Trades made after last Tuesday will be discussed in the next weekly post. I will be discussing then about 8 trades including the purchase of PEP shares last Friday at $78.25. I entered a limit order at that price when the market was at $78.90, thinking that the odds of it being filled were remote at best. It is frequently impossible to predict herd like movements by institutional investors.
Closing Price Last Friday: PEP: $78.10 -$1.59 (-2.00%)
Big Picture Synopsis
Closing Price Last Friday: PEP: $78.10 -$1.59 (-2.00%)
Big Picture Synopsis
Stocks:
Stable Vix Pattern (bullish)
Vix Asset Allocation Model Explained Simply
Use of the VIX as a Timing Model
Short Term: Hoping for a 10%+ Correction
Intermediate Term: Slightly Bullish
Long Term: Bullish
I thought that this article written by Brett Arends, and titled "How to invest like a cockroach", highlighted one of the basic questions of investing.
Use of the VIX as a Timing Model
Short Term: Hoping for a 10%+ Correction
Intermediate Term: Slightly Bullish
Long Term: Bullish
I thought that this article written by Brett Arends, and titled "How to invest like a cockroach", highlighted one of the basic questions of investing.
The general question to be answered by every investor is whether you want to grow your nest egg rapidly by taking an abundant amount of risks, or more slowly and methodically with less risks.
I call my investment approach "turtle" investing, and would prefer that analogy to one mentioning cockroaches.
Bonds:
Short Term: Neutral to Slightly Bearish
Intermediate and Long Term: Slightly Bearish Based on Interest Rate Normalization
The Difficult Path to Interest Rate Normalization
Short Term: Neutral to Slightly Bearish
Intermediate and Long Term: Slightly Bearish Based on Interest Rate Normalization
The Difficult Path to Interest Rate Normalization
The preceding bond forecast assumes an average annual CPI of 2% to 2.25% over the next ten years, within the range of the recent 10 year TIP break-even spread.
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Recent Developments:
Janet Yellin testified that the recovery in the labor market was far from complete. I would not call that news. FRB: Testimony--Yellen, Semiannual Monetary Policy Report to the Congress--February 11, 2014
China's exports in January rose 10.6%, better than the 2% forecast, and up from 4.3% in December.
Emerging market currencies in several countries are still under significant downside pressure. The most vulnerable currencies include those from Turkey, Argentina, Ukraine, South Africa, Hungary and Indonesia. Bloomberg Those currency declines caused Procter & Gamble to issue an earnings warning for 2014. P&G Updates Earnings Projections to Reflect Significant Currency Exchange Rate Movements
The headlines say that "Australian Unemployment Jumps to 10-Year High" - Bloomberg. What is the 10 year high? Answer: 6%.
CPI declined by .06% in Germany during January 2014 and rose 1.3% Y-O-Y. Press releases- Consumer prices in January 2014: +1.3% on January 2013 - Federal Statistical Office
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Banco Santander S.A. ADS (SAN:NYSE)
For as long as I own Santander's common stock, I will reinvest the dividend. I recently received over 6 shares purchased with the last dividend. Spain does not withhold a dividend tax when the U.S. investor reinvests the dividend (or at least has never done so for me):
I would just like to highlight why it could be relevant to avoid the foreign tax on dividend income for some U.S. taxpayers.
A single person can take up to a $300 foreign tax credit ($600 when filing jointly with a spouse) without having to complete IRS Form 1116. Of course, no recovery is permitted for foreign taxes paid on dividends received in retirement accounts.
As long as you fall within those limits, then it is my understanding, as a lay person on tax issues, that you can take as a credit the full amount of the foreign taxes paid. However, if you go over those numbers, then Form 1116 needs to be filled out. If that form is not filled out, you will lose the excess over the foregoing limit amounts.
I am required to fill out that form or lose the excess over the limit.
This IRS form limits the amount of the foreign tax credit to the lesser of the foreign tax paid or the amount of U.S. tax attributable to the taxpayer's foreign source income. "TaxAlmanac -Foreign Tax Credit"; Charles Schwab Publication: "Claiming Foreign Taxes: Credit or Deduction?"; TurboTax Article: "Filing IRS Form 1116 to Claim the Foreign Tax Credit". My knowledge on the subject is limited to a few articles read on the internet and my practical experience filling out Form 1116 using TurboTax.
If you are retired and single for example, with no earned or pension income, then your tax bracket may be less than 15%, the amount withheld by several nations from tax payments. Many will withhold more than 15%.
If you pay only 15% in foreign taxes, and are in a 10% U.S. tax bracket, then Form 1116 will not allow you to claim the entire 15% paid in foreign taxes. Instead, the form will limit a credit for that tax year to the amount that you would have paid without the foreign tax credit, which would be 10% in this hypothetical. The excess could be carried forward and used in subsequent tax years-with the same limitations.
I have zero expertise on tax issues, and really hate having to deal with these issues. I have filled out that Form 1116, and I have a foreign tax credit carryforward. I only have income from dividends, interest and capital gains and consequently have considerable control over my tax bracket. Since I can be subject to limits on the availability of foreign credits given my taxable income and significant holdings of foreign dividend paying securities, it is relevant for me to avoid, wherever possible, foreign tax withholding.
I recently discussed this issue in comments to a Seeking Alpha article on the Canadian energy company Enerplus which I own.
**********
Merrill Lynch Depositor Inc. PreferredPLUS Cl A 8% TRUCs QWS-2 for Qwest Capital Funding Inc. (PJA:NYSE)-And More Discussion on the Hideous Call Warrant Provisions in TCs:
PJA is one of the few trust certificates that I still own. Stocks, Bonds & Politics: Trust Certificates: New Gateway Post Most of them have been called by the call warrant owners, that is, the brokerage companies that originally formed the Grantor Trust that owns the bonds.
The call warrant mechanism was a risk free means for the brokerage company to capture the bond's appreciation during a period of declining interest rates. Brokerage companies are really good at creating products that enrich themselves, frequently at the expense of mom and pop investors. The call warrant provision is just one way to accomplish that objective.
The owner of the TC has the risk of default, while the brokerage company who created the TC would be free to take the bond's appreciation whenever it was in its interest to do so by redeeming the TC at its par value plus accrued interest. Once the trustee received the redemption proceeds from the call warrant owner, the bonds would then be delivered to the call warrant owner who could then sell them at a risk free profit in the bond market.
Sure, it stinks but it is what one has to expect from brokerage firms. It is what it is. At least the owners of the fixed coupon TC will receive par value plus accrued interest when the security is redeemed by the call warrant owner. While recognizing that the call warrant provision is hideous, and caps my potential profits, I have managed to do well in this niche area, with minimal capital exposure, as shown by the snapshots in the TC Gateway Post.
For our purposes, it is important to realize that the appreciation in the TC will be capped due to the existence of the call warrant. KTN is one of the few TCs without a call warrant attached to it and it is selling near $30. My average cost is below $14.
Generally, I do not want to pay more than par value plus accrued interest for a TC that could be called at anytime and when it would be advantageous for the call warrant owner to do so now. An example would be JZJ, which I still own, where the underlying bonds are selling for over 130, AT & T 2031 Bond, and the owners of that TC have already been subject to a partial call. I lost part of my JZJ position and all of the functionally equivalent JZE to a call warrant owner redemption. Call Warrant Exercised on JZE and JZJ; Proceeds Received from Calls of JZE and JZJ JZE had been purchase at $12.5 and was redeemed in full at $25 plus accrued interest.
For the most part, only long term bonds with make whole provisions were selected for purchase by the Grantor Trusts formed by the brokerage companies.
Why?
Those bonds would not be called by the issuer, since the redemption would be punitive. Without a threat of a redemption by the issuer, the bond would consequently rise more in price during periods of falling interest rates compared to bonds without those provisions or even those with modified make whole provisions (e.g. make whole to 2016 for a redemption prior to that year, but no make whole thereafter until the original maturity date in say 2032)
I own 150 PJA shares in a taxable account and 50 shares in the Roth IRA. I took a snapshot of the semi-annual payment received for the 150 shares:
The TC has an 8% coupon, higher than the underlying bond's 7.75% coupon. The additional yield for the TC is accomplished by having the Grantor Trust own more bonds compared to what would be necessary to support the same coupon.
The underlying bond was originally issued by U.S. West Capital Funding. U.S. West was acquired by Qwest in 2000. Qwest was in turn acquired by CenturyLink Inc. (CTL:NYSE). The underlying senior bond is now a CTL obligation and will have the same rating as other CTL unsecured senior notes.
My original purchase was a 50 share lot which I still own. Item # 2 Bought 50 PJA at 19.45 (12/11/2009 Post) The last purchase was made in September 2013. Roth IRA: Bought 50 PJA at $25.18
FINRA - Investor Information on CTL Bonds
According to FINRA, the underlying bond in PJA is currently rated junk by both Moody's and S & P. Bonds Detail I am at my limit with 200 shares given the risks. Credit risk is more important than interest rate risk, and both types of major risks for long term bonds are significant here.
*********************************
Banco Santander S.A. ADS (SAN:NYSE)
For as long as I own Santander's common stock, I will reinvest the dividend. I recently received over 6 shares purchased with the last dividend. Spain does not withhold a dividend tax when the U.S. investor reinvests the dividend (or at least has never done so for me):
I would just like to highlight why it could be relevant to avoid the foreign tax on dividend income for some U.S. taxpayers.
A single person can take up to a $300 foreign tax credit ($600 when filing jointly with a spouse) without having to complete IRS Form 1116. Of course, no recovery is permitted for foreign taxes paid on dividends received in retirement accounts.
As long as you fall within those limits, then it is my understanding, as a lay person on tax issues, that you can take as a credit the full amount of the foreign taxes paid. However, if you go over those numbers, then Form 1116 needs to be filled out. If that form is not filled out, you will lose the excess over the foregoing limit amounts.
I am required to fill out that form or lose the excess over the limit.
This IRS form limits the amount of the foreign tax credit to the lesser of the foreign tax paid or the amount of U.S. tax attributable to the taxpayer's foreign source income. "TaxAlmanac -Foreign Tax Credit"; Charles Schwab Publication: "Claiming Foreign Taxes: Credit or Deduction?"; TurboTax Article: "Filing IRS Form 1116 to Claim the Foreign Tax Credit". My knowledge on the subject is limited to a few articles read on the internet and my practical experience filling out Form 1116 using TurboTax.
If you are retired and single for example, with no earned or pension income, then your tax bracket may be less than 15%, the amount withheld by several nations from tax payments. Many will withhold more than 15%.
If you pay only 15% in foreign taxes, and are in a 10% U.S. tax bracket, then Form 1116 will not allow you to claim the entire 15% paid in foreign taxes. Instead, the form will limit a credit for that tax year to the amount that you would have paid without the foreign tax credit, which would be 10% in this hypothetical. The excess could be carried forward and used in subsequent tax years-with the same limitations.
I have zero expertise on tax issues, and really hate having to deal with these issues. I have filled out that Form 1116, and I have a foreign tax credit carryforward. I only have income from dividends, interest and capital gains and consequently have considerable control over my tax bracket. Since I can be subject to limits on the availability of foreign credits given my taxable income and significant holdings of foreign dividend paying securities, it is relevant for me to avoid, wherever possible, foreign tax withholding.
I recently discussed this issue in comments to a Seeking Alpha article on the Canadian energy company Enerplus which I own.
**********
Merrill Lynch Depositor Inc. PreferredPLUS Cl A 8% TRUCs QWS-2 for Qwest Capital Funding Inc. (PJA:NYSE)-And More Discussion on the Hideous Call Warrant Provisions in TCs:
PJA is one of the few trust certificates that I still own. Stocks, Bonds & Politics: Trust Certificates: New Gateway Post Most of them have been called by the call warrant owners, that is, the brokerage companies that originally formed the Grantor Trust that owns the bonds.
The call warrant mechanism was a risk free means for the brokerage company to capture the bond's appreciation during a period of declining interest rates. Brokerage companies are really good at creating products that enrich themselves, frequently at the expense of mom and pop investors. The call warrant provision is just one way to accomplish that objective.
The owner of the TC has the risk of default, while the brokerage company who created the TC would be free to take the bond's appreciation whenever it was in its interest to do so by redeeming the TC at its par value plus accrued interest. Once the trustee received the redemption proceeds from the call warrant owner, the bonds would then be delivered to the call warrant owner who could then sell them at a risk free profit in the bond market.
Sure, it stinks but it is what one has to expect from brokerage firms. It is what it is. At least the owners of the fixed coupon TC will receive par value plus accrued interest when the security is redeemed by the call warrant owner. While recognizing that the call warrant provision is hideous, and caps my potential profits, I have managed to do well in this niche area, with minimal capital exposure, as shown by the snapshots in the TC Gateway Post.
For our purposes, it is important to realize that the appreciation in the TC will be capped due to the existence of the call warrant. KTN is one of the few TCs without a call warrant attached to it and it is selling near $30. My average cost is below $14.
Generally, I do not want to pay more than par value plus accrued interest for a TC that could be called at anytime and when it would be advantageous for the call warrant owner to do so now. An example would be JZJ, which I still own, where the underlying bonds are selling for over 130, AT & T 2031 Bond, and the owners of that TC have already been subject to a partial call. I lost part of my JZJ position and all of the functionally equivalent JZE to a call warrant owner redemption. Call Warrant Exercised on JZE and JZJ; Proceeds Received from Calls of JZE and JZJ JZE had been purchase at $12.5 and was redeemed in full at $25 plus accrued interest.
For the most part, only long term bonds with make whole provisions were selected for purchase by the Grantor Trusts formed by the brokerage companies.
Why?
Those bonds would not be called by the issuer, since the redemption would be punitive. Without a threat of a redemption by the issuer, the bond would consequently rise more in price during periods of falling interest rates compared to bonds without those provisions or even those with modified make whole provisions (e.g. make whole to 2016 for a redemption prior to that year, but no make whole thereafter until the original maturity date in say 2032)
I own 150 PJA shares in a taxable account and 50 shares in the Roth IRA. I took a snapshot of the semi-annual payment received for the 150 shares:
The TC has an 8% coupon, higher than the underlying bond's 7.75% coupon. The additional yield for the TC is accomplished by having the Grantor Trust own more bonds compared to what would be necessary to support the same coupon.
The underlying bond was originally issued by U.S. West Capital Funding. U.S. West was acquired by Qwest in 2000. Qwest was in turn acquired by CenturyLink Inc. (CTL:NYSE). The underlying senior bond is now a CTL obligation and will have the same rating as other CTL unsecured senior notes.
My original purchase was a 50 share lot which I still own. Item # 2 Bought 50 PJA at 19.45 (12/11/2009 Post) The last purchase was made in September 2013. Roth IRA: Bought 50 PJA at $25.18
FINRA - Investor Information on CTL Bonds
According to FINRA, the underlying bond in PJA is currently rated junk by both Moody's and S & P. Bonds Detail I am at my limit with 200 shares given the risks. Credit risk is more important than interest rate risk, and both types of major risks for long term bonds are significant here.
*********************************
1. Bought 100 TICC at $9.97-ROTH IRA (see Disclaimer):
Snapshot of Trade:
Security Description: TICC Capital (TICC) is a relatively small Business Development Corporation (BDC) that invests in middle market companies.
TICC Capital website
The current quarterly dividend is $.29 per share, which was raised from $.27 in the 2012 third quarter. During the Near Depression period, TICC reduced its quarterly dividend from $.36 to $.30 per share in 2008 2nd quarter. TICC slashed the quarterly dividend to $.20 in the 2008 third quarter, and then slashed it again to $.15 in the 2009 first quarter. TICC Capital Dividend History This dividend history is viewed extremely negatively. On the positive side, the dividend is moving back up slowly and this BDC did pay $.12 per share special dividends in both 2005 and 2006 when conditions were more optimal for its operations.
Prior Trades: I eliminated my ROTH IRA position in TICC last year:
Item # 7 Sold 202+ TICC at $10.5 (102+ Roth IRA & 100 in a Taxable Account0(11/27/13 Post)-Item # 1 Bought 100 of the BDC TICC at $9.8-ROTH IRA (February 2012)
The total return on those shares was 25.13%.
I also sold at the same time my highest cost shares held in a taxable account that were bought at $10.30.
After paring my taxable account position, I currently own 60+ shares, with 50 of those shares purchased at $9.85 and the remaining shares have been bought with the dividends. Added 50 TICC at $9.85 (Item # 1)
Recent Earnings Report: For the 2013 third quarter, TICC reported net investment income of $12.2M or $.23 per share. Core net income was reported at $.28 per share. The Board declared a $.29 per share dividend for the 2013 4th quarter. Net asset value was reported at $9.9 per share, up from $9.75 as of 6/30/13.
As of 9/30/13, the weighted average yield of TICC's debt instruments was 8.7%, up from 8.5% as of 6/30/13.
When I bought back the shares previously sold in the ROTH IRA, I only had the 2013 third quarter report that showed a net asset value per share at $9.9 as of 9/30/2013: 10-Q
Rationale: The goal for any BDC purchase made in the ROTH IRA is to collect several dividend payments and then exit the position at whatever profit is available. After collecting the dividends for a year or so, I will generally look to sell a position when at least two of the following three conditions are met: (1) I have a profit in the shares; (2) my total annualized return exceeds 10%; and (3) the market price exceeds the net asset value per share by more than 5%.
Risks: The company discusses risks factors incident to its operations starting at page 23 of its 2012 Annual Report. This discussion continues until page 43. Whenever it takes that many single spaced pages to summarize risks, an investor needs to pay attention.
I would highlight the potential conflicts sections (page 36-37 and 40); and the discussion at pages 39-40 that TICC's investments "may be extremely risky and we could lose all or part of our investment). BDC's do not have a capital cushion since they are required to pay out 90%+ of their income in shareholder distributions. While that requirement leads to a lofty dividend, the capital flight out of the corporation restrains growth and will frequently lead BDCs to sell shares in order to replenish capital.
I am not a fan of BDCs, but will buy them in small amounts for their income generation. The goal is generally to collect dividends for a period of time and then to opportunistically exit the position at any profit, no matter how small. Since I frequently start with over a 10% dividend yield, a 10% annualized return is made easier for that reason, particularly when I am somewhat disciplined about entry and exit points. This last buy was relatively close to net asset value per share.
A dividend cut is a possibility given the current dividend and the quarterly net income numbers.
Future Buys and Sells: I may buy up to another 100 shares at lower prices.
Closing Price Last Friday: TICC: 10.45 +0.02 (+0.19%)
2. Bought 50 NBTB at $22.76 (Regional Bank Basket Strategy)(see Disclaimer): This strategy is called a basket strategy for a reason. I am spreading my risk to a large number of stocks rather than to concentrate my funds in a just a few, which limits my risk. Frequently, I have been surprised by the stocks that have outperformed a regional bank index fund, and consequently would not have purchased them without utilizing a basket approach. I will also repeatedly trade stocks in the basket, booking profits from eliminations and pares, and hopefully lowering my cost basis over time with successful trading.
NBTB is a first time buy, whereas BHLB discussed below was sold last year at $28.74 and then bought back at $24.51.
Snapshot of Trade:
Company Description: NBT Bancorp (NBTB) is a small regional bank holding company whose headquarters is located in Norwich, NY which is about 65 miles south of Syracuse. (NBT Bancorp Company Profile page at Reuters) NBT Bank, the operating subsidiary, currently has 155 banking locations in five states, with 125 of those locations in upstate New York, southern New Hampshire, and northwestern Vermont and the remaining 30 branches located in northeastern Pennsylvania (through NBT's Pennstar Bank division) NBT Bancorp
The share price of this bank remained remarkably stable in 2007-2010, moving up and down mostly between $20 and $25 per share. Looking at this chart, I see no evidence reflecting the financial turmoil of the recent Near Depression. NBTB Interactive Chart
Prior Trades: None
Recent Earnings Report: For the 2013 4th quarter, NBT reported net income of $13.1M or $.41 per share, up from $.39 for the same period in 2012. SEC Filed Press Release
Net Interest Margin: 3.61%
NPL Ratio: .99%
NPA Ratio: .74%
Coverage ratio: 129.29%
Net Charge Offs to average loans (annualized): .44%
Return on Average Tangible Equity: 14.42%
Total Capital Ratio: 12.99%
At the time of my purchase, the consensus E.P.S. estimate for 2014 was $1.67 and $1.79 in 2015. The P/E based on a share price of $22.76 and the 2014 estimate would be 13.63, falling to 12.72 based on the 2015 E.P.S. estimate. The estimated E.P.S. growth rate between 20014 to 2015 is 7.19%.
Rationale: After the recent price decline, the risk/reward balance move slightly in favor of reward. The NPL and NPA ratios manifest prudent management. The current share price is supported by a decent dividend yield.
The current quarterly dividend is $.21 per share, which was raised from $.2 in the 2013 4th quarter NBT Bancorp Inc. (NBTB) Dividend History - NASDAQ.com The dividend was not cut during or after the recent recession. However, the quarterly dividend remained constant at $.2 per share from the 2007 second quarter until it was raised by just one cent late last year.
Assuming a continuation of the $.21 rate, the dividend yield would be about 3.69% at a total cost per share of $22.76.
The bank remained profitable during the recent recession, though E.P.S. did decline from $1.81 in 2008 to $1.53 in 2009.
The bank did not participate in TARP (Last sentence first paragraph at page 11, form10-k The bank did complete a public offering of stock in April 2009, selling 1,576,230 and raising $33.5M in net proceeds.
I am currently well below my minimum investment level of $40,000 in the regional bank basket.
Risks: For regional banks, the main risk at the moment is the ongoing compression of their net interest margins as operating expenses increase. This kind of trend has led to earnings declines or anemic earnings growth. The robust rally last year was in large part due to the rise in intermediate and long term rates. Investors believed that the net interest margin would start to improve as some types of loans reset at higher rates while the cost of funds remained abnormally low due to continuation of ZIRP. With the recent downtrend in rates, investors turned away from the regional banks and their share prices have suffered in many cases a 10% or greater decline over the past several weeks.
It remains to be seen whether the banks will get any relief on net interest margins any time soon.
St. Louis FED Chart Net Interest Margin:
Net Interest Margin for all U.S. Banks- St. Louis Fed
Most of the benefit from repricing CDs at abnormally low rates has already been achieved given the length of time since the FED commenced ZIRP in late 2008. A large part of the benefit received from CD repricing occurred in 2009 and 2010. Banks were able to reduce their borrowing costs as yields on CDs declined precipitously which increased their net interest rate margin due to lower borrowing costs.
Net Interest Margin for U.S. Banks with average assets under $1B- St. Louis Fed
Net Interest Margin for U.S. Peer Banks (with average assets less than $15B)
Net Interest Margin for U.S. Banks with average assets greater than $15B- St. Louis Fed
All banks will face an increase in loan losses during recessions, and those events will have a significant negative impact on share prices.
Banks who made improvident lending decisions during good times, and there will invariably be a very large number of those, will frequently fail during recessions, particularly severe ones like the most recent Near Depression. The FDIC will seize the failed banks, causing a total loss for common shareholders, as well as owners of the issuer's equity preferred stocks and junior bonds.
As I noted in my Gateway Post for regional banks, banks have repeatedly blown themselves up during my lifetime and will most likely continue doing so. I consequently place a premium on banks that navigated the last recession without cutting their dividend or having a losing year. At least that kind of performance shows some prudence by management which hopefully will continue for the next up and down cycle. I will accept less earnings growth for more prudence.
So, there is always the potential for a total wipe out when buying the stock or any junior security issued by a leveraged bank holding company. Even with a failure, significant declines in the share price will occur, with or without dividend slashes, when buying a bank stock.
A large number of banks reduced their quarterly dividends to just 1 cent per share in response to the recent recession. Many of those banks that slashed their quarterly dividends may not restore them to pre-2007 levels for another decade or longer.
Future Buys and Sells: I will be monitoring earnings before deciding whether or not to average down. I will not average up. A potential average down price would be below $20, limiting any future purchase to another 50 share lot. If I bought another 50 shares at below $20, I would consider selling the highest cost lot above $25.
The bank discusses risks starting at page 19 of its 2012 Annual Report: 10-k
Closing Price Last Friday: NBTB: $23.20 -0.02 (-0.09%)
Snapshot of Trade:
 |
| 2014 Roth IRA Bought 100 TICC at $9.97 |
TICC Capital website
The current quarterly dividend is $.29 per share, which was raised from $.27 in the 2012 third quarter. During the Near Depression period, TICC reduced its quarterly dividend from $.36 to $.30 per share in 2008 2nd quarter. TICC slashed the quarterly dividend to $.20 in the 2008 third quarter, and then slashed it again to $.15 in the 2009 first quarter. TICC Capital Dividend History This dividend history is viewed extremely negatively. On the positive side, the dividend is moving back up slowly and this BDC did pay $.12 per share special dividends in both 2005 and 2006 when conditions were more optimal for its operations.
Prior Trades: I eliminated my ROTH IRA position in TICC last year:
Item # 7 Sold 202+ TICC at $10.5 (102+ Roth IRA & 100 in a Taxable Account0(11/27/13 Post)-Item # 1 Bought 100 of the BDC TICC at $9.8-ROTH IRA (February 2012)
The total return on those shares was 25.13%.
I also sold at the same time my highest cost shares held in a taxable account that were bought at $10.30.
After paring my taxable account position, I currently own 60+ shares, with 50 of those shares purchased at $9.85 and the remaining shares have been bought with the dividends. Added 50 TICC at $9.85 (Item # 1)
Recent Earnings Report: For the 2013 third quarter, TICC reported net investment income of $12.2M or $.23 per share. Core net income was reported at $.28 per share. The Board declared a $.29 per share dividend for the 2013 4th quarter. Net asset value was reported at $9.9 per share, up from $9.75 as of 6/30/13.
As of 9/30/13, the weighted average yield of TICC's debt instruments was 8.7%, up from 8.5% as of 6/30/13.
When I bought back the shares previously sold in the ROTH IRA, I only had the 2013 third quarter report that showed a net asset value per share at $9.9 as of 9/30/2013: 10-Q
Rationale: The goal for any BDC purchase made in the ROTH IRA is to collect several dividend payments and then exit the position at whatever profit is available. After collecting the dividends for a year or so, I will generally look to sell a position when at least two of the following three conditions are met: (1) I have a profit in the shares; (2) my total annualized return exceeds 10%; and (3) the market price exceeds the net asset value per share by more than 5%.
Risks: The company discusses risks factors incident to its operations starting at page 23 of its 2012 Annual Report. This discussion continues until page 43. Whenever it takes that many single spaced pages to summarize risks, an investor needs to pay attention.
I would highlight the potential conflicts sections (page 36-37 and 40); and the discussion at pages 39-40 that TICC's investments "may be extremely risky and we could lose all or part of our investment). BDC's do not have a capital cushion since they are required to pay out 90%+ of their income in shareholder distributions. While that requirement leads to a lofty dividend, the capital flight out of the corporation restrains growth and will frequently lead BDCs to sell shares in order to replenish capital.
I am not a fan of BDCs, but will buy them in small amounts for their income generation. The goal is generally to collect dividends for a period of time and then to opportunistically exit the position at any profit, no matter how small. Since I frequently start with over a 10% dividend yield, a 10% annualized return is made easier for that reason, particularly when I am somewhat disciplined about entry and exit points. This last buy was relatively close to net asset value per share.
A dividend cut is a possibility given the current dividend and the quarterly net income numbers.
Future Buys and Sells: I may buy up to another 100 shares at lower prices.
Closing Price Last Friday: TICC: 10.45 +0.02 (+0.19%)
2. Bought 50 NBTB at $22.76 (Regional Bank Basket Strategy)(see Disclaimer): This strategy is called a basket strategy for a reason. I am spreading my risk to a large number of stocks rather than to concentrate my funds in a just a few, which limits my risk. Frequently, I have been surprised by the stocks that have outperformed a regional bank index fund, and consequently would not have purchased them without utilizing a basket approach. I will also repeatedly trade stocks in the basket, booking profits from eliminations and pares, and hopefully lowering my cost basis over time with successful trading.
NBTB is a first time buy, whereas BHLB discussed below was sold last year at $28.74 and then bought back at $24.51.
Snapshot of Trade:
 |
| 2014 Bought 50 NBTB at $22.76 |
The share price of this bank remained remarkably stable in 2007-2010, moving up and down mostly between $20 and $25 per share. Looking at this chart, I see no evidence reflecting the financial turmoil of the recent Near Depression. NBTB Interactive Chart
Prior Trades: None
Recent Earnings Report: For the 2013 4th quarter, NBT reported net income of $13.1M or $.41 per share, up from $.39 for the same period in 2012. SEC Filed Press Release
Net Interest Margin: 3.61%
NPL Ratio: .99%
NPA Ratio: .74%
Coverage ratio: 129.29%
Net Charge Offs to average loans (annualized): .44%
Return on Average Tangible Equity: 14.42%
Total Capital Ratio: 12.99%
At the time of my purchase, the consensus E.P.S. estimate for 2014 was $1.67 and $1.79 in 2015. The P/E based on a share price of $22.76 and the 2014 estimate would be 13.63, falling to 12.72 based on the 2015 E.P.S. estimate. The estimated E.P.S. growth rate between 20014 to 2015 is 7.19%.
Rationale: After the recent price decline, the risk/reward balance move slightly in favor of reward. The NPL and NPA ratios manifest prudent management. The current share price is supported by a decent dividend yield.
The current quarterly dividend is $.21 per share, which was raised from $.2 in the 2013 4th quarter NBT Bancorp Inc. (NBTB) Dividend History - NASDAQ.com The dividend was not cut during or after the recent recession. However, the quarterly dividend remained constant at $.2 per share from the 2007 second quarter until it was raised by just one cent late last year.
Assuming a continuation of the $.21 rate, the dividend yield would be about 3.69% at a total cost per share of $22.76.
The bank remained profitable during the recent recession, though E.P.S. did decline from $1.81 in 2008 to $1.53 in 2009.
The bank did not participate in TARP (Last sentence first paragraph at page 11, form10-k The bank did complete a public offering of stock in April 2009, selling 1,576,230 and raising $33.5M in net proceeds.
I am currently well below my minimum investment level of $40,000 in the regional bank basket.
Risks: For regional banks, the main risk at the moment is the ongoing compression of their net interest margins as operating expenses increase. This kind of trend has led to earnings declines or anemic earnings growth. The robust rally last year was in large part due to the rise in intermediate and long term rates. Investors believed that the net interest margin would start to improve as some types of loans reset at higher rates while the cost of funds remained abnormally low due to continuation of ZIRP. With the recent downtrend in rates, investors turned away from the regional banks and their share prices have suffered in many cases a 10% or greater decline over the past several weeks.
It remains to be seen whether the banks will get any relief on net interest margins any time soon.
St. Louis FED Chart Net Interest Margin:
Net Interest Margin for all U.S. Banks- St. Louis Fed
Most of the benefit from repricing CDs at abnormally low rates has already been achieved given the length of time since the FED commenced ZIRP in late 2008. A large part of the benefit received from CD repricing occurred in 2009 and 2010. Banks were able to reduce their borrowing costs as yields on CDs declined precipitously which increased their net interest rate margin due to lower borrowing costs.
Net Interest Margin for U.S. Banks with average assets under $1B- St. Louis Fed
Net Interest Margin for U.S. Peer Banks (with average assets less than $15B)
Net Interest Margin for U.S. Banks with average assets greater than $15B- St. Louis Fed
All banks will face an increase in loan losses during recessions, and those events will have a significant negative impact on share prices.
Banks who made improvident lending decisions during good times, and there will invariably be a very large number of those, will frequently fail during recessions, particularly severe ones like the most recent Near Depression. The FDIC will seize the failed banks, causing a total loss for common shareholders, as well as owners of the issuer's equity preferred stocks and junior bonds.
As I noted in my Gateway Post for regional banks, banks have repeatedly blown themselves up during my lifetime and will most likely continue doing so. I consequently place a premium on banks that navigated the last recession without cutting their dividend or having a losing year. At least that kind of performance shows some prudence by management which hopefully will continue for the next up and down cycle. I will accept less earnings growth for more prudence.
So, there is always the potential for a total wipe out when buying the stock or any junior security issued by a leveraged bank holding company. Even with a failure, significant declines in the share price will occur, with or without dividend slashes, when buying a bank stock.
A large number of banks reduced their quarterly dividends to just 1 cent per share in response to the recent recession. Many of those banks that slashed their quarterly dividends may not restore them to pre-2007 levels for another decade or longer.
Future Buys and Sells: I will be monitoring earnings before deciding whether or not to average down. I will not average up. A potential average down price would be below $20, limiting any future purchase to another 50 share lot. If I bought another 50 shares at below $20, I would consider selling the highest cost lot above $25.
The bank discusses risks starting at page 19 of its 2012 Annual Report: 10-k
Closing Price Last Friday: NBTB: $23.20 -0.02 (-0.09%)
3. Bought 50 BHLB at $24.51 (Regional Bank Basket Strategy)(see Disclaimer):
Snapshot of Trade:
 |
| 2014 Bought Back 50 BHLB at $24.51 |
BHLB announced an agreement to purchase 20 Bank of America branches in NY back in July 2013. SEC Filed Press Release This acquisition was completed last January. This acquisition increased the total number of branches to 91 across New England and New York.
Other acquisitions include Rome Bancorp (Rome, N.Y.) in 2011; Legacy Bancorp (Pittsfield, MA) in 2011; Connecticut Bank and Trust (Hartford, CT) in 2012; and Beacon Federal (Syracuse, NY) in 2012
A long term chart shows a steady rise from around $12 in 2000 to a double top formation at close to $38 occurring first in 2004 and again in 2006. In October 2007, the shares were changing hands at close to $30 and thereafter declined to $17 before bottoming. For the most part, the shares have been in an uptrend with chop since early 2010. The most recent correction started last July after the shares crossed $29, hitting $29.2 on 7/5/13. Long Term BHLB Interactive Chart The movement over the past year has shown two distinct and relatively sharp downturns, the first being in July 2013 and the next one starting in January of 2014. BHLB Interactive Chart The price dip in 2014, roughly from $27 to $24.5, brought the stock back into my reasonable valuation range. Since 7/7/13 to my purchase at $24.51, the price has corrected by 16.06%.
Link to December 2012 Seeking Alpha article on Berkshire Hills Bancorp
Prior Trade: Item # 2 Bought 50 BHLB AT $21.66 (3/12/12 Post)- Item # 1 Sold 50 BHLB at $28.74+ (7/13/13 Post)
The price declined 14.7% since I sold my shares at $28.74.
Recent Earnings Report: For the 2013 4th quarter, BHLB reported net income of $10.5M or $.42 per share, up from $9.3M or $.38 per share in the 2012 4th quarter. SEC Filed Press Release Acquisition related expenses took a bite out of earnings.
The net interest margin declined to 3.26% from 3.67% in the year earlier quarter. That is a major negative. The bank experienced 16% annualized loan growth in the quarter.
2013 4th Quarter:
Efficiency Ratio: 63.21%
NPL Ratio: .66%
NPA Ratio: .53%
Coverage Ratio: 121%
Charge Offs/Average Loans: .31%
ROA: .77%
Return on Tangible Equity: 10.47%
Tangible Equity to Tangible Assets: 7.54%
Tangible Book Value Per Share: $16.27
Book Value Per Share: $27.08
On the date of my purchase, the consensus E.P.S. estimate for 2014 was $1.7 and $1.95 for 2014. BHLB Analyst Estimates Based on the 2014 E.P.S. estimate of $1.7 and a total cost per share of $24.51, the P/E would be about 14.41, with a forward P/E based on the 2015 estimate at 12.56. The estimated E.P.S. growth rate between 2014-2015 is 14.7%, so the P.E.G. ratio is near 1.
Rationale: This bank appears to be well managed and has been prudently growing its geographic footprint from its base in Massachusetts.
The dividend provides some support for the share price. The current rate is $.18 per share. At a total cost of $24.51 per share, the dividend yield would be about 2.94%. BHLB went ex dividend shortly after my purchase.
The dividend was not cut during the recent Near Depression period, which is always viewed as a positive for a regional bank. The quarterly dividend was, however, kept at a constant $.16 per share rate from the 2008 second quarter, when it was raised to $.16 from $.15, until the 2011 4th quarter, when the bank raised the rate from $.16 to $.17. Berkshire Hills Bancorp, Inc. (BHLB) Dividend History - NASDAQ.com The rate was at $.1 in 2000, so the bank has not yet doubled the dividend rate in 13 years. That rate of dividend growth is viewed slightly negatively, but is understandable given what happened in 2008. There was also a recession in 2001. nber.org/cycles
While there was a spike in non-performing loans as a result of the recent Near Depression, the NPL ratio peaked at less than 2%, which I view favorably 2011 Annual Report at page 11
The bank did participate in TARP, which is viewed negatively, but did pay the government back quickly in May 2009 after raising $32M in a stock offering. Those shares were sold at $21.5 SEC Filed Press Release
Risks: There are some risks associated with small banks rapidly increasing their size. The net interest margin contraction is a major negative.
I believe that it is helpful to read the risk summary prepared by the company. BHLB discusses risks incident to its operations starting at page 33 of its 2012 Annual Report. 10-K
Future Buys and Sells: I would look to add another 50 shares at or below $22. A $28.5 price within one year would likely trigger a sell based on valuation.
Closing Price Last Friday: BHLB: $25.09 +0.49 (+1.99%)
4. Paired Trade: Bought 100 of EFM at $24.88 and Sold 50 FHNPRA at $22.49 (see Disclaimer):
Snapshots of Trades:
Snapshot of FHNPRA Profit:
Item # 5 Bought: 50 FHNPRA at $21.39 (10/24/13 Post)
Security Descriptions: The Entergy Mississippi Inc. 6.20% Series First Mortgage Bonds 2040 (EFM) is a first lien bond on substantially all of Entergy Mississippi's assets. Interest is paid quarterly based on a fixed coupon rate of 6.2% on a $25 par value. The issuer has the option to redeem at par value plus accrued interest on or after 4/15/2015. Unless the issuer elects to redeem this bond early, it will mature on 4/15/2040.
It is certainly possible that the issuer will redeem this bond provided interest rates are at current levels, or lower, when the optional redemption right comes into being. I would note, however, that the issuer has not redeemed the functionally equivalent first mortgage bond EMQ, which has a 6% coupon, even though it has that right since November 2007.
EFM Prospectus: Preliminary Prospectus Supplement
EFM Interactive Chart
When looking a functionally equivalent securities, I will focus first on the current yield at the available prices (not the coupon amount-the lower coupon security may have the higher current yield), and then I will consider YTM, the percentage discounts to par value, and the likelihood of capital gains based on the discounts to par value and the impact of the optional redemption right on increases above par value. Stocks, Bonds & Politics: Functional Equivalence in Bond Trading
The First Horizon National Non-Cumulative Perpetual Preferred Series A (FHN.PA) is an equity preferred stock that pays non-cumulative dividends at the fixed coupon rate of 6.2% on a $25 par value. Prospectus This security is rated in junk territory by both Moody's and S & P.
Prior EFM Trade: Item # 2 Roth IRA Paired Trade: Sold 50 EMQ at $26.49 and Bought 50 EFM at $24.9 (11/6/2013)
Rationale: In this paired trade, I am accepting about a .75% reduction in current yield in exchange for a safer security. EFM is a secured bond with a current rating of A3 by Moody's while FHNPRA pays non-cumulative dividends and is rated Ba1 by Moody's. Interest payments on the bond can not be deferred without causing a default and a BK. The bond also has a maturity date whereas FHNPRA could end up being a perpetual security.
With EFM, I am playing the long term, low inflation/bouts of deflation scenario, viewed as less likely than the rising rate scenario first caused by interest rate normalization and later aggravated by increasing inflation rates in a few years. EFM would perform badly when longer term rates are rising significantly, particularly when there are quick spikes in rates that unsettle bond investors such as the recent one that started last May.
Risks in EFM: Interest rate risk remains the main risk. I am not currently concerned about credit risk. I would have interest rate risk with a fixed coupon equity preferred stock too, and more credit risk compared to EFM.
{At the time of my purchase, Quantumonline incorrectly had the Moody's rating for this bond at Ba2, a junk rating. I sent an mail to the person who runs that site, linking the recent Moody's upgrade to A3 from Baa1 for Entergy Mississippi First Mortgage Bonds. The proprietor of that site is confusing equity preferred stocks issued by this company with its First Mortgage Bonds}
Closing Prices Last Friday:
EFM: $25.00 -0.11 (-0.44%)
FHN-PA: $22.70 +0.21 (+0.93%)
5. Bought 50 DREPRL at $23.78-Roth IRA (see Disclaimer):
Snapshot of Trade:
Security Description: The Duke Realty 6.6% Cumulative Redeemable Preferred Series L (DRE.PL) is an equity preferred stock issued by Duke Realty (DRE), a large REIT that owns industrial and other commercial properties.
Company Website: Home - Duke Realty
A list of properties can be found in the 2012 Annual Report starting at page 15: 2012 10-K
The company recently sold last December $250M in 3.875% senior notes maturing in 2021. Duke Realty
Quarterly dividends are cumulative and non-qualified. The coupon is 6.6% on a $25 par value. Duke has the option to redeem DREPRL at anytime now.
Prospectus
According to Quantumonline, this security is rated investment grade by Moody's at Baa3 and BB by S & P.
The unsecured senior debt was recently upgraded to BBB from BBB- by S & P. Bloomberg
In February of 2013, Fitch had a BBB- rating on the senior unsecured debt and a BB on the preferred stock issues.
As with other REIT preferred stocks, the dividends are cumulative.
As noted in prior posts, this REIT had difficulties during the Near Depression and its aftermath, which resulted in a common share dividend slash and a major wipe out of market capitalization through a plunging share price. DRE Interactive Chart; Dividend History | Investor Relations | Duke Realty
This preferred stock went ex dividend shortly after my purchase.
Prior Trades: None
Related Trades: I have bought and sold the common shares and currently own 100 of DRE. Item # 4 Bought: 100 DRE at $14.99 (1/20/14 Post)
Recent Earnings Report: For the 2013 4th quarter, Duke Realty reported core FFO per share at $.29. The FFO number surpassed the consensus estimate by 2 cents. Total portfolio occupancy was at 94% and in-service portfolio occupancy was at 94.2%.
Earnings Call Transcript - Seeking Alpha
After the earnings report, RBC raised DRE to outperform from neutral and increased its price target to $19 from $18.
Rationale: I am attempting to generate income. I have a Baa3 comfort level with the security. I have an overall favorable opinion of Duke Realty notwithstanding its problems during the recent Near Depression.
At a total cost of $23.78, the dividend yield is about 6.94%.
This purchase may end up being part of a paired trade, where I sell the 100 DRE shares and keep the preferred.
This security was trading at over $25.5 in May 2013: DRE.PL Stock Chart If interest rates continue to trend down, which I am not predicting as likely, there is some potential for modest appreciation in the share price, assuming investors become more comfortable with the interest rate issue.
Risks: The company discusses risks incident to its business starting at page 7 of its 2012 Annual Report: 2012 10-K
Interest rate risk is the main one in my opinion. If rates rise, the value of this security will go down in price. This security was trading at over $25.5 in May 2013 and dropped quickly to $22.25 by late December. DRE.PL Stock Chart
That decline also highlights volatility risk, which was really on display during the Near Depression period, when many REIT preferred stocks fell into the single digits even though there was no deferral of the dividend payments. Just as an example of volatility risk, I bought one REIT preferred at $2.7 in October 2008 that was redeemed last year by the issuer as its $25 par value and the issuer never missed a dividend payment. That kind of deep drop is related to a fear (perhaps in part rational at the time) that the security would become worthless.
Future Buys and Sells: I would need close to a 8% yield to buy another 50 shares. I would likely sell the shares on a pop to par value.
Closing Price Last Friday: DRE-PL: $23.80 +0.07 (+0.29%)
6. Sold 50 MLPG at $35.77-Roth IRA (see Disclaimer):
Snapshot of Trade:
Snapshot of History:
Snapshot of Profit:
Item # 4 Bought 50 MLPG at $31.26-ROTH IRA (2/27/13 Post)
Security Description: The UBS AG E-TRACS linked to Alerian Natural Gas MLP Index 2040 (MLPG) is an exchange traded note issued by UBS that tracks an index of the 20 largest, by market capitalization, natural gas infrastructure MLPs. An ETN is a senior unsecured note, which subjects the owner to the credit risk of the issuer.
Prior Trades: I still own 50 shares in a taxable account, where I may averaged down with another 50 share lot buy at some point.
Rationale: The motivation was primarily profit taking in one of my lowest yielding securities owned in the ROTH IRA. Another reason has to do with an abundance of caution, possibly excessive at times, normally exercised in the management of my retirement accounts.
One of the top holdings of this ETN blew up last Monday (2/10/14): BWP: $13.01 -$11.08 (-45.99%): Boardwalk Pipeline Partners LP Boardwalk partners cut its distribution by 80% to 10 cents per share. The reason given by the company was that increased natural gas production was reducing transportation rates and revenues from storage services. Boardwalk Announces Fourth Quarter 2013 Results And Announces Quarterly Distribution Of $0.10 Per Unit; Bloomberg I simply do not have sufficient information to know whether this issue will impact other natural gas pipeline and storage companies, and by how much, or whether this is a problem more specific to Boardwalk.
Boardwalk Pipeline had about a 5% weighting in the index used for the MLPG ETN based on the information last supplied by the sponsor: UBS- ETRACS Alerian Natural Gas MLP Index ETN
Some of the other constituents did not decline in sympathy:
Closing Prices from 2/10/14:
WPZ: $49.97 +0.05 (+0.10%) : Williams Partners L.P.
EPD: $66.08 +0.36 (+0.55%) : Enterprise Products Partners
XTEX: $28.23 +0.81 (+2.95%) : Crosstex Energy, L.P.
MWE: 69.87 +0.60 (+0.87%) : MarkWest Energy Partners, LP
ACMP: 54.97 +0.23 (+0.42%) : Access Midstream Partners, L.P.
Other constituents suffered minor declines. My preliminary conclusion was that the market was drawing a distinction between Boardwalk and the other MLPs, at least for that one day.
Closing Price Last Friday: MLPG: $36.47 +0.01 (+0.03%)
 |
| 2013 BHLB 50 Shares +$338.12 |
Recent Earnings Report: For the 2013 4th quarter, BHLB reported net income of $10.5M or $.42 per share, up from $9.3M or $.38 per share in the 2012 4th quarter. SEC Filed Press Release Acquisition related expenses took a bite out of earnings.
The net interest margin declined to 3.26% from 3.67% in the year earlier quarter. That is a major negative. The bank experienced 16% annualized loan growth in the quarter.
2013 4th Quarter:
Efficiency Ratio: 63.21%
NPL Ratio: .66%
NPA Ratio: .53%
Coverage Ratio: 121%
Charge Offs/Average Loans: .31%
ROA: .77%
Return on Tangible Equity: 10.47%
Tangible Equity to Tangible Assets: 7.54%
Tangible Book Value Per Share: $16.27
Book Value Per Share: $27.08
On the date of my purchase, the consensus E.P.S. estimate for 2014 was $1.7 and $1.95 for 2014. BHLB Analyst Estimates Based on the 2014 E.P.S. estimate of $1.7 and a total cost per share of $24.51, the P/E would be about 14.41, with a forward P/E based on the 2015 estimate at 12.56. The estimated E.P.S. growth rate between 2014-2015 is 14.7%, so the P.E.G. ratio is near 1.
Rationale: This bank appears to be well managed and has been prudently growing its geographic footprint from its base in Massachusetts.
The dividend provides some support for the share price. The current rate is $.18 per share. At a total cost of $24.51 per share, the dividend yield would be about 2.94%. BHLB went ex dividend shortly after my purchase.
The dividend was not cut during the recent Near Depression period, which is always viewed as a positive for a regional bank. The quarterly dividend was, however, kept at a constant $.16 per share rate from the 2008 second quarter, when it was raised to $.16 from $.15, until the 2011 4th quarter, when the bank raised the rate from $.16 to $.17. Berkshire Hills Bancorp, Inc. (BHLB) Dividend History - NASDAQ.com The rate was at $.1 in 2000, so the bank has not yet doubled the dividend rate in 13 years. That rate of dividend growth is viewed slightly negatively, but is understandable given what happened in 2008. There was also a recession in 2001. nber.org/cycles
While there was a spike in non-performing loans as a result of the recent Near Depression, the NPL ratio peaked at less than 2%, which I view favorably 2011 Annual Report at page 11
The bank did participate in TARP, which is viewed negatively, but did pay the government back quickly in May 2009 after raising $32M in a stock offering. Those shares were sold at $21.5 SEC Filed Press Release
Risks: There are some risks associated with small banks rapidly increasing their size. The net interest margin contraction is a major negative.
I believe that it is helpful to read the risk summary prepared by the company. BHLB discusses risks incident to its operations starting at page 33 of its 2012 Annual Report. 10-K
Future Buys and Sells: I would look to add another 50 shares at or below $22. A $28.5 price within one year would likely trigger a sell based on valuation.
Closing Price Last Friday: BHLB: $25.09 +0.49 (+1.99%)
4. Paired Trade: Bought 100 of EFM at $24.88 and Sold 50 FHNPRA at $22.49 (see Disclaimer):
Snapshots of Trades:
 |
| 2014 Sold 50 FHNPRA at $22.49 |
 |
| 2014 Bought 100 EFM at $24.88 |
Snapshot of FHNPRA Profit:
 |
| 2014 FHNPRA 50 Shares +$39.08 |
Security Descriptions: The Entergy Mississippi Inc. 6.20% Series First Mortgage Bonds 2040 (EFM) is a first lien bond on substantially all of Entergy Mississippi's assets. Interest is paid quarterly based on a fixed coupon rate of 6.2% on a $25 par value. The issuer has the option to redeem at par value plus accrued interest on or after 4/15/2015. Unless the issuer elects to redeem this bond early, it will mature on 4/15/2040.
It is certainly possible that the issuer will redeem this bond provided interest rates are at current levels, or lower, when the optional redemption right comes into being. I would note, however, that the issuer has not redeemed the functionally equivalent first mortgage bond EMQ, which has a 6% coupon, even though it has that right since November 2007.
EFM Prospectus: Preliminary Prospectus Supplement
EFM Interactive Chart
When looking a functionally equivalent securities, I will focus first on the current yield at the available prices (not the coupon amount-the lower coupon security may have the higher current yield), and then I will consider YTM, the percentage discounts to par value, and the likelihood of capital gains based on the discounts to par value and the impact of the optional redemption right on increases above par value. Stocks, Bonds & Politics: Functional Equivalence in Bond Trading
The First Horizon National Non-Cumulative Perpetual Preferred Series A (FHN.PA) is an equity preferred stock that pays non-cumulative dividends at the fixed coupon rate of 6.2% on a $25 par value. Prospectus This security is rated in junk territory by both Moody's and S & P.
Prior EFM Trade: Item # 2 Roth IRA Paired Trade: Sold 50 EMQ at $26.49 and Bought 50 EFM at $24.9 (11/6/2013)
Rationale: In this paired trade, I am accepting about a .75% reduction in current yield in exchange for a safer security. EFM is a secured bond with a current rating of A3 by Moody's while FHNPRA pays non-cumulative dividends and is rated Ba1 by Moody's. Interest payments on the bond can not be deferred without causing a default and a BK. The bond also has a maturity date whereas FHNPRA could end up being a perpetual security.
With EFM, I am playing the long term, low inflation/bouts of deflation scenario, viewed as less likely than the rising rate scenario first caused by interest rate normalization and later aggravated by increasing inflation rates in a few years. EFM would perform badly when longer term rates are rising significantly, particularly when there are quick spikes in rates that unsettle bond investors such as the recent one that started last May.
Risks in EFM: Interest rate risk remains the main risk. I am not currently concerned about credit risk. I would have interest rate risk with a fixed coupon equity preferred stock too, and more credit risk compared to EFM.
{At the time of my purchase, Quantumonline incorrectly had the Moody's rating for this bond at Ba2, a junk rating. I sent an mail to the person who runs that site, linking the recent Moody's upgrade to A3 from Baa1 for Entergy Mississippi First Mortgage Bonds. The proprietor of that site is confusing equity preferred stocks issued by this company with its First Mortgage Bonds}
Closing Prices Last Friday:
EFM: $25.00 -0.11 (-0.44%)
FHN-PA: $22.70 +0.21 (+0.93%)
5. Bought 50 DREPRL at $23.78-Roth IRA (see Disclaimer):
Snapshot of Trade:
 |
| 2014 Roth IRA Bought 50 DREPRL at $23.78 |
Company Website: Home - Duke Realty
A list of properties can be found in the 2012 Annual Report starting at page 15: 2012 10-K
The company recently sold last December $250M in 3.875% senior notes maturing in 2021. Duke Realty
Quarterly dividends are cumulative and non-qualified. The coupon is 6.6% on a $25 par value. Duke has the option to redeem DREPRL at anytime now.
Prospectus
According to Quantumonline, this security is rated investment grade by Moody's at Baa3 and BB by S & P.
The unsecured senior debt was recently upgraded to BBB from BBB- by S & P. Bloomberg
In February of 2013, Fitch had a BBB- rating on the senior unsecured debt and a BB on the preferred stock issues.
As with other REIT preferred stocks, the dividends are cumulative.
As noted in prior posts, this REIT had difficulties during the Near Depression and its aftermath, which resulted in a common share dividend slash and a major wipe out of market capitalization through a plunging share price. DRE Interactive Chart; Dividend History | Investor Relations | Duke Realty
This preferred stock went ex dividend shortly after my purchase.
Prior Trades: None
Related Trades: I have bought and sold the common shares and currently own 100 of DRE. Item # 4 Bought: 100 DRE at $14.99 (1/20/14 Post)
Recent Earnings Report: For the 2013 4th quarter, Duke Realty reported core FFO per share at $.29. The FFO number surpassed the consensus estimate by 2 cents. Total portfolio occupancy was at 94% and in-service portfolio occupancy was at 94.2%.
Earnings Call Transcript - Seeking Alpha
After the earnings report, RBC raised DRE to outperform from neutral and increased its price target to $19 from $18.
Rationale: I am attempting to generate income. I have a Baa3 comfort level with the security. I have an overall favorable opinion of Duke Realty notwithstanding its problems during the recent Near Depression.
At a total cost of $23.78, the dividend yield is about 6.94%.
This purchase may end up being part of a paired trade, where I sell the 100 DRE shares and keep the preferred.
This security was trading at over $25.5 in May 2013: DRE.PL Stock Chart If interest rates continue to trend down, which I am not predicting as likely, there is some potential for modest appreciation in the share price, assuming investors become more comfortable with the interest rate issue.
Risks: The company discusses risks incident to its business starting at page 7 of its 2012 Annual Report: 2012 10-K
Interest rate risk is the main one in my opinion. If rates rise, the value of this security will go down in price. This security was trading at over $25.5 in May 2013 and dropped quickly to $22.25 by late December. DRE.PL Stock Chart
That decline also highlights volatility risk, which was really on display during the Near Depression period, when many REIT preferred stocks fell into the single digits even though there was no deferral of the dividend payments. Just as an example of volatility risk, I bought one REIT preferred at $2.7 in October 2008 that was redeemed last year by the issuer as its $25 par value and the issuer never missed a dividend payment. That kind of deep drop is related to a fear (perhaps in part rational at the time) that the security would become worthless.
Future Buys and Sells: I would need close to a 8% yield to buy another 50 shares. I would likely sell the shares on a pop to par value.
Closing Price Last Friday: DRE-PL: $23.80 +0.07 (+0.29%)
6. Sold 50 MLPG at $35.77-Roth IRA (see Disclaimer):
Snapshot of Trade:
 |
| 2014 Roth IRA Sold 50 MLPG at $35.77 |
Snapshot of Profit:
 |
| 2014 Roth IRA 50 MLPG +$211.48 |
Item # 4 Bought 50 MLPG at $31.26-ROTH IRA (2/27/13 Post)
Security Description: The UBS AG E-TRACS linked to Alerian Natural Gas MLP Index 2040 (MLPG) is an exchange traded note issued by UBS that tracks an index of the 20 largest, by market capitalization, natural gas infrastructure MLPs. An ETN is a senior unsecured note, which subjects the owner to the credit risk of the issuer.
Prior Trades: I still own 50 shares in a taxable account, where I may averaged down with another 50 share lot buy at some point.
Rationale: The motivation was primarily profit taking in one of my lowest yielding securities owned in the ROTH IRA. Another reason has to do with an abundance of caution, possibly excessive at times, normally exercised in the management of my retirement accounts.
One of the top holdings of this ETN blew up last Monday (2/10/14): BWP: $13.01 -$11.08 (-45.99%): Boardwalk Pipeline Partners LP Boardwalk partners cut its distribution by 80% to 10 cents per share. The reason given by the company was that increased natural gas production was reducing transportation rates and revenues from storage services. Boardwalk Announces Fourth Quarter 2013 Results And Announces Quarterly Distribution Of $0.10 Per Unit; Bloomberg I simply do not have sufficient information to know whether this issue will impact other natural gas pipeline and storage companies, and by how much, or whether this is a problem more specific to Boardwalk.
Boardwalk Pipeline had about a 5% weighting in the index used for the MLPG ETN based on the information last supplied by the sponsor: UBS- ETRACS Alerian Natural Gas MLP Index ETN
Some of the other constituents did not decline in sympathy:
Closing Prices from 2/10/14:
WPZ: $49.97 +0.05 (+0.10%) : Williams Partners L.P.
EPD: $66.08 +0.36 (+0.55%) : Enterprise Products Partners
XTEX: $28.23 +0.81 (+2.95%) : Crosstex Energy, L.P.
MWE: 69.87 +0.60 (+0.87%) : MarkWest Energy Partners, LP
ACMP: 54.97 +0.23 (+0.42%) : Access Midstream Partners, L.P.
Other constituents suffered minor declines. My preliminary conclusion was that the market was drawing a distinction between Boardwalk and the other MLPs, at least for that one day.
Closing Price Last Friday: MLPG: $36.47 +0.01 (+0.03%)
Re. Cockroach investing the concept is good to build an all-weather portfolio, but in reality it failed in 2013 when it lost about 9% (according to the author) when the market had an impressive ascent.
ReplyDeleteSomeone was saying that TAA is popular at the bottom of the market and Buy-and-Hold is popular at the top of the market. I am just wondering if it will work better to reverse it.
Behavior Finance? Any thoughts?
The portfolio mentioned in that article makes excessive use of both cash and gold in my opinion. It is similar to the Permanent Portfolio and the recommendation made in the Talmud. I own the Permanent Portfolio mutual fund and view it as a disaster kind of portfolio.
ReplyDeleteI use different allocations in my cockroach style of investing and will constantly shift allocations based on my opinions about relative valuations. I will use cash in that allocation scheme which provided a good cushion in 2008 and was an excellent choice in 2000. However, my cash allocation restrained my performance in 2013.
Theory is easy to implement until you actually have to do in real time successfully.
Generally, you want to define a market has being in a long term secular bull or bear phase first.
For long term secular stock bear markets, the strategy is to sell the rips and buy the dips. Buy and hold is not a strategy likely to lead to positive returns for most investors during such periods. The long term secular bull market is a buy and hold, nip and tuck kind of strategy.
The average annual return for the S & P 500 between 1949 to 12/31/1965 was over 14% with dividends reinvested and adjusted for inflation, which was also the case for the period starting in August 1982 and ending in 1999. In between those long term secular bulls, the secular bear market occurs and produced a negative 1%+ annualized return adjusted for inflation and with dividends invested. The long term secular bear market will have a number of violent up and down moves, with some of the largest percentage gains in stock market history, but the overall result over 10 to 15 years or so is negative. That kind of market has to be traded. There will be at least one major decline of 45% or more (80% is possible-1929-1932) and long term positions can be acquired after that type of decline.
Thanks for your insightful comments.
ReplyDeleteRe. underperformance (I assume?) caused by large cash allocation were you able to identify the necessary adjustments and modify your VIX AA Model accordingly. Also, if your benchmark is S&P you should only compare your equity performance against it (for stock selection), not the total portfolio.
One popular blogger/advisor says his objective is "to capture most of the upside while avoiding the full brunt of large declines in hopes of adding value over the entire stock market cycle." This approach will produce a more steady return over time. Mathematically, a less sever drawdown (or a small gain) in a market crash year will go a long way in producing a market beating record.
Just my two cents.
Regards,
Peter
My general goal is to beat the S & P 500 index with considerably less risk. Sometimes, that requires significant shifts into and out of asset classes.
ReplyDeleteI posted my performance number for the 3 year period ending in October 2011, which encompassed the Dark Period. I substantially outperformed the S & P 500 in that period:
http://tennesseeindependent.blogspot.com/2011/12/sold-50-cys-at-1333joseph-stiglitz-on.html
I view it as important to lose a lot less in down markets. A corollary is that some of the "safe" investments need to be allocated back into risk assets when the plunge actually occurs.
Part of the trade off is that the emphasis on preservation of capital causes underperformance in powerful up years.
I am more likely to outperform in bear markets and mild up markets.
I do not own stocks like Tesla, Facebook, Amazon, Priceline, etc. That is what I mean by choosing whether you want to be a turtle or a hare, use your own brand of cockroach investing or the shooting star method. I could have bought any of those stocks and done much better overall over the past few years.
I am okay with underperformance in a major up year like 2013, where I had a 20% or so total return.
As to adjustments, I am basically at the same weighting in stocks as I have been for awhile now. I will publish a new stock fund table to highlight that point soon.
Last Update:
http://tennesseeindependent.blogspot.com/2013/10/updated-stock-fund-table-as-of-101813.html
The VIX Model is actually keeping me invested at a relatively high level for my age, when my inclination is to run and hide, bury myself in a bunker and wait for a better opportunity.