Stocks:
Stable Vix Pattern (Bullish)
Stable Vix Pattern (Bullish)
Short Term: Hoping for a 10+% Correction
Intermediate and Long Term: Bullish
Bonds:
Short to Long Term: Slightly Bearish (due to interest rate normalization)
The better than expected jobs report sent the 10 year treasury down in price and up in yield. This was not due to a change in inflation expectations, but to interest rate normalization. The ten year treasury closed yesterday at a 2.73% yield:
Daily Treasury Yield Curve Rates
The better than expected economic news did cause a slight uptick in inflation expectations embodied in the 10 year TIP's price. The inflation expectation closed at a 2.07% annual average rate, compared to 1.99% as of the previous Friday. If there is a material significant upward movement in inflation expectations, I will change my bond outlook. I am not tying the outlook solely to bond losses resulting from interest rate normalization with no losses associated with rising inflation.
Better than expected economic news will cause investors to reassess the time frame for the reduction and elimination of the FED's asset purchases. It is those asset purchases that are keeping intermediate and longer term treasuries below free market prices and yields. The process of returning to interest rates set by a free market is what is meant by interest rate normalization. Stocks, Bonds & Politics: The Difficult Path to Interest Rate Normalization
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Recent Economic Reports:
The June ISM PMI for manufacturing was reported at 50.9, slightly better than expected, and up from the 48.8 reading in May. The new orders component rose to 51.9 from 48.8. Production increased to 53.4 from 48.6. Exports increased to 54.5 from 51.
CoreLogic reported that its home price index rose 12.02% in May year-over-year, the largest Y-O-Y increase since February 2006 and the 15th consecutive increase in prices nationally.
The government reported that factory orders rose 2.1% in May, better than the consensus estimate of +1.9%. Excluding transportation, new orders rose .6%. Orders for April were revised to 1.3% from 1% growth. census.gov.pdf
U.S. light vehicle sales increased to a 15.9M annual run rate in June, the highest level since November 2007, according to WardsAuto.
ADP reported that the private sector added 188,000 jobs in June, led by a 84,000 increase by small employers (1-49 employees). ADP National Employment Report - June 2013 The expectation was for a 160,000 increase in private jobs. Construction jobs increased by 21,000.
ISM June Services PMI Index declined to 52.2% from 53.7% in May. The consensus estimate was 54.4. The new orders component declined to 50.8 from 56. Employment did rise to 54.7 from 50.1.
The Labor Department reported yesterday that 195,000 jobs were added in June with the unemployment rate remaining unchanged at 7.6%. Employment Situation Summary The private sector added 202,000 jobs. Manufacturing cut 6,000 jobs. Average hourly earnings rose 10 cents to $24.01. The prior two months were revised up to show an additional 70,000 jobs. The U-6 number jumped to 14.3% in June from 13.8% in May. Table A-15. Alternative measures of labor underutilization
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Travelport Redemption 2016 Bond:
Travelport redeemed another one of my bonds. This last one was a 9% senior unsecured note maturing in 2016 and was redeemed at a premium to its par value. I owned just one bond:
I also received $26.25 in accrued interest. I am just glad to exit the position at a profit plus the interest payments:
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Reinvestment DWX Dividend and IDV Adds:
The SPDR S&P International Dividend ETF Fund (DWX) hit a closing high of $50.85 back in May and has slid some since that time. I considered paring my 100 share lot at over $50 but decided to keep my position in tack long term. This international stock ETF does pay a good dividend, which I recently used to buy more shares:
Bought 50 of the Stock ETF DWX at $47.56; Averaged Down By Adding 50 of the Stock ETF DWX at $43.76
Sponsor's website: SPDR S&P International Dividend ETF
Instead of adding to DWX with open market purchases on downdrafts, I have elected to buy small lots of IDV which can be purchased at Fidelity without a commission. I am buying 5 or 10 shares during market dips and currently own just 20 shares.
Sponsor's website: iShares International Select Dividend ETF (IDV) The expense ratio is .5%, and this ETF currently owns 101 positions.
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GGAL Foreign Tax Withholding:
There is a point when taxation becomes nothing more or less than confiscation. Argentina's withholding tax on my GGAL dividend has without question reached the point of confiscation. It is really not important since my position in Grupo Financiero Galicia S.A. ADS is a Lottery Ticket but there is something to be learned nonetheless from what was taken by Argentina and what was left for me:
So Argentina took $1.39 of the $1.46 dividend payment and left me with 7 cents. I am certain that the "populist" politicians who are responsible for ruining that nation's potential see nothing amiss with that result.
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1. Sold 50 ONB at $14.12 (REGIONAL BANK BASKET STRATEGY GATEWAY POST)(see Disclaimer): I decided to eliminate Old National Bancorp for the second time for the reasons explained below. It would have been better to wait until yesterday to sell these shares.
Snapshot of Trade:
Snapshot of Profit:
Item # 4 Bought Back 50 ONB at $11.9 May 2013
This last trade constitutes my second round trip for ONB: Item # 1 SOLD 100 ONB at $13 August 2012 (snapshot of profit=$99.07)-Bought 100 ONB at $11.85 May 2012
Total Realized Gains for ONB= $194.2
Rationale: My regional bank basket rose in value during June and started off July with a strong up move. Excluding ONB, the basket ended 7/1/13 up $663.54 or 1.31%, beating once again the move in the S & P 500 which gained .54%.
It is natural for me to start selling some stocks into strength.
I chose Old National based on a number of factors including its TTM of about 14.78 at the $14.12 price which is on the high side and a less than 3% dividend yield at the $14.12 price which is on the low end for banks in my basket. I also had a quick profit of about 16%. ONB is also one of my smallest positions in the basket, and I have flipped it previously. Lastly, I am somewhat concerned about the heavy short interest discussed in this Forbes' article. Am I missing something that the short sellers see?
Last Friday's Close: ONB: $14.74 +0.40 (+2.79%)
I also used the rally in regional bank stocks to unload another 50 share position yesterday, which I will discuss briefly in the next post.
After these two sells, the unrealized gain stood at approximately $7,073 as of 7/5/13, up 2.4% or $1,204. last Friday (all of the foregoing numbers exclude the increase in value of reinvested dividends which are not being tracked in my YF portfolio).
2. Bought 100 HUSKF at $26.42 (see Disclaimer):
Snapshot of Trade:
Security Description: I bought the ordinary shares of Husky Energy (HUSKF) that are traded on U.S. "pink sheet" exchange, now called OTCMarkets. By buying the ordinary shares on a U.S. exchnage, I saved about $11 in the brokerage commission. Sometimes, the brokerage company will convert HUSKF into the Toronto listed ordinary shares HSE:TO on the settlement date. As shown below, the shares cost about $1.5 per share less using USDs rather than my CADs to complete a purchase on the Toronto exchange, due to the greenback's recent strength against the Canadian dollar:
Recent Earnings Report: For the 2013 first quarter, Husky reported net income of C$535M or C$.54 per share down from C$.6 in the 2012 first quarter, reflecting lower crude prices. Cash flow from operations increased approximately 8% to C$1.3B or C$1.3 per share. The Liwan Gas Project in the South China Sea is scheduled for first production in late 2013 or early 2014.
The average forecast was for C$.54, Reuters.
U.S. refining and marketing added C$145M to net earnings during the first quarter, up from C$71M, primarily reflecting higher throughputs at Husky's Lima refining and more favorable crack spreads. The Lima refinery produces about 2 billion gallons of refined petroleum products annually including 25% of the gasoline consumed in Ohio. Husky Energy - U.S. Refineries The Canadian refining operations are discussed starting at page 62 of the Annual Report.
SEC Filed News Release
Earnings Call Transcript - Seeking Alpha
Rationale: Husky is viewed by many investors as a relatively unattractive integrated energy company. Since early in 2009, the ordinary shares have been trading mostly in a narrow channel range between C$25 to C$30 per share. HSE.TO Interactive Chart
There are several potential catalysts on the horizon, however, with the Liwan Gas Project being the most important. Husky Energy - The Liwan Gas Project – Block 29/26 That project is a joint venture with CNOOC and is located about 300 kilometres southwest of Hong Kong. Natural gas is much more expensive in Asia with price realizations between $11 and $13/mcf. Management is projecting production from this field of approximately 150 mmcfpd.
During the first 15 months of production, Husky is expected to be reimbursed C$700M in exploration expenses.
Husky produced last quarter about 321,000 barrels of oil equivalent per day, weighted 72% in oil and liquids compared to 69% a year ago.
Husky is also involved in Canada's oil sands. It exchanged with BP a 50% interest in its Sunrise oil sands project for a 50% interest in BP's Toledo refinery, plus BP is responsible for the C$2.5 in capital spending for that project. Husky Energy - Sunrise Energy Project The first phase of that project is scheduled for completion in 2014 and is expected to produce about 60,000 barrels per day.
Husky has been successful in replacing its production with new reserves with a two year reserve replacement ratio of 175% or 149% after certain "economic revisions". Form 6-K
More information relating to Husky's upstream projects can be found in its Annual Report, starting at page 18: SEC Form 40-F
A recent article published by Seeking Alpha discusses Husky's project in the Cold Lake region of Alberta's oil sands.
I have been in a trading mode for this security, clipping the dividend and realizing several small gains on the shares.
In part, I am attempting to play the value of the USD against the CAD, hoping that the CAD will strengthen after my purchase. This last purchase is consequently, at least in part, a use of a strong currency to buy an asset priced in a weaker one. The CAD has fallen in value against the USD over the past several weeks: USD/CAD Currency Conversion Chart
Stocks, Bonds & Politics: International Trading and Currency Risks; Stocks, Bonds & Politics: Strong U.S. Dollar + Weak Market=Time to Start Looking Overseas
On 5/9/13, the USD and CAD were near parity. The Toronto listed Husky shares closed that day at $C29.75, while the U.S. listed HUSKY closed that day at USD$29.89. The U.S. listed shares thereafter declined 11.6% until my purchase, while the Toronto listed shares declined 6.18% during the same time frame. The difference in those numbers is the CAD's decline in value against the U.S.D. Ideally, I would now want the CAD to rise against the USD and for the ordinary shares to gain in price.
The current consensus estimate is for C$2.4 in 2014, up from C2.13 in 2013. The forward P/E at C$28.1 is about 11.71. The dividend yield at C$28.1 is about 4.27%. All of those numbers are viewed as favorable particularly in light of the potential catalysts discussed above.
HUSKF Interactive Chart
HSE.TO Interactive Chart
HSE Husky Energy has a 4 star rating from Morningstar and a fair value estimate of C$33.
Long term debt stood at C$3.918B as of 12/31/12 and at C$3.979B as of 3/31/13 (page 34, 2012 Annual Report, SEC Form 40-F and page 11 n. 7 EX-99.2) The company sold about 44.4M common shares at C$27.05 in June 2011 (page 41 Annual Report)
Given its relatively small size, I would also view Husky as a potential acquisition target for CNOOC, given their Liwan joint venture. CNOOC recently acquired the Canadian oil company Nexen. For any such acquisition to happen, there would probably have to be a divestiture of Husky's Canadian oil sands projects, since the Canadian government will approve acquisitions by foreign state owned enterprises of those projects only in "exceptional circumstances". Other restrictions and guidelines are also applicable as explained in this article: Canada - CBC News
Risks: The currency risk works both ways. A continued declined in the CAD against the USD would make it more difficult to realize a profit. With the rise in U.S. interest rates, foreign currencies will continue to be under downside pressure.
Recent earnings results have been lackluster.
Risks factors are enumerated and discussed in more detail starting at page 70 of the 2012 Annual Report.
Husky is a relatively small integrated energy company with a market cap near C$27B. If something goes wrong in one of its major projects, the impact will be far more substantial on Husky than on an Exxon or Chevron. In other words, good and bad results are magnified given Husky's size compared to the large firms in this industry sector.
Last Friday's close: U.S. Listed HUSKF: 26.24 +0.11 (+0.42%)
Toronto Listed: HSE.TO: 27.65 +0.15 (+0.55%)
The difference is price is due solely to the currency exchange.
3. Sold 50 IDE at $17.12 Roth IRA (see disclaimer): The ING Infrastructure Industrial & Material Fund (IDE) is a closed end stock fund that just went ex dividend for its quarterly distribution of 40.5 cents per share. Since I owned the shares on the ex dividend date of 7/1/13, I will receive that dividend, bringing my total dividend amount to $60.75. The net asset value per share closed at $17.21 on 7/1.
Data as of Tuesday 7/2/13:
Closing Net Asset Value Per Share: $17.13
Closing Market Price: $17.18
Premium: +.29%
On the day of purchase (12/4/12), the discount was -9.39%.
IDE Page at CEFConnect
Sponsor's Web Site: ING Infrastructure, Industrials and Materials Fund - overview
Snapshot of Trade:
Snapshot of Profit:
Total Return=11.69% annualized (exceeding my goal)
Item # 4 Bought Roth IRA: 50 IDE at $16.15 (December 2012).
Prior to this trade, I had realized gains of $331.91 in this CEF: Bought 50 of the CEF IDE at $17.4 August 2010; Added 50 IDE at $16.85 August 2010; Sold 50 IDE at $18.7 September 2010; Bought 50 of the Stock CEF IDE at 19.57 January 2011; Sold 100 of the Stock CEF IDE at $20.3 March 2011; BOUGHT 50 of the Stock CEF IDE at $17.18 November 2011; Sold 50 of the Stock CEF IDE at $18.61 May 2012
Largest of Three Prior Gains:
Total Realized Gains to Date in IDE (excluding the dividends)= $366.39
I am down to owning 100 shares in a taxable account. BOUGHT 100 IDE at $17.55 September 2012
Last Friday's close: IDE: $16.95 -0.11 (-0.64%)
4. Bought 100 ZTR at $12.82 Roth IRA (see Disclaimer): I substituted ZTR for IDE. I pick up a more balanced portfolio with ZTR which is selling at almost a 10% discount compared to the current slight premium price for IDE.
Snapshot of Trade:
Security Description: The Zweig Total Return Fund (ZTR) is a balanced closed end fund. I recently discussed the purchase of 200 shares in a taxable account. Bought 200 ZTR at $12.835 According to CEFConnect, the fund is lightly leveraged at 1.4%.
May 2013 Fact Sheet.pdf
Dividends are paid monthly at the current rate of $.083 per share. Zweig Closed End Funds Authorize Declaration Of A Distribution At that rate, and without taking into account the return of capital issue, the dividend yield at a total cost of $12.82 is about 7.77%. The last distribution was reduced from the prior monthly rate of $.085. The next ex dividend date is 7/9/13.
SEC Form N-Q: ZWEIG TOTAL RETURN FUND
As of 3/31/13, the total net unrealized gain was $63.347M.
SEC Form N-CSR: The Zweig Total Return Fund (shareholder annual report 12/31/2012)
I will just copy most of my earlier discussion here and update the relevant data.
The Zweig closed end funds are now part of Virtus Investment Partners.
Sponsor's Website: Closed-End Fund Detail | Virtus Investment Partners
Morningstar page on ZTR (rated 2 stars; no leverage; historically, the dividend has been supported with return of capital; see also 2012 tax information .pdf)
ZTR Page at the CEFA
CEFConnect Page for ZTR
Data As of Tuesday 7/2/13:
Closing Net Asset Value Per Share: $14.28
Closing Market Price= $12.85
Discount: -10.01%
Data on Date of Purchase 7/3/13:
Closing Net Asset Value Per Share=$14.27
Closing Market Price=$12.88
Discount= -9.74%
Last Friday, the net asset value per share was reported at $14.35, creating a discount of -10.17% based on the closing price.
Average Discounts as of 7/2/13:
1 Year=11.43%
3 Year=10.54%
5 Year=10.41%
Rationale: (1) Decent Balanced Portfolio with Dividend Income: The fund changed its distribution from quarterly to monthly last year and reduced the annual managed distribution rate. The quarterly dividend amount was a destructive return of capital which is one reason for the two star rating by Morningstar. The analyst at Morningstar opined in her analysis that the fund had engaged in a destructive return of capital in 15 out of 20 years. Another 2012 change was to reduce the amount of cash in the portfolio which had been large.
The current distribution is to distribute 7% of the Fund's net asset value on an annualized basis (down from the previous 10%), including all available investment income. The last declaration was for $.084 per share with a 3/7/13 ex date. The Zweig Total Return Fund At that rate, the dividend yield would be about 7.85%. Even at that reduced annual rate, the fund will have to realized capital gains in order to avoid a return of capital in the future.
I looked at the portfolio and am comfortable with most of the holdings. The fund also has a position in Amazon which I would not buy at current levels, but I may be wrong about that stock. I would not have Freeport-McMoRan Cooper and Gold and Safeway anywhere near my top ten. At least Safeway's stock has made a decent move this year but it is difficult to look at a five year chart and justify such a heavy weighting except as a short term temporary trade based on an excessively low valuation.
Two Year Chart: Freeport-McMoRan Copper & Gold (FCX) Interactive Chart
Five Year Chart: Safeway| SWY Interactive Chart
ZTR owned 209,000 SWY shares and 228,000 FCX shares, as of 3/31/13.
{I decided to dig further into the fund's history on both SWY and FCX. I noted no SWY shares and 72,000 FCX as of 3/31/12, The Zweig Total Return Fund; and still no SWY shares as of 6/30/12, though the FCX had been increased to 87,000. The Zweig Total Return Fund Semi-Annual Report 6/30/12 No SWY shares are shown as of 9/30/12 and the FCX position had been liquidated since 6/30/12. FCX was then added back with 199,000 during the 2012 4th quarter, but SWY was still a no show in the portfolio. The Zweig Total Return Fund 2012 Annual Report SWY makes its appearance with 209,000 in the 2013 1st quarter and FCX had been taken up to 228,000 shares. ZWEIG TOTAL RETURN FUND N-Q Filing. FCX did precipitously decline in price during early December 2012, falling about $8 per share after FCX announced an agreement to acquire Plains Petroleum and McMoran Exploration, SEC Filed Press Release. I do not know when ZTR acquired those 199,000 in the 4th quarter but I would hope that it was after that acquisition announcement. Part of the fund's use of tactical allocation that has a market timing component}
The fund lost only 10.09% in 2008 based on its net asset value per share.
Risks: (1) Bond Allocation Is Mostly In U.S. Treasuries: I do not own any treasuries. In a rising rate environment due to increased inflation expectations, treasuries will generally decline in price more than other bonds due to their perceived lack of credit risk. I am not comfortable with this funds allocation to treasuries. I am willing to accept those low yielding securities as a contrarian bet against my own opinion about them.
Most of the fund's exposure to U.S. government bonds is to TIPs maturing in 2015, 2016 and 2017 Most of the foreign government bond exposure is short term. In my opinion, the fund would be better off in cash yielding nothing than in those low yielding bonds.
The corporate bond exposure is limited to issues from CSX and Ingersoll-Rand, both maturing in 2018.
(2) Normal Risks Associated with Stocks and Closed End Funds: With any CEF, the price and the price in relation to net asset value is determined by market participants and will frequently be irrational.
(3) Return of Capital: The dividend has historically been supported by a frequent destructive return of capital. The only way for the fund to earn its dividend is to realize more capital gains. There is no way that interest from it low yielding government bonds and dividends would come close to covering the payout. As mentioned in the prior post, the fund did cut its managed distribution policy from 10% of its net asset value per year to 7% back in March 2012. The fund also changed its reliance on the Zweig tactical asset allocation model to place less reliance on cash which was then earning nothing.
Through May 2013, the fund has managed to realize sufficient capital gains to support its 2013 distributions for the first five months: The Zweig Total Return Fund, Inc. Discloses Sources of Distribution
Last Friday's Close: ZTR: $12.89 +0.01 (+0.08%)
5. Added 50 of the Bond CEF ERC at $14.09 Yesterday (see Disclaimer): I have been averaging down in bond CEFs during the ongoing swoon. I am breaking the orders up into very small pieces, usually 50 shares and spacing them out over time. I am spending less than $1,000 per week in this averaging down process. Generally, this limit will result in one add of 50 shares per week. I have also changed my distribution option to reinvestment.
Snapshot of Trade:
Security Description: The Wells Fargo Advantage Multi-Sector Income Fund (ERC) is a leveraged world closed end bond that has a substantial weighting in junk rated bonds. The fund is a multi-sector fund that will own both corporate and government bonds.
The junk rated bonds were weighted at almost 60% as 3/31/13, according to the sponsor's fact sheet. FactShee.pdf
Junk bonds will generally outperform treasuries when interest rates are rising due to increased inflation expectations resulting from economic growth. Better economic conditions will reduce that part of the junk yield associated with enhanced credit risk. The actual impact will of course vary among individual junk bonds.
However, the recent rise in interest rates is due to interest rate normalization that is causing a rate reset throughout the corporate bond credit spectrum unrelated to inflation expectations or any other factor normally impacting bond prices in a free market.
This last add brings me up to 400 shares in a taxable account. I also own shares in the ROTH IRA.
Sponsor's Webpage: Wells Fargo Advantage Multi-Sector Income Fund
Last Filed SEC Form N-Q (holdings as of 1/31/13; unrealized gain at that time=$41.979+M)
Last Filed SEC Form N-CSR (Shareholder Annual Report for the period ending 10/31/12)
ERC Page at CEFConnect
ERC Page at Morningstar (currently rated 3 stars)
Data as of Wednesday 7/3/13
Closing Net Asset Value Per Share: $16.17
Closing Market Price: $14.39
Discount: -11.01%
Data from Friday 7/5/13
Closing Net Asset Value Per Share= $16.08
Closing Market Price: $14.28
Discount: -11.19%
Discount at $14.09 Price: -12.38%
Average Discounts as of 7/3/13 (from "pricing history" at CEFConnect):
1 Year: -5.14%
3 Years: -6.26%
5 Years: -8.74%
The five year data includes the extreme discounts from 2008. On 10/10/2008, this fund closed at a -40.27% discount to its net asset value per share. The closing price that day was $8.35. The market price rose $2.03 the next day which narrowed the discount to -25.8% as of 10/11/08. Those were the days for CEF investors, most likely once in a lifetime opportunities to buy bond funds at greater than 40% discounts to the value of their owned assets. For our purposes now, it is just important to remember that the five year average discount still includes those extreme numbers.
Prior Trades:
ROTH IRA: Item # 2 Added 50 ERC at $14.75-ROTH IRA (June 2012); Added 50 ERC at $14.75-Roth IRA (September 2011); Item # 1 Bought 100 of the Bond CEF ERC at 15.13 March 2011
Prior to this last add, I owned 350 shares in a taxable account: Added 50 of the CEF ERC at $14.14 February 2010 (noting a prior purchase of 100 shares at $12.96 on 7/30/09 at Item # 3- 7/30/2009 Post; Added 100 of the CEF ERC at $15.25 August 2010; Added 100 ERC at 15.23 September 2010; Sold 100 ERC at $16.27 October 2010 (pre 7/09 shares); Bought Back 100 ERC at $15.63 December 2010; Item # 1 Sold 100 of 550 ERC at $15.49 July 2011 (snapshot realized gain= $244.8-share lot purchased 7/30/09).
Rationale: At the current monthly dividend, the yield at a total cost of $14.09 is about 8.52% .
The key is to collect the income and then exit the position with at least a small profit on the shares.
I missed the opportunity to sell the shares earlier this year that would have resulted in a 10+% annualized return on the 200 shares. The shares hit $16.86 last April: Wells Fargo Advantage Multi-Sec Stock Chart | ERC Interactive Chart
Risks: This fund took a nose dive during the recent bond sell off. Earlier this year, I may have had an unrealized gain near $600, and I am now in the red. There is of course an enhanced credit risk in the junk bond part of the portfolio, and currency risk inherent in the foreign bond positions.
One well known risk is that a CEF will suffer a greater percentage loss in market value than in net asset value per share during periods of persistent net asset value declines. This risk is highlighted by what happened to ERC's market price since 5/1/13 compared to its net asset value per share:
Unadjusted for Dividends:
ERC Historical Prices
Market Price 5/1/13 $16.83
Market Price 7/3/13 $14.39
Decline: -14.5%
Net Asset Value 5/1/13 $17.48
Net Asset Value 7/3/13 $16.17
Decline: - 7.49%%
Adjusted for $.2 in Dividends: - 6.35%
Leverage of course works both ways. Using borrowed money to buy an asset declining in value is not going to work out favorably of course and will only increase the total loss amount. The optimal environment for a leveraged bond fund is when the short term rates are abnormally low, as now, and the bonds purchased with the borrowed funds are going up, not down, in value.
Future Buys and Sells: I will most likely sell 100 ERC shares when and if the price exceeds $15.5. If the discount exceeds 10% and the price falls below $13.5, I may add 50 more shares.
Last Friday's close: ERC: $14.28 -0.11 (-0.76%)
6. Sold 50 Shares of YMLP at $18.56-Regular IRA (see Disclaimer):
Snapshot of Trade:
Snapshot of Loss: I realized a loss of $.14 on the shares.
While I am not going to pay for my future nursing home expenses with that kind of total return, the upside is that this a $.14 share loss on the shares is still well within the range of an acceptable loss, unlikely to result, in and of itself at least, in Headknocker having to live under a bridge and having to scrap for nourishment in garage cans.
This trade was a knee jerk reaction to the woes of Linn Energy, one of YMLP's holdings, that has declined from $34.5 on 6/26/13 to close at $23.45 yesterday after hitting an intra-day and 52 week low at $20.35.The downdraft was caused by an informal SEC inquiry into Linn's accounting practices. (see discussions at MarketWatch and Barrons.com)
That investigation or "inquiry" is not too surprising after two articles written by Andrew Bary and published by Barron's which called into question Linn's accounting and valuation. One of those articles was titled "Linn Energy Shares Are Overvalued" and the other "Drilling Into Linn Energy's Numbers". Leon Cooperman wrote a letter in response defending Linn, Letters to Barron's Editors - Barrons.com, which link also contains Bary's reply to Cooperman.
The apparent issues involved in that investigation caused me to revisit my traditional concerns about the sustainability of distributions among E & P MLPs. Money needed for drilling new wells is flying out the door in handsome distributions to unit holders.
One SA author, who has no detectable shortage in the ego department, penned an article after Linn's blowup explaining why Linn had to blow up. Seeking Alpha
I thought that the SA article was far less informative than the earlier Barron's articles. I left a comment to that article, noting that I have always had concerns about the ability of MLP E & P companies replacing their production through the drill bit. I will not engage the author, viewing him as unworthy of any exchange, so my comment was directed to another reader. That concern applies to all of MLP E & P companies.
I sold out of Linn Energy back in June 2010 after experiencing one too many headaches completing my own tax returns with information provided in the K-1. Sold 100 LINE at 25.90-Added to LINE at $15.21 April 2009 So I missed about 14 points on the upside and more on the downside.
Yorkville High Income MLP ETF Holdings
YMLP is an MLP ETF which I disfavor for the reasons discussed in earlier posts. I will just copy one of the discussions here:
"As previously noted, one serious problem with MLP ETFs is that they are organized as regular "C" corporations. Consequently, a MLP ETF is required to pay taxes on the taxable distributions paid by the MLPs as well as any gains from securities sales. Those "C" corporations will consequently estimate the amount of that tax liability and keep those funds. In effect, this creates a double taxation issue and will cause this type of fund to underperform the index.
The Investment Company Act of 1940 requires that no more than 25% of an open-end fund's assets can be invested in MLPs. That is the reason why those concentrated MLP ETFs have to form the "C" corporations, since those funds exceed that 25% limitation. MLP ETFs and ETNs"
Item # 3 Added 100 EMLP at $21.32 (since sold)
Closing Price Last Friday: YMLP: $18.14 -0.01 (-0.06%)
The better than expected jobs report sent the 10 year treasury down in price and up in yield. This was not due to a change in inflation expectations, but to interest rate normalization. The ten year treasury closed yesterday at a 2.73% yield:
Daily Treasury Yield Curve Rates
The better than expected economic news did cause a slight uptick in inflation expectations embodied in the 10 year TIP's price. The inflation expectation closed at a 2.07% annual average rate, compared to 1.99% as of the previous Friday. If there is a material significant upward movement in inflation expectations, I will change my bond outlook. I am not tying the outlook solely to bond losses resulting from interest rate normalization with no losses associated with rising inflation.
Better than expected economic news will cause investors to reassess the time frame for the reduction and elimination of the FED's asset purchases. It is those asset purchases that are keeping intermediate and longer term treasuries below free market prices and yields. The process of returning to interest rates set by a free market is what is meant by interest rate normalization. Stocks, Bonds & Politics: The Difficult Path to Interest Rate Normalization
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Recent Economic Reports:
The June ISM PMI for manufacturing was reported at 50.9, slightly better than expected, and up from the 48.8 reading in May. The new orders component rose to 51.9 from 48.8. Production increased to 53.4 from 48.6. Exports increased to 54.5 from 51.
CoreLogic reported that its home price index rose 12.02% in May year-over-year, the largest Y-O-Y increase since February 2006 and the 15th consecutive increase in prices nationally.
The government reported that factory orders rose 2.1% in May, better than the consensus estimate of +1.9%. Excluding transportation, new orders rose .6%. Orders for April were revised to 1.3% from 1% growth. census.gov.pdf
U.S. light vehicle sales increased to a 15.9M annual run rate in June, the highest level since November 2007, according to WardsAuto.
ADP reported that the private sector added 188,000 jobs in June, led by a 84,000 increase by small employers (1-49 employees). ADP National Employment Report - June 2013 The expectation was for a 160,000 increase in private jobs. Construction jobs increased by 21,000.
ISM June Services PMI Index declined to 52.2% from 53.7% in May. The consensus estimate was 54.4. The new orders component declined to 50.8 from 56. Employment did rise to 54.7 from 50.1.
The Labor Department reported yesterday that 195,000 jobs were added in June with the unemployment rate remaining unchanged at 7.6%. Employment Situation Summary The private sector added 202,000 jobs. Manufacturing cut 6,000 jobs. Average hourly earnings rose 10 cents to $24.01. The prior two months were revised up to show an additional 70,000 jobs. The U-6 number jumped to 14.3% in June from 13.8% in May. Table A-15. Alternative measures of labor underutilization
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Travelport Redemption 2016 Bond:
Travelport redeemed another one of my bonds. This last one was a 9% senior unsecured note maturing in 2016 and was redeemed at a premium to its par value. I owned just one bond:
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| Profit=$122.94 |
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Reinvestment DWX Dividend and IDV Adds:
The SPDR S&P International Dividend ETF Fund (DWX) hit a closing high of $50.85 back in May and has slid some since that time. I considered paring my 100 share lot at over $50 but decided to keep my position in tack long term. This international stock ETF does pay a good dividend, which I recently used to buy more shares:
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| DWX Reinvestment Average Cost Per Share=$43.76 |
Sponsor's website: SPDR S&P International Dividend ETF
Instead of adding to DWX with open market purchases on downdrafts, I have elected to buy small lots of IDV which can be purchased at Fidelity without a commission. I am buying 5 or 10 shares during market dips and currently own just 20 shares.
Sponsor's website: iShares International Select Dividend ETF (IDV) The expense ratio is .5%, and this ETF currently owns 101 positions.
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GGAL Foreign Tax Withholding:
There is a point when taxation becomes nothing more or less than confiscation. Argentina's withholding tax on my GGAL dividend has without question reached the point of confiscation. It is really not important since my position in Grupo Financiero Galicia S.A. ADS is a Lottery Ticket but there is something to be learned nonetheless from what was taken by Argentina and what was left for me:
So Argentina took $1.39 of the $1.46 dividend payment and left me with 7 cents. I am certain that the "populist" politicians who are responsible for ruining that nation's potential see nothing amiss with that result.
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1. Sold 50 ONB at $14.12 (REGIONAL BANK BASKET STRATEGY GATEWAY POST)(see Disclaimer): I decided to eliminate Old National Bancorp for the second time for the reasons explained below. It would have been better to wait until yesterday to sell these shares.
Snapshot of Trade:
Snapshot of Profit:
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| 2013 ONB 50 Shares +$95.13 |
Item # 4 Bought Back 50 ONB at $11.9 May 2013
This last trade constitutes my second round trip for ONB: Item # 1 SOLD 100 ONB at $13 August 2012 (snapshot of profit=$99.07)-Bought 100 ONB at $11.85 May 2012
Total Realized Gains for ONB= $194.2
Rationale: My regional bank basket rose in value during June and started off July with a strong up move. Excluding ONB, the basket ended 7/1/13 up $663.54 or 1.31%, beating once again the move in the S & P 500 which gained .54%.
It is natural for me to start selling some stocks into strength.
I chose Old National based on a number of factors including its TTM of about 14.78 at the $14.12 price which is on the high side and a less than 3% dividend yield at the $14.12 price which is on the low end for banks in my basket. I also had a quick profit of about 16%. ONB is also one of my smallest positions in the basket, and I have flipped it previously. Lastly, I am somewhat concerned about the heavy short interest discussed in this Forbes' article. Am I missing something that the short sellers see?
Last Friday's Close: ONB: $14.74 +0.40 (+2.79%)
I also used the rally in regional bank stocks to unload another 50 share position yesterday, which I will discuss briefly in the next post.
After these two sells, the unrealized gain stood at approximately $7,073 as of 7/5/13, up 2.4% or $1,204. last Friday (all of the foregoing numbers exclude the increase in value of reinvested dividends which are not being tracked in my YF portfolio).
2. Bought 100 HUSKF at $26.42 (see Disclaimer):
Snapshot of Trade:
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| 2013 BOUGHT 100 HUSKF at $26.42 |
HSE.TO: C$27.91 -0.11 (-0.39%) Converted to $26.47 at the time of purchase
USDCAD: 1.0541 +0.0045 (+0.43%)
Company Website: Husky Energy
Husky is controlled by Honk Kong billionaire Li Ka-shing.
The current quarterly dividend is C$.3 per share: Husky Energy - Dividend Information
Company Website: Husky Energy
Husky is controlled by Honk Kong billionaire Li Ka-shing.
The current quarterly dividend is C$.3 per share: Husky Energy - Dividend Information
Prior Trades: Sold 200 HSE:CA at $28.13 CADs October 2012-Bought 100 HUSKF at $23.81 January 2012 (converted into ordinary shares) & Bought 100 HSE:CA at C$26.59 CADs July 2011; Sold HSE:CA @ 27.70 CAD February 2011-Bought 100 HSE:TO at C$26.25 CADs July 2010; Sold HSE:TO at $30.48 CADs April 2010--Bought 100 Husky at $28.99 Canadian January 2010
Total Realized Gain on Shares=USDs $933.06 (snapshots in Gateway Post Canadian Dollar (CAD) Strategy)
Recent Earnings Report: For the 2013 first quarter, Husky reported net income of C$535M or C$.54 per share down from C$.6 in the 2012 first quarter, reflecting lower crude prices. Cash flow from operations increased approximately 8% to C$1.3B or C$1.3 per share. The Liwan Gas Project in the South China Sea is scheduled for first production in late 2013 or early 2014.
The average forecast was for C$.54, Reuters.
U.S. refining and marketing added C$145M to net earnings during the first quarter, up from C$71M, primarily reflecting higher throughputs at Husky's Lima refining and more favorable crack spreads. The Lima refinery produces about 2 billion gallons of refined petroleum products annually including 25% of the gasoline consumed in Ohio. Husky Energy - U.S. Refineries The Canadian refining operations are discussed starting at page 62 of the Annual Report.
SEC Filed News Release
Earnings Call Transcript - Seeking Alpha
Rationale: Husky is viewed by many investors as a relatively unattractive integrated energy company. Since early in 2009, the ordinary shares have been trading mostly in a narrow channel range between C$25 to C$30 per share. HSE.TO Interactive Chart
There are several potential catalysts on the horizon, however, with the Liwan Gas Project being the most important. Husky Energy - The Liwan Gas Project – Block 29/26 That project is a joint venture with CNOOC and is located about 300 kilometres southwest of Hong Kong. Natural gas is much more expensive in Asia with price realizations between $11 and $13/mcf. Management is projecting production from this field of approximately 150 mmcfpd.
During the first 15 months of production, Husky is expected to be reimbursed C$700M in exploration expenses.
Husky produced last quarter about 321,000 barrels of oil equivalent per day, weighted 72% in oil and liquids compared to 69% a year ago.
Husky is also involved in Canada's oil sands. It exchanged with BP a 50% interest in its Sunrise oil sands project for a 50% interest in BP's Toledo refinery, plus BP is responsible for the C$2.5 in capital spending for that project. Husky Energy - Sunrise Energy Project The first phase of that project is scheduled for completion in 2014 and is expected to produce about 60,000 barrels per day.
Husky has been successful in replacing its production with new reserves with a two year reserve replacement ratio of 175% or 149% after certain "economic revisions". Form 6-K
More information relating to Husky's upstream projects can be found in its Annual Report, starting at page 18: SEC Form 40-F
A recent article published by Seeking Alpha discusses Husky's project in the Cold Lake region of Alberta's oil sands.
I have been in a trading mode for this security, clipping the dividend and realizing several small gains on the shares.
In part, I am attempting to play the value of the USD against the CAD, hoping that the CAD will strengthen after my purchase. This last purchase is consequently, at least in part, a use of a strong currency to buy an asset priced in a weaker one. The CAD has fallen in value against the USD over the past several weeks: USD/CAD Currency Conversion Chart
Stocks, Bonds & Politics: International Trading and Currency Risks; Stocks, Bonds & Politics: Strong U.S. Dollar + Weak Market=Time to Start Looking Overseas
On 5/9/13, the USD and CAD were near parity. The Toronto listed Husky shares closed that day at $C29.75, while the U.S. listed HUSKY closed that day at USD$29.89. The U.S. listed shares thereafter declined 11.6% until my purchase, while the Toronto listed shares declined 6.18% during the same time frame. The difference in those numbers is the CAD's decline in value against the U.S.D. Ideally, I would now want the CAD to rise against the USD and for the ordinary shares to gain in price.
The current consensus estimate is for C$2.4 in 2014, up from C2.13 in 2013. The forward P/E at C$28.1 is about 11.71. The dividend yield at C$28.1 is about 4.27%. All of those numbers are viewed as favorable particularly in light of the potential catalysts discussed above.
HUSKF Interactive Chart
HSE.TO Interactive Chart
HSE Husky Energy has a 4 star rating from Morningstar and a fair value estimate of C$33.
Long term debt stood at C$3.918B as of 12/31/12 and at C$3.979B as of 3/31/13 (page 34, 2012 Annual Report, SEC Form 40-F and page 11 n. 7 EX-99.2) The company sold about 44.4M common shares at C$27.05 in June 2011 (page 41 Annual Report)
Given its relatively small size, I would also view Husky as a potential acquisition target for CNOOC, given their Liwan joint venture. CNOOC recently acquired the Canadian oil company Nexen. For any such acquisition to happen, there would probably have to be a divestiture of Husky's Canadian oil sands projects, since the Canadian government will approve acquisitions by foreign state owned enterprises of those projects only in "exceptional circumstances". Other restrictions and guidelines are also applicable as explained in this article: Canada - CBC News
Risks: The currency risk works both ways. A continued declined in the CAD against the USD would make it more difficult to realize a profit. With the rise in U.S. interest rates, foreign currencies will continue to be under downside pressure.
Recent earnings results have been lackluster.
Risks factors are enumerated and discussed in more detail starting at page 70 of the 2012 Annual Report.
Husky is a relatively small integrated energy company with a market cap near C$27B. If something goes wrong in one of its major projects, the impact will be far more substantial on Husky than on an Exxon or Chevron. In other words, good and bad results are magnified given Husky's size compared to the large firms in this industry sector.
Last Friday's close: U.S. Listed HUSKF: 26.24 +0.11 (+0.42%)
Toronto Listed: HSE.TO: 27.65 +0.15 (+0.55%)
The difference is price is due solely to the currency exchange.
3. Sold 50 IDE at $17.12 Roth IRA (see disclaimer): The ING Infrastructure Industrial & Material Fund (IDE) is a closed end stock fund that just went ex dividend for its quarterly distribution of 40.5 cents per share. Since I owned the shares on the ex dividend date of 7/1/13, I will receive that dividend, bringing my total dividend amount to $60.75. The net asset value per share closed at $17.21 on 7/1.
Data as of Tuesday 7/2/13:
Closing Net Asset Value Per Share: $17.13
Closing Market Price: $17.18
Premium: +.29%
On the day of purchase (12/4/12), the discount was -9.39%.
IDE Page at CEFConnect
Sponsor's Web Site: ING Infrastructure, Industrials and Materials Fund - overview
Snapshot of Trade:
Snapshot of Profit:
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| 2013 ROTH IRA 50 Shares +$34.48 |
Total Return=11.69% annualized (exceeding my goal)
Item # 4 Bought Roth IRA: 50 IDE at $16.15 (December 2012).
Prior to this trade, I had realized gains of $331.91 in this CEF: Bought 50 of the CEF IDE at $17.4 August 2010; Added 50 IDE at $16.85 August 2010; Sold 50 IDE at $18.7 September 2010; Bought 50 of the Stock CEF IDE at 19.57 January 2011; Sold 100 of the Stock CEF IDE at $20.3 March 2011; BOUGHT 50 of the Stock CEF IDE at $17.18 November 2011; Sold 50 of the Stock CEF IDE at $18.61 May 2012
Largest of Three Prior Gains:
.jpg){kind=small} |
| 2011 IDE +$227.25 (2 fifty share lots) |
Total Realized Gains to Date in IDE (excluding the dividends)= $366.39
I am down to owning 100 shares in a taxable account. BOUGHT 100 IDE at $17.55 September 2012
Last Friday's close: IDE: $16.95 -0.11 (-0.64%)
4. Bought 100 ZTR at $12.82 Roth IRA (see Disclaimer): I substituted ZTR for IDE. I pick up a more balanced portfolio with ZTR which is selling at almost a 10% discount compared to the current slight premium price for IDE.
Snapshot of Trade:
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| 2013 Roth IRA Bought 100 ZTR at $12.82 |
Security Description: The Zweig Total Return Fund (ZTR) is a balanced closed end fund. I recently discussed the purchase of 200 shares in a taxable account. Bought 200 ZTR at $12.835 According to CEFConnect, the fund is lightly leveraged at 1.4%.
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| Top Ten Holdings-Asset Allocations As of 5/31/13 |
Dividends are paid monthly at the current rate of $.083 per share. Zweig Closed End Funds Authorize Declaration Of A Distribution At that rate, and without taking into account the return of capital issue, the dividend yield at a total cost of $12.82 is about 7.77%. The last distribution was reduced from the prior monthly rate of $.085. The next ex dividend date is 7/9/13.
SEC Form N-Q: ZWEIG TOTAL RETURN FUND
As of 3/31/13, the total net unrealized gain was $63.347M.
SEC Form N-CSR: The Zweig Total Return Fund (shareholder annual report 12/31/2012)
I will just copy most of my earlier discussion here and update the relevant data.
The Zweig closed end funds are now part of Virtus Investment Partners.
Sponsor's Website: Closed-End Fund Detail | Virtus Investment Partners
Morningstar page on ZTR (rated 2 stars; no leverage; historically, the dividend has been supported with return of capital; see also 2012 tax information .pdf)
ZTR Page at the CEFA
CEFConnect Page for ZTR
Data As of Tuesday 7/2/13:
Closing Net Asset Value Per Share: $14.28
Closing Market Price= $12.85
Discount: -10.01%
Data on Date of Purchase 7/3/13:
Closing Net Asset Value Per Share=$14.27
Closing Market Price=$12.88
Discount= -9.74%
Last Friday, the net asset value per share was reported at $14.35, creating a discount of -10.17% based on the closing price.
Average Discounts as of 7/2/13:
1 Year=11.43%
3 Year=10.54%
5 Year=10.41%
The current distribution is to distribute 7% of the Fund's net asset value on an annualized basis (down from the previous 10%), including all available investment income. The last declaration was for $.084 per share with a 3/7/13 ex date. The Zweig Total Return Fund At that rate, the dividend yield would be about 7.85%. Even at that reduced annual rate, the fund will have to realized capital gains in order to avoid a return of capital in the future.
I looked at the portfolio and am comfortable with most of the holdings. The fund also has a position in Amazon which I would not buy at current levels, but I may be wrong about that stock. I would not have Freeport-McMoRan Cooper and Gold and Safeway anywhere near my top ten. At least Safeway's stock has made a decent move this year but it is difficult to look at a five year chart and justify such a heavy weighting except as a short term temporary trade based on an excessively low valuation.
Two Year Chart: Freeport-McMoRan Copper & Gold (FCX) Interactive Chart
Five Year Chart: Safeway| SWY Interactive Chart
ZTR owned 209,000 SWY shares and 228,000 FCX shares, as of 3/31/13.
{I decided to dig further into the fund's history on both SWY and FCX. I noted no SWY shares and 72,000 FCX as of 3/31/12, The Zweig Total Return Fund; and still no SWY shares as of 6/30/12, though the FCX had been increased to 87,000. The Zweig Total Return Fund Semi-Annual Report 6/30/12 No SWY shares are shown as of 9/30/12 and the FCX position had been liquidated since 6/30/12. FCX was then added back with 199,000 during the 2012 4th quarter, but SWY was still a no show in the portfolio. The Zweig Total Return Fund 2012 Annual Report SWY makes its appearance with 209,000 in the 2013 1st quarter and FCX had been taken up to 228,000 shares. ZWEIG TOTAL RETURN FUND N-Q Filing. FCX did precipitously decline in price during early December 2012, falling about $8 per share after FCX announced an agreement to acquire Plains Petroleum and McMoran Exploration, SEC Filed Press Release. I do not know when ZTR acquired those 199,000 in the 4th quarter but I would hope that it was after that acquisition announcement. Part of the fund's use of tactical allocation that has a market timing component}
The fund lost only 10.09% in 2008 based on its net asset value per share.
Risks: (1) Bond Allocation Is Mostly In U.S. Treasuries: I do not own any treasuries. In a rising rate environment due to increased inflation expectations, treasuries will generally decline in price more than other bonds due to their perceived lack of credit risk. I am not comfortable with this funds allocation to treasuries. I am willing to accept those low yielding securities as a contrarian bet against my own opinion about them.
Most of the fund's exposure to U.S. government bonds is to TIPs maturing in 2015, 2016 and 2017 Most of the foreign government bond exposure is short term. In my opinion, the fund would be better off in cash yielding nothing than in those low yielding bonds.
The corporate bond exposure is limited to issues from CSX and Ingersoll-Rand, both maturing in 2018.
(2) Normal Risks Associated with Stocks and Closed End Funds: With any CEF, the price and the price in relation to net asset value is determined by market participants and will frequently be irrational.
(3) Return of Capital: The dividend has historically been supported by a frequent destructive return of capital. The only way for the fund to earn its dividend is to realize more capital gains. There is no way that interest from it low yielding government bonds and dividends would come close to covering the payout. As mentioned in the prior post, the fund did cut its managed distribution policy from 10% of its net asset value per year to 7% back in March 2012. The fund also changed its reliance on the Zweig tactical asset allocation model to place less reliance on cash which was then earning nothing.
Through May 2013, the fund has managed to realize sufficient capital gains to support its 2013 distributions for the first five months: The Zweig Total Return Fund, Inc. Discloses Sources of Distribution
Last Friday's Close: ZTR: $12.89 +0.01 (+0.08%)
5. Added 50 of the Bond CEF ERC at $14.09 Yesterday (see Disclaimer): I have been averaging down in bond CEFs during the ongoing swoon. I am breaking the orders up into very small pieces, usually 50 shares and spacing them out over time. I am spending less than $1,000 per week in this averaging down process. Generally, this limit will result in one add of 50 shares per week. I have also changed my distribution option to reinvestment.
Snapshot of Trade:
Security Description: The Wells Fargo Advantage Multi-Sector Income Fund (ERC) is a leveraged world closed end bond that has a substantial weighting in junk rated bonds. The fund is a multi-sector fund that will own both corporate and government bonds.
The junk rated bonds were weighted at almost 60% as 3/31/13, according to the sponsor's fact sheet. FactShee.pdf
Junk bonds will generally outperform treasuries when interest rates are rising due to increased inflation expectations resulting from economic growth. Better economic conditions will reduce that part of the junk yield associated with enhanced credit risk. The actual impact will of course vary among individual junk bonds.
However, the recent rise in interest rates is due to interest rate normalization that is causing a rate reset throughout the corporate bond credit spectrum unrelated to inflation expectations or any other factor normally impacting bond prices in a free market.
This last add brings me up to 400 shares in a taxable account. I also own shares in the ROTH IRA.
Sponsor's Webpage: Wells Fargo Advantage Multi-Sector Income Fund
Last Filed SEC Form N-Q (holdings as of 1/31/13; unrealized gain at that time=$41.979+M)
Last Filed SEC Form N-CSR (Shareholder Annual Report for the period ending 10/31/12)
ERC Page at CEFConnect
ERC Page at Morningstar (currently rated 3 stars)
Data as of Wednesday 7/3/13
Closing Net Asset Value Per Share: $16.17
Closing Market Price: $14.39
Discount: -11.01%
Data from Friday 7/5/13
Closing Net Asset Value Per Share= $16.08
Closing Market Price: $14.28
Discount: -11.19%
Discount at $14.09 Price: -12.38%
Average Discounts as of 7/3/13 (from "pricing history" at CEFConnect):
1 Year: -5.14%
3 Years: -6.26%
5 Years: -8.74%
The five year data includes the extreme discounts from 2008. On 10/10/2008, this fund closed at a -40.27% discount to its net asset value per share. The closing price that day was $8.35. The market price rose $2.03 the next day which narrowed the discount to -25.8% as of 10/11/08. Those were the days for CEF investors, most likely once in a lifetime opportunities to buy bond funds at greater than 40% discounts to the value of their owned assets. For our purposes now, it is just important to remember that the five year average discount still includes those extreme numbers.
Prior Trades:
ROTH IRA: Item # 2 Added 50 ERC at $14.75-ROTH IRA (June 2012); Added 50 ERC at $14.75-Roth IRA (September 2011); Item # 1 Bought 100 of the Bond CEF ERC at 15.13 March 2011
Prior to this last add, I owned 350 shares in a taxable account: Added 50 of the CEF ERC at $14.14 February 2010 (noting a prior purchase of 100 shares at $12.96 on 7/30/09 at Item # 3- 7/30/2009 Post; Added 100 of the CEF ERC at $15.25 August 2010; Added 100 ERC at 15.23 September 2010; Sold 100 ERC at $16.27 October 2010 (pre 7/09 shares); Bought Back 100 ERC at $15.63 December 2010; Item # 1 Sold 100 of 550 ERC at $15.49 July 2011 (snapshot realized gain= $244.8-share lot purchased 7/30/09).
Rationale: At the current monthly dividend, the yield at a total cost of $14.09 is about 8.52% .
The key is to collect the income and then exit the position with at least a small profit on the shares.
I missed the opportunity to sell the shares earlier this year that would have resulted in a 10+% annualized return on the 200 shares. The shares hit $16.86 last April: Wells Fargo Advantage Multi-Sec Stock Chart | ERC Interactive Chart
Risks: This fund took a nose dive during the recent bond sell off. Earlier this year, I may have had an unrealized gain near $600, and I am now in the red. There is of course an enhanced credit risk in the junk bond part of the portfolio, and currency risk inherent in the foreign bond positions.
One well known risk is that a CEF will suffer a greater percentage loss in market value than in net asset value per share during periods of persistent net asset value declines. This risk is highlighted by what happened to ERC's market price since 5/1/13 compared to its net asset value per share:
Unadjusted for Dividends:
ERC Historical Prices
Market Price 5/1/13 $16.83
Market Price 7/3/13 $14.39
Decline: -14.5%
Net Asset Value 5/1/13 $17.48
Net Asset Value 7/3/13 $16.17
Decline: - 7.49%%
Adjusted for $.2 in Dividends: - 6.35%
Leverage of course works both ways. Using borrowed money to buy an asset declining in value is not going to work out favorably of course and will only increase the total loss amount. The optimal environment for a leveraged bond fund is when the short term rates are abnormally low, as now, and the bonds purchased with the borrowed funds are going up, not down, in value.
Future Buys and Sells: I will most likely sell 100 ERC shares when and if the price exceeds $15.5. If the discount exceeds 10% and the price falls below $13.5, I may add 50 more shares.
Last Friday's close: ERC: $14.28 -0.11 (-0.76%)
6. Sold 50 Shares of YMLP at $18.56-Regular IRA (see Disclaimer):
Snapshot of Trade:
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| 2013 Sold 53+ YMLP at $18.56 |
Snapshot of Loss: I realized a loss of $.14 on the shares.
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| 2013 Regular IRA 53+ Shares YMLP -$.14 |
While I am not going to pay for my future nursing home expenses with that kind of total return, the upside is that this a $.14 share loss on the shares is still well within the range of an acceptable loss, unlikely to result, in and of itself at least, in Headknocker having to live under a bridge and having to scrap for nourishment in garage cans.
This trade was a knee jerk reaction to the woes of Linn Energy, one of YMLP's holdings, that has declined from $34.5 on 6/26/13 to close at $23.45 yesterday after hitting an intra-day and 52 week low at $20.35.The downdraft was caused by an informal SEC inquiry into Linn's accounting practices. (see discussions at MarketWatch and Barrons.com)
That investigation or "inquiry" is not too surprising after two articles written by Andrew Bary and published by Barron's which called into question Linn's accounting and valuation. One of those articles was titled "Linn Energy Shares Are Overvalued" and the other "Drilling Into Linn Energy's Numbers". Leon Cooperman wrote a letter in response defending Linn, Letters to Barron's Editors - Barrons.com, which link also contains Bary's reply to Cooperman.
The apparent issues involved in that investigation caused me to revisit my traditional concerns about the sustainability of distributions among E & P MLPs. Money needed for drilling new wells is flying out the door in handsome distributions to unit holders.
One SA author, who has no detectable shortage in the ego department, penned an article after Linn's blowup explaining why Linn had to blow up. Seeking Alpha
I thought that the SA article was far less informative than the earlier Barron's articles. I left a comment to that article, noting that I have always had concerns about the ability of MLP E & P companies replacing their production through the drill bit. I will not engage the author, viewing him as unworthy of any exchange, so my comment was directed to another reader. That concern applies to all of MLP E & P companies.
I sold out of Linn Energy back in June 2010 after experiencing one too many headaches completing my own tax returns with information provided in the K-1. Sold 100 LINE at 25.90-Added to LINE at $15.21 April 2009 So I missed about 14 points on the upside and more on the downside.
Yorkville High Income MLP ETF Holdings
YMLP is an MLP ETF which I disfavor for the reasons discussed in earlier posts. I will just copy one of the discussions here:
"As previously noted, one serious problem with MLP ETFs is that they are organized as regular "C" corporations. Consequently, a MLP ETF is required to pay taxes on the taxable distributions paid by the MLPs as well as any gains from securities sales. Those "C" corporations will consequently estimate the amount of that tax liability and keep those funds. In effect, this creates a double taxation issue and will cause this type of fund to underperform the index.
The Investment Company Act of 1940 requires that no more than 25% of an open-end fund's assets can be invested in MLPs. That is the reason why those concentrated MLP ETFs have to form the "C" corporations, since those funds exceed that 25% limitation. MLP ETFs and ETNs"
Item # 3 Added 100 EMLP at $21.32 (since sold)
Closing Price Last Friday: YMLP: $18.14 -0.01 (-0.06%)
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