The Google Search Box, formerly located to the right, quit working altogether again, and was removed on 11/21. I will restore it when and if it starts to work. In the meantime, the search box in the upper left hand corner still works but returns an entire post rather than just a snippet requiring the user to comb through multiple posts to find relevant material.
Big Picture Synopsis
Stocks:
Stable Vix Pattern (Bullish)
Vix Asset Allocation Model Explained Simply
Use of the VIX as a Timing Model
Short Term: Expecting a 10%+ Correction
Intermediate and Long Term: Bullish
Icahn claims to be "very cautious" on stocks and sees the possibility of a "big drop".
The stock market is making the OG nervous.
Bonds:
Short Term: Neutral
Intermediate and Long Term: Slightly Bearish Based on Interest Rate Normalization
The Difficult Path to Interest Rate Normalization
The intermediate and long term forecast assumes an average annual CPI increase of 2% to 2.25%.
Interest rates can only go so high based on the anticipated rate of inflation embodied in the pricing of the 10 year TIP.
I am being very cautious with my bond buys. Generally, I will buy only 50 shares of a bond or bond like security when the yield is over 7% and will then consider buying the other 50 shares when and if the yield rises to 8%+.
Big Picture Synopsis
Stocks:
Stable Vix Pattern (Bullish)
Vix Asset Allocation Model Explained Simply
Use of the VIX as a Timing Model
Short Term: Expecting a 10%+ Correction
Intermediate and Long Term: Bullish
Icahn claims to be "very cautious" on stocks and sees the possibility of a "big drop".
The stock market is making the OG nervous.
Bonds:
Short Term: Neutral
Intermediate and Long Term: Slightly Bearish Based on Interest Rate Normalization
The Difficult Path to Interest Rate Normalization
The intermediate and long term forecast assumes an average annual CPI increase of 2% to 2.25%.
Interest rates can only go so high based on the anticipated rate of inflation embodied in the pricing of the 10 year TIP.
I am being very cautious with my bond buys. Generally, I will buy only 50 shares of a bond or bond like security when the yield is over 7% and will then consider buying the other 50 shares when and if the yield rises to 8%+.
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Recent Developments:
GDP growth in the euro zone countries continues to be either negative or slightly positive. Eurostat reported last week that GDP contracted in France and Italy during the third quarter. Germany's GDP did increase by 1.3% on an annualized basis which kept the euro zone GDP in slightly positive territory. The euro zone economy experienced negative GDP for six consecutive quarters starting in late 2011 through the first quarter of 2013. eurostat.PDF; WSJ.com
The Japanese economy expanded at an annualized pace of 1.9% in the third quarter. Growth was reported at 4.3% in the 2013 first quarter and 3.8% in the second quarter.
Eurostat reported that annual inflation in the euro area was just .7% in October 2013. eurostat.ec.PDF
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Santander (own common and equity preferred shares SANPRB): By reinvesting Santander's common share dividend, I avoid paying Spain's withholding tax.
My last common share purchase was discussed in this post: Item # 3 Added 40 SAN at $6.8 (4/16/2013 Post)
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Adams Express (own 884+): Adams Express declared a year end distribution of $.69 per share consisting of the following:
$.44 per share in long term capital gains
$.16 per share in short term capital gains
$.09 per share in income
I currently own 884+ shares which will generate about $610 in cash next month. I mentioned in a recent post that I may sell 200 shares before the ex dividend date in order to lower my average cost per share below $10. Stocks, Bonds & Politics (introduction 10/31/13 Post) The ex dividend date is 11/21/13. I have not decided whether to do that yet. I am not reinvesting the dividend and there is something to be said for just keeping the 200 shares for their cash generation over time
I am reluctant to sell at the current discount: CEFConnect
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General Electric (own 531+):
As part of its continuing effort to shrink GE Capital, General Electric reported that the company was planning to separate its retail credit business through an IPO. 8-k GE plans to sell up to 20% of the division in an IPO next year, and then complete the separation through a share distribution to its investors in 2015. The distribution would be in the form of an exchange for GE shares. That division of GE Capital issues store credit cards for about 55 million Americans. This division is expected to earn about $2.2B this year and accounted for $53B of the $274B in loans made by GE Capital.
In another announcement, CSX And GE announced a pilot program to use liquefied natural gas to fuel locomotives.
At the recent Dubai Air Show, GE announced that it had received 450 orders for the new GE9X engine for the Boeing 777X valued at $26B.
The stock has done well over the past year. GE Interactive Chart
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1. ADDED 100 of the Municipal Bond CEF NPI at $12.25 (see Disclaimer):
Snapshot of Trade:
Snapshot of Quote Before Trade: As noted in the following snapshot, NPI went ex dividend for its monthly distribution on the day after my purchase. While I try to avoid "buying the dividend", the decline in price was greater than the amount of the dividend.
Security Description: The Nuveen Premium Income Municipal Fund (NPI) is a leveraged closed end fund that invests in tax free municipal bonds.
CEFConnect Page for NPI
Data on Day of Purchase 11/12/13:
Closing Net Asset Value Per Share: $13.82
Closing Market Price: $12.22
Discount: -11.58%
Average 1 Year Discount: -5.79%
Average 3 Year Discount: -3.55%
Average 5 Year Discount: -3.88%
The net asset value per share declined by 1 cent from the previous day while the market price fell by 10 cents. That highlights a CEF risk. Both interest rate and CEF risks explain the decline from May 1 2013, when this CEF closed at a $15.53 net asset value per share and a -5.15% discount to net asset value. Seven monthly dividends of $.072 have gone ex dividend since 5/1 or $.504. If I subtract that number from the 5/1 net asset value, I still arrive at a 7.8% decline in net asset value per share through 11/12/13, made worse by the expansion in the discount from 5.15% to 11.58%. The expansion in the discount, a known CEF risk, caused 45% of the adjusted market decline.
Prior Trades: Item # 5 Added 50 NPI at $12.16 (8/10/13 Post); Item # 3 Added 50 NPI at $12.45 (7/27/13 Post); Item # 5 Bought 58 NPI at $13.4 & 42 at $13.17 (6/15/13 Post)
Rationale and Risks: I have nothing to add to my previous discussions linked above.
I would just emphasize that the interest rate risk is just huge.
The sponsor claims that the leveraged effective duration was 16.09 years as of 10/31/13. NPI - Nuveen Premium Income Municipal Fund
The discount was -5.15% on 5/1/13, with the net asset value per share then at $15.53. The share price closed at $14.73 on 5/1.
At a total cost of $12.25, the tax free yield is about 7%. The tax equivalent yield, which assumes a 28% federal tax bracket, is about 10.9% at that total cost per share.
2. Bought 150 CSG at $8.3955-And 50 in ROTH IRA (See Disclaimer):
Recent Developments:
GDP growth in the euro zone countries continues to be either negative or slightly positive. Eurostat reported last week that GDP contracted in France and Italy during the third quarter. Germany's GDP did increase by 1.3% on an annualized basis which kept the euro zone GDP in slightly positive territory. The euro zone economy experienced negative GDP for six consecutive quarters starting in late 2011 through the first quarter of 2013. eurostat.PDF; WSJ.com
The Japanese economy expanded at an annualized pace of 1.9% in the third quarter. Growth was reported at 4.3% in the 2013 first quarter and 3.8% in the second quarter.
Eurostat reported that annual inflation in the euro area was just .7% in October 2013. eurostat.ec.PDF
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Santander (own common and equity preferred shares SANPRB): By reinvesting Santander's common share dividend, I avoid paying Spain's withholding tax.
My last common share purchase was discussed in this post: Item # 3 Added 40 SAN at $6.8 (4/16/2013 Post)
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Adams Express (own 884+): Adams Express declared a year end distribution of $.69 per share consisting of the following:
$.44 per share in long term capital gains
$.16 per share in short term capital gains
$.09 per share in income
I currently own 884+ shares which will generate about $610 in cash next month. I mentioned in a recent post that I may sell 200 shares before the ex dividend date in order to lower my average cost per share below $10. Stocks, Bonds & Politics (introduction 10/31/13 Post) The ex dividend date is 11/21/13. I have not decided whether to do that yet. I am not reinvesting the dividend and there is something to be said for just keeping the 200 shares for their cash generation over time
I am reluctant to sell at the current discount: CEFConnect
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General Electric (own 531+):
As part of its continuing effort to shrink GE Capital, General Electric reported that the company was planning to separate its retail credit business through an IPO. 8-k GE plans to sell up to 20% of the division in an IPO next year, and then complete the separation through a share distribution to its investors in 2015. The distribution would be in the form of an exchange for GE shares. That division of GE Capital issues store credit cards for about 55 million Americans. This division is expected to earn about $2.2B this year and accounted for $53B of the $274B in loans made by GE Capital.
In another announcement, CSX And GE announced a pilot program to use liquefied natural gas to fuel locomotives.
At the recent Dubai Air Show, GE announced that it had received 450 orders for the new GE9X engine for the Boeing 777X valued at $26B.
The stock has done well over the past year. GE Interactive Chart
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1. ADDED 100 of the Municipal Bond CEF NPI at $12.25 (see Disclaimer):
Snapshot of Trade:
Snapshot of Quote Before Trade: As noted in the following snapshot, NPI went ex dividend for its monthly distribution on the day after my purchase. While I try to avoid "buying the dividend", the decline in price was greater than the amount of the dividend.
Security Description: The Nuveen Premium Income Municipal Fund (NPI) is a leveraged closed end fund that invests in tax free municipal bonds.
CEFConnect Page for NPI
Data on Day of Purchase 11/12/13:
Closing Net Asset Value Per Share: $13.82
Closing Market Price: $12.22
Discount: -11.58%
Average 1 Year Discount: -5.79%
Average 3 Year Discount: -3.55%
Average 5 Year Discount: -3.88%
The net asset value per share declined by 1 cent from the previous day while the market price fell by 10 cents. That highlights a CEF risk. Both interest rate and CEF risks explain the decline from May 1 2013, when this CEF closed at a $15.53 net asset value per share and a -5.15% discount to net asset value. Seven monthly dividends of $.072 have gone ex dividend since 5/1 or $.504. If I subtract that number from the 5/1 net asset value, I still arrive at a 7.8% decline in net asset value per share through 11/12/13, made worse by the expansion in the discount from 5.15% to 11.58%. The expansion in the discount, a known CEF risk, caused 45% of the adjusted market decline.
Prior Trades: Item # 5 Added 50 NPI at $12.16 (8/10/13 Post); Item # 3 Added 50 NPI at $12.45 (7/27/13 Post); Item # 5 Bought 58 NPI at $13.4 & 42 at $13.17 (6/15/13 Post)
Rationale and Risks: I have nothing to add to my previous discussions linked above.
I would just emphasize that the interest rate risk is just huge.
The sponsor claims that the leveraged effective duration was 16.09 years as of 10/31/13. NPI - Nuveen Premium Income Municipal Fund
The discount was -5.15% on 5/1/13, with the net asset value per share then at $15.53. The share price closed at $14.73 on 5/1.
At a total cost of $12.25, the tax free yield is about 7%. The tax equivalent yield, which assumes a 28% federal tax bracket, is about 10.9% at that total cost per share.
2. Bought 150 CSG at $8.3955-And 50 in ROTH IRA (See Disclaimer):
The stock prices of REITs will generally go down when interest rates rise, though some investors wish to debate the rationality of that decline. Ultimately, the decree and durability of the price decline depends on the increase in rates and inflation as they impact both costs and rents. A rapid upward adjustment of 2% in interest rates due to interest rate normalization, when costs and rents are both going up 2% annually, could put a squeeze on net operating income. Other factors impacting operating income include improving occupancy levels and lower rent concessions due to an improving economy.
CSG is already at a 96% occupancy level so there is only some room for improvements in that metric, compared to another REIT who is below 90%.
Snapshot of Trade:
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| Bought CSG 150 Shares at $8.3955 |
Security Description: Chambers Street Properties (CSG) is a self-administered and internally managed REIT that focuses on acquiring, owning and operating net-leased industrial and office properties. A net lease requires the tenant to pay rent and expenses normally paid by the property owner including real estate taxes, insurance, maintenance, repairs and/or utilities. A single net lease will require the tenant to pay property taxes. A double net lease adds insurance costs to the tenant's obligations. In the triple net lease, the tenant is responsible for all costs normally paid by the owner. The rent would of course be lower than in a standard lease agreement for the same property.
Chambers owned or had a majority interest in 131 properties, including those owned in joint ventures, containing 34.5M rentable square feet. Overview | Our Portfolio | Chambers Street Properties
I just look at the pictures, mostly office and industrial properties. Properties | Our Portfolio | Chambers Street Properties
Chambers Street Properties Profile Page
Chambers Street Properties Key Developments Page
September 2013 Investor Presentation
Chambers Street Properties Key Developments Page
September 2013 Investor Presentation
Prior Trades: None
Recent Earnings Report: For the 2013 third quarter, Chambers reported core FFO of $40.4M or $.17 per share, up from $.06 in the 2013 third quarter. The portfolio leasing percentage was 96% as of 9/30/13. Adjusted FFO which excludes recurring capital expenditures and other items was reported at $.15 per share. SEC Filed Press Release
This REIT recently switched from paying a quarterly to monthly dividends. The current monthly rate is $.042.
Rationale: (1) Generation of Tax Free Cash Flow in the Roth IRA Plus Some Potential Share Appreciations: Based on the current monthly dividend rate, the dividend yield at a total cost of $8.40 is about 6%.
I also added 50 in the ROTH IRA which converts that 6% into tax free income. That purchase was made with cash flow.
I also added 50 in the ROTH IRA which converts that 6% into tax free income. That purchase was made with cash flow.
Risks and Disadvantages: REITs generally have unimpressive dividend growth and will frequently cut their dividends during recessions.
Since 90%+ of the net income has to be paid out in dividends, cash is not being retained to grow the business. Share issuances are used to raise new capital.
Chambers has a number of short term mortgages on their properties. While the current rates are low, commercial mortgages are relatively short in duration and will need to be refinanced continually. Income generation can be hurt by higher refinancing costs.
Investors have a tendency to view REITs as bond substitutes. Consequently, the price will frequently be driven down when interest rates rise.
The company details risks factors starting at page 9 of its 2012 Annual Report: Form 10-K
3. Averaged Down: Bought 50 GHY at $17.14 (see Disclaimer):
Snapshot of Trade:
Security Description: The Prudential Global Short Duration High Yield Fund (GHY) is a leveraged closed end bond fund. This is my second average down in the main taxable account. This is one of the bond CEFs where I started to buy too soon. Since timing is accurate by happenstance or in hindsight, most of the time, I deal with that issue by slicing and dicing orders into small pieces, so I do not mind averaging down. I will omit to lacking the ability to forecast the future with anything resembling certainty. Reinvesting the dividend is just another way to average down.
High yield is a phrase that describes "junk" bonds. This fund is weighted in junk rated "B" and "BB" bonds:
CEFConnect Page for GHY
Data on Day of Trade (Wednesday 11/13/13):
Closing Net Asset Value Per Share: $18.84
Closing Market Price $17.15
Discount: -8.97%
Average 1 Year Discount: -6.71% (new fund)
This security went ex dividend for its monthly distribution last Monday (11/18), shortly after my purchase.
On the day of my purchase, the net asset value per share declined 1 cent from the previous day, while the market price fell by 15 cents. That is an illustration of a CEF risk that does not exist with mutual funds that are priced each based on the closing net asset value per share.
Prior Trades-Main Taxable Account Only: Item # 5 Bought 50 GHY at $18.55 4/30/13 Post); Item # 2 Added 50 of the Bond CEF GHY at $18.3 (5/29/13 Post). As noted in the last linked post, the net asset value per share was $19.12 on 5/21/13, with the discount at -3.61%. The decline in market price is due to both a decline in net asset value per share and the expansion of the discount.
Rationale: (1) Income with Low Duration Risk: This fund is currently paying a monthly distribution of $.1225 per share. The next dividend date is 11/20/13. Prudential Short Duration High Yield Fund, Inc. and Prudential Global Short Duration High Yield Fund, Inc. declare distributions for September, October and November 2013
Assuming a continuation of that rate, which is in no way assured, the dividend yield would be about 8.57% at a total cost of $17.15 per share. I am reinvesting the dividend to buy additional shares for as long as the discount to net asset value per share exceeds 5%.
Interest rate risk is mitigated somewhat by the fund's short duration. As of 9/30/13, the sponsor claims that the duration is 2.6 years.
"Get to know your bond fund: Duration" Vanguard
Leverage works both ways. Leveraged bond CEFs have been able to borrow short term at abnormally low rates. Using that low cost borrowed money to buy bonds with higher yields creates additional income for the fund's shareholders. It is also beneficial for the assets bought with borrowed money to go up in value. When the net interest spread is meaningful, and the assets are going up in value, then I would also generally expect a narrowing of the discount, creating three ways to make money.
Generally, I would prefer buying a bond CEF when its discount to net asset value is significantly higher than the 1, 3 and 5 year average.
I would not want to own a leveraged bond CEF during a period of rapidly rising rates. Preferably, I would own them only when rates are stable or declining and short term rates are sufficiently low to create a good net interest spread (i.e. the difference between the cost of borrowed funds and the yields of assets bought with those funds)
But, when there are three ways to make money, there will be three ways to lose money too.
Risks: Even with a relatively short duration, this fund suffered a significant decline in net asset value per share starting in early May as interest rates spiked up. It is fairly typical for the discount to expand during periods of market stress, generally defined by me to mean a rapid decline in asset prices over a relatively short period. When the CEF uses leverage, that will magnify the losses during those periods. Purchasing an asset with borrowed money that declines in price is not helpful. Leverage will also increase the fund's duration.
From early May through mid-September, leveraged bond CEFs experienced the triple whammy for their investors: owned assets declined in price, the discount expanded, and the leverage just added to the declines.
Another risk for a foreign bond fund involves currency conversions. If a fund owns a bond denominated in Euros, and the EURO declines in value versus the USD, then a U.S. fund would suffer a loss even if the price remained the same. The converse is also true. Currency conversions can create significant gains or losses.
Future Buys/Sells: I may average down in one or more 50 share buys, but only at prices below $16.75 for the first 50 share lot and $16.25 for the second.
4. Sold 105+ CSCO at $21.2 (See Disclaimer):
Snapshot of Trade:
Snapshot of Profit:
The snapshot does not include .371 fractional shares that will be liquidated on the settlement date.
Item # 2 Bought Back 50 CSCO at $19.95 (February 2012)
Item # 3 Added 50 CSCO at $18.7 (9/27/12 Post)
Prior Trades: Item # 1 Sold 50 Cisco at $21.06 (2/20/13 Post)(snapshot of profit=$59.57)-Item # 4 Bought 50 CSCO @ 19.55 (November 2010 Post). Similar round trips have occurred in the past: Bought 50 CSCO at $22.45 (6/26/2010)-Sold Cisco near the closing price of $24.31 Aug. 2010; Bought CSCO at $20.39 (9/3/2010 Post)-SOLD 50 CSCO @ $24.42 on 11/8/2010
Snapshot of 2010 Trades:
There were no trades in 2011-2012. I flipped 30 shares in 2009 for a $45.48 profit.
While I am not losing money on this stock, I am finding it very difficult to make money since CSCO frequently releases an unfavorable earnings report that knocks the stock back down. The stock has traded mostly between $15 to $25 since 2001. CSCO Interactive Chart
Total Realized Gains Cisco Trades=$526.21
Rationale: I thought the recent earnings report and future guidance were awful. SEC Filed Press Release The sales declines in major emerging markets was just stunning, with orders in the five largest emerging markets plunging 21%.
China: -18%
Brazil: -25
India: -18%
Russia: -30%
Mexico: -18%
Page 6 Earnings Call Transcript - Seeking Alpha
A Cisco competitor, Juniper Networks, reiterated its guidance for the quarter, rejecting Chambers' excuse that customers were hesitant to buy due to the NSA spying revelations. Reuters
For the current quarter, Cisco forecasts the first quarterly sales decline in four years. Revenues are anticipated to decline 8%-10% in the Q/E January 2014 with Non-GAAP E.P.S. estimated at between 45 to 47 cents. The consensus forecast was for 52 cents. Cisco earned 51 cents in the Q/E January 2013. The latest report is discussed in these articles. Bloomberg; Barrons.com; Seeking Alpha
After a few years, I just quit listening to whatever excuse du jour Chambers is currently peddling.
Future Buys/Sells: I am targeting a potential re-entry at below $19. I would be more comfortable at below $18.
5. Bought 50 NNNPRD at $22.63 (see Disclaimer): Normally, I would buy a REIT preferred stock in the IRA accounts. My cash is running low in those accounts, and I have a couple of other securities that I wish to buy in those accounts.
Snapshot of Trade:
The dividend yield at a total cost of $22.63 per share is about 7.32%.
Security Description: The National Retail Properties 6.625% Cumulative Preferred Stock (NNN.PD) is an equity preferred stock issued by the REIT National Retail Properties (NNN) As of 9/30/13, this REIT owns 1,850 properties in 47 states with gross leasable space of 20.3M square feet. Our Portfolio | NNN REIT
Prospectus
NNN has the option to redeem on or after 2/23/2017.
There is a change of control provision in the prospectus which allows the preferred stock owner to convert into common shares based on a formula when there is a change in control as defined in the prospectus. NNN may redeem at par plus accrued dividends to avoid that conversion. This kind of provision may become important when and if a potential acquirer uses its target's balance sheet to finance the bid in whole or in part.
As an example of what can happens when there is no change in control provision, there was a leveraged buyout of Innkeeper's, a hotel REIT, which resulted in a gain for the common shareholders several years ago. The preferred shareholders were left hanging. Innkeeper's later declared bankruptcy and the preferred shareholders were left with zilch.
According to Quantumonline, this security is rated Baa3 by Moody's and BB+ by S & P.
The Dividend Stopper Clause is typical for an equity preferred stock (see pages 19-20 attached to the prospectus):
The Dividend Stopper Clause prevents the company from paying a cash dividend to the common shareholders while deferring the payment of a preferred dividend. It is the legal means used to enforce the preferred shareholders' preference right to dividends over common shareholders.
Common Stock Dividend History: Dividends | NNN REIT
For a REIT, this clause will provide slightly more protection to the preferred shareholder than a similar clause in an equity preferred stock prospectus issued by bank holding companies or other regular "C" corporations. The REIT has to pay its common shareholders at least 90%+ of its net income in order to maintain its tax status which is not the case with a regular "C" corporation. Once the REIT pays out any cash at all to its common shareholders, it has to pay the preferred dividend. It can only defer the preferred dividend after eliminating the common share dividend and it can not eliminate the common share dividend as long as it has to pay out 90+% of its net income. Of course, when things get bad, there may be no net income, and a few REITs did eliminate cash common share dividends and deferred preferred stock dividends due to the last recession. One of them was Strategic Hotels, which I owned, which subsequently paid out all preferred dividends in deferral. Strategic Hotels & Resorts - Press Release
National Retail Properties Profile Page at Reuters
Prior Trades: None
Related Trades: Bought: 50 NNPRE at $19.71-Roth IRA
Recent Earnings Report: For the 2013 third quarter, NNN reported FFF available to common shareholders of $.49 per share and revenues of $100.621M. 8-K - 2013.09.30 AFFO per share was reported at $.50. Portfolio occupancy was at 98.1% as of 9/30/13.
The company estimated 2014 FFO of $1.94 to $1.99.
2013.09.30 Form 10-Q
Rationale and Risks: The discussion made in the preceding linked post is equally applicable to NNNPRD. Both NNNPRE and NNNPRD are in pari-passu (parity). Both are equal in seniority and have equal rights to dividend payments. Both pay cumulative dividends and have $25 par values. The only differences are the coupons and the issuer's optional call date.
For functionally equivalent securities like NNNPRD and NNNPRE, the main consideration is the current yield at the investor's total cost. A secondary consideration is whether one is more likely to be called than the other. I do not view it likely that NNNPRE will ever be called, while it is only conceivable that the higher coupon NNNPRD will be called at some point after NNN has the right to call. There is no obligation for the issuer to redeem and consequently both securities may end up being perpetual in their durations.
The company discusses risk factors starting at page S-8 of the prospectus. I am not currently concerned about credit risk issues. However, during a period of economic stress such as the last Near Depression, investors will imagine credit risks that are not really present to a meaningful degree and will consequently smash the stock prices of REIT equity preferred stocks. For a REIT like NNN, I would view that kind of price action to be more related to what I call volatility risk than to credit risk.
I view the main risk factors to interest rate and volatility risks.
6. Averaged Down in Main Taxable Account: Added 50 BWG at $16.43 (see Disclaimer):
Snapshot of Trade:
Security Description: The Legg Mason BW Global Income Opportunities Fund (BWG) is a global closed end bond fund.
BWG Page at CEFConnect
Data on Date of Trade (11/14/13)
Closing Net Asset Value Per Share: $19.28
Closing Market Price: $16.41
Discount: -14.89%
Average 1 Year Discount: -9.25% (new fund)
The fund is currently paying a $.12 monthly dividend. Legg Mason BW Global Income Opportunities Fund Inc. (BWG) Announces Distributions for the Months of September, October and November 2013 Assuming a continuation of that rate, which is in no way assured, the dividend yield would be about 8.76% at a total cost of $16.43 per share. That purchase was an average down from a buy at $20.55 (4/2013-not optimal timing).
This security will ex dividend for its monthly distribution on 11/20/13.
Prior Trades: My most recent purchase was discussed in Item # 4 Bought 50 BWG at $16.68 (10/3/13 Post).
For this bond CEF, I will just try to exit the position when and if I can do so at any profit.
Rationale and Risks: I recently discussed the rationale and risks for this security (see preceding link)
7. Averaged Down in Main Taxable Account: Added 50 GDO at $18.03 (see Disclaimer):
Snapshot of Trade:
Security Description: The Western Asset Global Corp Defined Opportunity Fund (GDO) is a lightly leveraged world closed end bond fund.
For the next three months, Western Asset Global Corporate Defined Opportunity Fund Inc. (GDO) raised its monthly dividend to $.116 from $.115, which is better than a dividend cut.
At that new rate the dividend yield would be about 7.72% at a total cost of $18.03 per share. The next ex dividend date is 11/20.
This security will go ex dividend for its monthly distribution on 11/20/13.
SEC Form 10-Q for period ending 7/31/13 (holdings list)
Last SEC Filed Shareholder Report (period ending 4/30/13)
GDO Page at CEFConnect
Data on Date of Trade (11/14/13):
Closing Net Asset Value Per Share: $20.24
Closing Market Value: $18.07
Discount: -10.72%
Average 1 Year Discount: -6.6%
Average 3 Year Discount: -5.26%
While the fund is weighted in investment grade bonds, there is a significant exposure to junk rated bonds (BB, B and CCC)
Since 90%+ of the net income has to be paid out in dividends, cash is not being retained to grow the business. Share issuances are used to raise new capital.
Chambers has a number of short term mortgages on their properties. While the current rates are low, commercial mortgages are relatively short in duration and will need to be refinanced continually. Income generation can be hurt by higher refinancing costs.
Investors have a tendency to view REITs as bond substitutes. Consequently, the price will frequently be driven down when interest rates rise.
The company details risks factors starting at page 9 of its 2012 Annual Report: Form 10-K
3. Averaged Down: Bought 50 GHY at $17.14 (see Disclaimer):
Snapshot of Trade:
Security Description: The Prudential Global Short Duration High Yield Fund (GHY) is a leveraged closed end bond fund. This is my second average down in the main taxable account. This is one of the bond CEFs where I started to buy too soon. Since timing is accurate by happenstance or in hindsight, most of the time, I deal with that issue by slicing and dicing orders into small pieces, so I do not mind averaging down. I will omit to lacking the ability to forecast the future with anything resembling certainty. Reinvesting the dividend is just another way to average down.
High yield is a phrase that describes "junk" bonds. This fund is weighted in junk rated "B" and "BB" bonds:
 |
| Credit Quality as of 9/30/13 |
Data on Day of Trade (Wednesday 11/13/13):
Closing Net Asset Value Per Share: $18.84
Closing Market Price $17.15
Discount: -8.97%
Average 1 Year Discount: -6.71% (new fund)
This security went ex dividend for its monthly distribution last Monday (11/18), shortly after my purchase.
On the day of my purchase, the net asset value per share declined 1 cent from the previous day, while the market price fell by 15 cents. That is an illustration of a CEF risk that does not exist with mutual funds that are priced each based on the closing net asset value per share.
Prior Trades-Main Taxable Account Only: Item # 5 Bought 50 GHY at $18.55 4/30/13 Post); Item # 2 Added 50 of the Bond CEF GHY at $18.3 (5/29/13 Post). As noted in the last linked post, the net asset value per share was $19.12 on 5/21/13, with the discount at -3.61%. The decline in market price is due to both a decline in net asset value per share and the expansion of the discount.
Rationale: (1) Income with Low Duration Risk: This fund is currently paying a monthly distribution of $.1225 per share. The next dividend date is 11/20/13. Prudential Short Duration High Yield Fund, Inc. and Prudential Global Short Duration High Yield Fund, Inc. declare distributions for September, October and November 2013
Assuming a continuation of that rate, which is in no way assured, the dividend yield would be about 8.57% at a total cost of $17.15 per share. I am reinvesting the dividend to buy additional shares for as long as the discount to net asset value per share exceeds 5%.
Interest rate risk is mitigated somewhat by the fund's short duration. As of 9/30/13, the sponsor claims that the duration is 2.6 years.
"Get to know your bond fund: Duration" Vanguard
Leverage works both ways. Leveraged bond CEFs have been able to borrow short term at abnormally low rates. Using that low cost borrowed money to buy bonds with higher yields creates additional income for the fund's shareholders. It is also beneficial for the assets bought with borrowed money to go up in value. When the net interest spread is meaningful, and the assets are going up in value, then I would also generally expect a narrowing of the discount, creating three ways to make money.
Generally, I would prefer buying a bond CEF when its discount to net asset value is significantly higher than the 1, 3 and 5 year average.
I would not want to own a leveraged bond CEF during a period of rapidly rising rates. Preferably, I would own them only when rates are stable or declining and short term rates are sufficiently low to create a good net interest spread (i.e. the difference between the cost of borrowed funds and the yields of assets bought with those funds)
But, when there are three ways to make money, there will be three ways to lose money too.
Risks: Even with a relatively short duration, this fund suffered a significant decline in net asset value per share starting in early May as interest rates spiked up. It is fairly typical for the discount to expand during periods of market stress, generally defined by me to mean a rapid decline in asset prices over a relatively short period. When the CEF uses leverage, that will magnify the losses during those periods. Purchasing an asset with borrowed money that declines in price is not helpful. Leverage will also increase the fund's duration.
From early May through mid-September, leveraged bond CEFs experienced the triple whammy for their investors: owned assets declined in price, the discount expanded, and the leverage just added to the declines.
Another risk for a foreign bond fund involves currency conversions. If a fund owns a bond denominated in Euros, and the EURO declines in value versus the USD, then a U.S. fund would suffer a loss even if the price remained the same. The converse is also true. Currency conversions can create significant gains or losses.
Future Buys/Sells: I may average down in one or more 50 share buys, but only at prices below $16.75 for the first 50 share lot and $16.25 for the second.
4. Sold 105+ CSCO at $21.2 (See Disclaimer):
Snapshot of Trade:
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| 2013 Sold 105+ CSCO at $21.2 |
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| 2013 Total=$232.09/Last Trade 105 Shares +$173.52 |
Item # 2 Bought Back 50 CSCO at $19.95 (February 2012)
Item # 3 Added 50 CSCO at $18.7 (9/27/12 Post)
Prior Trades: Item # 1 Sold 50 Cisco at $21.06 (2/20/13 Post)(snapshot of profit=$59.57)-Item # 4 Bought 50 CSCO @ 19.55 (November 2010 Post). Similar round trips have occurred in the past: Bought 50 CSCO at $22.45 (6/26/2010)-Sold Cisco near the closing price of $24.31 Aug. 2010; Bought CSCO at $20.39 (9/3/2010 Post)-SOLD 50 CSCO @ $24.42 on 11/8/2010
Snapshot of 2010 Trades:
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| 2010 Cisco 100 Shares $247.64 |
While I am not losing money on this stock, I am finding it very difficult to make money since CSCO frequently releases an unfavorable earnings report that knocks the stock back down. The stock has traded mostly between $15 to $25 since 2001. CSCO Interactive Chart
Total Realized Gains Cisco Trades=$526.21
Rationale: I thought the recent earnings report and future guidance were awful. SEC Filed Press Release The sales declines in major emerging markets was just stunning, with orders in the five largest emerging markets plunging 21%.
China: -18%
Brazil: -25
India: -18%
Russia: -30%
Mexico: -18%
Page 6 Earnings Call Transcript - Seeking Alpha
A Cisco competitor, Juniper Networks, reiterated its guidance for the quarter, rejecting Chambers' excuse that customers were hesitant to buy due to the NSA spying revelations. Reuters
For the current quarter, Cisco forecasts the first quarterly sales decline in four years. Revenues are anticipated to decline 8%-10% in the Q/E January 2014 with Non-GAAP E.P.S. estimated at between 45 to 47 cents. The consensus forecast was for 52 cents. Cisco earned 51 cents in the Q/E January 2013. The latest report is discussed in these articles. Bloomberg; Barrons.com; Seeking Alpha
After a few years, I just quit listening to whatever excuse du jour Chambers is currently peddling.
Future Buys/Sells: I am targeting a potential re-entry at below $19. I would be more comfortable at below $18.
5. Bought 50 NNNPRD at $22.63 (see Disclaimer): Normally, I would buy a REIT preferred stock in the IRA accounts. My cash is running low in those accounts, and I have a couple of other securities that I wish to buy in those accounts.
Snapshot of Trade:
The dividend yield at a total cost of $22.63 per share is about 7.32%.
Security Description: The National Retail Properties 6.625% Cumulative Preferred Stock (NNN.PD) is an equity preferred stock issued by the REIT National Retail Properties (NNN) As of 9/30/13, this REIT owns 1,850 properties in 47 states with gross leasable space of 20.3M square feet. Our Portfolio | NNN REIT
Prospectus
NNN has the option to redeem on or after 2/23/2017.
There is a change of control provision in the prospectus which allows the preferred stock owner to convert into common shares based on a formula when there is a change in control as defined in the prospectus. NNN may redeem at par plus accrued dividends to avoid that conversion. This kind of provision may become important when and if a potential acquirer uses its target's balance sheet to finance the bid in whole or in part.
As an example of what can happens when there is no change in control provision, there was a leveraged buyout of Innkeeper's, a hotel REIT, which resulted in a gain for the common shareholders several years ago. The preferred shareholders were left hanging. Innkeeper's later declared bankruptcy and the preferred shareholders were left with zilch.
According to Quantumonline, this security is rated Baa3 by Moody's and BB+ by S & P.
The Dividend Stopper Clause is typical for an equity preferred stock (see pages 19-20 attached to the prospectus):
 |
| Stopper Clause |
Common Stock Dividend History: Dividends | NNN REIT
For a REIT, this clause will provide slightly more protection to the preferred shareholder than a similar clause in an equity preferred stock prospectus issued by bank holding companies or other regular "C" corporations. The REIT has to pay its common shareholders at least 90%+ of its net income in order to maintain its tax status which is not the case with a regular "C" corporation. Once the REIT pays out any cash at all to its common shareholders, it has to pay the preferred dividend. It can only defer the preferred dividend after eliminating the common share dividend and it can not eliminate the common share dividend as long as it has to pay out 90+% of its net income. Of course, when things get bad, there may be no net income, and a few REITs did eliminate cash common share dividends and deferred preferred stock dividends due to the last recession. One of them was Strategic Hotels, which I owned, which subsequently paid out all preferred dividends in deferral. Strategic Hotels & Resorts - Press Release
National Retail Properties Profile Page at Reuters
Prior Trades: None
Related Trades: Bought: 50 NNPRE at $19.71-Roth IRA
Recent Earnings Report: For the 2013 third quarter, NNN reported FFF available to common shareholders of $.49 per share and revenues of $100.621M. 8-K - 2013.09.30 AFFO per share was reported at $.50. Portfolio occupancy was at 98.1% as of 9/30/13.
The company estimated 2014 FFO of $1.94 to $1.99.
2013.09.30 Form 10-Q
Rationale and Risks: The discussion made in the preceding linked post is equally applicable to NNNPRD. Both NNNPRE and NNNPRD are in pari-passu (parity). Both are equal in seniority and have equal rights to dividend payments. Both pay cumulative dividends and have $25 par values. The only differences are the coupons and the issuer's optional call date.
For functionally equivalent securities like NNNPRD and NNNPRE, the main consideration is the current yield at the investor's total cost. A secondary consideration is whether one is more likely to be called than the other. I do not view it likely that NNNPRE will ever be called, while it is only conceivable that the higher coupon NNNPRD will be called at some point after NNN has the right to call. There is no obligation for the issuer to redeem and consequently both securities may end up being perpetual in their durations.
The company discusses risk factors starting at page S-8 of the prospectus. I am not currently concerned about credit risk issues. However, during a period of economic stress such as the last Near Depression, investors will imagine credit risks that are not really present to a meaningful degree and will consequently smash the stock prices of REIT equity preferred stocks. For a REIT like NNN, I would view that kind of price action to be more related to what I call volatility risk than to credit risk.
I view the main risk factors to interest rate and volatility risks.
6. Averaged Down in Main Taxable Account: Added 50 BWG at $16.43 (see Disclaimer):
Snapshot of Trade:
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| 2013 Added 50 BWG at $16.43 |
BWG Page at CEFConnect
Data on Date of Trade (11/14/13)
Closing Net Asset Value Per Share: $19.28
Closing Market Price: $16.41
Discount: -14.89%
Average 1 Year Discount: -9.25% (new fund)
The fund is currently paying a $.12 monthly dividend. Legg Mason BW Global Income Opportunities Fund Inc. (BWG) Announces Distributions for the Months of September, October and November 2013 Assuming a continuation of that rate, which is in no way assured, the dividend yield would be about 8.76% at a total cost of $16.43 per share. That purchase was an average down from a buy at $20.55 (4/2013-not optimal timing).
This security will ex dividend for its monthly distribution on 11/20/13.
Prior Trades: My most recent purchase was discussed in Item # 4 Bought 50 BWG at $16.68 (10/3/13 Post).
For this bond CEF, I will just try to exit the position when and if I can do so at any profit.
Rationale and Risks: I recently discussed the rationale and risks for this security (see preceding link)
7. Averaged Down in Main Taxable Account: Added 50 GDO at $18.03 (see Disclaimer):
Snapshot of Trade:
 |
| 2013 Added 50 GDO at $18.03 |
For the next three months, Western Asset Global Corporate Defined Opportunity Fund Inc. (GDO) raised its monthly dividend to $.116 from $.115, which is better than a dividend cut.
At that new rate the dividend yield would be about 7.72% at a total cost of $18.03 per share. The next ex dividend date is 11/20.
This security will go ex dividend for its monthly distribution on 11/20/13.
SEC Form 10-Q for period ending 7/31/13 (holdings list)
Last SEC Filed Shareholder Report (period ending 4/30/13)
GDO Page at CEFConnect
Data on Date of Trade (11/14/13):
Closing Net Asset Value Per Share: $20.24
Closing Market Value: $18.07
Discount: -10.72%
Average 1 Year Discount: -6.6%
Average 3 Year Discount: -5.26%
While the fund is weighted in investment grade bonds, there is a significant exposure to junk rated bonds (BB, B and CCC)
Prior Trades: My most recent purchases are discussed in Item # 7, Paired Trade Sold 100 IGI at $20.22 in Roth IRA and Bought 100 GDO at $17.79-Regular IRA (10/24/13) and in Item # 4 Added 50 GDO at $17.58-Roth IRA (6/29/13 Post)
Links to prior trades are provided in the first linked post.
I am an active trader of this security. My goal is to harvest over time a 10% annualized return in this bond CEF.
Rationale and Risks: I recently discussed the rationale and risks for this security (see preceding links)
********
This post is long enough. I will discuss trades made this week prior to this post's publication in the next post.
Links to prior trades are provided in the first linked post.
I am an active trader of this security. My goal is to harvest over time a 10% annualized return in this bond CEF.
Rationale and Risks: I recently discussed the rationale and risks for this security (see preceding links)
********
This post is long enough. I will discuss trades made this week prior to this post's publication in the next post.
To soothe the OG's nerves:
ReplyDeletehttp://www.cnbc.com/id/101211132
Buffett says stocks are in a "zone of reasonableness" and likely to be higher 5 to 10 years from now.
One of the things I like about the Aegon (based in the Netherlands) hybrids is there is no tax skimmed off the distributions. I owned an Italian energy company, Enel, for several years and paid a 27% tax on the paltry dividend.
Do you know if it is generally true that you can avoid the foreign tax by reinvesting the dividends?
Cathie: Buffett said that stocks will be likely be higher in five years and are currently in a zone of reasonableness. The LB agrees with that opinion; the RB opines that DJIA 20,000 will be hit before 1/1/2016; and the OG frets that the market is about to go down 20%, noting that this up and down stuff is just getting old after 50 years. He would have preferred to have bought that 30 year treasury bond yielding 15% in 1982 rather than letting the RB buy stocks. The OG feels that prosperity in his financial affairs will turn into pain and devastation and can not be soothed by any human's predictions about the future. Two 50% or so plunges in stocks since 2000 did not calmed his nerves.
ReplyDeleteA worthwhile read is Jeremy Grantham's quarterly newsletter that I will discuss in the next post:
http://online.barrons.com/article/SB50001424053111904253404579207793809107008.html?mod=BOL_article_full_more#articleTabs_article%3D1
If Grantham is correct then emerging markets will outperform the U.S. over the next two years, with the U.S. markets gaining 30% or so, elevated by a continuation of highly abnormal central bank monetary policies throughout the developed world, then the likelihood of a nasty correction thereafter will be high, possibly something similar to October 1987 which is how the first phase of the prior long term secular bull market ended with a resounding thud, followed by 4+ years of meandering and consolidation before the second and final phase started in earnest.
He shares my views that the efficient market theory is "laughable":
My Post on that Subject:
Efficient Market Theory: Do Humans Really Behave Rationally-Seek out Relevant Information & Then Process Information With Good Judgment?
http://tennesseeindependent.blogspot.com/2009/06/efficient-market-theory-do-humans.html
Efficient Market Hypothesis as Hokum
http://tennesseeindependent.blogspot.com/2010/03/efficient-market-hypothesis-as-hokumwbs.html
Liz Ann Sonders is also positive:
http://online.barrons.com/article/SB50001424053111904253404579209882388033144.html?mod=BOL_hp_highlight_1#articleTabs_article%3D1
Cathie: On the tax issue, I am familiar only with Spain, France, Canada, Australia, Switzerland and the Netherlands. I am not familiar with Italy. I simply have not had any experience with Italy.
ReplyDeleteCanada will not apply its tax to distributions paid into an IRA.
For the Netherlands and Spain, I have avoided the withholding tax by reinvesting the dividend (RDS/A, UN, SAN)
For France, the tax would be withheld irrespective of whether the dividend was reinvested but the tax rate would depend on whether the broker took advantage of a lower rate by filing for a relief at the source (Vanguard and Fidelity file-15% tax; Schwab and TDAmeritrade do not file-30% tax)
http://www.dtcc.com/downloads/legal/imp_notices/2012/dtc/div/1228-12.pdf
Australia has not withheld any tax on a dividend when the company has paid the tax ("franked" dividend").
see item # 7 and comment section:
http://tennesseeindependent.blogspot.com/2012/08/mtystlprasold-50-nabzy-at-2547earnings.html
I am not clear on what that means. Australia may not have a double taxation system for dividends like the U.S.
Tennindependent,
ReplyDeleteLike you, I have been making small investments in my Roth IRA in bond like securities to produce cash flow that can be reinvested. I have been looking at a couple of trust preferred securities (Countrywide Capital CFC-B 7.0% and Merrill Lynch MER-E 7.12%) Unlike the equity preferreds I own, the prices of these two trust preferreds did not decline significantly during the interest rate run up earlier this year. I assume that is because they are likely to be called because they can no longer be counted as tier 1 capital and the coupon rates are relatively high.
I enjoy reading your blog each week and I would appreciate your input
Tompettytx: It is my understanding that trust preferred securities only have to be phased out as Tier 1 capital over a three year period for banks like BAC.
ReplyDeleteSection 171 (b)(4)(b)
"(B) Debt or equity instruments issued before may 19, 2010.—For debt or equity instruments issued before May 19, 2010, by depository institution holding companies or by nonbank financial companies supervised by the Board of Governors, any regulatory capital deductions required under this section shall be phased in incrementally over a period of 3 years, with the phase-in period to begin on January 1, 2013, except as set forth in subparagraph (C)."
http://www.fdic.gov/regulations/reform/dfa_selections.html#2
Both of those securities that you mentioned can be called now at par value plus accrued interest payments and both have relatively high coupons. Those two factors will likely cause them to hug the $25 par values. I would not be surprised by a redemption notice at anytime. Based on the market's prices, other investors believe that they will be called relatively soon.
I have not invested in a Merrill Lynch TP. I did buy one from Countrywide, CPP, that has been called in December 2012.
http://tennesseeindependent.blogspot.com/2011/09/bought-back-50-cpp-at-2135sold-50-of-tc.html
A list of outstanding BAC equity and trust preferred securities can be found at
http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=capitalsecurities#fbid=VGCl0VvU2G-/Trust
A number of the outstanding TPs are 3 month Libor floaters and BAC is probably in no hurry to redeem those low yielding securities.
I do not know why there are so many Merrill Lynch TPs still outstanding. Of the exchange traded TPs originally issued by BAC, only one remains, BACPRZ which has a 6% coupon. Some TPs are traded in the bond market with $1,000 par values, and I have bought some of those including one issued by MBNA which was redeemed by BAC.
http://tennesseeindependent.blogspot.com/2011/11/earnings-ares-capital-arcc-appelton.html
Merrill TPs outstanding:
MER-K 6.45%
MER-M 6.45%
MER-P 7.375%
MER-D 7%
MER-E 7.12%
MER-F 7.28%
It is unusual for a TP to have no maturity date, which is the case for several of the Merrill TPs.
Tennindependent,
ReplyDeleteThanks for your response.