Except for the security discussed in Item # 8, this post will discuss some trades made before Friday, 2/28/14. I am running slightly more than a week behind in discussing my trades. There will probably be 8 to 10 trades discussed in the next weekly post that have already been made.
Big Picture Synopsis
Big Picture Synopsis
Stocks:
Stable VIX Pattern (Bullish)
Short Term: Expecting a 10% to 20% Correction
Intermediate Term: Slightly Bullish
Long Term: Bullish
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
An interest rate rise last Friday, probably caused by a better than expected jobs report, nicked REITs. In my last post, published last Wednesday, I provided a table of equity REIT common and preferred shares that I currently own. Equity REIT Common and Preferred Stock Table as of 3/5/14 Those shares were bought since 9/1/13, except for BDN, after those securities suffered a 10% or greater correction in price.
I noted on the same day that Realty Income (O) was overvalued at its then current $44+ price in my opinion. (comment by Southgent1951 at Seeking Alpha) That price was near the top of my "do nothing" range which is just a general way of saying "do not buy or sell". Sometimes I will sell or pare a position that has risen 20% or so within a few months that is outside my buy target range but still within the do nothing range. That would particularly be possible when the move was mostly or entirely unrelated to the firm's operations. I had just bought 100 Realty Income shares in December 2013 at $36.96. I do not slavishly follow my own rules and will frequently forget what I am suppose to do anyway.
I elected to continue holding Realty Income for several reasons, recognizing that $200 or so of my unrealized profit was in danger of evaporating.
First and foremost, the security was not in my sell range yet. Generally, my buy range for REIT's will be somewhere between 10 to 15 times current year estimate FFO. A quality REIT like Realty Income will fall within a 13 to 15 range whereas a less desirable one may have a range between 10-12.
Those ranges are set primarily by my judgment guided by a number of factors including prior dividend growth history; the existence or lack thereof of prior dividend cuts; the quality of the properties and tenants; the occupancy rate; the consistency and reliability of earnings and revenue growth; the experience of management; the amount, cost and maturity of debt; and so on.
Once that range is set, which is due to alteration based on subsequent events and is consequently not carved in stone, the "do nothing" range will sit immediately above it and will be narrow or broad based on some of the same characteristics used to decide the buy range. Given the quality of Realty Income, my "do nothing range may be fairly broad, say $39 to $46, but would be narrower on a percentage basis for a lesser quality REIT.
I will also shrink or expand the hold range based the yield comparison with safe securities. I would have a narrower hold spread for Realty Income than I do now if I could buy a 2 year insured bank CD paying 4%+ monthly, which I was able to do as late as November 2008, but no more of course.
And, I would add that I sold all Realty Income shares at $44.25 held in my late father's testamentary trust and my 91 year old mother's account. I have narrower spreads for both of those accounts.
Second, I am already sitting on an abundant amount of cash earning nothing. If I sell Realty Income and forego the current income which is close to a 6% yield based on my constant cost number, then I have to find an alternative, and the alternatives are scarce at the current time.
Third, while I had a $700+ unrealized profit in the shares before last week's price drop, I did not see a significant risk that all of that profit would be lost when looking out 2 or 3 years. Sure, I might lose several hundred dollars of it this week, or next month or this year. But as long as the company keeps chugging along, raising the dividend, the risk of permanently losing some part of that profit is not acute when focusing on time intervals measured in years rather than days or months.
As noted in the comments to the aforementioned SA article, Warren Buffett would prefer to own real estate directly rather than through the medium of REITs. There is something to be said for that approach when you have boatloads of money. I mentioned in a comment that I prefer REITs since I do not want the hassles of direct ownership and I prefer the liquidity of a common stock that owns real estate to directly owning an apartment, industrial or office building. If anyone wants direct ownership, Nashville is a good place to start.
Jon Meacham wrote an article published in this week's TIME.com that is titled "The South's Red-Hot Town".
An interest rate rise last Friday, probably caused by a better than expected jobs report, nicked REITs. In my last post, published last Wednesday, I provided a table of equity REIT common and preferred shares that I currently own. Equity REIT Common and Preferred Stock Table as of 3/5/14 Those shares were bought since 9/1/13, except for BDN, after those securities suffered a 10% or greater correction in price.
I noted on the same day that Realty Income (O) was overvalued at its then current $44+ price in my opinion. (comment by Southgent1951 at Seeking Alpha) That price was near the top of my "do nothing" range which is just a general way of saying "do not buy or sell". Sometimes I will sell or pare a position that has risen 20% or so within a few months that is outside my buy target range but still within the do nothing range. That would particularly be possible when the move was mostly or entirely unrelated to the firm's operations. I had just bought 100 Realty Income shares in December 2013 at $36.96. I do not slavishly follow my own rules and will frequently forget what I am suppose to do anyway.
I elected to continue holding Realty Income for several reasons, recognizing that $200 or so of my unrealized profit was in danger of evaporating.
First and foremost, the security was not in my sell range yet. Generally, my buy range for REIT's will be somewhere between 10 to 15 times current year estimate FFO. A quality REIT like Realty Income will fall within a 13 to 15 range whereas a less desirable one may have a range between 10-12.
Those ranges are set primarily by my judgment guided by a number of factors including prior dividend growth history; the existence or lack thereof of prior dividend cuts; the quality of the properties and tenants; the occupancy rate; the consistency and reliability of earnings and revenue growth; the experience of management; the amount, cost and maturity of debt; and so on.
Once that range is set, which is due to alteration based on subsequent events and is consequently not carved in stone, the "do nothing" range will sit immediately above it and will be narrow or broad based on some of the same characteristics used to decide the buy range. Given the quality of Realty Income, my "do nothing range may be fairly broad, say $39 to $46, but would be narrower on a percentage basis for a lesser quality REIT.
I will also shrink or expand the hold range based the yield comparison with safe securities. I would have a narrower hold spread for Realty Income than I do now if I could buy a 2 year insured bank CD paying 4%+ monthly, which I was able to do as late as November 2008, but no more of course.
And, I would add that I sold all Realty Income shares at $44.25 held in my late father's testamentary trust and my 91 year old mother's account. I have narrower spreads for both of those accounts.
Second, I am already sitting on an abundant amount of cash earning nothing. If I sell Realty Income and forego the current income which is close to a 6% yield based on my constant cost number, then I have to find an alternative, and the alternatives are scarce at the current time.
Third, while I had a $700+ unrealized profit in the shares before last week's price drop, I did not see a significant risk that all of that profit would be lost when looking out 2 or 3 years. Sure, I might lose several hundred dollars of it this week, or next month or this year. But as long as the company keeps chugging along, raising the dividend, the risk of permanently losing some part of that profit is not acute when focusing on time intervals measured in years rather than days or months.
As noted in the comments to the aforementioned SA article, Warren Buffett would prefer to own real estate directly rather than through the medium of REITs. There is something to be said for that approach when you have boatloads of money. I mentioned in a comment that I prefer REITs since I do not want the hassles of direct ownership and I prefer the liquidity of a common stock that owns real estate to directly owning an apartment, industrial or office building. If anyone wants direct ownership, Nashville is a good place to start.
Jon Meacham wrote an article published in this week's TIME.com that is titled "The South's Red-Hot Town".
************************
Recent Developments:
The Labor Department reported last Friday that private payroll employment increased by 175,000 in February, and the unemployment rate was little changed at 6.7%. Employment Situation Summary The U-6 number continued to decline, falling to 12.6 from 12.7 in January. Table A-15. Alternative measures of labor underutilization There were slight increases to the previously reported job totals for December and January. Those numbers were revised higher by a combined 25,000 jobs. The construction sector added 15,000 jobs in February and 50,000 in January. Possibly 2014 will be the year that new residential housing construction will add meaningfully to new job growth, i.e., more in line with past recoveries from recessions.
The ISM manufacturing PMI for February improved to 53.2 from 51.3 in January. The new orders component increased to 54.5 from 51.2.
CoreLogic reported that its nationwide home price index increased 12% in January 2014 compared to January 2013.
The ISM services NMI index declined to 51.6% in February from 54 in January. The business activity component fell to 54.6 from 56.3. New orders increased to 51.3 from 50.9. The Markit services PMI index for the U.S. also dipped in February, but was higher at 53.3 than the ISM number. markiteconomics''
China reported last night that its exports fell 18.1% in February, compared to a year earlier, creating a surprising trade deficit of $22.8B for the month.
ADP reported that private sector jobs increased by 139,000 in February. I am discounting economic numbers for both January and February due to the harsh weather conditions.
CoreLogic reported that 4 million residential properties returned to positive equity in 2013. By returning to positive equity, those households who do not qualify for refinancing under the HARP program can refinance at today's abnormally low rates, thereby increasing their disposable income after debt service payments. The FED's DSR ratio has been trending down and is currently at levels last seen in the early 1980s. Chart: Household Debt Service Payments as a Percent of Disposable Personal Income - St. Louis Fed
By increasing the amount of disposable income through refinancing, consumers will have more money to spend and/or to save without having to incur debt, providing a long term potential for virtuous consumer spending in the U.S.
The non-virtuous spending occurred in the 1985 to 2007 period, as consumers assumed a perpetually increasing amount of debt to fund spending that ultimately led to the necessity of de-leveraging since millions of households could no longer afford to service all of their debts.
The substantial decline in the DSR ratio is one of the long term powerful forces that is shaping the ongoing secular bull market, as I have argued many times herein. The latest such summary can be found in the introduction section of a December 2013 post: Stocks, Bonds & Politics I always frame that opinion in terms of more probable than not. Eventually, if I am right, we can all look back and say the long term bull market started on March 10, 2009, when the S & P 500 closed at 719.6, up from the prior day's close of 676.53. Historical Prices | S&P 500 Index
We know now with 100% certainty that the prior long term bull market started on August 20, 1982 when the S & P index spurted to 113.02, closed that month at 119.51 and closed 1982 at 140.64. I remember that day in August 1982 as if it was yesterday. It was obvious then that the FED had tamed the inflation monster, the underlying cause of the long term secular bear markets in both stocks and bonds, and it really did not matter that rates will still sky high (the 30 year mortgage rate averaged 16.04% plus 2.2 points in 1982-Freddie Mac), or that the economy was still reeling from a recession. The end of all that bad stuff was in sight.
In a speech given in Mexico last Wednesday, the Dallas Fed President Richard Fisher referred to some stock metrics, such as price to projected forward earnings, price to sales and market capitalization to GDP, to be at "eye-popping levels". He is concerned about the ghost of irrational exuberance coming back to haunt investors. (see last full paragraph before "QE Spillovers" at Dallas Fed)
The Federal Reserve estimates that U.S. household net worth increased by almost $3T in the 2013 4th quarter to $80.7T. Net worth increased by approximately $9.8 trillion during 2013. Home mortgage debt contracted by 1% in the quarter. www.federalreserve.gov/releases/z1/Current/z1.pdf
******************
BDCs and Index Funds:
BDCs turned down last Tuesday after it was reported that the Russell indexes would remove them in June unless the SEC changes the fee reporting standards by May 15th. BDCs pay hedge fund like compensation to their managers which currently has to be reported as acquired fund fees in an index. Barrons.com That article mentions that about 8% of the BDC shares are owned by index funds tracking the Russell 2000. I view BDCs with some disfavor. I will consequently limit my exposure to them to minimal levels and trade them for slender profits after harvesting several dividend payments.
S & P will soon be booting AINV from the S & P 400 (mid-cap index) and PSEC from the S & P 600 (small cap index), as I noted in the prior post. Wells Fargo estimates that 16.2M shares of PSEC and 17.7M shares of AINV will be sold as a result of those index changes. Barrons.com That article has a snapshot of the BDCs included in the Russell 2000. I have small positions in four of them (TICC, NMFC, PFLT, and BKCC). I have a larger positions in PSEC.
I do not intend to sell any shares as a result of the foregoing index changes. At some point this year, I will sell 100 shares of PSEC owned in the Roth IRA, provided I can sell those shares bought at $10.2 over $11.2. Bought 100 PSEC @ $10.2-Roth IRA (November 2012)
I initiated a position in AINV on 3/4/14 after the Russell news hit the wires. The AINV shares closed at $8.67 that day, and had fallen from a $9.15 close on 2/24 or about a 5.25% decline. AINV Historical Prices It will be a couple of weeks before I discuss that trade. My lowest price paid for AINV shares was a 50 share purchase made in March 2009 at $2.35, classified as a Lottery Ticket at that time.
I discussed selling the BDC TCPC in my last weekly post. Sold Roth IRA: 50 TCPC at $17.8 One of the criteria used for making that decision was the then existing premium to net asset value per share which was $15.06 as of 9/30/13. I noted then that I expected no significant change when TCPC reported 4th quarter results. Last Thursday, TCP Capital reported that net asset value was $15.18 per share as of 12/31/2013.
I left some comments to two recent SA articles discussing PSEC:
Seeking Alpha and
Seeking Alpha
The ISM services NMI index declined to 51.6% in February from 54 in January. The business activity component fell to 54.6 from 56.3. New orders increased to 51.3 from 50.9. The Markit services PMI index for the U.S. also dipped in February, but was higher at 53.3 than the ISM number. markiteconomics''
China reported last night that its exports fell 18.1% in February, compared to a year earlier, creating a surprising trade deficit of $22.8B for the month.
ADP reported that private sector jobs increased by 139,000 in February. I am discounting economic numbers for both January and February due to the harsh weather conditions.
CoreLogic reported that 4 million residential properties returned to positive equity in 2013. By returning to positive equity, those households who do not qualify for refinancing under the HARP program can refinance at today's abnormally low rates, thereby increasing their disposable income after debt service payments. The FED's DSR ratio has been trending down and is currently at levels last seen in the early 1980s. Chart: Household Debt Service Payments as a Percent of Disposable Personal Income - St. Louis Fed
By increasing the amount of disposable income through refinancing, consumers will have more money to spend and/or to save without having to incur debt, providing a long term potential for virtuous consumer spending in the U.S.
The non-virtuous spending occurred in the 1985 to 2007 period, as consumers assumed a perpetually increasing amount of debt to fund spending that ultimately led to the necessity of de-leveraging since millions of households could no longer afford to service all of their debts.
The substantial decline in the DSR ratio is one of the long term powerful forces that is shaping the ongoing secular bull market, as I have argued many times herein. The latest such summary can be found in the introduction section of a December 2013 post: Stocks, Bonds & Politics I always frame that opinion in terms of more probable than not. Eventually, if I am right, we can all look back and say the long term bull market started on March 10, 2009, when the S & P 500 closed at 719.6, up from the prior day's close of 676.53. Historical Prices | S&P 500 Index
We know now with 100% certainty that the prior long term bull market started on August 20, 1982 when the S & P index spurted to 113.02, closed that month at 119.51 and closed 1982 at 140.64. I remember that day in August 1982 as if it was yesterday. It was obvious then that the FED had tamed the inflation monster, the underlying cause of the long term secular bear markets in both stocks and bonds, and it really did not matter that rates will still sky high (the 30 year mortgage rate averaged 16.04% plus 2.2 points in 1982-Freddie Mac), or that the economy was still reeling from a recession. The end of all that bad stuff was in sight.
In a speech given in Mexico last Wednesday, the Dallas Fed President Richard Fisher referred to some stock metrics, such as price to projected forward earnings, price to sales and market capitalization to GDP, to be at "eye-popping levels". He is concerned about the ghost of irrational exuberance coming back to haunt investors. (see last full paragraph before "QE Spillovers" at Dallas Fed)
The Federal Reserve estimates that U.S. household net worth increased by almost $3T in the 2013 4th quarter to $80.7T. Net worth increased by approximately $9.8 trillion during 2013. Home mortgage debt contracted by 1% in the quarter. www.federalreserve.gov/releases/z1/Current/z1.pdf
******************
BDCs and Index Funds:
BDCs turned down last Tuesday after it was reported that the Russell indexes would remove them in June unless the SEC changes the fee reporting standards by May 15th. BDCs pay hedge fund like compensation to their managers which currently has to be reported as acquired fund fees in an index. Barrons.com That article mentions that about 8% of the BDC shares are owned by index funds tracking the Russell 2000. I view BDCs with some disfavor. I will consequently limit my exposure to them to minimal levels and trade them for slender profits after harvesting several dividend payments.
S & P will soon be booting AINV from the S & P 400 (mid-cap index) and PSEC from the S & P 600 (small cap index), as I noted in the prior post. Wells Fargo estimates that 16.2M shares of PSEC and 17.7M shares of AINV will be sold as a result of those index changes. Barrons.com That article has a snapshot of the BDCs included in the Russell 2000. I have small positions in four of them (TICC, NMFC, PFLT, and BKCC). I have a larger positions in PSEC.
I do not intend to sell any shares as a result of the foregoing index changes. At some point this year, I will sell 100 shares of PSEC owned in the Roth IRA, provided I can sell those shares bought at $10.2 over $11.2. Bought 100 PSEC @ $10.2-Roth IRA (November 2012)
I initiated a position in AINV on 3/4/14 after the Russell news hit the wires. The AINV shares closed at $8.67 that day, and had fallen from a $9.15 close on 2/24 or about a 5.25% decline. AINV Historical Prices It will be a couple of weeks before I discuss that trade. My lowest price paid for AINV shares was a 50 share purchase made in March 2009 at $2.35, classified as a Lottery Ticket at that time.
I discussed selling the BDC TCPC in my last weekly post. Sold Roth IRA: 50 TCPC at $17.8 One of the criteria used for making that decision was the then existing premium to net asset value per share which was $15.06 as of 9/30/13. I noted then that I expected no significant change when TCPC reported 4th quarter results. Last Thursday, TCP Capital reported that net asset value was $15.18 per share as of 12/31/2013.
I left some comments to two recent SA articles discussing PSEC:
Seeking Alpha and
Seeking Alpha
****************************
MOU and MBC:
MOU was the symbol for an exchange traded unsecured bond issued by Citigroup Funding and guaranteed by Citigroup. As noted in my last weekly post, this note matured today at its $10 par value.
The last annual coupon, based on the performance of the Russell 2000, was 28.35% paid on the $10 par value, or $283.50 for each 100 shares. I know that it is hard to believe. I owned 100 shares of this $10 par value bond, equivalent to one $1,000 par bond traded in the bond market.
As of this morning, I have not yet received either the final interest payment or the redemption proceeds. I will probably receive both later today. The security is no longer listed in my account with its symbol (MOU). Instead, it is shown only with its Cusip number which indicates that it has been submitted for payment and is no longer available for trading of course:
The End Date for the last annual period was 3/3/2014. The Russell 2000 closed at 1,176.36 on 3/3/14. The Starting Value of the Russell 2000 for this last coupon period was 916.5, the closing value on 2/22/13.
A similar unsecured senior bond is MBC: Citigroup Financial Inc. 3.00% Min Coupon "Principal Protected" Notes for Russell 2000 Index Stock (MBC). MBC is in its final coupon period with an End Date of 6/2/2014. The Starting Value was 998.78 and the Maximum Level Violation occurs at 1,298.41 (a close above that level on or before the End Date triggers a reversion to the 3% minimum coupon, irrespective of what thereafter happens) I own 200 shares of that one and will be content to let it play out. Final Pricing Supplement
Bought 100 MBC at $9.84
Bought 100 MBC at $9.78
******************
Canadian Natural Resources (own):
Some investors naturally gravitate to a stock like XOM, reassured by its size, financial heft and returns over the past one hundred years or so, or however many decades cover their ownership. A great deal of that security blanket rationale is on display in the comment section to this Seeking Alpha article. The past is not always prologue. I left a comment to that article just pointing out the production, dividend and earnings growth of CNQ.
As noted below, Exxon recently announced that its output will be flat in 2014 and will grow maybe 2% to 3% in 2015-2017. I would not count on that growth in those out years based on Exxon's recent history. Exxon's quarterly dividend was $.23 in 2001 and is currently $.63. per share. Exxon Mobil Corporation (XOM) Dividend History That is a little more than a double in 13 years.
Link to CNQ's 4th quarter earnings press release: Canadian Natural Resources Limited Announces 2013 Fourth Quarter and Year End Results
Sometimes, I link a chart in the blog and the link does not work properly for whatever reason. I thought that it would be useful to compare the symbols CNQ, CNQ.TO and XOM over the past year. CNQ.TO is the ordinary share symbol at YF priced in CADs and traded on the Toronto exchange. CNQ is NYSE listing traded in USDs. Which one has outperformed and why?
Canadian Natural Resources Stock Chart | CNQ Interactive Chart
If that link does not have three lines, then just add the missing symbols after clicking "compare"
*******************
MOU was the symbol for an exchange traded unsecured bond issued by Citigroup Funding and guaranteed by Citigroup. As noted in my last weekly post, this note matured today at its $10 par value.
The last annual coupon, based on the performance of the Russell 2000, was 28.35% paid on the $10 par value, or $283.50 for each 100 shares. I know that it is hard to believe. I owned 100 shares of this $10 par value bond, equivalent to one $1,000 par bond traded in the bond market.
As of this morning, I have not yet received either the final interest payment or the redemption proceeds. I will probably receive both later today. The security is no longer listed in my account with its symbol (MOU). Instead, it is shown only with its Cusip number which indicates that it has been submitted for payment and is no longer available for trading of course:
The End Date for the last annual period was 3/3/2014. The Russell 2000 closed at 1,176.36 on 3/3/14. The Starting Value of the Russell 2000 for this last coupon period was 916.5, the closing value on 2/22/13.
A similar unsecured senior bond is MBC: Citigroup Financial Inc. 3.00% Min Coupon "Principal Protected" Notes for Russell 2000 Index Stock (MBC). MBC is in its final coupon period with an End Date of 6/2/2014. The Starting Value was 998.78 and the Maximum Level Violation occurs at 1,298.41 (a close above that level on or before the End Date triggers a reversion to the 3% minimum coupon, irrespective of what thereafter happens) I own 200 shares of that one and will be content to let it play out. Final Pricing Supplement
Bought 100 MBC at $9.84
Bought 100 MBC at $9.78
******************
Canadian Natural Resources (own):
Some investors naturally gravitate to a stock like XOM, reassured by its size, financial heft and returns over the past one hundred years or so, or however many decades cover their ownership. A great deal of that security blanket rationale is on display in the comment section to this Seeking Alpha article. The past is not always prologue. I left a comment to that article just pointing out the production, dividend and earnings growth of CNQ.
As noted below, Exxon recently announced that its output will be flat in 2014 and will grow maybe 2% to 3% in 2015-2017. I would not count on that growth in those out years based on Exxon's recent history. Exxon's quarterly dividend was $.23 in 2001 and is currently $.63. per share. Exxon Mobil Corporation (XOM) Dividend History That is a little more than a double in 13 years.
Link to CNQ's 4th quarter earnings press release: Canadian Natural Resources Limited Announces 2013 Fourth Quarter and Year End Results
Sometimes, I link a chart in the blog and the link does not work properly for whatever reason. I thought that it would be useful to compare the symbols CNQ, CNQ.TO and XOM over the past year. CNQ.TO is the ordinary share symbol at YF priced in CADs and traded on the Toronto exchange. CNQ is NYSE listing traded in USDs. Which one has outperformed and why?
Canadian Natural Resources Stock Chart | CNQ Interactive Chart
If that link does not have three lines, then just add the missing symbols after clicking "compare"
*******************
1. Bought 100 FSTA at $25.42-Commission Free ETF at Fidelity (see Disclaimer): This is one of Fidelity's new sector ETFs that can be bought and sold commission free by its customers, provided the security is held for 30 days.
Snapshot of Trade:
 |
| 2014 Bought 100 FSTA at $25.42 |
Security Description: The Fidelity MSCI Consumer Staples Index ETF (FSTA) is a sector ETF sponsored by Fidelity that attempts to track, before fees and expenses, the U.S. MSCI IMI Consumer Staples Index. In addition to consumer staples, this fund will own some retailers including Costco, WMT, and CVS that sell consumer staples.
This ETF can be purchased commission free by Fidelity brokerage customers.
This ETF can be purchased commission free by Fidelity brokerage customers.
I took this snapshot of the top holdings as of 2/21/14:
There are no surprises in this list. P & G had the largest weighting at 12.55%, followed by KO at 9.72%; Philip Morris International at 8.72%; Pepsico at 7.09%; Wal-Mart at 7.04% and CVS at 5.14%. While the fund listed 106 holdings, I counted 24 with less than a .25% weighting.
Prior Trades: None. I have invested in other consumer staple ETFs. Some other ETFs in this sector include the following: Consumer Staples Select Sector SPDR Fund (XLP); iShares U.S. Consumer Goods ETF (IYK); iShares Global Consumer Staples ETF (KXI); Vanguard Consumer Staples ETF (VDC); Dynamic Food & Beverage Portfolio (PBJ), and First Trust Consumer Staples Fund (FXG)
Rationale and Risks: Many of these companies provide their investors with a steady and consistent increase in both earnings and dividends.
Consumer staple stocks have been struggling as of late. Currency issues have been a major drag on earnings, but I would view emerging markets to be a long term positive for multi-national purveyors of consumer staples. Revenue stagnation in developed markets for alcoholic carbonated beverages and packaged foods is another problem.
Last Friday's Close: FSTA: $25.80 +0.02 (+0.08%)
2. Bought 50 of the Fidelity Sector ETF for Energy FENY at $25.49 (see Disclaimer): This is another new sector fund sponsored by Fidelity that can be purchased commission free by their customers. As with the other sector funds, the standard commission will be charged if the customers sells within thirty days.
Snapshot of Trade:
Security Description: The Fidelity MSCI Energy Index ETF (FENY) is a new sector ETF sponsored by Fidelity.
I took this snapshot of FENY's top holdings as of 2/25/14:
As one would expect, this sector fund is top heavy, with Exxon at 22.05%; Chevron at 11.56%; and Schlumberger at 6.37%.
The preceding snapshot captures only the largest of the 161 stocks then owned by this fund.
Any sector index fund in the energy area, which is weighted according to market capitalization, will be weighted heavily in Exxon and Chevron.
Another low cost sector fund, Energy Select Sector SPDR Fund (XLE), had a 16.17% weighting in Exxon; 12.86% in Chevron and 7.25% in Schlumberger. That fund owned 47 stocks as of 2/25/14 and had an expense ratio insignificantly higher than FENY at .16%.
Subsequent to my purchase, Exxon fell -2.72 or -2.82% on 3/5 after announcing flat output in 2014 with overall spending declining 6% to about $39.8B. Excluding potential acquisitions, XOM estimated that spending will average less than $37B per year from 2015 to 2017. ExxonMobil to Start Production at Record Number of New Oil and Gas Projects in 2014; Reuters; Seeking Alpha I no longer own Exxon shares and would not consider buying more than a token amount at current market prices. In an indirect way, buying 50 of FENY is a way to gain some minimal exposure to XOM given its large weighting. I currently own 100+ Conoco (COP), over 200 shares of Enerplus (200 of which are the ordinary shares traded in Toronto) and small individual positions in CNQ and SU.
I would anticipate that XLE and FENY will be close in their total returns. The main difference from my perspective is that I can buy FENY commission free and can consequently add small lots cost effectively.
Prior Trades: None
Rationale: I have cut back some on my individual stock holdings in the energy sector by selling 100 Husky, Sold 100 HUSKF at $29.39. And I reduced my fund exposure in the energy and natural resource sector by unloading 200 of the CEF IRR as noted below.
This Fidelity sector ETF provides me with a low cost means to acquire an additional weighting that can be traded without the restrictions that may attach to a no transaction fee (NTF) mutual fund bought through a broker, which will normally have a fee charged for selling shares within 90 days to 6 months, as the case may be, and a minimum initial investment that would be $2,500 or more. The mutual fund will also have a much higher expense ratio than this Fidelity ETF. Lastly, it would be normal for most mutual funds to underperform index funds anyway.
And it is material to me that I can average down by buying 5 or 10 shares which is cost effective due to the absence of a brokerage commission.
Risks: This fund would have the normal stock risks associated with a sector fund that owns only energy production and service companies. The prices for oil and natural gas are the two biggest wild cards.
Future buys and sells: I view this kind of purchase as a potential trading vehicle. Energy stocks appear to me to be a reasonably valued sector at the moment. I will not be adverse to adding 5 or 10 shares periodically as long as I can do so without incurring a brokerage commission.
Last Friday's close: FENY: $25.51 +0.01 (+0.04%)
Consumer staple stocks have been struggling as of late. Currency issues have been a major drag on earnings, but I would view emerging markets to be a long term positive for multi-national purveyors of consumer staples. Revenue stagnation in developed markets for alcoholic carbonated beverages and packaged foods is another problem.
Last Friday's Close: FSTA: $25.80 +0.02 (+0.08%)
2. Bought 50 of the Fidelity Sector ETF for Energy FENY at $25.49 (see Disclaimer): This is another new sector fund sponsored by Fidelity that can be purchased commission free by their customers. As with the other sector funds, the standard commission will be charged if the customers sells within thirty days.
Snapshot of Trade:
Security Description: The Fidelity MSCI Energy Index ETF (FENY) is a new sector ETF sponsored by Fidelity.
I took this snapshot of FENY's top holdings as of 2/25/14:
As one would expect, this sector fund is top heavy, with Exxon at 22.05%; Chevron at 11.56%; and Schlumberger at 6.37%.
The preceding snapshot captures only the largest of the 161 stocks then owned by this fund.
Any sector index fund in the energy area, which is weighted according to market capitalization, will be weighted heavily in Exxon and Chevron.
Another low cost sector fund, Energy Select Sector SPDR Fund (XLE), had a 16.17% weighting in Exxon; 12.86% in Chevron and 7.25% in Schlumberger. That fund owned 47 stocks as of 2/25/14 and had an expense ratio insignificantly higher than FENY at .16%.
Subsequent to my purchase, Exxon fell -2.72 or -2.82% on 3/5 after announcing flat output in 2014 with overall spending declining 6% to about $39.8B. Excluding potential acquisitions, XOM estimated that spending will average less than $37B per year from 2015 to 2017. ExxonMobil to Start Production at Record Number of New Oil and Gas Projects in 2014; Reuters; Seeking Alpha I no longer own Exxon shares and would not consider buying more than a token amount at current market prices. In an indirect way, buying 50 of FENY is a way to gain some minimal exposure to XOM given its large weighting. I currently own 100+ Conoco (COP), over 200 shares of Enerplus (200 of which are the ordinary shares traded in Toronto) and small individual positions in CNQ and SU.
I would anticipate that XLE and FENY will be close in their total returns. The main difference from my perspective is that I can buy FENY commission free and can consequently add small lots cost effectively.
Prior Trades: None
Rationale: I have cut back some on my individual stock holdings in the energy sector by selling 100 Husky, Sold 100 HUSKF at $29.39. And I reduced my fund exposure in the energy and natural resource sector by unloading 200 of the CEF IRR as noted below.
This Fidelity sector ETF provides me with a low cost means to acquire an additional weighting that can be traded without the restrictions that may attach to a no transaction fee (NTF) mutual fund bought through a broker, which will normally have a fee charged for selling shares within 90 days to 6 months, as the case may be, and a minimum initial investment that would be $2,500 or more. The mutual fund will also have a much higher expense ratio than this Fidelity ETF. Lastly, it would be normal for most mutual funds to underperform index funds anyway.
And it is material to me that I can average down by buying 5 or 10 shares which is cost effective due to the absence of a brokerage commission.
Risks: This fund would have the normal stock risks associated with a sector fund that owns only energy production and service companies. The prices for oil and natural gas are the two biggest wild cards.
Future buys and sells: I view this kind of purchase as a potential trading vehicle. Energy stocks appear to me to be a reasonably valued sector at the moment. I will not be adverse to adding 5 or 10 shares periodically as long as I can do so without incurring a brokerage commission.
Last Friday's close: FENY: $25.51 +0.01 (+0.04%)
3. Sold 50 ARU at $25.44 (see Disclaimer):
Snapshot of Trade:
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| 2014 Sold 50 ARU at $25.44 |
Snapshot of Profit:
Security Description: Ares Capital Corp. 5.875% Senior Notes due 2022 (ARU) is a senior unsecured baby bond issued by the BDC Ares Capital Corp. (ARCC )
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| 2014 ARU 50 Shares +$31.08 |
Security Description: Ares Capital Corp. 5.875% Senior Notes due 2022 (ARU) is a senior unsecured baby bond issued by the BDC Ares Capital Corp. (ARCC )
Related Trades: I still own a position in ARCC common shares. After buying and selling the common shares, I current own 170 shares with 120 of those shares owned in two IRA accounts. My last two purchases were in my IRAs. Item # 2 Bought 70 ARCC at $17.24-REGULAR IRA (April 2013); Item # 4 Bought 50 ARCC at $16.9 -Roth IRA (June 2013) The other shares currently owned were bought at $16.17 (January 2011).
I last sold shares in May 2013. Sold 50 ARCC at $18.02
Rationale: ARU is a relatively low yielding security. I attempted to sell it earlier as a paired trade when I bought 50 shares of KWN at $24.78, a senior note issued by Kennedy-Wilson with a 7.75% coupon and selling at a discount to its $25 par value. After successfully buying KWN, I completed the paired trade later by selling ARU at an acceptable price.
I am not likely to buy this bond back unless I can buy it at a greater than 5% discount to its $25 par value.
Last Friday Close: ARU: $25.35 0.00 (0.00%)
4. Bought 100 GNEPRA at $8.05 (see Disclaimer):
Snapshot of Trade:
Company and Security Description: Genie Energy Ltd. Preferred Series 2012 (GNE.PA) is an equity preferred stock issued by Genie Energy Ltd. Cl B (GNE) that currently pays qualified and cumulative dividends at a fixed coupon rate of 7.5% on a $8.5 par value. I highlighted the par value number since it is so unusual.
The dividend may be increased in accordance with a formula linked to the excess EBITDA over $32M originating only from GNE's retail energy provider business. Prospectus The retail provider business is known as IDT Energy, a provider of retail electricity and natural gas to more than 1 million residences and small businesses in NY, PA, MD and ILL. IDT Energy | About Us
The formula only gives the owners of GNEPRA a small part of the excess in EBITDA over $32M.
I have the common shares under observation for a possible purchase, but only as a Lottery Ticket.
Snapshot of Dividend Calculation:
I would not hazard a guess whether or not the dividend will be increased above 7.5% or by how much. I would hazard a guess that it will not be increased within the next year.
The last dividend was classified as a return of capital. Investor Relations
Company Website: Genie Energy Ltd.
Prior Trades: None
Last Earnings Report: For the 2013 third quarter, Genie Energy reported net income attributable to common shareholders of $1.7M or $.08. That number excludes that part of the net income paid out to the preferred shareholders. The total net income was $3.9M on revenues of $71.6M. IRT reported EBITDA of $9.6M, up from .5M in the 2013 second quarter. SEC Filed Press Release
Rationale: This was a minor purchase. The dividend yield is good at the current coupon rate. The dollar amount of the dividend is not material in isolation. However, when grouped together with all of my income generating securities, the overall impact is significant.
Risks: I am-currently-slightly comfortable with the credit risk. I am not aware of any credit ratings for this security. I would rate it within the junk universe of ratings.
The company summarizes the risks incident to its operations starting at page 10 of its 2012 Annual Report filed with the SEC. Genie starts out that discussion with a summary of the risks faced by IDT Energy.
Last Friday's Close: GNE-PA: $8.15 -0.16 (-1.92%)
5. Sold 100 HUSIPRF at $20.44 (see Disclaimer): In retrospect, I paid too much for the first 50 share lot purchased and thereafter averaged down after a decline. As a result of the 50 share average down, I was able to sell the 100 share profitably.
Snapshot of Trade:
In my prior update of my exchange traded bonds and preferred stocks, this security was listed with an old symbol which was HBAPRF. All of the HSBC USA preferred stocks had their symbols changed from prefix HBA to HUSI, followed by the applicable series letter designation. I still own 100 HUSIPRG.
Snapshot of Recent Roth IRA History:
The problem is shown by this recent history snapshot. I bought shares at $20.95 (7/30/13) and then had to average down at $18.53 in just a few weeks. I needed to be more circumspect about my entry point with this low yielding equity preferred floater likely to pay its 3.5% minimum coupon for at least two or probably more years.
Snapshot of Profit: By averaging down, which I could do by chopping my orders into two 50 share lots, I salvaged a profit:
Item # 3 Bought 50 HBAPRF at $18.53-Roth IRA (9/14/13 Post); Item # 5 Bought 50 HBAPRF at $20.95 (8/3/13 Post)
Security Description: The HSBC USA Inc. Floating Rate Non-Cumulative Preferred Series F (HUSI.PF) is an equity preferred stock that pays qualified and non-cumulative dividends at the greater of 3.5% or .75% above the 3 month Libor rate on a $25 par value. Prospectus The issuer is the holding company HSBC USA, an indirect wholly owned subsidiary of HSBC Holdings, plc (HSBC)
Prior Trades: I have not had much luck with this one. I did flip it for small profits on two other occasions: Bought 50 HBAPRF at 20.69 (January 2011)-Sold 50 HBAPRF at 22.44 (May 2011); Bought 50 HBAPRF at $19.89 (August 2011)-Sold 50 HBAPRF at $20.65 (March 2012)
Advantages and Disadvantages of Equity Preferred Floating Rate Securities
Floaters: Links in One Post
2013 Annual Report: HUSI 12.31.13 10-K
Rationale: I need to find a better entry point for both 50 share purchases, rather than just one. I will wait for a better opportunity to re-initiate a position. This class of security has been volatile at times with a strong downside bias. The most recent significant downside volatility occurred during the market's correction in the 2011 summer. In August 2011, I detailed the volatile downside movement in several securities on just one day during that period, including several equity preferred floaters with minimum coupons. Item # 1 Fear and Enhanced Volatility in Certain Classes of Income Securities
Over the past few weeks, I have been trying to improve my yield from income producing securities by selling off lower current yielding ones and buying those with significantly higher current yields. However, given the ongoing redemptions, I am not improving my overall yield of the Exchange Traded Bond and Equity Preferred Stock segment of my portfolio. Stocks, Bonds & Politics: Updated Exchange Traded Bonds and Preferred Stock Table as of 2/10/14 I can not easily replace for example the redemptions of 200 PJA or 150 of JZV. PJA Redeemed by Call Warrant Owner (2/25/14 Post); Call Warrant Owner Redeems JZV and JBI (1/13/14 Post).
I would note that the options for income generated by bonds and preferred stocks are not viewed favorably now. I am having to take more risks for less yield.
Last Friday's Close: HUSI-PF: $20.25 -0.02 (-0.10%)
6. Sold 200 of the Stock CEF IRR at $10.06 (see Disclaimer): The managers of this fund were fired for underperformance. Morningstar has demoted the fund's rating to one star, which is much deserved. I would give it a negative star rating.
Snapshot of Trade:
Security Description: The ING Risk Managed Natural Resources Fund (IRR) is a stock CEF that uses a buy-write strategy.
Rationale: I realized a small gain only because most of the dividend payments were classified as returns of capital which lowered by cost basis. According to CEFConnect, the annualized total return of this fund was 4.6% based on net asset value per share over the past five years through 2/26/14. The category average total return over the same period is shown 14.44%. That is almost a 10% per year underperformance. Fortunately, I only had a negligible investment. It is amazing that anyone is actually paid anything to produce such dismal results.
Future Buys and Sells: I learned my lesson. I will never buy shares again. I still own 100 shares in an IRA where the RB is hoping that the fund's managers will have a brain transplant or an infusion of a new wonder drug that awakens them from their stupor.
7. Pared Intel Again: Sold 40 Shares at $24.61 (see Disclaimer): Rightly or wrongly, I am becoming increasingly disillusioned with Intel. Whenever Intel comes to mind now, I conjure up an image of an elephant trying to tap dance.
Snapshot of Trade:
Snapshot of Position Before Trade:
I selected the highest cost lot to sell, which was the 40 shares purchased in August 2010 at a total cost of $18.55.
Snapshot of Position after Trade:
Snapshot of Profit
The top line in the preceding snapshot shows the profit realized from this 40 share lot. The other lines reflect a transaction on 1/15/2014, referenced in a prior post.
Prior Trades: This is my 4th pare of an Intel position that I started to acquire in small odd lots shortly after Lehman's failure. Those purchases were made with cash flow originating from dividend and interest payments. I have been selling off my highest cost shares. The first two pares were described in a December 2013 post: Pared Intel: Sold 42 at $23.64 and 45 at $25-Highest Cost Shares I then sold more shares in January: Item # 6 SOLD: 20 41 INTC at $26.73 The profit from those three pares was $657.2. This last transaction netted $232.62, bringing the total realized gain for shares purchased since October 2008 up to $889.82.
As noted in the December 2013 post, I netted small gains from odd lot flips in 2006 and 2008 (+$174.96). Overall, I have found Intel to be a poor stock investment since the late 1990s, even though I have profitably traded it since it reached it peak back in 2000. I could have bought a large number of other blue chips in late 2008 and easily doubled or even tripled my money.
Rationale: I am simply disappointed with Intel. It has unquestionably been caught flatfooted as consumers have moved to smartphones and tablets. One of the Intel bulls at Seeking Alpha expressed misgivings about Intel's inability to produce a single customer who had incorporated the new Intel chip called Merrifield into a smartphone. Another point made by that author is that Merrifield is slower than Apple's A7. Seeking Alpha Why is Apple able to design a faster chip?
I have also started to appreciate the benefits of a tablet, based on my increasing use of my IPad. To an OG, it is just amazing that I can lay down on the couch, tap the button for Netflix or Amazon's Prime Video service, and instantly start watching a motion picture or a TV show in HD.
Last Friday's Close: INTC: $24.64 +0.01 (+0.04%)
8. Bought 50 NABZY at $15.48 (The $500 to $1,000 Flyers Basket Strategy)(see Disclaimer): This is the only trade made on 2/28/14 that will be discussed in this post. The remaining ones will be discussed in the next weekly post.
Snapshot of Trade:
Company Description: The National Australia Bank Ltd. ADS (NABZY) is an ADS for the ordinary shares of the National Australia Bank Ltd. (NAB:ASX).
Bank Website: About Us - NAB
NAB has over 12M customers and operates more than 1,800 branches globally, primarily in Australia, New Zealand, the U.S. and the U.K. In the U.S., NAB owns the Great Western Bank which has more than 160 branches in the Midwest and Arizona. (see map at page 18: 2013 Annual Report for Great Western Bank.pdf; 2013 cash earnings of $112+M up from $100+M in 2012 at page 19)
One share of NABZY equal .5 ordinary NAB:ASX shares.
When I first purchased NABZY back in 2010, the ratio was 1 ordinary share equals 1 ADR share. The ordinary shares were not split but the ADR did undergo a 2 for 1 split earlier this year. (see notice from custodian: tss.db.com .pdf)
On the day of my trade, the ordinary shares closed in Australia at AUD$34.74.
I used the currency exchange converter at YF to translate than number into USDs. The value will fluctuate during the day.
Since the ADR is equal to .5 ordinary shares, I need to divide $30.9928 to calculate the equivalent price for NABZY which is priced in USDs. That price would be $15.4964 which is close to what I paid for the NABZY shares.
Prior Trades: I traded this stock a couple of times before the ADRs split two for 1. Item # 1 Bought 50 NABZY at $24.7 (March 2010) and Item # 9 ADDED 50 NABZY AT $19.51 with Mid-May cash flow (May 2010)-Item # 2 Sold 100 NABZY at $25.2-Sold 100 NABZY at $25.2)($285.6 +$64.59 dividend payment); and Item # 7 Sold 50 NABZY at $25.47 (August 2012)-Bought 50 of the ADR NABZY at $24.55 (collecting one dividend).
Snapshot of 2010 Trade:
Recent Earnings Release: For its fiscal first quarter ending 12/31/13, NAB reported a 7% increase in cash profit to AUD$1.55B. Bad and doubtful loans declined by 23%. The bank noted a problem with its U.K. operations, involving the miscalculation of repayments on 42,500 mortgages. NAB 2014 First Quarter Trading Update.pdf
Fiscal 2013 Annual Report: full-year-results-2013.pdf
YF shows the estimated F/Y 2014 E.P.S. for the NABZY ADR shares as $1.22. NABZY Analyst Estimates
Rationale: This bank pays a good dividend. Dividends are paid semi-annually in Australian Dollars. NAB's dividend payment history - NAB That page refers to the "franking level" of recent dividends as 100%. I am not sure but I believe that means that no withholding tax would be applied to the payment. In 2013, NAB paid out AUD$1.9 which would be equivalent to AUD$.95 for NABZY now after the 2 for split. At the exchange rate in effect for 2/28/14, AUD$.95 would convert into USD$.8514 per share. At a total cost of $15.48, the dividend yield would be 5.5% based on all of those assumptions.
The value of the dividend to the owner of NABZY shares will in part depend on the currency conversion rate. The dividend becomes more valuable when the AUD rises in value against the USD, and less valuable when the Australian currency is declining which has the same practical effect as a dividend cut. So if one AUD bought 1.05 USDs at the time of the dividend conversion, then the owner of NABZY would in effect receive more and would have a higher dividend yield based on the constant cost number. Going back to the 8/10/12 conversion rate, that AUD$.95 per share share dividend would convert into USD$1 which would equate to a 6.46% yield at a total cost of $15.48 for each NABZY share.
In order words, the U.S. owner of NABZY would want the AUD to gain in value against the USD after purchase, but the dividend's value is not the main reason. The NABZY share price is inextricably linked to the price of the ordinary shares in AUDs converted into USDs.
The recent share price decline is due in significant part to a decline in the Australian dollar vs. the USD rather than any adverse event at the company. The shares closed at $17.58 on 10/28/13, adjusted for the subsequent split, and at $15.49 on 2/28/14, a decline of 11.89%. The USD/AUD conversion rate was at 1.04 on 10/28/13 and at 1.12 on 2/28, representing a decline of about 7.69% in the AUD during that time frame. USD/AUD Currency Conversion Chart The ordinary shares declined from AUD$36.68 to $34.74 or 5.29%. This will not be exact due to differences in the currency conversion values during the day.
As previously discussed, that currency loss will flow through into the pricing of U.S. listed ADR priced in USDs.
What happens when the price of the ordinary shares and the AUD go up at the same time? This is just a hypothetical, but I can pick a historical time when the AUD was strong against the USD, with one AUD buying more than 1.0574 USDs . If the ordinary shares closed at AUD$34.74 (the closing price from 2/28/14) when the AUD would buy $1.04 USDs (rather than .89), then NABZY would have then been priced before the 2 for split at $36.73 or $18.15 adjusted for the split rather than the actual $15.48 per share price from 2/28/14.
Risks: Given the recent weakness in the Australian Dollar, currency risk is significant, but it can cut both ways as noted in the preceding paragraph.
The Australian dollar did rise last Thursday after the release of stronger than expected economic data.
Many commentators believe the Australian housing market is overheated. One forecaster, Harry Dent, predicts a plunge. International Business Times There are geographic ares in both Canada and Australia where housing prices have increased a far faster levels than incomes, an ingredient underlying the busting of the U.S. housing bubble. Needless to say, we are all familiar with how banks react to major declines in home prices.
I limited my purchase to just 50 shares due to these concerns and risks.
Future Buys and Sells: I decided to chop a potential order for 100 shares into two 50 share lots primarily due to the ongoing weakness in the Australian Dollar. I will consider averaging down at less than $14.75. I will most likely refrain from averaging up.
Last Friday's Closing price: NABZY: $15.72 -0.14 (-0.88%)
This post is long enough. I thought that I would add a comment about the Super Bowl Ring and Putin, since it highlights one of his many highly undesirable features. I was reminded of that incident when Putin flat out denied that those heavily armed troops were Russian soldiers. It also brought back into my foggy memory the honors thesis that I had to write in 1973.
***************
Politics and ETC.
1. Putin and a Missing Super Bowl Ring/Putin's Claims Regarding Russia's Military Seizure of Crimea: I am use to politicians stealing and lying, but rarely is both a lie and a theft caught in the same video.
The owner of New England Patriots was visiting Putin. He took off his diamond studded Super Bowl ring to show Putin, who took the ring and put it on his finger. Putin reportedly said that he could kill someone with that ring. He then put it in his pocket and walked away under the escort of burly guards. When asked about that ring later, Putin responded "what ring". YouTube; Putin: What Super Bowl Ring? - ABC News
And, in just a chuckle out loud moment, Putin claims that those heavily armed men wearing masks and driving around the Crimea in Russian vehicles are not Russian soldiers but locals who went to the local army surplus store to dress and arm themselves. According to Vlad, Russia has no control over them and has no involvement in the military seizure of land that it explicitly recognized as part of Ukraine in the Budapest Memorandum on Security Assurances, wherein it promised to respect Ukraine's territorial integrity and to refrain from the use or threat of force. CNN.com
A NYT reporter in Crimea noted in a recently published article that those masked men have dropped all pretenses about their true identity. One solider readily acknowledged that he was with the Russian infantry recently sent to Crimea to protect that region from their "enemy, Ukraine". Russia is clamping down on the free press in Crimea who are reporting facts rather than the Kremlin's reality creations. A observer sent by the U.N. was threatened by armed men and run out of the country. CNN.com Troops fired on unarmed U.N. observers attempting to travel into Crimea. Reuters
Kerry was "dumbfounded" that such an obvious lie would be stated with such a poker face, but this is standard operating procedure for the Russians and has been for as long as I can remember. Treaties mean nothing to the Russian government. Putin would view a statement of fact and telling the truth as expressing anti-Russian views.
If Putin actually believes the crap that routinely comes out of his mouth, then he is without question delusional, probably beyond all hope of being cured even by amazing gizmos used by Star Trek's Dr. Leonard McCoy; and he would be in need of immediate psychiatric attention and a bountiful amount of meds. If I was a Russian citizen making that comment while in the Motherland, a five year stint in a Siberian Gulag might be my best conceivable future option thereafter.
Putin has demonstrated that he is more than competent at torpedoing Russia's currency and stock market. The Russian stock market declined by more than 7% last week, MarketWatch, and the ruble is in free fall against the USD. RUB/USD Currency Conversion Chart or USD/RUB Currency Conversion Chart
Putin's comments about Crimea also brought back to me an old memory. To graduate summa or magna cum laude from Tulane back in 1973, I had to write an honor's thesis and then defend that paper in front of a couple professors. I never anything for the first semester's credit, and then I went into gear after hearing that the government was going to publish its formally secret records regarding China and the Soviet Union from 1945. I ordered the material from the GAO, and started to read cable after cable until an obvious topic just jumped off the page. I titled my thesis something like Soviet Violations of the Sino-Soviet Treaty of 1945, still available somewhere in Tulane's library.
On a related subject, the True Believers blame Obama, of course, for Russia's military seizure of Crimea. Everything that goes wrong in the world is Obama's fault. This would not have happened under Reagan's Presidency, or so they claim. What a minute? Didn't Russia invade Afghanistan and attempt to seize that nation using military force during most of Reagan's first and second term. And, the response was limited to arming the fanatics who later became the Taliban. Well, no one thought about what would happen thereafter, such as the Afghan versions of TBs providing sanctuary and training to the Al-Qaeda operatives responsible for 9/11.
The world is not a simple place, and there are limits to American power. Putin knows that the West will no go to war over Crimea. And he has made it plain when he sent troops into two Georgia provinces of South Ossetia and Abkhazia during Bush's term that he wanted to bring back into Russia's fold those areas with predominant Russian speaking populations. Russo-Georgian war As noted in a recent NYT, Putin wants to turn back the clock to when Russia was the "Soviet Union".
What did Bush do to stop Putin in Georgia? Did he resort to military force? I read a few days ago an editorial written by a TB and published by the WSJ that blamed Obama for what happened in 2008 in those provinces! Uninformed and biased does not do that author justice.
And this is really a hoot. Putin is a nominee for the Nobel Peace Prize. The very idea that anyone would even consider him is farcical.
Costly military ventures that fail to secure any long term result remotely worthy of the cost will happen due to the perpetual failure of millions to comprehend those basic truths and their substitution of chess beating for anything remotely resembling a thoughtful analysis.
Last Friday Close: ARU: $25.35 0.00 (0.00%)
4. Bought 100 GNEPRA at $8.05 (see Disclaimer):
Snapshot of Trade:
Company and Security Description: Genie Energy Ltd. Preferred Series 2012 (GNE.PA) is an equity preferred stock issued by Genie Energy Ltd. Cl B (GNE) that currently pays qualified and cumulative dividends at a fixed coupon rate of 7.5% on a $8.5 par value. I highlighted the par value number since it is so unusual.
The dividend may be increased in accordance with a formula linked to the excess EBITDA over $32M originating only from GNE's retail energy provider business. Prospectus The retail provider business is known as IDT Energy, a provider of retail electricity and natural gas to more than 1 million residences and small businesses in NY, PA, MD and ILL. IDT Energy | About Us
The formula only gives the owners of GNEPRA a small part of the excess in EBITDA over $32M.
I have the common shares under observation for a possible purchase, but only as a Lottery Ticket.
Snapshot of Dividend Calculation:
I would not hazard a guess whether or not the dividend will be increased above 7.5% or by how much. I would hazard a guess that it will not be increased within the next year.
The last dividend was classified as a return of capital. Investor Relations
Company Website: Genie Energy Ltd.
Prior Trades: None
Last Earnings Report: For the 2013 third quarter, Genie Energy reported net income attributable to common shareholders of $1.7M or $.08. That number excludes that part of the net income paid out to the preferred shareholders. The total net income was $3.9M on revenues of $71.6M. IRT reported EBITDA of $9.6M, up from .5M in the 2013 second quarter. SEC Filed Press Release
Rationale: This was a minor purchase. The dividend yield is good at the current coupon rate. The dollar amount of the dividend is not material in isolation. However, when grouped together with all of my income generating securities, the overall impact is significant.
Risks: I am-currently-slightly comfortable with the credit risk. I am not aware of any credit ratings for this security. I would rate it within the junk universe of ratings.
The company summarizes the risks incident to its operations starting at page 10 of its 2012 Annual Report filed with the SEC. Genie starts out that discussion with a summary of the risks faced by IDT Energy.
Last Friday's Close: GNE-PA: $8.15 -0.16 (-1.92%)
5. Sold 100 HUSIPRF at $20.44 (see Disclaimer): In retrospect, I paid too much for the first 50 share lot purchased and thereafter averaged down after a decline. As a result of the 50 share average down, I was able to sell the 100 share profitably.
Snapshot of Trade:
 |
| Sold 2014 100 HUSIPRF at $20.44 |
Snapshot of Recent Roth IRA History:
The problem is shown by this recent history snapshot. I bought shares at $20.95 (7/30/13) and then had to average down at $18.53 in just a few weeks. I needed to be more circumspect about my entry point with this low yielding equity preferred floater likely to pay its 3.5% minimum coupon for at least two or probably more years.
Snapshot of Profit: By averaging down, which I could do by chopping my orders into two 50 share lots, I salvaged a profit:
 |
| 2014 HUSIPRF 100 Shares +$48.96 |
Security Description: The HSBC USA Inc. Floating Rate Non-Cumulative Preferred Series F (HUSI.PF) is an equity preferred stock that pays qualified and non-cumulative dividends at the greater of 3.5% or .75% above the 3 month Libor rate on a $25 par value. Prospectus The issuer is the holding company HSBC USA, an indirect wholly owned subsidiary of HSBC Holdings, plc (HSBC)
Prior Trades: I have not had much luck with this one. I did flip it for small profits on two other occasions: Bought 50 HBAPRF at 20.69 (January 2011)-Sold 50 HBAPRF at 22.44 (May 2011); Bought 50 HBAPRF at $19.89 (August 2011)-Sold 50 HBAPRF at $20.65 (March 2012)
Advantages and Disadvantages of Equity Preferred Floating Rate Securities
Floaters: Links in One Post
2013 Annual Report: HUSI 12.31.13 10-K
Rationale: I need to find a better entry point for both 50 share purchases, rather than just one. I will wait for a better opportunity to re-initiate a position. This class of security has been volatile at times with a strong downside bias. The most recent significant downside volatility occurred during the market's correction in the 2011 summer. In August 2011, I detailed the volatile downside movement in several securities on just one day during that period, including several equity preferred floaters with minimum coupons. Item # 1 Fear and Enhanced Volatility in Certain Classes of Income Securities
Over the past few weeks, I have been trying to improve my yield from income producing securities by selling off lower current yielding ones and buying those with significantly higher current yields. However, given the ongoing redemptions, I am not improving my overall yield of the Exchange Traded Bond and Equity Preferred Stock segment of my portfolio. Stocks, Bonds & Politics: Updated Exchange Traded Bonds and Preferred Stock Table as of 2/10/14 I can not easily replace for example the redemptions of 200 PJA or 150 of JZV. PJA Redeemed by Call Warrant Owner (2/25/14 Post); Call Warrant Owner Redeems JZV and JBI (1/13/14 Post).
I would note that the options for income generated by bonds and preferred stocks are not viewed favorably now. I am having to take more risks for less yield.
Last Friday's Close: HUSI-PF: $20.25 -0.02 (-0.10%)
6. Sold 200 of the Stock CEF IRR at $10.06 (see Disclaimer): The managers of this fund were fired for underperformance. Morningstar has demoted the fund's rating to one star, which is much deserved. I would give it a negative star rating.
Snapshot of Trade:
 |
| 2014 Sold 200 IRR at $10.06 |
Rationale: I realized a small gain only because most of the dividend payments were classified as returns of capital which lowered by cost basis. According to CEFConnect, the annualized total return of this fund was 4.6% based on net asset value per share over the past five years through 2/26/14. The category average total return over the same period is shown 14.44%. That is almost a 10% per year underperformance. Fortunately, I only had a negligible investment. It is amazing that anyone is actually paid anything to produce such dismal results.
Future Buys and Sells: I learned my lesson. I will never buy shares again. I still own 100 shares in an IRA where the RB is hoping that the fund's managers will have a brain transplant or an infusion of a new wonder drug that awakens them from their stupor.
7. Pared Intel Again: Sold 40 Shares at $24.61 (see Disclaimer): Rightly or wrongly, I am becoming increasingly disillusioned with Intel. Whenever Intel comes to mind now, I conjure up an image of an elephant trying to tap dance.
Snapshot of Trade:
Snapshot of Position Before Trade:
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| 150.95 Intel Shares-Average Cost Per Share at $16.32 |
I selected the highest cost lot to sell, which was the 40 shares purchased in August 2010 at a total cost of $18.55.
Snapshot of Position after Trade:
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| Intel Remaining Shares=110+ Shares at Average Cost Per Share of $15.52 |
Snapshot of Profit
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| 2014 Intel 40 Shares +$232.62 |
Prior Trades: This is my 4th pare of an Intel position that I started to acquire in small odd lots shortly after Lehman's failure. Those purchases were made with cash flow originating from dividend and interest payments. I have been selling off my highest cost shares. The first two pares were described in a December 2013 post: Pared Intel: Sold 42 at $23.64 and 45 at $25-Highest Cost Shares I then sold more shares in January: Item # 6 SOLD: 20 41 INTC at $26.73 The profit from those three pares was $657.2. This last transaction netted $232.62, bringing the total realized gain for shares purchased since October 2008 up to $889.82.
As noted in the December 2013 post, I netted small gains from odd lot flips in 2006 and 2008 (+$174.96). Overall, I have found Intel to be a poor stock investment since the late 1990s, even though I have profitably traded it since it reached it peak back in 2000. I could have bought a large number of other blue chips in late 2008 and easily doubled or even tripled my money.
Rationale: I am simply disappointed with Intel. It has unquestionably been caught flatfooted as consumers have moved to smartphones and tablets. One of the Intel bulls at Seeking Alpha expressed misgivings about Intel's inability to produce a single customer who had incorporated the new Intel chip called Merrifield into a smartphone. Another point made by that author is that Merrifield is slower than Apple's A7. Seeking Alpha Why is Apple able to design a faster chip?
I have also started to appreciate the benefits of a tablet, based on my increasing use of my IPad. To an OG, it is just amazing that I can lay down on the couch, tap the button for Netflix or Amazon's Prime Video service, and instantly start watching a motion picture or a TV show in HD.
Last Friday's Close: INTC: $24.64 +0.01 (+0.04%)
8. Bought 50 NABZY at $15.48 (The $500 to $1,000 Flyers Basket Strategy)(see Disclaimer): This is the only trade made on 2/28/14 that will be discussed in this post. The remaining ones will be discussed in the next weekly post.
Snapshot of Trade:
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| 2014 Bought 50 NABZY at $15.475 |
Bank Website: About Us - NAB
NAB has over 12M customers and operates more than 1,800 branches globally, primarily in Australia, New Zealand, the U.S. and the U.K. In the U.S., NAB owns the Great Western Bank which has more than 160 branches in the Midwest and Arizona. (see map at page 18: 2013 Annual Report for Great Western Bank.pdf; 2013 cash earnings of $112+M up from $100+M in 2012 at page 19)
One share of NABZY equal .5 ordinary NAB:ASX shares.
When I first purchased NABZY back in 2010, the ratio was 1 ordinary share equals 1 ADR share. The ordinary shares were not split but the ADR did undergo a 2 for 1 split earlier this year. (see notice from custodian: tss.db.com .pdf)
On the day of my trade, the ordinary shares closed in Australia at AUD$34.74.
I used the currency exchange converter at YF to translate than number into USDs. The value will fluctuate during the day.
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| 34.74AUDs=$30.9928 USDs |
Prior Trades: I traded this stock a couple of times before the ADRs split two for 1. Item # 1 Bought 50 NABZY at $24.7 (March 2010) and Item # 9 ADDED 50 NABZY AT $19.51 with Mid-May cash flow (May 2010)-Item # 2 Sold 100 NABZY at $25.2-Sold 100 NABZY at $25.2)($285.6 +$64.59 dividend payment); and Item # 7 Sold 50 NABZY at $25.47 (August 2012)-Bought 50 of the ADR NABZY at $24.55 (collecting one dividend).
Snapshot of 2010 Trade:
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| 2010 NABZY 100 Shares +$285.6 |
Fiscal 2013 Annual Report: full-year-results-2013.pdf
YF shows the estimated F/Y 2014 E.P.S. for the NABZY ADR shares as $1.22. NABZY Analyst Estimates
Rationale: This bank pays a good dividend. Dividends are paid semi-annually in Australian Dollars. NAB's dividend payment history - NAB That page refers to the "franking level" of recent dividends as 100%. I am not sure but I believe that means that no withholding tax would be applied to the payment. In 2013, NAB paid out AUD$1.9 which would be equivalent to AUD$.95 for NABZY now after the 2 for split. At the exchange rate in effect for 2/28/14, AUD$.95 would convert into USD$.8514 per share. At a total cost of $15.48, the dividend yield would be 5.5% based on all of those assumptions.
The value of the dividend to the owner of NABZY shares will in part depend on the currency conversion rate. The dividend becomes more valuable when the AUD rises in value against the USD, and less valuable when the Australian currency is declining which has the same practical effect as a dividend cut. So if one AUD bought 1.05 USDs at the time of the dividend conversion, then the owner of NABZY would in effect receive more and would have a higher dividend yield based on the constant cost number. Going back to the 8/10/12 conversion rate, that AUD$.95 per share share dividend would convert into USD$1 which would equate to a 6.46% yield at a total cost of $15.48 for each NABZY share.
In order words, the U.S. owner of NABZY would want the AUD to gain in value against the USD after purchase, but the dividend's value is not the main reason. The NABZY share price is inextricably linked to the price of the ordinary shares in AUDs converted into USDs.
The recent share price decline is due in significant part to a decline in the Australian dollar vs. the USD rather than any adverse event at the company. The shares closed at $17.58 on 10/28/13, adjusted for the subsequent split, and at $15.49 on 2/28/14, a decline of 11.89%. The USD/AUD conversion rate was at 1.04 on 10/28/13 and at 1.12 on 2/28, representing a decline of about 7.69% in the AUD during that time frame. USD/AUD Currency Conversion Chart The ordinary shares declined from AUD$36.68 to $34.74 or 5.29%. This will not be exact due to differences in the currency conversion values during the day.
As previously discussed, that currency loss will flow through into the pricing of U.S. listed ADR priced in USDs.
What happens when the price of the ordinary shares and the AUD go up at the same time? This is just a hypothetical, but I can pick a historical time when the AUD was strong against the USD, with one AUD buying more than 1.0574 USDs . If the ordinary shares closed at AUD$34.74 (the closing price from 2/28/14) when the AUD would buy $1.04 USDs (rather than .89), then NABZY would have then been priced before the 2 for split at $36.73 or $18.15 adjusted for the split rather than the actual $15.48 per share price from 2/28/14.
Risks: Given the recent weakness in the Australian Dollar, currency risk is significant, but it can cut both ways as noted in the preceding paragraph.
The Australian dollar did rise last Thursday after the release of stronger than expected economic data.
Many commentators believe the Australian housing market is overheated. One forecaster, Harry Dent, predicts a plunge. International Business Times There are geographic ares in both Canada and Australia where housing prices have increased a far faster levels than incomes, an ingredient underlying the busting of the U.S. housing bubble. Needless to say, we are all familiar with how banks react to major declines in home prices.
I limited my purchase to just 50 shares due to these concerns and risks.
Future Buys and Sells: I decided to chop a potential order for 100 shares into two 50 share lots primarily due to the ongoing weakness in the Australian Dollar. I will consider averaging down at less than $14.75. I will most likely refrain from averaging up.
Last Friday's Closing price: NABZY: $15.72 -0.14 (-0.88%)
This post is long enough. I thought that I would add a comment about the Super Bowl Ring and Putin, since it highlights one of his many highly undesirable features. I was reminded of that incident when Putin flat out denied that those heavily armed troops were Russian soldiers. It also brought back into my foggy memory the honors thesis that I had to write in 1973.
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Politics and ETC.
1. Putin and a Missing Super Bowl Ring/Putin's Claims Regarding Russia's Military Seizure of Crimea: I am use to politicians stealing and lying, but rarely is both a lie and a theft caught in the same video.
The owner of New England Patriots was visiting Putin. He took off his diamond studded Super Bowl ring to show Putin, who took the ring and put it on his finger. Putin reportedly said that he could kill someone with that ring. He then put it in his pocket and walked away under the escort of burly guards. When asked about that ring later, Putin responded "what ring". YouTube; Putin: What Super Bowl Ring? - ABC News
And, in just a chuckle out loud moment, Putin claims that those heavily armed men wearing masks and driving around the Crimea in Russian vehicles are not Russian soldiers but locals who went to the local army surplus store to dress and arm themselves. According to Vlad, Russia has no control over them and has no involvement in the military seizure of land that it explicitly recognized as part of Ukraine in the Budapest Memorandum on Security Assurances, wherein it promised to respect Ukraine's territorial integrity and to refrain from the use or threat of force. CNN.com
A NYT reporter in Crimea noted in a recently published article that those masked men have dropped all pretenses about their true identity. One solider readily acknowledged that he was with the Russian infantry recently sent to Crimea to protect that region from their "enemy, Ukraine". Russia is clamping down on the free press in Crimea who are reporting facts rather than the Kremlin's reality creations. A observer sent by the U.N. was threatened by armed men and run out of the country. CNN.com Troops fired on unarmed U.N. observers attempting to travel into Crimea. Reuters
Kerry was "dumbfounded" that such an obvious lie would be stated with such a poker face, but this is standard operating procedure for the Russians and has been for as long as I can remember. Treaties mean nothing to the Russian government. Putin would view a statement of fact and telling the truth as expressing anti-Russian views.
If Putin actually believes the crap that routinely comes out of his mouth, then he is without question delusional, probably beyond all hope of being cured even by amazing gizmos used by Star Trek's Dr. Leonard McCoy; and he would be in need of immediate psychiatric attention and a bountiful amount of meds. If I was a Russian citizen making that comment while in the Motherland, a five year stint in a Siberian Gulag might be my best conceivable future option thereafter.
Putin has demonstrated that he is more than competent at torpedoing Russia's currency and stock market. The Russian stock market declined by more than 7% last week, MarketWatch, and the ruble is in free fall against the USD. RUB/USD Currency Conversion Chart or USD/RUB Currency Conversion Chart
Putin's comments about Crimea also brought back to me an old memory. To graduate summa or magna cum laude from Tulane back in 1973, I had to write an honor's thesis and then defend that paper in front of a couple professors. I never anything for the first semester's credit, and then I went into gear after hearing that the government was going to publish its formally secret records regarding China and the Soviet Union from 1945. I ordered the material from the GAO, and started to read cable after cable until an obvious topic just jumped off the page. I titled my thesis something like Soviet Violations of the Sino-Soviet Treaty of 1945, still available somewhere in Tulane's library.
On a related subject, the True Believers blame Obama, of course, for Russia's military seizure of Crimea. Everything that goes wrong in the world is Obama's fault. This would not have happened under Reagan's Presidency, or so they claim. What a minute? Didn't Russia invade Afghanistan and attempt to seize that nation using military force during most of Reagan's first and second term. And, the response was limited to arming the fanatics who later became the Taliban. Well, no one thought about what would happen thereafter, such as the Afghan versions of TBs providing sanctuary and training to the Al-Qaeda operatives responsible for 9/11.
The world is not a simple place, and there are limits to American power. Putin knows that the West will no go to war over Crimea. And he has made it plain when he sent troops into two Georgia provinces of South Ossetia and Abkhazia during Bush's term that he wanted to bring back into Russia's fold those areas with predominant Russian speaking populations. Russo-Georgian war As noted in a recent NYT, Putin wants to turn back the clock to when Russia was the "Soviet Union".
What did Bush do to stop Putin in Georgia? Did he resort to military force? I read a few days ago an editorial written by a TB and published by the WSJ that blamed Obama for what happened in 2008 in those provinces! Uninformed and biased does not do that author justice.
And this is really a hoot. Putin is a nominee for the Nobel Peace Prize. The very idea that anyone would even consider him is farcical.
Costly military ventures that fail to secure any long term result remotely worthy of the cost will happen due to the perpetual failure of millions to comprehend those basic truths and their substitution of chess beating for anything remotely resembling a thoughtful analysis.
Hi Southgent,
ReplyDeleteAs you look at all sides and evaluate all relevant information do you have any view on the impact of Europe's deflation as outlined in this article, Europe’s hot new export is deflation?
http://www.marketwatch.com/story/europes-hot-new-export-is-deflation-2014-03-12?pagenumber=2
Regards,
Peter
Peter: There are deflationary forces in Europe, Japan and the U.S. that restrain inflation. Inflation remains a problem elsewhere.
ReplyDeleteThe deflationary pull is what I would expect in the aftermath of a financial crisis and a severe recession that required de-leveraging by consumers in developed consumers. There are surpluses of labor and underutilized plant.
Over the next few years, I would expect the demand forces to pick up significantly and inflation concerns will become dominant once again.
Since I have a balanced portfolio, I play different scenarios based on a current assessment of the big picture forces at play.
In my 12/10/13 Post, I made the following observation: " Ultimately, risk free interest rates will depend on inflation and inflation expectations. While I am negative about intermediate and longer term bonds at the current time, except for short term trades, I recognize that I am not omnipotent, capable of predicting the future. I also recognize that there are powerful deflationary forces that are keeping a lid on inflation, even with extraordinarily easy central bank monetary policies as reflected in both ZIRP and QE.
I am consequently playing, to some decree, a less likely scenario of prolonged low inflation/deflation by buying some longer term bonds. Recognizing the interest rate risk issue, I am chopping my orders into bits and pieces, spacing them out in time. The typical order is to buy 50 shares of a $25 par value security and then consider averaging down with another 50 share purchase when and if the yield exceeds 8%."
Thanks so much for your insights. Since no one can correctly predict the market in a consistent manner it would be better to have a balanced portfolio.
ReplyDeleteOn AA, you had mentioned "... The VIX Model is actually keeping me invested at a relatively high level for my age, ....." There are many studies on AA. For example, one guideline is equity allocation = 100 - age. A guru says in his book that you don't need to have fixed income. He suggests that keep 5 year living expenses in liquid asset and the rest in stocks. (5 year business cycle?)
You said you don't need to be right about the allocations (in your situation), but how would you typically approach the AA issue?
Best Regards,
Peter
Peter: My asset allocations involve more than stocks and bonds.
ReplyDelete1. A key component is that I lack debt. I have no mortgage. I built my house in 1982 when it was advantageous to do so. If I was young and did not own a home, I would have bought one when home prices and long term mortgage rates collapsed to abnormally low levels. I would have jumped at that 3.5% thirty year mortgage loan. When I built my house, the 30 year was at 16% with 2 points. I paid cash. The opportunity at that time was that the prices of both labor and material were extremely depressed due to a recession. And the owner of the lot had not been able to sell any lots in my subdivision for over 2 years due to a sewer hookup moratorium and wanted somebody to start building a house after that moratorium was lifted so I received a superb price on a prime piece of land.
2. Over the years, I have not tried to shoot the lights out by investing in unproven and/or excessively valued companies and then hope that I could sell the shares before the bottom fell out. Patience is part of the asset allocation process along with a focus on income generation and the compounding effect that naturally occurs over a long period of time.
3. I have built up a cash allocation so that I will not have to sell my risk assets to pay living expenses. Unfortunately, that cash allocation is not earning anything now. Prior to the onset of the Fed's s Jihad Against the Saving Class, which started in late 2008, a 4% to 5% return on risk free assets was an average range. That number was closer to 13% to 15% back in 1981. Even if I had no cash allocation, I could easily live off the cash flow
4. If owning risk free assets make more sense than owning risk assets, I would move more toward the risk free assets. I would have more in cash now with a 4% yield than a 0% yield. Between 1978-1982, most of my assets were invested in savings accounts and CDs earning a very high interest rate. I recall owning only 400 shares of Duke Energy (DUK) during that period.
Both stocks and bonds appear to be filled with some danger now. So, if I was younger and in my formative asset building years, I would probably be more cautious than I am now, and I am cautious now.