate amount of the VFICX proceeds realized from the sale in a taxable account.
I am going to give a detailed discussion of bond CEF MIN since this was my first purchase. I recently sold profitably 1000 shares of MMT, another bond CEF from the same sponsor. Sold 300 of the Bond CEF MMT at $7.57-ROTH IRA (4/30/13 Post); Sold 300 of the BOND CEF MMT at $7.09 (2/29/13 Post); Sold 300+of the Bond CEF MMT at $6.83 (1/19/2012 Post).
I am not going to discuss the other purchases much, since those securities have been discussed on many occasions. I will just update the pertinent data and reference earlier discussions.
Total Cost of Five Purchases (MIN, GDO, ARCC, GHY, SGL) = $4,867
Total Proceeds from VFICX= $4,616.21
Please note that I have not increased my exposure to bonds but simply reached for additional yield that becomes even more advantageous by buying the higher yielding securities in the ROTH IRA and selling the lower yielding bond fund held in a taxable account.
If the funds used to pay for those five purchases had remained parked in the Vanguard Prime Money Market fund, and earned for an entire year the current rate of .01%, I would earn a grand total of almost $.49. Thank you Uncle Ben. I am more than just a tad underwhelmed.
2. Bought 300 MIN at $5.6-Roth IRA (see Disclaimer):
Snapshot of Trades: This snapshot includes the first securities purchase in the ROTH IRA as part of the pared trade:
The MFS Intermediate Income Trust (MIN) is a leveraged closed end fund that owns investment grade corporate bonds. The fund pays monthly dividends at the current rate of $.04274 per share. MFS Announces Closed-End Fund Distributions At a total cost of $5.6, the dividend yield at that rate would be approximately 9.16%.
As of 4/30/13, the sponsor claimed that the average duration of MIN was 4.41 years and the effective duration was at 3.84 years.
MIN Data Date of Purchase (6/3/13)
Closing Net Asset Value Per Share: $5.97
Closing Market Price: $5.65
Discount: -5.36%
Discount at $5.6 Purchase Price= -6.2%
MIN DATA Date After Purchase (6/4/13):
Closing Net Asset Value Per share: $5.97
Closing Market Price: $5.67
Discount: -5.03
Last SEC Filed Shareholder Report for period ending 1/31/13: MFS INTERMEDIATE INCOME TRUST N-Q
Sponsor's Webpage: MFS Intermediate Income Trust
I took the following snapshot of MIN's top ten holdings and credit quality information, both as of 4/30/13:
MIN Page at CEFConnect
Morningstar has a negative view of this CEF, giving it a 1 star rating at the time of my purchase and 2 stars now. MIN MFS Intermediate Income The rating was based on a combination of factors, including the a "nothing special" performance, its premium pricing to net asset value and a large return of capital component supporting the dividend. Morningstar notes that this fund was selling at an average premium to net asset value of 4.69% for the prior six months. That issue was no longer applicable when I purchased shares since the shares had fallen to a discount to net asset value as noted above.
One huge negative for me is that the managers of this fund have somehow lost money buying investment grade corporate bonds with a strong tailwind at their back. I view that as just pathetic.
The Annual report for the period ending October 31, 2012 shows that the fund still had a loss carryforward of $35,709,870 after using part of that loss carryforward to offset recent long term capital gains. MFS INTERMEDIATE INCOME TRUST at page 38 The loss carryforward was $47,508,883 as of 10/31/10: MFS INTERMEDIATE INCOME TRUST at page 39 Lastly, the loss carryforward was at $67,223,261 as of 10/31/10; $61,879,081 as of 10/31/07; and $35,028,896 as of 10/31/03. The two portfolio managers have been managing the fund since March 2002 and May 2004 respectively.
I left a comment to a SA article discussing my negative view of the loss carryforward number for an intermediate investment grade bond fund and illustrating how the loss carryforward increased the return of capital component of MIN's dividend for the 2012 fiscal year. MIN Update - Seeking Alpha
The loss carryforward will shield long term capital gains from taxation, which in turn will increase the dividend's return of capital component since this fund actually needs a substantial amount of capital gains each year to support the dividend. Some investors like a return of capital, but I am not one of them.
I did not explore how the manager's of the fund lost money investing in an asset class that has done well for a long time. I suspect that the main reason was bad trading, selling bonds at inopportune moments, and possibly more than a few less than optimal selections. Anyone interested in exploring how those managers accomplished that result can dig through the historical shareholder reports at the SEC. MIN's SEC Filings The end result already tells the story for me, without the need for exploring the particulars.
So, if I am so negative about the competence of MIN"s managers, why buy the fund? I am generally comfortable with the investment grade bond portfolio and the relatively short duration. More importantly, the recent decline juices the dividend yield and may provide me hopefully with a short term trading opportunity.
In May 2013, there was a huge selloff in bond CEFs and the shares of MIN declined from $6.51 on 4/29 to my purchase price of $5.6 on 6/4, a 13.98% decline based on price and 13.32% adjusted for the one monthly dividend ($.043 per share) paid during that time period. MIN Historical Prices
During the same period, the ETF LQD, which owns investment grade corporate bonds and has a longer duration at 7.69 years as of 6/3/13, declined 3.99% in price (calculation made by using the $117.06 price at the time the MIN order was filled and after an adjustment for a $.361 dividend). The Vanguard mutual fund VFICX fell less than 2%.
I view MIN to be nothing more than a short term trade. Most likely, I would sell that shares at $6 or higher. A return to $6 from $5.6 price would be less than a 50% retracement from the $6.51 price on 4/29/13. MIN Interactive Chart
The return of capital adjustment to the cost basis is not relevant in a IRA, but the inability to earn the dividend is still relevant irrespective of whether MIN is bought in an IRA or a taxable account.
My goal is simply to collect several monthly dividends and then hopefully sell the shares at over $6 before the end of this year. If the shares fall below a 10% discount to net asset value, I will simply change my reinvestment option from cash to reinvestment and thereafter become an involuntary long term holder. I will not be buying more shares in the open market based on my negative opinions about this fund and its managers.
Friday's close: MIN: $5.63 -0.04 (-0.71%)
3. ADDED 50 GDO at $18.7-Roth IRA (see Disclaimer): The snapshot of this trade can be found in Item #2 above.
For readers of this blog, the Western Asset Global Corp Defined Opportunity Fund (GDO) needs no introduction. After selling out of my position, which went over a $10,000 exposure at one time, I have started buying shares back and now I have already started to average down.
I last eliminated my position in the ROTH IRA back in February 2013: Pared Trade Roth IRA: Sold 120 GDO at $20.73-Bought 100 GSPRD at $21.38 Incidentally, I later sold GSPRD in that pared trade: Sold 100 GSPRD at $23.71-Roth IRA (4/2/13 Post).
This last 50 share purchase in the ROTH IRA was an average down from a March 2013 buy which now brings my position up to 150 shares in the Roth IRA. Bought Back GDO at $19.95-Roth IRA
Data on Date of Purchase (Tuesday 6/4/13)
Closing Net Asset Value Per Share: $20.6
Closing Market Price: $18.71
Discount: -9.17%
Data from Previous Friday (5/31/13)
Closing Net Asset Value Per Share: $20.66
Closing Market Price: $19.1
Discount: -7.55%
GDO Page at Morningstar (recently upgraded to 4 stars, possibly based just on the price decline; three year average discount -4.55%)
GDO page at CEFConnect The "pricing history" page shows the recent expansion in the discount to net asset value.
The link to the sponsor's site for GDO will not work. Instead, the link will take you to the main Legg Mason page where you will need to click a box titled "closed end funds" and then scroll to GDO.
Individual Investor - Closed-End Funds Details
Under the "portfolio characteristics" tab, the fund provides details about country weighting, credit quality and important metrics like duration. The fund claims that the effective duration was 4.2 years as of 3/31/13, and the fund had then 257 holdings. The fund had a 63.51% currency exposure to the USD; 22.09% to the Euro and 12.25% to the British Pound as of 3/31/13. So there is currency risk associated with those foreign bond holdings which requires some monitoring of the exchange rates for at least the Euro and British Pound:
EUR/USD Currency Conversion Chart
GBP/USD Currency Conversion Chart
The credit quality is weighted in investment grade bonds, but the fund does maintain a significant exposure to junk rated bonds (as of 3/31/13, BB at 14.57%; B at 12.23%; CCC at 3.85%)
I mentioned in an earlier post that GDO recently cut its monthly dividend to $.115 per share from $.12. Western Asset Global Corporate Defined Opportunity Fund Inc. (“GDO”) Sets New Rate and Announces Distributions for the Months of June, July and August 2013 I expect that this CEF will make an effort to avoid a return of capital distribution, which is one reason for the recent cuts, and the other reason is the fund's relatively short duration. The managers also need to keep in mind that the fund is scheduled to liquidate in 2024 which means that higher yielding, longer term bonds need to be kept to a minimum.
None of the 2012 dividends were classified as return of capital by the fund: leggmason.com/PDF
At the new reduced monthly rate, the dividend yield at a total cost of $18.7 would be about 7.38%.
Needless to say, I have been an active trader in this security. Some of my trades are linked below:
Bought 100 of the CEF GDO at $18.6 March 2010; Bought 70 of the CEF GDO in Regular IRA at $18.61 March 2010; Bought 200 of the CEF GDO at 18.63 and 18.53 (100 in Roth and 100 Taxable Account respectively) March 2010; Bought 100 GDO at $18.57 April 2010; Bought Back 50 shares of GDO at 17.8 in the Roth IRA previously sold at $19.24 December 2010; Sold 100 GDO at $18.72 January 2012; Sold 200 GDO at $19.18 June 2012; Sold Remaining GDO in Taxable Account at $19.69 July 2012; Sold 100 GDO at $20.79 December 2012; Pared Trade Roth IRA: Sold 120 GDO at $20.73-Bought 100 GSPRD at $21.38; Bought 100 GDO at $19.8 April 2013
Friday's Close: GDO: $18.88 -0.10 (-0.53%)
4. Bought 50 ARCC at $16.9-ROTH IRA (see Disclaimer): Ares Capital is a business development corporation.
Profile at Reuters
Key Developments
I do not expect much, if any, capital appreciation when buying a BDC due to the rich compensation paid to a BDC's managers (see pages 40-42 10-q), the hefty dividends paid to the common shareholders that deplete the firm's capital cushion, the constant flow of capital raises which are frequently dilutive to existing shareholders, and the risky loans made by BDCs to private companies. The sole reason to buy any BDC is for its income generation. The goal is to sell the stock for any profit after collecting several dividend payments.
BDCs are likely to decline more than a major market average during recessions, stock bear markets and corrections in bull markets. In a recent SA comment, I noted that the BDC PSEC declined about 35% between 5/2/2011 and 8/8/11 when the S & P 500 declined almost 18%. During that same period, ARCC declined from $17.36 to $13.07. Adding back a $.35 per share dividend to the $13.07 price, the adjusted decline was 22.69%.
I also recently bought 70 shares in a regular IRA. Item # 2 Bought 70 ARCC at $17.24-REGULAR IRA The last 50 share purchase brought me up to 120 shares in the IRAs.
I sold 50 ARCC shares in taxable account: Item # 1 Sold 50 ARCC at $18.02 (5/6/13 Post) I calculated in that post that the total return for those shares was 29.38%. I still own 50 shares bought in a taxable account: Bought: 50 of the BDC ARCC at $16.17
For tax reasons, it makes more sense to own BDCs in the IRA since most of the dividends paid by them will not be classified as qualified dividends. However, given their risks, a frequently discussed subject in this blog, I will trade them frequently in an IRA for whatever profit is achievable after collecting a year or two of dividends. I am simply hoping for a 10% annualized gain with the dividend providing most of that return.
As of 3/31/13, the net asset value per share was $15.98, up from $15.47 as of 3/31/12 but down from $16.04 on 12/31/12. The company had as of 3/31/13 investments in 151 companies with a weighted average yield of its loans and other income producing investments at 11%. Ares Capital Corporation Declares Second Quarter 2013 Dividend of $0.38 Per Share and Announces March 31, 2013 Financial Results
Based on the current regular $.38 per share quarterly dividend, the yield at a total cost of $16.9 is approximately 8.99%. Ares did pay a $.05 special dividend last December. ARCC :: Investor Resources :: Dividends
A list of the investments can be found starting at page 4 of the recently filed SEC Form 10-Q. (see also ARCC :: Portfolio)
As previously noted, Ares priced a large public offering of common stock during April, selling 19.148M shares at $17.43 (see page 59-Form 10-Q)
Friday's Close: ARCC: $16.93 -0.01 (-0.06%)
5. Added 50 GHY at $17.55 in the Roth IRA (see Disclaimer): This is the 4th security bought in the pared trade. The Prudential Global Short Duration High Yield Fund (GHY) is a new closed end fund that invests in short term junk bonds globally.
As of 4/30/2013, the U.S. had approximately a 56.1% weighting. Foreign currency exposure can by itself result in net asset value per share going down or up, adding both potential risks and benefits (gains and losses) resulting from owning foreign bonds. The currency risk is just another layer of risk.
Since my last purchase in the Roth IRA, made on 4/24/13, the fund has paid one monthly dividend of $.125 per share. GHY Historical Prices The net asset value per share was $19.07 on 4/24/13 and $19.06 on 5/24/2013, indicating that the share price decline was not due to any material change in the net asset value per share. Instead, the discount to net asset value has been expanding along with all other CEF bond funds that I monitor.
Historical NAV per share and discount/premium information can be found under the "pricing history" tab at CEFConnect.
The fund recently declared a $.125 per share dividend for June, July and August: Prudential Short Duration High Yield Fund, Inc. and Prudential Global Short Duration High Yield Fund, Inc. Declare Distributions for June, July, and August 2013 The June ex dividend date is shown as 6/18/13.
Snapshot of Trade:
Unfortunately, I started to buy this new CEF shortly before the bond CEF space underwent one of its periodic downdrafts.
This last purchase was an average down and brings me up to 100 shares in the Roth IRA. Item # 3 Bought 50 of the Bond CEF GHY at $18.77-Roth IRA I changed my dividend option to reinvestment from payment in cash after completing this last purchase. I noted in that post that the net asset value was $19.
Data From Day Prior To Purchase:
Closing Net Asset Value Per Share= $18.86
Closing Market Price= $17.73
Discount= -5.99%
Data From Day of Purchase:
Closing Net Asset Value Per Share: $18.74
Closing Market Price: $17.4
Discount: -7.15%
The closing net asset value per share last Friday was $18.76.
GHY Page at CEFConnect
Holdings - Prudential Investments
The sponsor states that the duration was 2.7 years as of 4/30/13. Fund Facts (near bottom of page)
SEC Filed Semi-Annual Report for the Period Ending 1/31/13: Prudential Global Short Duration High Yield Fund, Inc.
Friday's Close: GHY: $18.02 +0.05 (+0.28%)
6. Sold 50 GJS at $17.14-Roth IRA (see Disclaimer): The Synthetic Fixed-Income Securities Inc. Floating Rate STRATS Series 2006-2 for Goldman Sachs Group (GJS) is one of the many esoteric securities that I will buy in the retirement accounts. GJS is a Synthetic Floater in the Trust Certificate legal form of ownership that pays a .9% float over the 3 month treasury bill on a $25 par value, up to a maximum coupon of 7.5%. www.sec.gov The underlying security in this complex Exchange Traded Bond is an unsecured senior bond issued by Goldman Sachs that matures in 2033. My last foray into this security was a 50 share purchase at $13.77 last December.
Snapshot of Transaction History: This snapshot reveals why I decided to harvest the profit:
For as long as the FED continues ZIRP, a .9% spread over the three month T Bill is almost a .9% spread over zero or just call it .9% on a $25 par value. In other words, the yield is currently not much even when computed on a total cost per share that is deeply discounted from the $25 par value. The security does have two advantages when bought at my last price of $13.77. One is a profit built into the difference between the $25 par value at maturity and the purchase price. The other is that the deep discount would juice the yield when rates return to normal levels, which would be in the 4% to 4.5% range for the 3 month T Bill.
3-Month Treasury Constant Maturity Rate - St. Louis Fed
We are years away from that normal range, unless something totally unexpected happens with inflation that causes the FED to spike increases in the federal funds rate, viewed now as a very low possibility event within the next four to five years.
Snapshot of Trade:
Snapshot of Profit:
Bought Roth IRA: 50 GJS at $13.77 (12/19/12 Post)
I have not had the same success with GJS compared to the synthetic floaters GYB and PYT that have minimum coupons and a 2034 GS Capital TP as their underlying security.
Bought 100 GJS at $12.25 June 2009- SOLD GJS at 13.06 August 2009
Bought 100 GJS AT $13 October 2009-Sold 100 GJS at 15.6 in the Roth IRA November 2009
Bought: 50 GJS at 14.6 August 2010- Sold 50 GJS @ 16.20 October 2010
Added 50 of the Synthetic Floater GJS at 13.25-Roth IRA-December 2011-Sold 100 GJS at $14.9 and Bought Back 100 of GYB at 17.2-Roth IRA March 2012
Bought 100 GJS at $10.5 April 2009
I no longer view any of the synthetic floaters as worthy of purchase at their current prices and my outlook for short term interest rates over the next three to five years.
This last profit brings my total for Trust Certificates up to $25,644.11 (see snapshots at Stocks, Bonds & Politics: Trust Certificates: New Gateway Post)
Rationale: At the moment, the profit realized from this security is more important than its income generating potential five or so years into the future. The last 12 months of income is close to $12. I can earn far more with another investment now than that $12 or so paid by GJS to me over the past year. The future inflation protection is not worth the low current income, reasonably projected to last several more years, given the profit built into the sales price.
7. Added 50 SGL at $9.89 Roth IRA (see Disclaimer): This is the last purchase made as part of the pared trade. I have at least managed to increase the "tax free" income generated by securities owned in the ROTH IRA, but that is not hard to do when the Vanguard Prime Money Market Fund (the source of funds for those purchases) has a current 30 day yield of .01%. Taxable Money Market Funds - V
I am becoming weary writing this post. I thought before the week started that I would be doing nothing, and have already bought by Thursday 10 securities. The decline in bond CEFs in May triggered most of the buying.
The Strategic Global Income Fund is an unleveraged world bond fund.
Snapshot of Trade:
My recent foray into SGL was ill-timed. Any foray into bond CEFs would have been far removed from optimal when made before around May 10. This last add brings me up to 150 shares in the ROTH IRA and I also recently bought 200 shares in a taxable account.
Item # 2 Bought Back 100 SGL at $10.57-Roth IRA; Item # 5 Bought 200 SGL at $10.56 (order date 5/7/13)(net asset value per share at $11.5)(one monthly dividend paid since that purchase)
I have nothing much to add to those recent prior discussions except to say the price is lower and the discount to net asset value has expanded to over 10% based on the closing data from the day prior to my purchase: SGL Interactive Chart $11.33 close on 1/23/13)
Data From 6/5/13:
Closing Net Asset Value Per Share $11.09
Closing Market Price= $9.96
Discount: -10.19
Date from Day of Purchase 6/6/13
Closing Net Asset Value Per Share: $11.09
Closing Market Price Per Share: $9.9
Discount: 10.73%
A 10.73% discount to net asset value per share is a steep discount for a bond CEF.
This CEF has suffered a sharp decline in net asset value per share since my 5/7/13 purchase, when the NAV per share was $11.5. After adjusting for one monthly dividend, the decline between 5/7 and 6/5 was significant at 3.06%. The adjusted share price decline was slightly steeper at -5.04%. Part of the recent net asset value decline may be currency related, given the recent strength of the USD until May 28 when the Dollar Index close at 84.1. I noted on June 6 that the Dollar Index had accelerated its slide from that high and was down over 1% at 81.54 when I placed the SGL order. DXY Index Chart A lower price indicates dollar weakness against a basket of currencies weighted in the EURO. (more information about U.S. Dollar Index: ICE_USDX_Brochure.pdf.
The one year average discount was 5.7%; the 3 year average discount was 5.59%; and the five year average discount, which includes the ridiculous discounts from the 2008 time period, was 8.16%, all computed by CEFConnect as of 6/5/13. This fund traded at over 30% discounts to its net asset value for brief periods during 2008
SGL Page at Morningstar (raised to 4 stars after the recent swoon in price)
SGL page at CEFConnect
Friday's Close: SGL: $9.86 -0.04 (-0.40%)
8. Bought 5 shares of EFAV at $57.46 (New Teaching Strategy for the Young Investor)(see Disclaimer): This is a teaching strategy attempting to mimic what I would be doing as a novice investor with limited funds to invest. The expense ratio of this fund is .2%, and the fund currently owns 184 stocks.
iShares MSCI EAFE Minimum Volatility Index Fund (EFAV): Overview - iShares
EFAV can be bought commission free at Fidelity. The decline since my original 15 share purchase was sufficient to trigger an automatic add last Wednesday.
In this particular strategy, I am not thinking at all after selecting the initial commission free ETFs to buy, but simply following a long term investment strategy that has several trading rules attached to it including buying small lots on dips. Bought 15 Shares EFAV at $61.6 So, if the young investor was working 80 hours a week (close to my work work week in the late 1970s and early 1980s) or otherwise had little time to devote to stocks, it could be determined fairly easily that the market was tanking and consequently a purchase of a 5 or 10 shares of a commission free ETF may be appropriate as part of a long term strategy. This ETF had declined by about 6.72% since my initial purchase. Most brokerage firms will allow the investor to set a price for an email alert which would be another way to handle buying 5 or 10 shares after 5+% declines. A 20% decline would trigger a bigger buy, with the largest buys coming during the catastrophic phase of a long term bear market (greater than a 45% decline)
Snapshot of Commission Free Purchase:
Friday's Close: EFAV: $58.18 +0.46 (+0.80%)
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I will discuss some of the trades made last week in the next weekly post. This one is long enough. Mostly, I have been concentrating my attention on bond CEFs and BDCs that are being sucked once again into a black hole. I will trade this kind of event, buying in increments and spacing the purchases out over several days.
Even if I am correct that the 10 year will rise to a 3.5% yield by this time next year, that kind of normalization in interest rates can not justify the kind of selloff recently experienced by bond CEFs. As noted in the introduction section and in the prior weekly post, inflation is declining according to the government's CPI and PCE price indexes, both highlighting a potential deflation threat near term rather than problematic inflation anywhere on the horizon. (see Doug Short's discussion at Two Measures of Inflation)
Historical Chart for the ISM Manufacturing: PMI Composite Index
The May ISM Services index was reported at 53.7%, up from 53.1% in April, marking the 41st consecutive month of expansion. The business activity index was at 56.5%. The new orders component rose to 56 from 54.5, but employment ticked down to 50.1 from 52.
Historical Chart for the ISM Non-manufacturing: Business Activity Index
Historical Chart for the ISM Non-manufacturing: NMI Composite Index
Historical Chart for the ISM Non-manufacturing: New Orders Index
Historical Chart for the ISM Non-manufacturing: Employment Index
Historical Chart for the ISM Non-manufacturing: Backlog of Orders Index
Labor productivity rose .05% in the 2013 first quarter and .9% Y-O-Y. First Quarter 2013, Revised Non-farm unit labor costs fell fell 4.3% in the first quarter, as hourly compensation fell 3.8% with the .05% increase in productivity. Hourly compensation did rise 2% over the past four quarters but the decline in the last quarter was the largest since the BLS started to compile statistics in 1947.
ADP reported that private employers added an estimated 135,000 jobs in May, lower than the consensus estimate of 165,000. ADP also revised the April number down from 119,000 to 113,000. The service sector provided all of the new jobs with manufacturing shedding 3,000 jobs during the month.
In the Beige Book released last week, eleven out of the 12 FED Districts reported modest to moderate growth for the period between early April to late May, with the Dallas FED reporting strong growth in its district. FRB: Beige Book - June 5, 2013
For the first time in 16 years, U.S. crude oil production exceeded imports over the 7 day period ending May 31. eia.gov/petroleum/supply/weekly/pdf/table1.pdf
The Federal Reserve released its "Z.1" flow of funds last week. This report contains an estimate of household net worth. federalreserve.gov.pdf At the end of the 2013 first quarter, the FED estimated that household net worth increased about $3 trillion, since 12/31/2012, to approximately $70.3 trillion. Household debt declined .6% in the first quarter with mortgage debt shrinking by 2.3%.
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Intel (own):
FBR Capital Markets raised Intel to outperform and increased its price target to $28 from $23. The report is summarized in a Barrons' article.
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Gross June 2013 Newsletter:
In his June newsletter, PIMCO | Investment Outlook - Wounded Heart, Bill Gross makes a convincing case why the FED's monetary policies are now doing more harm than good.
I am willing to overlook another few months of QE for two reasons.
First, one positive long term secular force supporting U.S. growth is the increase in disposable household income resulting initially from mortgage refinancing at abnormally low interest rates and consequently providing more disposal income to spend and/or to save to support a long term recovery. A large segment of households need a continued recovery in home prices in order to refinance since their loans are not owned by Fannie or Freddie and consequently do not qualify for refinancing under the HARP program. Disposable income will then be augmented over time by increases in wage income and income from savings once the FED ends ZIRP.
Second, new home construction is still on life support and the U.S. economy needs this important sector to improve.
However, I also recognize that the positive returns from QE are rapidly diminishing and are probably outweighed now by the negative impacts which are now and have been substantial drags on the economy.
Gross identifies several of the negative consequences.
I view the most important one to be the impact on spending arising from lower interest income from savings. I highlighted that issue in several 2011 posts including this one: Item # 1 The Real Cost of The Federal Reserve's Jihad against the Saver Class I referenced a study that estimated that the FED's abnormal monetary policies were reducing U.S. GDP by about 1.75% per year. Another summary of this study can be found in The Big Picture blog. While the impact can be debated, the overall negative impact on spending from reduced income can not be seriously questioned as being substantial.
There is for example over 1 trillion dollars sitting in money market accounts, owned by individuals and non-profits, earning nothing due to ZIRP. Households and Nonprofit Organizations; Money Market Mutual Fund Shares; Asset
The average five year CD rate for banks and thrifts is less than .8%, 5-Year CD: National Rate of Banks and Thrifts. The 1 year CD rate average for national banks is .1%. 1-Year CD: National Rate of Banks (see Certificates of Deposit -St. Louis Fed for more information on the impact of the FED's Jihad Against the Saving Class)
The Federal Reserve publishes the components of the money supply. Savings deposits as of 5/20/13 were at $6.803 trillion dollars. Small denomination time deposits (less than $100,000) totaled $580+ billion. Institutional money funds total $1.739 trillion. Federal Reserve Statistical Release H.6 - May 30, 2013
In 2011, corporations were sitting on nearly $5 trillion in cash (more now). Why Are Corporations Holding So Much Cash?
In short, there is a ton of money laying around earning nothing. Individual Americans have a proven tendency to spend their income. Unfortunately, the leaders of many American corporations would prefer to hoard cash rather than to invest it in productive enterprises. Possibly they need massive cuts in their pay which has gone way beyond ridiculous for hired help prone to mistakes and modest at best achievements.
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This post will be primarily devoted to describing what I characterize as a pared trade. A pare trade is basically keeping my overall allocation relatively unchanged but switching from one security to one or more other securities. The rational will generally be one or more of the following: (1) better income potential; (2) an assessment of relative valuation, particularly applicable for functionally equivalent securities; and/or (3) a determination about possible capital appreciation potential.
The first part of the trade was to sell my entire position of the Vanguard bond mutual fund VGICX held in a taxable account. The yield on that fund after tax was below 2%. I am paring that sell, just in my mind, with the purchase of several high yielding closed end bond funds and one BDC in the ROTH IRA, where their dividend payments become tax free. Closed end bond funds have been smashed during the recent bond correction. Some of my reasons underlying this pared trade are also discussed in recent comments to this SA article. Yields It would not be surprising to see the bond CEFs continue sliding in price as interest rates continue their path toward normalization.
1. First Part of the Paired Trade: Sold All 459+ Shares of VFICX in a Taxable Account (See Disclaimer):
Snapshot of History: I have held this security for a few years and received a decent return taking into account the conservative nature of this fund. I previously sold 100 shares for a profit, as shown in this detailed history which took two snapshots two display. All of the dividends were reinvested to buy more shares. I also received several short and long term capital gain distributions in addition to the monthly income dividends. Since inception in 2009, those capital gain distributions totaled $310.94.
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| Transaction History 12/30/2010 to 5/31/2013 |
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| Transaction History: 11/04/2009 to 11/30/2010 |
Snapshot of Profit:
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| 2013 VFICX 459+ Shares +$145.93 |
Security Description: VFICX is an intermediate term bond mutual fund that owns investment grade bonds.
The Vanguard Intermediate-Term Investment-Grade Fund Investor Shares (VFICX) had an average duration of 5.3 years as of 4/30/13 and an SEC yield of 2.15% as of 6/3/13. It simply made no sense for me to keep that fund in a taxable account where taxes eat into the meagre yield.
Closing Price on Day of Sale (6/4/13): VFICX: $10.05 -0.02 (-0.20%)
The average duration of the ETF LQD, an intermediate investment grade corporate bond fund, was 7.69 years as of 6/3/13.
The intermediate investment grade bond ETF from Vanguard ((VCIT) has an average duration of 7.5 years as of 4/30/13, with a SEC yield of 2.7% as of 6/3/13.
MIN, the investment grade intermediate bond CEF discussed in the next section, has an effective duration of 3.84 years.
Friday's Close: VFICX: $10.01 -0.04 (-0.40%)
Given the low yield of this fund, it will not take much of a decline to wipe out a year's worth of dividend payments.
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The following discussion is a list of income producing securities bought in the ROTH IRA rather than continuing to hold VFICX in a taxable account. I am not using the funds raised in the VFICX transaction to buy securities in the ROTH IRA where I have plenty of cash earning zero. Instead, I am substituting similar and/or higher yielding securities in an IRA in the approximate amount of the VFICX proceeds realized from the sale in a taxable account.
I am going to give a detailed discussion of bond CEF MIN since this was my first purchase. I recently sold profitably 1000 shares of MMT, another bond CEF from the same sponsor. Sold 300 of the Bond CEF MMT at $7.57-ROTH IRA (4/30/13 Post); Sold 300 of the BOND CEF MMT at $7.09 (2/29/13 Post); Sold 300+of the Bond CEF MMT at $6.83 (1/19/2012 Post).
I am not going to discuss the other purchases much, since those securities have been discussed on many occasions. I will just update the pertinent data and reference earlier discussions.
Total Cost of Five Purchases (MIN, GDO, ARCC, GHY, SGL) = $4,867
Total Proceeds from VFICX= $4,616.21
Please note that I have not increased my exposure to bonds but simply reached for additional yield that becomes even more advantageous by buying the higher yielding securities in the ROTH IRA and selling the lower yielding bond fund held in a taxable account.
If the funds used to pay for those five purchases had remained parked in the Vanguard Prime Money Market fund, and earned for an entire year the current rate of .01%, I would earn a grand total of almost $.49. Thank you Uncle Ben. I am more than just a tad underwhelmed.
2. Bought 300 MIN at $5.6-Roth IRA (see Disclaimer):
Snapshot of Trades: This snapshot includes the first securities purchase in the ROTH IRA as part of the pared trade:
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| Part of Pared Trade: 50 ARCC @ $16.9, 50 GDO @18.7, 300 MIN @5.6 |
The MFS Intermediate Income Trust (MIN) is a leveraged closed end fund that owns investment grade corporate bonds. The fund pays monthly dividends at the current rate of $.04274 per share. MFS Announces Closed-End Fund Distributions At a total cost of $5.6, the dividend yield at that rate would be approximately 9.16%.
As of 4/30/13, the sponsor claimed that the average duration of MIN was 4.41 years and the effective duration was at 3.84 years.
MIN Data Date of Purchase (6/3/13)
Closing Net Asset Value Per Share: $5.97
Closing Market Price: $5.65
Discount: -5.36%
Discount at $5.6 Purchase Price= -6.2%
MIN DATA Date After Purchase (6/4/13):
Closing Net Asset Value Per share: $5.97
Closing Market Price: $5.67
Discount: -5.03
Last SEC Filed Shareholder Report for period ending 1/31/13: MFS INTERMEDIATE INCOME TRUST N-Q
Sponsor's Webpage: MFS Intermediate Income Trust
I took the following snapshot of MIN's top ten holdings and credit quality information, both as of 4/30/13:
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| AS of 4/30/13: Sponsor's Webpage |
MIN Page at CEFConnect
Morningstar has a negative view of this CEF, giving it a 1 star rating at the time of my purchase and 2 stars now. MIN MFS Intermediate Income The rating was based on a combination of factors, including the a "nothing special" performance, its premium pricing to net asset value and a large return of capital component supporting the dividend. Morningstar notes that this fund was selling at an average premium to net asset value of 4.69% for the prior six months. That issue was no longer applicable when I purchased shares since the shares had fallen to a discount to net asset value as noted above.
One huge negative for me is that the managers of this fund have somehow lost money buying investment grade corporate bonds with a strong tailwind at their back. I view that as just pathetic.
The Annual report for the period ending October 31, 2012 shows that the fund still had a loss carryforward of $35,709,870 after using part of that loss carryforward to offset recent long term capital gains. MFS INTERMEDIATE INCOME TRUST at page 38 The loss carryforward was $47,508,883 as of 10/31/10: MFS INTERMEDIATE INCOME TRUST at page 39 Lastly, the loss carryforward was at $67,223,261 as of 10/31/10; $61,879,081 as of 10/31/07; and $35,028,896 as of 10/31/03. The two portfolio managers have been managing the fund since March 2002 and May 2004 respectively.
I left a comment to a SA article discussing my negative view of the loss carryforward number for an intermediate investment grade bond fund and illustrating how the loss carryforward increased the return of capital component of MIN's dividend for the 2012 fiscal year. MIN Update - Seeking Alpha
The loss carryforward will shield long term capital gains from taxation, which in turn will increase the dividend's return of capital component since this fund actually needs a substantial amount of capital gains each year to support the dividend. Some investors like a return of capital, but I am not one of them.
I did not explore how the manager's of the fund lost money investing in an asset class that has done well for a long time. I suspect that the main reason was bad trading, selling bonds at inopportune moments, and possibly more than a few less than optimal selections. Anyone interested in exploring how those managers accomplished that result can dig through the historical shareholder reports at the SEC. MIN's SEC Filings The end result already tells the story for me, without the need for exploring the particulars.
So, if I am so negative about the competence of MIN"s managers, why buy the fund? I am generally comfortable with the investment grade bond portfolio and the relatively short duration. More importantly, the recent decline juices the dividend yield and may provide me hopefully with a short term trading opportunity.
In May 2013, there was a huge selloff in bond CEFs and the shares of MIN declined from $6.51 on 4/29 to my purchase price of $5.6 on 6/4, a 13.98% decline based on price and 13.32% adjusted for the one monthly dividend ($.043 per share) paid during that time period. MIN Historical Prices
During the same period, the ETF LQD, which owns investment grade corporate bonds and has a longer duration at 7.69 years as of 6/3/13, declined 3.99% in price (calculation made by using the $117.06 price at the time the MIN order was filled and after an adjustment for a $.361 dividend). The Vanguard mutual fund VFICX fell less than 2%.
I view MIN to be nothing more than a short term trade. Most likely, I would sell that shares at $6 or higher. A return to $6 from $5.6 price would be less than a 50% retracement from the $6.51 price on 4/29/13. MIN Interactive Chart
The return of capital adjustment to the cost basis is not relevant in a IRA, but the inability to earn the dividend is still relevant irrespective of whether MIN is bought in an IRA or a taxable account.
My goal is simply to collect several monthly dividends and then hopefully sell the shares at over $6 before the end of this year. If the shares fall below a 10% discount to net asset value, I will simply change my reinvestment option from cash to reinvestment and thereafter become an involuntary long term holder. I will not be buying more shares in the open market based on my negative opinions about this fund and its managers.
Friday's close: MIN: $5.63 -0.04 (-0.71%)
3. ADDED 50 GDO at $18.7-Roth IRA (see Disclaimer): The snapshot of this trade can be found in Item #2 above.
For readers of this blog, the Western Asset Global Corp Defined Opportunity Fund (GDO) needs no introduction. After selling out of my position, which went over a $10,000 exposure at one time, I have started buying shares back and now I have already started to average down.
I last eliminated my position in the ROTH IRA back in February 2013: Pared Trade Roth IRA: Sold 120 GDO at $20.73-Bought 100 GSPRD at $21.38 Incidentally, I later sold GSPRD in that pared trade: Sold 100 GSPRD at $23.71-Roth IRA (4/2/13 Post).
This last 50 share purchase in the ROTH IRA was an average down from a March 2013 buy which now brings my position up to 150 shares in the Roth IRA. Bought Back GDO at $19.95-Roth IRA
Data on Date of Purchase (Tuesday 6/4/13)
Closing Net Asset Value Per Share: $20.6
Closing Market Price: $18.71
Discount: -9.17%
Data from Previous Friday (5/31/13)
Closing Net Asset Value Per Share: $20.66
Closing Market Price: $19.1
Discount: -7.55%
GDO Page at Morningstar (recently upgraded to 4 stars, possibly based just on the price decline; three year average discount -4.55%)
GDO page at CEFConnect The "pricing history" page shows the recent expansion in the discount to net asset value.
The link to the sponsor's site for GDO will not work. Instead, the link will take you to the main Legg Mason page where you will need to click a box titled "closed end funds" and then scroll to GDO.
Individual Investor - Closed-End Funds Details
Under the "portfolio characteristics" tab, the fund provides details about country weighting, credit quality and important metrics like duration. The fund claims that the effective duration was 4.2 years as of 3/31/13, and the fund had then 257 holdings. The fund had a 63.51% currency exposure to the USD; 22.09% to the Euro and 12.25% to the British Pound as of 3/31/13. So there is currency risk associated with those foreign bond holdings which requires some monitoring of the exchange rates for at least the Euro and British Pound:
EUR/USD Currency Conversion Chart
GBP/USD Currency Conversion Chart
The credit quality is weighted in investment grade bonds, but the fund does maintain a significant exposure to junk rated bonds (as of 3/31/13, BB at 14.57%; B at 12.23%; CCC at 3.85%)
I mentioned in an earlier post that GDO recently cut its monthly dividend to $.115 per share from $.12. Western Asset Global Corporate Defined Opportunity Fund Inc. (“GDO”) Sets New Rate and Announces Distributions for the Months of June, July and August 2013 I expect that this CEF will make an effort to avoid a return of capital distribution, which is one reason for the recent cuts, and the other reason is the fund's relatively short duration. The managers also need to keep in mind that the fund is scheduled to liquidate in 2024 which means that higher yielding, longer term bonds need to be kept to a minimum.
None of the 2012 dividends were classified as return of capital by the fund: leggmason.com/PDF
At the new reduced monthly rate, the dividend yield at a total cost of $18.7 would be about 7.38%.
Needless to say, I have been an active trader in this security. Some of my trades are linked below:
Bought 100 of the CEF GDO at $18.6 March 2010; Bought 70 of the CEF GDO in Regular IRA at $18.61 March 2010; Bought 200 of the CEF GDO at 18.63 and 18.53 (100 in Roth and 100 Taxable Account respectively) March 2010; Bought 100 GDO at $18.57 April 2010; Bought Back 50 shares of GDO at 17.8 in the Roth IRA previously sold at $19.24 December 2010; Sold 100 GDO at $18.72 January 2012; Sold 200 GDO at $19.18 June 2012; Sold Remaining GDO in Taxable Account at $19.69 July 2012; Sold 100 GDO at $20.79 December 2012; Pared Trade Roth IRA: Sold 120 GDO at $20.73-Bought 100 GSPRD at $21.38; Bought 100 GDO at $19.8 April 2013
Friday's Close: GDO: $18.88 -0.10 (-0.53%)
4. Bought 50 ARCC at $16.9-ROTH IRA (see Disclaimer): Ares Capital is a business development corporation.
Profile at Reuters
Key Developments
I do not expect much, if any, capital appreciation when buying a BDC due to the rich compensation paid to a BDC's managers (see pages 40-42 10-q), the hefty dividends paid to the common shareholders that deplete the firm's capital cushion, the constant flow of capital raises which are frequently dilutive to existing shareholders, and the risky loans made by BDCs to private companies. The sole reason to buy any BDC is for its income generation. The goal is to sell the stock for any profit after collecting several dividend payments.
BDCs are likely to decline more than a major market average during recessions, stock bear markets and corrections in bull markets. In a recent SA comment, I noted that the BDC PSEC declined about 35% between 5/2/2011 and 8/8/11 when the S & P 500 declined almost 18%. During that same period, ARCC declined from $17.36 to $13.07. Adding back a $.35 per share dividend to the $13.07 price, the adjusted decline was 22.69%.
I also recently bought 70 shares in a regular IRA. Item # 2 Bought 70 ARCC at $17.24-REGULAR IRA The last 50 share purchase brought me up to 120 shares in the IRAs.
I sold 50 ARCC shares in taxable account: Item # 1 Sold 50 ARCC at $18.02 (5/6/13 Post) I calculated in that post that the total return for those shares was 29.38%. I still own 50 shares bought in a taxable account: Bought: 50 of the BDC ARCC at $16.17
For tax reasons, it makes more sense to own BDCs in the IRA since most of the dividends paid by them will not be classified as qualified dividends. However, given their risks, a frequently discussed subject in this blog, I will trade them frequently in an IRA for whatever profit is achievable after collecting a year or two of dividends. I am simply hoping for a 10% annualized gain with the dividend providing most of that return.
As of 3/31/13, the net asset value per share was $15.98, up from $15.47 as of 3/31/12 but down from $16.04 on 12/31/12. The company had as of 3/31/13 investments in 151 companies with a weighted average yield of its loans and other income producing investments at 11%. Ares Capital Corporation Declares Second Quarter 2013 Dividend of $0.38 Per Share and Announces March 31, 2013 Financial Results
Based on the current regular $.38 per share quarterly dividend, the yield at a total cost of $16.9 is approximately 8.99%. Ares did pay a $.05 special dividend last December. ARCC :: Investor Resources :: Dividends
A list of the investments can be found starting at page 4 of the recently filed SEC Form 10-Q. (see also ARCC :: Portfolio)
As previously noted, Ares priced a large public offering of common stock during April, selling 19.148M shares at $17.43 (see page 59-Form 10-Q)
Friday's Close: ARCC: $16.93 -0.01 (-0.06%)
5. Added 50 GHY at $17.55 in the Roth IRA (see Disclaimer): This is the 4th security bought in the pared trade. The Prudential Global Short Duration High Yield Fund (GHY) is a new closed end fund that invests in short term junk bonds globally.
As of 4/30/2013, the U.S. had approximately a 56.1% weighting. Foreign currency exposure can by itself result in net asset value per share going down or up, adding both potential risks and benefits (gains and losses) resulting from owning foreign bonds. The currency risk is just another layer of risk.
Since my last purchase in the Roth IRA, made on 4/24/13, the fund has paid one monthly dividend of $.125 per share. GHY Historical Prices The net asset value per share was $19.07 on 4/24/13 and $19.06 on 5/24/2013, indicating that the share price decline was not due to any material change in the net asset value per share. Instead, the discount to net asset value has been expanding along with all other CEF bond funds that I monitor.
Historical NAV per share and discount/premium information can be found under the "pricing history" tab at CEFConnect.
The fund recently declared a $.125 per share dividend for June, July and August: Prudential Short Duration High Yield Fund, Inc. and Prudential Global Short Duration High Yield Fund, Inc. Declare Distributions for June, July, and August 2013 The June ex dividend date is shown as 6/18/13.
Snapshot of Trade:
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| 2013 Roth IRA Added 50 GHY at $17.55 |
This last purchase was an average down and brings me up to 100 shares in the Roth IRA. Item # 3 Bought 50 of the Bond CEF GHY at $18.77-Roth IRA I changed my dividend option to reinvestment from payment in cash after completing this last purchase. I noted in that post that the net asset value was $19.
Data From Day Prior To Purchase:
Closing Net Asset Value Per Share= $18.86
Closing Market Price= $17.73
Discount= -5.99%
Data From Day of Purchase:
Closing Net Asset Value Per Share: $18.74
Closing Market Price: $17.4
Discount: -7.15%
The closing net asset value per share last Friday was $18.76.
GHY Page at CEFConnect
Holdings - Prudential Investments
The sponsor states that the duration was 2.7 years as of 4/30/13. Fund Facts (near bottom of page)
SEC Filed Semi-Annual Report for the Period Ending 1/31/13: Prudential Global Short Duration High Yield Fund, Inc.
Friday's Close: GHY: $18.02 +0.05 (+0.28%)
6. Sold 50 GJS at $17.14-Roth IRA (see Disclaimer): The Synthetic Fixed-Income Securities Inc. Floating Rate STRATS Series 2006-2 for Goldman Sachs Group (GJS) is one of the many esoteric securities that I will buy in the retirement accounts. GJS is a Synthetic Floater in the Trust Certificate legal form of ownership that pays a .9% float over the 3 month treasury bill on a $25 par value, up to a maximum coupon of 7.5%. www.sec.gov The underlying security in this complex Exchange Traded Bond is an unsecured senior bond issued by Goldman Sachs that matures in 2033. My last foray into this security was a 50 share purchase at $13.77 last December.
Snapshot of Transaction History: This snapshot reveals why I decided to harvest the profit:
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| GJS Transaction History |
For as long as the FED continues ZIRP, a .9% spread over the three month T Bill is almost a .9% spread over zero or just call it .9% on a $25 par value. In other words, the yield is currently not much even when computed on a total cost per share that is deeply discounted from the $25 par value. The security does have two advantages when bought at my last price of $13.77. One is a profit built into the difference between the $25 par value at maturity and the purchase price. The other is that the deep discount would juice the yield when rates return to normal levels, which would be in the 4% to 4.5% range for the 3 month T Bill.
3-Month Treasury Constant Maturity Rate - St. Louis Fed
We are years away from that normal range, unless something totally unexpected happens with inflation that causes the FED to spike increases in the federal funds rate, viewed now as a very low possibility event within the next four to five years.
Snapshot of Trade:
Snapshot of Profit:
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| 2013 Roth IRA GJS 50 Shares +$154.48 |
I have not had the same success with GJS compared to the synthetic floaters GYB and PYT that have minimum coupons and a 2034 GS Capital TP as their underlying security.
Bought 100 GJS at $12.25 June 2009- SOLD GJS at 13.06 August 2009
Bought 100 GJS AT $13 October 2009-Sold 100 GJS at 15.6 in the Roth IRA November 2009
Bought: 50 GJS at 14.6 August 2010- Sold 50 GJS @ 16.20 October 2010
Added 50 of the Synthetic Floater GJS at 13.25-Roth IRA-December 2011-Sold 100 GJS at $14.9 and Bought Back 100 of GYB at 17.2-Roth IRA March 2012
Bought 100 GJS at $10.5 April 2009
I no longer view any of the synthetic floaters as worthy of purchase at their current prices and my outlook for short term interest rates over the next three to five years.
This last profit brings my total for Trust Certificates up to $25,644.11 (see snapshots at Stocks, Bonds & Politics: Trust Certificates: New Gateway Post)
Rationale: At the moment, the profit realized from this security is more important than its income generating potential five or so years into the future. The last 12 months of income is close to $12. I can earn far more with another investment now than that $12 or so paid by GJS to me over the past year. The future inflation protection is not worth the low current income, reasonably projected to last several more years, given the profit built into the sales price.
7. Added 50 SGL at $9.89 Roth IRA (see Disclaimer): This is the last purchase made as part of the pared trade. I have at least managed to increase the "tax free" income generated by securities owned in the ROTH IRA, but that is not hard to do when the Vanguard Prime Money Market Fund (the source of funds for those purchases) has a current 30 day yield of .01%. Taxable Money Market Funds - V
I am becoming weary writing this post. I thought before the week started that I would be doing nothing, and have already bought by Thursday 10 securities. The decline in bond CEFs in May triggered most of the buying.
The Strategic Global Income Fund is an unleveraged world bond fund.
Snapshot of Trade:
My recent foray into SGL was ill-timed. Any foray into bond CEFs would have been far removed from optimal when made before around May 10. This last add brings me up to 150 shares in the ROTH IRA and I also recently bought 200 shares in a taxable account.
Item # 2 Bought Back 100 SGL at $10.57-Roth IRA; Item # 5 Bought 200 SGL at $10.56 (order date 5/7/13)(net asset value per share at $11.5)(one monthly dividend paid since that purchase)
I have nothing much to add to those recent prior discussions except to say the price is lower and the discount to net asset value has expanded to over 10% based on the closing data from the day prior to my purchase: SGL Interactive Chart $11.33 close on 1/23/13)
Data From 6/5/13:
Closing Net Asset Value Per Share $11.09
Closing Market Price= $9.96
Discount: -10.19
Date from Day of Purchase 6/6/13
Closing Net Asset Value Per Share: $11.09
Closing Market Price Per Share: $9.9
Discount: 10.73%
A 10.73% discount to net asset value per share is a steep discount for a bond CEF.
This CEF has suffered a sharp decline in net asset value per share since my 5/7/13 purchase, when the NAV per share was $11.5. After adjusting for one monthly dividend, the decline between 5/7 and 6/5 was significant at 3.06%. The adjusted share price decline was slightly steeper at -5.04%. Part of the recent net asset value decline may be currency related, given the recent strength of the USD until May 28 when the Dollar Index close at 84.1. I noted on June 6 that the Dollar Index had accelerated its slide from that high and was down over 1% at 81.54 when I placed the SGL order. DXY Index Chart A lower price indicates dollar weakness against a basket of currencies weighted in the EURO. (more information about U.S. Dollar Index: ICE_USDX_Brochure.pdf.
The one year average discount was 5.7%; the 3 year average discount was 5.59%; and the five year average discount, which includes the ridiculous discounts from the 2008 time period, was 8.16%, all computed by CEFConnect as of 6/5/13. This fund traded at over 30% discounts to its net asset value for brief periods during 2008
SGL Page at Morningstar (raised to 4 stars after the recent swoon in price)
SGL page at CEFConnect
Friday's Close: SGL: $9.86 -0.04 (-0.40%)
8. Bought 5 shares of EFAV at $57.46 (New Teaching Strategy for the Young Investor)(see Disclaimer): This is a teaching strategy attempting to mimic what I would be doing as a novice investor with limited funds to invest. The expense ratio of this fund is .2%, and the fund currently owns 184 stocks.
iShares MSCI EAFE Minimum Volatility Index Fund (EFAV): Overview - iShares
EFAV can be bought commission free at Fidelity. The decline since my original 15 share purchase was sufficient to trigger an automatic add last Wednesday.
In this particular strategy, I am not thinking at all after selecting the initial commission free ETFs to buy, but simply following a long term investment strategy that has several trading rules attached to it including buying small lots on dips. Bought 15 Shares EFAV at $61.6 So, if the young investor was working 80 hours a week (close to my work work week in the late 1970s and early 1980s) or otherwise had little time to devote to stocks, it could be determined fairly easily that the market was tanking and consequently a purchase of a 5 or 10 shares of a commission free ETF may be appropriate as part of a long term strategy. This ETF had declined by about 6.72% since my initial purchase. Most brokerage firms will allow the investor to set a price for an email alert which would be another way to handle buying 5 or 10 shares after 5+% declines. A 20% decline would trigger a bigger buy, with the largest buys coming during the catastrophic phase of a long term bear market (greater than a 45% decline)
Snapshot of Commission Free Purchase:
Friday's Close: EFAV: $58.18 +0.46 (+0.80%)
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I will discuss some of the trades made last week in the next weekly post. This one is long enough. Mostly, I have been concentrating my attention on bond CEFs and BDCs that are being sucked once again into a black hole. I will trade this kind of event, buying in increments and spacing the purchases out over several days.
Even if I am correct that the 10 year will rise to a 3.5% yield by this time next year, that kind of normalization in interest rates can not justify the kind of selloff recently experienced by bond CEFs. As noted in the introduction section and in the prior weekly post, inflation is declining according to the government's CPI and PCE price indexes, both highlighting a potential deflation threat near term rather than problematic inflation anywhere on the horizon. (see Doug Short's discussion at Two Measures of Inflation)
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