Closing Prices Last Friday:
S & P 500: 1,815.69 -17.39 (-0.95%)
Nasdaq: 3,999.73 -54.37 (-1.34%) (closed at 4,357.97 on 3/5/14)
VIX: 17.03 +1.14 (+7.17%) : VOLATILITY S&P 500
RUT:Russell 2000: 1,111.44 -16.22 (-1.44%)
TLT: 110.73 +0.89 (+0.81%) : iShares 20 Year Treasury Bond ETF
VNQ: $70.49 -0.41 (-0.58%) : Vanguard REIT ETF
Big Picture Synopsis
S & P 500: 1,815.69 -17.39 (-0.95%)
Nasdaq: 3,999.73 -54.37 (-1.34%) (closed at 4,357.97 on 3/5/14)
VIX: 17.03 +1.14 (+7.17%) : VOLATILITY S&P 500
RUT:Russell 2000: 1,111.44 -16.22 (-1.44%)
TLT: 110.73 +0.89 (+0.81%) : iShares 20 Year Treasury Bond ETF
VNQ: $70.49 -0.41 (-0.58%) : Vanguard REIT ETF
Big Picture Synopsis
Stocks:
Stable Vix Pattern (Bullish):
Short Term: Market Needs a 10%+ Correction
Intermediate Term: Slightly Bullish
Long Term Bullish
It is tough being a Left Brain dominated investor who has not yet managed to squash and obliterate the "contributions" from the Right Brain. The inane chatter emanating from the right lobe can be disruptive to LB's incessant crunching of those few million variables and alternative scenarios.
While the stock market has proved resilient and resistant to corrections since the 2011 summer, the latest declines look and smell like a correction in its early stages. The market bounced back earlier this year from a similar dip, and only time will tell whether a much needed correction is now in progress. Just in case, I have reduced my stock allocation by close to $10,000 by selling some stock funds and one recently purchased stock Wharf Holdings which turned into a flip.
Bob Janjuah, a market "strategist" employed by Nomura, has been predicting that really bad things are just around the corner for U.S. stocks. MarketWatch His current forecast is that the S & P 500 may spurt to 1,950 before plunging. Last November, he predicted that the market would drop 25% to 50% over the last three quarters of 2014. He predicted a 20% to 25% decline in the 3 months leading up to the 2012 Presidential election.
Goldman Sachs believes that there is a 67% probability (say what?) of a 10% retreat from the recent peak within 12 months. Bloomberg GS missed the 2013 year end forecast for the S & P 500 by a mere 300 points. The average forecast for the S & P 500 in 2013 by these highly compensated oracles was for a 7.6% gain. I wonder if anyone would pay RB mucho bucks to make forecasts-the price will be CHF1,000,000 paid in advance, non-refundable and no warranties expressed or implied, Caveat Emptor, for a yearly subscription.
Merrill Lynch's strategist is predicting a harder 10% to 15% correction this autumn. MarketWatch
Marc Faber expects a crash, worst than October 1987, later this year. I view him as a Perma Bear who is always predicting disaster around the corner.
Edgar Fielder gave us a number of pithy thoughts about these future forecasters in a 1977 book, Forecasting Quotes:
"He who lives by the crystal ball soon learns to eat ground glass"
"If you have to forecast, forecast often"
I thought that the last one was said in basically the same form by Keynes.
***
The decline last Thursday was tied to Putin going off the deep end in my opinion and becoming even more aggressive against both Europe and the Ukraine. He reportedly claimed that Ukraine's natural gas bill needs to be adjusted up by $17B or so to recoup historical gas discounts granted to that country in exchange for Russia's lease of Russia's Black Sea Fleet in Crimea. BBC News Europe needs to come up with the money or Putin might shut off the gas supply to Ukraine which unfortunately results in suspensions of deliveries to Europe.
Although Russia violated its treaty obligations embodied in the Budapest Memorandum and international law by seizing Crimea by force, Putin believes that Russia is entitled to recover those discounts, granted as advances against future lease payments, since Crimea is no longer part of the Ukraine. Russia is probably the only nation that would even make such a laughable and absurd claim. Only a madman would make such a claim, and ultimately there is no way to successfully appease a mad King who appears to be operating with no checks and balances and with absolute power.
I would hope that the Europeans will eventually recognize the clear and unequivocal message that Putin is sending to them. Unfortunately, a number of prominent German politicians and a substantial part of the German population are advocating appeasement that will only harden and encourage an animal like Putin. ("Comments of Former German Chancellor Helmut Schmidt"; "Gerhard Schroeder backs Putin on Ukraine - Telegraph"; more than 60% of Germans oppose using the air force to defend Nato's eastern border, WSJ.com; only 38% of Germans are in favor of any economic sanctions, Reuters)
My reading of the situation is that German businesses care more about their financial ties to Russia than to nationals security issues arising from Russia's aggression.
Putin will likely continue Russia's military aggression, which will include transparent efforts to hurt and destabilize neighboring sovereign nations. He will most likely seize more territory by force and will use the energy weapon to keep Europe quiescent in his Hitler like approach to international relations. At a minimum, Europe needs to free itself, as soon as possible and it may take several years, from any meaningful dependence on Russian energy. Putin unfortunately has the power to derail a budding worldwide economic recovery.
The market is overdue for a correction anyway. There are a number of stocks well within bubble land territory, and a large number of others outside reasonable range valuations. I view the S & P 500 to be at the top of a fair value range. Tiernan Ray gives the gory details on how a number of Nasdaq high flyers performed last Thursday: Barrons.com (the usual suspects along with some recent IPOs: AMZN, TRIP, SSYS, DDD, FEYE, FSLR, NFLX, YELP, FB, AKAM, SPLK, DATA, TWTR, GRUB)
Thursday's Closing Prices (4/10/14):
S & P 500 1,833.09 -39.09 (-2.09%)
While the stock market has proved resilient and resistant to corrections since the 2011 summer, the latest declines look and smell like a correction in its early stages. The market bounced back earlier this year from a similar dip, and only time will tell whether a much needed correction is now in progress. Just in case, I have reduced my stock allocation by close to $10,000 by selling some stock funds and one recently purchased stock Wharf Holdings which turned into a flip.
Bob Janjuah, a market "strategist" employed by Nomura, has been predicting that really bad things are just around the corner for U.S. stocks. MarketWatch His current forecast is that the S & P 500 may spurt to 1,950 before plunging. Last November, he predicted that the market would drop 25% to 50% over the last three quarters of 2014. He predicted a 20% to 25% decline in the 3 months leading up to the 2012 Presidential election.
Goldman Sachs believes that there is a 67% probability (say what?) of a 10% retreat from the recent peak within 12 months. Bloomberg GS missed the 2013 year end forecast for the S & P 500 by a mere 300 points. The average forecast for the S & P 500 in 2013 by these highly compensated oracles was for a 7.6% gain. I wonder if anyone would pay RB mucho bucks to make forecasts-the price will be CHF1,000,000 paid in advance, non-refundable and no warranties expressed or implied, Caveat Emptor, for a yearly subscription.
Merrill Lynch's strategist is predicting a harder 10% to 15% correction this autumn. MarketWatch
Marc Faber expects a crash, worst than October 1987, later this year. I view him as a Perma Bear who is always predicting disaster around the corner.
Edgar Fielder gave us a number of pithy thoughts about these future forecasters in a 1977 book, Forecasting Quotes:
"If you have to forecast, forecast often"
I thought that the last one was said in basically the same form by Keynes.
***
The decline last Thursday was tied to Putin going off the deep end in my opinion and becoming even more aggressive against both Europe and the Ukraine. He reportedly claimed that Ukraine's natural gas bill needs to be adjusted up by $17B or so to recoup historical gas discounts granted to that country in exchange for Russia's lease of Russia's Black Sea Fleet in Crimea. BBC News Europe needs to come up with the money or Putin might shut off the gas supply to Ukraine which unfortunately results in suspensions of deliveries to Europe.
Although Russia violated its treaty obligations embodied in the Budapest Memorandum and international law by seizing Crimea by force, Putin believes that Russia is entitled to recover those discounts, granted as advances against future lease payments, since Crimea is no longer part of the Ukraine. Russia is probably the only nation that would even make such a laughable and absurd claim. Only a madman would make such a claim, and ultimately there is no way to successfully appease a mad King who appears to be operating with no checks and balances and with absolute power.
I would hope that the Europeans will eventually recognize the clear and unequivocal message that Putin is sending to them. Unfortunately, a number of prominent German politicians and a substantial part of the German population are advocating appeasement that will only harden and encourage an animal like Putin. ("Comments of Former German Chancellor Helmut Schmidt"; "Gerhard Schroeder backs Putin on Ukraine - Telegraph"; more than 60% of Germans oppose using the air force to defend Nato's eastern border, WSJ.com; only 38% of Germans are in favor of any economic sanctions, Reuters)
My reading of the situation is that German businesses care more about their financial ties to Russia than to nationals security issues arising from Russia's aggression.
Putin will likely continue Russia's military aggression, which will include transparent efforts to hurt and destabilize neighboring sovereign nations. He will most likely seize more territory by force and will use the energy weapon to keep Europe quiescent in his Hitler like approach to international relations. At a minimum, Europe needs to free itself, as soon as possible and it may take several years, from any meaningful dependence on Russian energy. Putin unfortunately has the power to derail a budding worldwide economic recovery.
The market is overdue for a correction anyway. There are a number of stocks well within bubble land territory, and a large number of others outside reasonable range valuations. I view the S & P 500 to be at the top of a fair value range. Tiernan Ray gives the gory details on how a number of Nasdaq high flyers performed last Thursday: Barrons.com (the usual suspects along with some recent IPOs: AMZN, TRIP, SSYS, DDD, FEYE, FSLR, NFLX, YELP, FB, AKAM, SPLK, DATA, TWTR, GRUB)
Thursday's Closing Prices (4/10/14):
S & P 500 1,833.09 -39.09 (-2.09%)
Nasdaq: 4,054.11 -129.79 (-3.10%)
VIX: 15.79 +1.97 (+14.25%) : VOLATILITY S&P 500
RUT: 1,129.72 -30.25 (-2.61%) : Russell 2000
KRE: $39.45 -1.20 (-2.95%) : SPDR S&P Regional Banking ETF
TLT: $109.84 +1.01 (+0.93%) : iShares 20 Year Treasury Bond ETF
GLD: $127.01 +0.69 (+0.55%) : SPDR Gold Trust
BAB: $28.92 +0.14 (+0.49%) : PowerShares Build America Bond ETF
MUB: $107.41 +0.39 (+0.36%) : iShares National AMT-Free Municipal Bond ETF
LQD: $117.71 +0.19 (+0.16%) : iShares Investment Grade Corporate Bond ETF
VNQ: $70.91 -0.67 (-0.94%) : Vanguard REIT ETF (REITs acting more like a regular stock than a bond substitute)
VIX: 15.79 +1.97 (+14.25%) : VOLATILITY S&P 500
RUT: 1,129.72 -30.25 (-2.61%) : Russell 2000
KRE: $39.45 -1.20 (-2.95%) : SPDR S&P Regional Banking ETF
TLT: $109.84 +1.01 (+0.93%) : iShares 20 Year Treasury Bond ETF
GLD: $127.01 +0.69 (+0.55%) : SPDR Gold Trust
BAB: $28.92 +0.14 (+0.49%) : PowerShares Build America Bond ETF
MUB: $107.41 +0.39 (+0.36%) : iShares National AMT-Free Municipal Bond ETF
LQD: $117.71 +0.19 (+0.16%) : iShares Investment Grade Corporate Bond ETF
VNQ: $70.91 -0.67 (-0.94%) : Vanguard REIT ETF (REITs acting more like a regular stock than a bond substitute)
Bonds:
Short to Long Term: Slightly Bearish Based on Interest Rate Normalization
The bond forecast assumes that the ten year TIP pricing is correctly forecasting the average annual CPI over the next 10 years.
This article published by Bloomberg last week highlight concerns about deflation risks.
Even a 5.875% senior note maturing in 2032 can now be refinanced at lower rates. MetLife will be redeeming its exchange traded note MLG on 5/5/14, MetLife to Redeem 5.875% Senior Notes Due on November 21, 2033 Since this bond, like other exchange traded baby bonds, does not have a make whole provision, MET can redeem the note at par value plus accrued interest.
This article published by Bloomberg last week highlight concerns about deflation risks.
Even a 5.875% senior note maturing in 2032 can now be refinanced at lower rates. MetLife will be redeeming its exchange traded note MLG on 5/5/14, MetLife to Redeem 5.875% Senior Notes Due on November 21, 2033 Since this bond, like other exchange traded baby bonds, does not have a make whole provision, MET can redeem the note at par value plus accrued interest.
**************************
Recent Developments:
The minutes of the FED's meeting on March 18-19 were released last Wednesday and were interpreted by the market positively. The FED downplayed the previous estimates made by various FED officials on the timing of rate increases. MarketWatch
(see last paragraph before "Committee Policy Action at FRB: FOMC Minutes - March 18-19, 2014)
This discussion has to do with the projections made in March, where 13 out of 16 Fed officials stated their belief that the federal funds rate will be raised in 2015 based on their current economic forecasts, and 11 out of 16 believed that the federal funds rate will be 1% or higher at the end of 2015. That spooked the market some back in March. FRB: March 19, 2014: FOMC Projections
The S & P rallied 1.09% last Wednesday, gaining momentum after the release of the minutes.
China reported dismal export and import numbers for March. Exports declined by 6.6% while imports plunged by 11.3%. Bloomberg It is hard for anyone to know what is really happening, because it is accepted that the numbers were inflated a year ago with false documents.
Reuters reported that several China importers defaulted on contracts for the delivery of soybeans. Ships hauling the soybeans to China, worth approximately $300M, are stuck at or near China's harbors since the importers have not been able to secure letters of credit from Chinese banks.
The Richmond Federal Reserve publishes a quarterly report containing summaries and charts of important economic data. This is a link to the 2014 first quarter report: national_economic_indicators/ charts.pdf
The minutes of the FED's meeting on March 18-19 were released last Wednesday and were interpreted by the market positively. The FED downplayed the previous estimates made by various FED officials on the timing of rate increases. MarketWatch
(see last paragraph before "Committee Policy Action at FRB: FOMC Minutes - March 18-19, 2014)
This discussion has to do with the projections made in March, where 13 out of 16 Fed officials stated their belief that the federal funds rate will be raised in 2015 based on their current economic forecasts, and 11 out of 16 believed that the federal funds rate will be 1% or higher at the end of 2015. That spooked the market some back in March. FRB: March 19, 2014: FOMC Projections
The S & P rallied 1.09% last Wednesday, gaining momentum after the release of the minutes.
China reported dismal export and import numbers for March. Exports declined by 6.6% while imports plunged by 11.3%. Bloomberg It is hard for anyone to know what is really happening, because it is accepted that the numbers were inflated a year ago with false documents.
Reuters reported that several China importers defaulted on contracts for the delivery of soybeans. Ships hauling the soybeans to China, worth approximately $300M, are stuck at or near China's harbors since the importers have not been able to secure letters of credit from Chinese banks.
The Richmond Federal Reserve publishes a quarterly report containing summaries and charts of important economic data. This is a link to the 2014 first quarter report: national_economic_indicators/ charts.pdf
Interest and mortgage rates are remaining abnormally low by historical standards (expand to maximum by using cursor):
30-Year Conventional Mortgage Rate -St. Louis Fed
10-Year Treasury Constant Maturity Rate- St. Louis Fed
5-Year Treasury Constant Maturity Rate-St. Louis Fed
30-Year Treasury Constant Maturity Rate- St. Louis Fed
****************
Stress Test for Portfolio on Recent Down Days
I periodically evaluate my portfolio to see how well it is doing on major down days, and we have recently had several of those.
30-Year Conventional Mortgage Rate -St. Louis Fed
10-Year Treasury Constant Maturity Rate- St. Louis Fed
5-Year Treasury Constant Maturity Rate-St. Louis Fed
30-Year Treasury Constant Maturity Rate- St. Louis Fed
****************
Stress Test for Portfolio on Recent Down Days
I periodically evaluate my portfolio to see how well it is doing on major down days, and we have recently had several of those.
Last Monday, when the S & P 500 and Nasdaq declined 1.08% and 1.14%, my main taxable account was down .24%, while my bond heavy retirement accounts were net positive, with one up .35%.
And, last Tuesday, when the S & P 500 rose .38%, the main taxable account was up .31%. The portfolio design captured most of the S & P 500 gain, while going down less than 1/4 as much on the two prior bad days.
I am satisfied with this result in my main taxable account, where most of my stocks can be found:
S & P vs. Main Taxable Account:
Friday, April 4 S & P 500 -1.25 vs. -.28%
Monday April 7 S & P 500 -1.14% vs. -.24%
Tuesday April 8 S & P 500 +.38 vs. +.31%
Net S & P Down -2.01% vs. -.21%
Outperformance over 3 Day Period= 1.7%
By going down far less, I have less to recoup when the market starts to move back up on a relatively consistent basis, and that may not happen for the remainder of this year.
My outperformance increased on Thursday 4/10/14, when the S & P declined 2.09%. My main account was down .64%, with very little support from the securities that cushioned the fall on 4/4 and 4/7.
While individual bonds performed okay, bond CEFs declined even though their asset value climbed slightly. In other words, the bond CEFs acted more like a stock on a bad down day than a bond fund. The same was true for U.S. REITs. I had a number of green arrows on the previous two declines, as those stocks acted more like bond substitutes rather than regular common stocks, but the decline last Thursday pretty much dragged down most securities traded on the stock exchange, including a few exchange traded bonds.
I did receive some minor up moves in Canadian REITs, a few bond CEFs (e.g. NBB, MIN, KIO, FAX, SGL) as well as several exchange traded bonds and preferred stocks (e.g. AGILL, KWN, PYS, KTN, IPB, GSPRC, GSPRD, MSPRA, NLYPRD, PNTA, SLGPRI, HTGZ, EFM, CYSPRA, BPFHP, THGA, GYB) Most of my common stock went down, but many of the reasonably price blue chips like NVS had small loses of less than .25%. The advance decline ration was 1 to 4 on the NYSE and 85% of Nasdaq listed issues went down in price. Regional banks were hit hard again, and many on my monitor list are starting to approach the top end of a fair value range from overvalued territory.
Last Friday (4/11/14), I captured again only part of the S & P's .95% decline. Several Canadian REITs supported me some:
Closing Prices Last Friday 4/11/14:
AX-UN.TO: C$16.00 +0.22 (+1.39%) : ARTIS REIT
CAR-UN.TO: C$21.24 +0.21 (+1.00%)
D-UN.TO: C$29.23 +0.38 (+1.32%) : DUNDEE REIT
REI-UN.TO: C$27.21 +0.45 (+1.68%) : RIOCAN REIT
Considering what happened to stocks, those are good gains. My Canadian Basket was up C$161, or .26%.
A few American REIT common and preferred shares managed small gains:
FPO-PA: $25.30 +0.05 (+0.20%) : First Potomac Realty Trust
HCP: $40.22 +0.18 (+0.45%) : HCP
OHI: $34.09 +0.20 (+0.59%) : Omega Healthcare Investors
O: $41.43 +0.11 (+0.27%) : Realty Income
EPR: $53.51 +0.15 (+0.28%) : EPR Properties
The Equity REIT Common and Preferred Stock Basket was up $44.63 or .06%.
Some bonds, bond funds and equity preferred stocks also rose a tad, showing again negative correlation with stocks:
CBO.TO: C$19.79 +0.01 (+0.05%) : iShares 1-5 Year Laddered Canadian Corporate Bond ETF
AIY: $24.06 +0.18 (+0.74%) : Apollo Investment Corporation
BWG: $17.64 +0.04 (+0.23%) : Legg Mason BW Global Income
PNTA: $24.45 +0.04 (+0.17%) : PennantPark
JTP: $8.16 0.00 (+0.02%) : Nuveen Quality Preferred Income
RZA: $26.56 +0.12 (+0.45%) : Reinsurance Group of America (still own 50)
TCBIP: 23.75 +0.23 (+0.98%) : Texas Capital Bancshares
EVER-PA: $23.92 +0.23 (+0.97%) : EverBank Financial
SGL: 9.29 +0.02 (+0.22%) : Strategic Global Income Fund
ELB: 25.12 +0.01 (+0.04%) : Entergy Louisiana First Mortgage 6.0%
FAM: $14.01 +0.01 (+0.07%) : First Trust/Aberdeen Global
DLR-PG: $20.94 +0.08 (+0.36%) : Digital Realty Trust, Inc. Preferred
ARR-PA: $25.46 +0.19 (+0.76%) : Armour Residential REIT Preferred
{AIY, PNTA, RZA and ELB are exchange traded bonds}
I also had a number of bond CEFs go ex dividend on 4/11. The income generation will cushion declines provided the market price remains stable or goes up. ERC went ex dividend for a 10 cent distribution and rose 6 cents per share adjusted for that ex dividend.
A few consumer staple stocks managed small gains:
UN: $42.25 +0.13 (+0.31%) : Unilever NV
UL: 44.04 +0.39 (+0.89%) : Unilever PLC
GIS: $51.15 +0.15 (+0.29%) : General Mills
COP: $70.87 +1.16 (+1.66%) : ConocoPhillips (see discussion below)
CSX: 28.01 +0.04 (+0.14%) : CSX Corporation
BDCs had fractional gains and losses largely offsetting one another.
Some blue chips had minor declines, such as GE falling .59% which would not be abnormal on a better day for the market averages.
The stock CEF DPG once again bucked the downtrend: DPG: $19.91 +0.09 (+0.45%) : Duff & Phelps Global Utility
All of the foregoing securities are owned.
My goal is to outperform the S & P 500 with a balanced portfolio and a sizable cash allocation that can be at times drained to make opportunistic investments. My income generation will be significantly higher than the S & P 500 dividend yield and the volatility/risk is substantially lower, in part due to the higher income generation, cash and bond allocations.
I would not draw any conclusions from this recent data, except to make the observation that the current portfolio design is basically doing what it is supposed to do: capture most of the S & P advances while avoiding around 75% of the losses. I would be doing better with MM yields at 4% rather than .01%.
And, last Tuesday, when the S & P 500 rose .38%, the main taxable account was up .31%. The portfolio design captured most of the S & P 500 gain, while going down less than 1/4 as much on the two prior bad days.
I am satisfied with this result in my main taxable account, where most of my stocks can be found:
S & P vs. Main Taxable Account:
Friday, April 4 S & P 500 -1.25 vs. -.28%
Monday April 7 S & P 500 -1.14% vs. -.24%
Tuesday April 8 S & P 500 +.38 vs. +.31%
Net S & P Down -2.01% vs. -.21%
Outperformance over 3 Day Period= 1.7%
By going down far less, I have less to recoup when the market starts to move back up on a relatively consistent basis, and that may not happen for the remainder of this year.
My outperformance increased on Thursday 4/10/14, when the S & P declined 2.09%. My main account was down .64%, with very little support from the securities that cushioned the fall on 4/4 and 4/7.
While individual bonds performed okay, bond CEFs declined even though their asset value climbed slightly. In other words, the bond CEFs acted more like a stock on a bad down day than a bond fund. The same was true for U.S. REITs. I had a number of green arrows on the previous two declines, as those stocks acted more like bond substitutes rather than regular common stocks, but the decline last Thursday pretty much dragged down most securities traded on the stock exchange, including a few exchange traded bonds.
I did receive some minor up moves in Canadian REITs, a few bond CEFs (e.g. NBB, MIN, KIO, FAX, SGL) as well as several exchange traded bonds and preferred stocks (e.g. AGILL, KWN, PYS, KTN, IPB, GSPRC, GSPRD, MSPRA, NLYPRD, PNTA, SLGPRI, HTGZ, EFM, CYSPRA, BPFHP, THGA, GYB) Most of my common stock went down, but many of the reasonably price blue chips like NVS had small loses of less than .25%. The advance decline ration was 1 to 4 on the NYSE and 85% of Nasdaq listed issues went down in price. Regional banks were hit hard again, and many on my monitor list are starting to approach the top end of a fair value range from overvalued territory.
Last Friday (4/11/14), I captured again only part of the S & P's .95% decline. Several Canadian REITs supported me some:
Closing Prices Last Friday 4/11/14:
AX-UN.TO: C$16.00 +0.22 (+1.39%) : ARTIS REIT
CAR-UN.TO: C$21.24 +0.21 (+1.00%)
D-UN.TO: C$29.23 +0.38 (+1.32%) : DUNDEE REIT
REI-UN.TO: C$27.21 +0.45 (+1.68%) : RIOCAN REIT
Considering what happened to stocks, those are good gains. My Canadian Basket was up C$161, or .26%.
A few American REIT common and preferred shares managed small gains:
FPO-PA: $25.30 +0.05 (+0.20%) : First Potomac Realty Trust
HCP: $40.22 +0.18 (+0.45%) : HCP
OHI: $34.09 +0.20 (+0.59%) : Omega Healthcare Investors
O: $41.43 +0.11 (+0.27%) : Realty Income
EPR: $53.51 +0.15 (+0.28%) : EPR Properties
The Equity REIT Common and Preferred Stock Basket was up $44.63 or .06%.
Some bonds, bond funds and equity preferred stocks also rose a tad, showing again negative correlation with stocks:
CBO.TO: C$19.79 +0.01 (+0.05%) : iShares 1-5 Year Laddered Canadian Corporate Bond ETF
AIY: $24.06 +0.18 (+0.74%) : Apollo Investment Corporation
BWG: $17.64 +0.04 (+0.23%) : Legg Mason BW Global Income
PNTA: $24.45 +0.04 (+0.17%) : PennantPark
JTP: $8.16 0.00 (+0.02%) : Nuveen Quality Preferred Income
RZA: $26.56 +0.12 (+0.45%) : Reinsurance Group of America (still own 50)
TCBIP: 23.75 +0.23 (+0.98%) : Texas Capital Bancshares
EVER-PA: $23.92 +0.23 (+0.97%) : EverBank Financial
SGL: 9.29 +0.02 (+0.22%) : Strategic Global Income Fund
ELB: 25.12 +0.01 (+0.04%) : Entergy Louisiana First Mortgage 6.0%
FAM: $14.01 +0.01 (+0.07%) : First Trust/Aberdeen Global
DLR-PG: $20.94 +0.08 (+0.36%) : Digital Realty Trust, Inc. Preferred
ARR-PA: $25.46 +0.19 (+0.76%) : Armour Residential REIT Preferred
{AIY, PNTA, RZA and ELB are exchange traded bonds}
I also had a number of bond CEFs go ex dividend on 4/11. The income generation will cushion declines provided the market price remains stable or goes up. ERC went ex dividend for a 10 cent distribution and rose 6 cents per share adjusted for that ex dividend.
A few consumer staple stocks managed small gains:
UN: $42.25 +0.13 (+0.31%) : Unilever NV
UL: 44.04 +0.39 (+0.89%) : Unilever PLC
GIS: $51.15 +0.15 (+0.29%) : General Mills
COP: $70.87 +1.16 (+1.66%) : ConocoPhillips (see discussion below)
CSX: 28.01 +0.04 (+0.14%) : CSX Corporation
BDCs had fractional gains and losses largely offsetting one another.
Some blue chips had minor declines, such as GE falling .59% which would not be abnormal on a better day for the market averages.
The stock CEF DPG once again bucked the downtrend: DPG: $19.91 +0.09 (+0.45%) : Duff & Phelps Global Utility
All of the foregoing securities are owned.
My goal is to outperform the S & P 500 with a balanced portfolio and a sizable cash allocation that can be at times drained to make opportunistic investments. My income generation will be significantly higher than the S & P 500 dividend yield and the volatility/risk is substantially lower, in part due to the higher income generation, cash and bond allocations.
I would not draw any conclusions from this recent data, except to make the observation that the current portfolio design is basically doing what it is supposed to do: capture most of the S & P advances while avoiding around 75% of the losses. I would be doing better with MM yields at 4% rather than .01%.
*********************************
Coca Cola (own):
I own 265+ KO shares with an average cost of $25.41 per share. (snapshot in introduction KO) I am not reinvesting the dividend. I view the current price to be outside of my buy range and within my "do nothing" range. I re-initiated a position in March 2009 at a split adjusted price of $19.36, Buy of KO at $38.72 (March 2009), and later added shares at higher prices included reinvested dividends through 2010 (split adjusted $27.13 in April 2010)
I am concerned about declining carbonated beverage sales in the U.S., as highlighted in a recent WSJ article. Still beverage volume is increasing in North America and consists of brands like Minute Maid juice, Dasanti water, Honest Tea, Vitamin Water and Powerade sports drinks. Brands: The Coca-Cola Company When discussing KO's 4th quarter earnings report, KO, I noted that North America carbonated sales declined 3% but the still beverage brands grew 3%. 2013 Q4 Earnings Release (SEC Filing)
I am not surprised by the decline in the traditional regular sugar water brand, which I drink, or the plunge in Diet Cola sales. Consumers have been bombarded by junk science headlines that blame colas for just about every illness imaginable. The headline might say that a certain ingredient causes cancer, and then the story points to no risk other than imaginary ones coming out of California, or some other Nanny State jurisdiction, or some left wing "public interest" group on a crusade to brand colas as the next cigarette menace. CBS News A typical parade of these scare stories can be found in this negative Seeking Alpha article that cites such an authoritative source as Kathleen Sebelius.
In the last analysis, it does not matter much that these accusations lack anything approaching scientific rigor and are advanced by those with clear ulterior motives. It only matters that they are constantly being aired throughout the mass media with scare headlines. Consumers hear the headline and quit drinking the soda. Maybe the RB is on to something. The OG has been drinking a regular Coke, one a day, for several decades now and does not have either cancer or diabetes. Maybe the Magic Formula is a cure for cancer. Has it proven not to be a cure?
I noted in a recent comment at SA that KO hit an asinine valuation in 1998, going over $42 per share after a parabolic move starting in 1994: KO Interactive Chart When that absurd pricing action peaked in 1998, KO was selling at about 50 times 1997 earnings, which had been boosted by several one time items. Motley Fool Article Excluding those items, the P/E was over 60 times earnings. GuruFocus.com By 2002, the price was cut in half. Good companies will hit unsupportable valuations and need to be sold when that happens. Virtually every blue chip, possibly all of them, hit those valuations in the 1998 to 2000 time period.
Closing Price 4/11/14: KO: 38.63 -0.26 (-0.67%)
******************
Conoco (own):
COP rose yesterday after an analyst meeting which was preceded by this positive news release. ConocoPhillips Outlines Plans for Growth and Returns at Analyst Meeting
The technical analyst at Barron's has some positive comments about COP's price movement.
Since it is tough to find reasonably valued or undervalued stocks now, and I viewed COP as undervalued when I initiated a position a few weeks ago, I will generally do something when I make that judgment. Fortunately, I split a 100 share order into two 50 share lots and picked up the second lot near the recent bottom Item # 1 Bought 50 COP at $68.87 (January 2014 Post); Item # 6 Bought: 50 COP at $63.68 (2/10/14 Post)
Closing Price 4/11/14: COP: $70.87 +1.16 (+1.66%)
****************************
Orkla (own):
I bought a small position in this Norwegian based company as part of the Flyer's Basket, a risk category that allows for a $500 to $1,000 investment. Bought 100 ORKLY at $7.61 The share price has done well since that purchase. A number of European companies pay annual dividends only, and Orkla is one of them. The shares went ex dividend for that annual distribution last Friday:
Orkla rose a tad last Thursday.
************************
Novartis (own):
NVS is currently my favorite large cap, dividend paying pharmaceutical company.
Novartis AG (NVS) Dividend Date & History - NASDAQ.com
I can confirm receipt last week of its annual dividend of USD$2.7598 per share, minus a 15% Swiss withholding tax:
I did not reinvest this dividend.
I have NVS shares in a Vanguard and Fidelity account, and both brokerages withheld 15%. One investor claimed a 35% withholding tax. That appears inconsistent with Article 10 of a tax treaty with the U.S.: USA-Swiss Tax Treaty.pdf
I discuss my last buy in this post: Item # 1 Bought: 50 NVS at $76.72 (12/23/13 Post)
****************************
I am continuing to improve my cash flow by selling lower yielding securities and buying those with higher yields. I am also continuing to invest idle CADs earning nothing.
The REIT Common and Preferred Stock Basket continues to expand and more adds with be discussed in the next two weekly posts. The only add discussed in this post is the Canadian real estate company called Killam, discussed in Item #1 below.
When starting a sector basket, I will frequently continue buying securities as long as prices remain relatively attractive, and will end up owning at the height of the accumulation phase more than I really want to own. I am at that point now. I will then start to take profits and trim the basket down some.
Coca Cola (own):
I own 265+ KO shares with an average cost of $25.41 per share. (snapshot in introduction KO) I am not reinvesting the dividend. I view the current price to be outside of my buy range and within my "do nothing" range. I re-initiated a position in March 2009 at a split adjusted price of $19.36, Buy of KO at $38.72 (March 2009), and later added shares at higher prices included reinvested dividends through 2010 (split adjusted $27.13 in April 2010)
I am concerned about declining carbonated beverage sales in the U.S., as highlighted in a recent WSJ article. Still beverage volume is increasing in North America and consists of brands like Minute Maid juice, Dasanti water, Honest Tea, Vitamin Water and Powerade sports drinks. Brands: The Coca-Cola Company When discussing KO's 4th quarter earnings report, KO, I noted that North America carbonated sales declined 3% but the still beverage brands grew 3%. 2013 Q4 Earnings Release (SEC Filing)
I am not surprised by the decline in the traditional regular sugar water brand, which I drink, or the plunge in Diet Cola sales. Consumers have been bombarded by junk science headlines that blame colas for just about every illness imaginable. The headline might say that a certain ingredient causes cancer, and then the story points to no risk other than imaginary ones coming out of California, or some other Nanny State jurisdiction, or some left wing "public interest" group on a crusade to brand colas as the next cigarette menace. CBS News A typical parade of these scare stories can be found in this negative Seeking Alpha article that cites such an authoritative source as Kathleen Sebelius.
In the last analysis, it does not matter much that these accusations lack anything approaching scientific rigor and are advanced by those with clear ulterior motives. It only matters that they are constantly being aired throughout the mass media with scare headlines. Consumers hear the headline and quit drinking the soda. Maybe the RB is on to something. The OG has been drinking a regular Coke, one a day, for several decades now and does not have either cancer or diabetes. Maybe the Magic Formula is a cure for cancer. Has it proven not to be a cure?
I noted in a recent comment at SA that KO hit an asinine valuation in 1998, going over $42 per share after a parabolic move starting in 1994: KO Interactive Chart When that absurd pricing action peaked in 1998, KO was selling at about 50 times 1997 earnings, which had been boosted by several one time items. Motley Fool Article Excluding those items, the P/E was over 60 times earnings. GuruFocus.com By 2002, the price was cut in half. Good companies will hit unsupportable valuations and need to be sold when that happens. Virtually every blue chip, possibly all of them, hit those valuations in the 1998 to 2000 time period.
Closing Price 4/11/14: KO: 38.63 -0.26 (-0.67%)
******************
Conoco (own):
COP rose yesterday after an analyst meeting which was preceded by this positive news release. ConocoPhillips Outlines Plans for Growth and Returns at Analyst Meeting
The technical analyst at Barron's has some positive comments about COP's price movement.
Since it is tough to find reasonably valued or undervalued stocks now, and I viewed COP as undervalued when I initiated a position a few weeks ago, I will generally do something when I make that judgment. Fortunately, I split a 100 share order into two 50 share lots and picked up the second lot near the recent bottom Item # 1 Bought 50 COP at $68.87 (January 2014 Post); Item # 6 Bought: 50 COP at $63.68 (2/10/14 Post)
Closing Price 4/11/14: COP: $70.87 +1.16 (+1.66%)
****************************
Orkla (own):
I bought a small position in this Norwegian based company as part of the Flyer's Basket, a risk category that allows for a $500 to $1,000 investment. Bought 100 ORKLY at $7.61 The share price has done well since that purchase. A number of European companies pay annual dividends only, and Orkla is one of them. The shares went ex dividend for that annual distribution last Friday:
Orkla rose a tad last Thursday.
************************
Novartis (own):
NVS is currently my favorite large cap, dividend paying pharmaceutical company.
Novartis AG (NVS) Dividend Date & History - NASDAQ.com
I can confirm receipt last week of its annual dividend of USD$2.7598 per share, minus a 15% Swiss withholding tax:
I did not reinvest this dividend.
I have NVS shares in a Vanguard and Fidelity account, and both brokerages withheld 15%. One investor claimed a 35% withholding tax. That appears inconsistent with Article 10 of a tax treaty with the U.S.: USA-Swiss Tax Treaty.pdf
I discuss my last buy in this post: Item # 1 Bought: 50 NVS at $76.72 (12/23/13 Post)
****************************
I am continuing to improve my cash flow by selling lower yielding securities and buying those with higher yields. I am also continuing to invest idle CADs earning nothing.
The REIT Common and Preferred Stock Basket continues to expand and more adds with be discussed in the next two weekly posts. The only add discussed in this post is the Canadian real estate company called Killam, discussed in Item #1 below.
When starting a sector basket, I will frequently continue buying securities as long as prices remain relatively attractive, and will end up owning at the height of the accumulation phase more than I really want to own. I am at that point now. I will then start to take profits and trim the basket down some.
1. Bought 200 KMP:CA at C$10.16 (Canadian Dollar (CAD) Strategy)(see Disclaimer): This was a marginal buy, but it does give me some geographic diversity for Canadian apartments.
Snapshot of Trade:
Security Description: Killam Properties (KMP:TOR) is a Canadian non-REIT, based in Halifax Nova Scotia, that owns apartments and manufactured housing sites. The company owns and operates 12,637 apartment units (164 properties) and 5,164 manufactured housing sites located in "Atlantic Canada and Ontario". Investor Facts
I took a snapshot from the firm's fact sheet containing relevant historical data points:
 |
| Historical FFO and Payout Ratios |
Prior Trade: I bought and sold this one profitably back in 2010-2011: Bought: 100 KMP:CA @ 10.17 CAD & 100 ZCM:CA @ 15.3 CAD (Snapshot of profit: USD$107.06)
2013 Annual Report.pdf (list of properties at pp. 18-19, includes year built and number of units)
The stock does trade in the U.S. Grey Market, a dark market, under the symbol KMPPF.
The stock does trade in the U.S. Grey Market, a dark market, under the symbol KMPPF.
Recent Earnings Report: For the 2013 4th quarter, Killam reported a 5.9% increase in FFO to C$.18 per share. Total debt to assets was reported at 52.9%. The interest coverage ratio improved to 2.08 from 2 as of 12/31/12. Occupancy in the Killam's apartments was at 96.3% as of 12/31/13. FFO per share for 2013 was $.72 hurt by higher natural gas prices.
During 2013, the company refinanced C$66.7M of apartment mortgages at a weighted average interest cost of 3.03%, 155 basis points lower than weighted average interest cost prior to the refinancing. The weighted average mortgage interest rate improved 43 basis points in 2013, compared to 2012, to 4.05%. The average weighted maturity improved to 3.9 years from 3.4 years which highlights a risk when rates start to rise. Press Release Feb 18, 2014.pdf
During the 4th quarter, the company netted C$42.6 by selling a 10 property manufactured home community portfolio in New Brunswick, and began construction on a 122 unit apartment complex in Cambridge, Ontario.
Conference Call Slides: Q4 slides Final.pdf (pictures of new developments at pages 15-16)
Rationale: I started a sector shift into REITs last September and included a number of Canadian REITs in that sector shift. While Killam is a regular corporation, I am including it in my REIT sector allocation since it looks, smells and acts like a REIT and its payout is REIT like. I am also attempting to earn a return on my Canadian dollars. The dividend yield at an annual rate of C$.60 per share (paid monthly at $.05) is about 5.9%.
The stock has modest appreciation potential. The stock did trade over C$12 during 2012 and 2013 through April.
Given its small size, there is a possibility that one of the larger Canadian REITs may acquire Killam.
Risks: Again, any investor who is not a long term holder faces potentially significant currency risks by exchanging USDs for CADs in order to buy this security in Toronto.
I did not see a AFFO number when reviewing the 4th quarter report. I found the AFFO number in the 2013 Annual Report at page 24. Killam reported a 2013 AFFO per share of C$.6. The dividend for 2013 was C$.6. I would like to see the AFFO payout ratio less than 90% rather than at 100%.
The risks are also shown in a long term chart. The decline in 2008 is understandable, as the price hit $C4+ in late 2008. KMP.TO Interactive Chart The company discusses risks incident to its operations in its Annual Report.
Closing Price 4/11/14: KMP.TO: C$10.15 -0.07 (-0.68%)
2. Paired Trade: Sold 50 STIPRA at $20.66 and 50 GSPRJ at $24 and Bought 100 ESD at $17.28 (see Disclaimer): I am increasing cash flow with this paired trade which will also include a 60 purchase of the BDC BKCC to roughly equalize the proceeds realized from the two dispositions with the dollars devoted to new purchases. That BDC purchase will be discussed in the next weekly post.
Snapshot of Trades:
Sells:
Buy:
Snapshots of Profits:
Item # 4 Bought 50 STIPRA at $18.99 (January 2013)(snapshots of prior realized gains=$264.18)
Total Realized Gains: +$331.75
Item # 4 Bought: 50 GSPRJ AT $22.78 (November 2013)
I will just briefly mention the two non-cumulative equity preferred stocks that I sold in this paired trade.
The Goldman Sachs Group Inc. Fixed-to-Floating Preferred Rate Stock (GS.PJ) currently pays non-cumulative dividends at a fixed coupon rate of 5.5% on a $25 par value. If the security is not redeemed on or after 5/10/23, the rate will become a 3.64% spread to the 3 month Libor. PROSPECTUS SUPPLEMENT DATED APRIL 18, 2013 At a $24 total cost, the yield is about 5.73%. There is no possibility of a coupon increase before 5/10/23.
The SunTrust Banks Inc. Preferred Series A (STI.PA) is a floating rate equity preferred stock that pays non-cumulative and qualified dividends at the greater of 4% or .52% above the 3 month Libor on a $25 par value. The minimum coupon is likely to remain in existence until at least 2017. At the 4% minimum coupon, the yield at a total cost of $20.66 is about 4.84%.
Security Description ESD: The Western Asset Emerging Markets Debt Fund (ESD) is a lightly leveraged closed end fund that invests in emerging market debt. CEFConnect shows the leverage at 8.4% as of 12/31/13.
Data on Date of Trade Monday 4/3/2014
Net Asset Value Per Share: $19.46
Market Price Per Share: $17.25
Discount: - 11.36%
Average Discounts
1 Year: - 8.97%
3 Years: -6.69%
5 Years: -8.54%
CEFConnect Page for ESD
Fund Sponsor's Website: ESD
Fund Sponsor's Portfolio Characteristics Page as of 12/31/13:
Number of Holdings 186
Effective Duration: 6.59%
Snapshot of Credit Quality, Top Currencies and Country Concentrations:
Shareholder Report: WESTERN ASSET EMERGING MARKETS DEBT FUND (period ending 12/31/13; unrealized loss of about $9M; dividends sources mostly from income and to a lesser extent capital gains in 2013 and 2012-page 31)
Sponsor's website: Portfolio Characteristics (effective duration 6.59 years)
Get to know your bond fund: Duration | Vanguard
Credit Quality (snapshot from Portfolio Characteristics at sponsor's website):
Emerging market debt CEFs are discussed in this Seeking Alpha article.
In a recent interview published in Barrons.com, the manager of T. Rowe Price's emerging market bond fund (PREMX) discusses his opinions on how these securities fit into an investor's portfolio.
The current distribution is paid monthly at $.12 per share. Western Asset Emerging Markets Debt Fund Inc. (“ESD”) Announces Distributions for the Months of March, April and May 2014
In a 1/30/13, I linked a report prepared by Oppenheimer that had a number of then current charts about the performance of various asset class (the link to that report now takes me to their current 2014 report for Q2 2014, oppenheimerfunds.com.pdf, which I view as worth a review), I made this comment about emerging market bonds: "Emerging market bonds have been on top 6 out of the last 10 years. A reason to buy or sell". The current chart outlining the performance of various bond categories (page 29) shows that emerging market bonds were at the bottom in 2013 with a -8.98% loss with high yield bonds and senior loans at the top. Treasuries are shown at -2.75% and investment grade corporates at -1.53%.
In the 3/31/14 Oppenheimer chart update.pdf, there is an interesting chart at page 40 that shows the debt to GDP ratios of several emerging markets compared to the U.S., Japan and other developed countries, and then compares the sovereign debt yields on another axis. The emerging market countries have far lower debt to GDP ratios and far higher sovereign debt yields. Oppenheimer concludes that the market has not "fully" recognized that emerging market countries and central banks have "grown much more disciplined".
For those investing in emerging markets, there is an important chart on page 41 that shows current account as a percentage of GDP for several emerging market countries. The chart compares 1997 with 2013. The Philippines, Korea and Malaysia have gone from a negative ratio to positive ones, while India, South Africa and Turkey have increased their negative numbers. One of the foreign country ETFs that I currently own is EWM which owns Malaysian stocks.
Prior Trades: I found a trade from 2009:
Rationale: Given the steep correction in emerging market debt, I thought that I wound nibble in this area and hope that the correction is mostly in the rear view mirror. You never really know.
Assuming a continuation of the current monthly dividend of $.12 per share, the dividend yield is about 8.33% at a total cost of $17.28 per share. The dividend has not been supported by a return of capital over the past year according to CEFConnect.
Risks: The risks are highlighted in a long term chart. ESD Interactive Chart This CEF crashed and burn during the Near Depression, rapidly going from $18 or so per share to $10. Another mini crash started in May 2013 with a plunge from $22 to $17 over a 4 month period. That is huge for a bond fund. Since late August, the market price has stabilized in the $17 to $18 range.
"Country Risk" is acute. When thinking of this risk, just bring into your mind snapshots of Hugo Chavez, Cristina Fernández de Kirchner, and Vladimir Putin. Even the Koch brothers should bow down on their knees and thank the Lord that the U.S. has Obama, comparatively speaking of course. I doubt either one would agree with that statement.
Notwithstanding all of the ups and downs, the 10 year annualized return was 8.8% through 4/3/2014.
Then, there are the risks associated with CEFs, interest rate and credit risks-all kinds of potentially problematic risks associated with that 8.33% yield.
Future Buys: I am anticipating a more probable than not scenario for an average down given the weakness in this sector. If and when the shares decline below $16.7, I will consider buying another 50 shares, and would then consider selling the higher cost lot whenever I could do so at a profit. The general idea with this kind of security is to generate income while avoiding if possible a capital loss.
During the rout in bond CEFs, this bond CEF plunged from a $22.08 close on 5/8/13 to $16.36 in early February 2014. ESD Interactive Chart
Part of the decline for this CEF would be attributable to the turmoil in emerging markets that negatively impacted both stocks and bonds until recently. Many of these emerging markets, including Turkey, Russia, and Argentina, have had a number of negative news events over the past year. Those events create both risk and opportunity, but I am still more focused on the risk now.
Emerging market bonds are not likely to perform well when U.S. interest rates start to rise again.
Closing Price ESD 4/11/14: ESD: $17.58 -0.06 (-0.34%)
3. Bought 150 JDD at $11.7-Taxable Account and 100 in ROTH IRA at $11.64 (see Disclaimer): While this purchase was not part of a paired trade, it was financed from the cash allocations. The purpose was to increase cash flow in two accounts.
Snapshot of Trade-Taxable Account:
Snapshot of Trade-Roth IRA:
Security Description: Nuveen Diversified Dividend & Income Fund (JDD) is a leveraged CEF that invests in a variety of income producing securities including REITs, non-REIT common stocks, and variable rate senior loans.
Data On Day of Trade: Wednesday 4/2/14-Taxable Account
Closing Net Asset Value: $13.34
Closing Market Price: $11.71
Discount: -12.22%
Average Discounts:
1 Year: -8.8%
3 Years: -6.63%
5 Years: -9.11%
Data on Day of Trade Roth IRA 4/4/14
Closing Net Asset Value Per Share: $13.29
Market Price: $11.6
Discount: -12.72%
CEFConnect page for JDD
Last SEC Filed Shareholder Report: Period Ending 12/31/13
JDD Page at Morningstar (rated 4 stars at time of purchase)
This report shows a variety of different assets owned by the fund, including non-REIT common stocks, REITs, foreign bonds and variable rate senior loans, roughly in 25% allocations.
I referenced above some Oppenheimer charts that cover a wide array of topics. At page 34, there is a chart comparing senior loans and high yield differentials. Historically, senior loans have traded at a premium to high yield bonds, given their secured status, but ended last year roughly equal in yields with high yield bonds.
While this fund has supported recent distributions in part with a ROC, I would classify that support as benign since the fund has earned the distribution. The fund used a loss carryforward to shelter $8.789+M in capital gains in 2013 and $9.615+M in 2012. As a result of that "tax shelter", none of those realized gains were used to support the dividend which then caused the ROC for part of the distribution. (see page 36: www.sec.gov)
Prior Trades: I found three prior roundtrip trades:
Item # 4 Sold CEF JDD at 11.28 (July 2011)-Item # 6 Bought 100 JDD in Roth at $8.4 (August 2009)-Item # 5 Added to CEF JDD at $9.45 (October 2009)
During 2013, the company refinanced C$66.7M of apartment mortgages at a weighted average interest cost of 3.03%, 155 basis points lower than weighted average interest cost prior to the refinancing. The weighted average mortgage interest rate improved 43 basis points in 2013, compared to 2012, to 4.05%. The average weighted maturity improved to 3.9 years from 3.4 years which highlights a risk when rates start to rise. Press Release Feb 18, 2014.pdf
During the 4th quarter, the company netted C$42.6 by selling a 10 property manufactured home community portfolio in New Brunswick, and began construction on a 122 unit apartment complex in Cambridge, Ontario.
Conference Call Slides: Q4 slides Final.pdf (pictures of new developments at pages 15-16)
Rationale: I started a sector shift into REITs last September and included a number of Canadian REITs in that sector shift. While Killam is a regular corporation, I am including it in my REIT sector allocation since it looks, smells and acts like a REIT and its payout is REIT like. I am also attempting to earn a return on my Canadian dollars. The dividend yield at an annual rate of C$.60 per share (paid monthly at $.05) is about 5.9%.
The stock has modest appreciation potential. The stock did trade over C$12 during 2012 and 2013 through April.
Given its small size, there is a possibility that one of the larger Canadian REITs may acquire Killam.
Risks: Again, any investor who is not a long term holder faces potentially significant currency risks by exchanging USDs for CADs in order to buy this security in Toronto.
I did not see a AFFO number when reviewing the 4th quarter report. I found the AFFO number in the 2013 Annual Report at page 24. Killam reported a 2013 AFFO per share of C$.6. The dividend for 2013 was C$.6. I would like to see the AFFO payout ratio less than 90% rather than at 100%.
The risks are also shown in a long term chart. The decline in 2008 is understandable, as the price hit $C4+ in late 2008. KMP.TO Interactive Chart The company discusses risks incident to its operations in its Annual Report.
Closing Price 4/11/14: KMP.TO: C$10.15 -0.07 (-0.68%)
2. Paired Trade: Sold 50 STIPRA at $20.66 and 50 GSPRJ at $24 and Bought 100 ESD at $17.28 (see Disclaimer): I am increasing cash flow with this paired trade which will also include a 60 purchase of the BDC BKCC to roughly equalize the proceeds realized from the two dispositions with the dollars devoted to new purchases. That BDC purchase will be discussed in the next weekly post.
Snapshot of Trades:
Sells:
Buy:
Snapshots of Profits:
 |
| 2014 STIPRA 50 Shares +$67.57 |
Total Realized Gains: +$331.75
 |
| 2014 GSPRJ 50 Shares +$45.08 |
I will just briefly mention the two non-cumulative equity preferred stocks that I sold in this paired trade.
The Goldman Sachs Group Inc. Fixed-to-Floating Preferred Rate Stock (GS.PJ) currently pays non-cumulative dividends at a fixed coupon rate of 5.5% on a $25 par value. If the security is not redeemed on or after 5/10/23, the rate will become a 3.64% spread to the 3 month Libor. PROSPECTUS SUPPLEMENT DATED APRIL 18, 2013 At a $24 total cost, the yield is about 5.73%. There is no possibility of a coupon increase before 5/10/23.
The SunTrust Banks Inc. Preferred Series A (STI.PA) is a floating rate equity preferred stock that pays non-cumulative and qualified dividends at the greater of 4% or .52% above the 3 month Libor on a $25 par value. The minimum coupon is likely to remain in existence until at least 2017. At the 4% minimum coupon, the yield at a total cost of $20.66 is about 4.84%.
Data on Date of Trade Monday 4/3/2014
Net Asset Value Per Share: $19.46
Market Price Per Share: $17.25
Discount: - 11.36%
Average Discounts
1 Year: - 8.97%
3 Years: -6.69%
5 Years: -8.54%
CEFConnect Page for ESD
Fund Sponsor's Website: ESD
Fund Sponsor's Portfolio Characteristics Page as of 12/31/13:
Number of Holdings 186
Effective Duration: 6.59%
Snapshot of Credit Quality, Top Currencies and Country Concentrations:
 |
| As of 12/31/13-Subject to Change Of Course |
Sponsor's website: Portfolio Characteristics (effective duration 6.59 years)
Get to know your bond fund: Duration | Vanguard
Credit Quality (snapshot from Portfolio Characteristics at sponsor's website):
Emerging market debt CEFs are discussed in this Seeking Alpha article.
In a recent interview published in Barrons.com, the manager of T. Rowe Price's emerging market bond fund (PREMX) discusses his opinions on how these securities fit into an investor's portfolio.
The current distribution is paid monthly at $.12 per share. Western Asset Emerging Markets Debt Fund Inc. (“ESD”) Announces Distributions for the Months of March, April and May 2014
In a 1/30/13, I linked a report prepared by Oppenheimer that had a number of then current charts about the performance of various asset class (the link to that report now takes me to their current 2014 report for Q2 2014, oppenheimerfunds.com.pdf, which I view as worth a review), I made this comment about emerging market bonds: "Emerging market bonds have been on top 6 out of the last 10 years. A reason to buy or sell". The current chart outlining the performance of various bond categories (page 29) shows that emerging market bonds were at the bottom in 2013 with a -8.98% loss with high yield bonds and senior loans at the top. Treasuries are shown at -2.75% and investment grade corporates at -1.53%.
In the 3/31/14 Oppenheimer chart update.pdf, there is an interesting chart at page 40 that shows the debt to GDP ratios of several emerging markets compared to the U.S., Japan and other developed countries, and then compares the sovereign debt yields on another axis. The emerging market countries have far lower debt to GDP ratios and far higher sovereign debt yields. Oppenheimer concludes that the market has not "fully" recognized that emerging market countries and central banks have "grown much more disciplined".
For those investing in emerging markets, there is an important chart on page 41 that shows current account as a percentage of GDP for several emerging market countries. The chart compares 1997 with 2013. The Philippines, Korea and Malaysia have gone from a negative ratio to positive ones, while India, South Africa and Turkey have increased their negative numbers. One of the foreign country ETFs that I currently own is EWM which owns Malaysian stocks.
Prior Trades: I found a trade from 2009:
 |
| 2009 ESD 50 Shares +$191.97 |
Assuming a continuation of the current monthly dividend of $.12 per share, the dividend yield is about 8.33% at a total cost of $17.28 per share. The dividend has not been supported by a return of capital over the past year according to CEFConnect.
Risks: The risks are highlighted in a long term chart. ESD Interactive Chart This CEF crashed and burn during the Near Depression, rapidly going from $18 or so per share to $10. Another mini crash started in May 2013 with a plunge from $22 to $17 over a 4 month period. That is huge for a bond fund. Since late August, the market price has stabilized in the $17 to $18 range.
"Country Risk" is acute. When thinking of this risk, just bring into your mind snapshots of Hugo Chavez, Cristina Fernández de Kirchner, and Vladimir Putin. Even the Koch brothers should bow down on their knees and thank the Lord that the U.S. has Obama, comparatively speaking of course. I doubt either one would agree with that statement.
Notwithstanding all of the ups and downs, the 10 year annualized return was 8.8% through 4/3/2014.
Then, there are the risks associated with CEFs, interest rate and credit risks-all kinds of potentially problematic risks associated with that 8.33% yield.
Future Buys: I am anticipating a more probable than not scenario for an average down given the weakness in this sector. If and when the shares decline below $16.7, I will consider buying another 50 shares, and would then consider selling the higher cost lot whenever I could do so at a profit. The general idea with this kind of security is to generate income while avoiding if possible a capital loss.
During the rout in bond CEFs, this bond CEF plunged from a $22.08 close on 5/8/13 to $16.36 in early February 2014. ESD Interactive Chart
Part of the decline for this CEF would be attributable to the turmoil in emerging markets that negatively impacted both stocks and bonds until recently. Many of these emerging markets, including Turkey, Russia, and Argentina, have had a number of negative news events over the past year. Those events create both risk and opportunity, but I am still more focused on the risk now.
Emerging market bonds are not likely to perform well when U.S. interest rates start to rise again.
Closing Price ESD 4/11/14: ESD: $17.58 -0.06 (-0.34%)
3. Bought 150 JDD at $11.7-Taxable Account and 100 in ROTH IRA at $11.64 (see Disclaimer): While this purchase was not part of a paired trade, it was financed from the cash allocations. The purpose was to increase cash flow in two accounts.
Snapshot of Trade-Taxable Account:
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| 2014 Bought 150 JDD at $11.7 |
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| 2014 Roth IRA Bought 100 JDD at $11.64 |
Data On Day of Trade: Wednesday 4/2/14-Taxable Account
Closing Net Asset Value: $13.34
Closing Market Price: $11.71
Discount: -12.22%
Average Discounts:
1 Year: -8.8%
3 Years: -6.63%
5 Years: -9.11%
Data on Day of Trade Roth IRA 4/4/14
Closing Net Asset Value Per Share: $13.29
Market Price: $11.6
Discount: -12.72%
CEFConnect page for JDD
Last SEC Filed Shareholder Report: Period Ending 12/31/13
JDD Page at Morningstar (rated 4 stars at time of purchase)
This report shows a variety of different assets owned by the fund, including non-REIT common stocks, REITs, foreign bonds and variable rate senior loans, roughly in 25% allocations.
I referenced above some Oppenheimer charts that cover a wide array of topics. At page 34, there is a chart comparing senior loans and high yield differentials. Historically, senior loans have traded at a premium to high yield bonds, given their secured status, but ended last year roughly equal in yields with high yield bonds.
While this fund has supported recent distributions in part with a ROC, I would classify that support as benign since the fund has earned the distribution. The fund used a loss carryforward to shelter $8.789+M in capital gains in 2013 and $9.615+M in 2012. As a result of that "tax shelter", none of those realized gains were used to support the dividend which then caused the ROC for part of the distribution. (see page 36: www.sec.gov)
Prior Trades: I found three prior roundtrip trades:
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| 2011 Roth IRA 100 Shares +$197.07 |
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| 2010 ROTH IRA JDD 70 Shares +$101.98 |
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| 2010 Taxable JDD 300 Shares +$131.93 |
Total Realized Gains: $430.98
Rationale: I view this as a relatively short term trade that hopefully will produce a stream of income and an exit price $16+ higher than my purchase prices. The current dividend yield, based on a quarterly dividend of $.25 per share, is approximately 8.55% at a total cost per share of $11.7. The yield slightly improves for the Roth IRA purchase at $11.64.
I improve my odds of capital appreciation by buying at a significantly greater discount than the three year average.
The ROTH IRA purchase converts the taxable dividend into a tax free one. Most of the dividend will be supported by interest payments and non-qualified dividends from REITs.
Risks: The market price and net asset value decline since May 1, 2013 shows what can go wrong when investors flee bond CEFs. It can go from bad to worse too.
May 1, 2013-Unadjusted for Dividends
Net Asset Value $13.38
Market Price: $13.73
Premium to Net Asset Value +2.62%
Percentage Declines 5/1/13 to 4/3/14
Net Asset Value Per Share: Almost unchanged (13.38 to 13.34 unadjusted for dividends)
Market Price: -14.71%
The non-REIT stock allocation, roughly 1/4 of the total, was the primary source of the stable net asset value, offsetting declines in other sectors. REITs and foreign debt would have been negative for the year.
Just about all of the decline in the market price is due to the movement from a +2.62% premium to a -12.22% discount.
Closing Price 4/11/14: JDD: $11.68 -0.05 (-0.43%)
4. Added 50 SWZ at $14.32 (see disclaimer): This brings me up to 593+ shares, with 450 of those shares purchased in open market transactions and the remainder with dividends. I will generally add 50 shares once a year, whenever the spirit moves me. I prefer to buy closer to a 14%-15% discount to net asset value, but this CEF has been hugging the 10% to 12% since August 2013, so I pulled the trigger when I noted that the prior day's discount was 12%.
Snapshot of Trade:
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| 2014 Added 50 SWZ at $14.32 |
Data on Date of Trade Thursday 4/3/14:
Net Asset Value Per share: $16.25
Market Price: $14.31
Discount: -11.94%
Average Discounts:
One Year: -11.64%
3 Years: -11.68%
5 Years: -12.51%
CEFConnect Page for SWZ
Last SEC Filed Shareholder Report: The Swiss Helvetia Fund, Inc. (period ending 12/31/13)
The fund has large positions in both Nestle, Roche and Novartis. Using the numbers from the annual report, the position in Nestle had a 10.41% weighting valued at $49+M with a cost basis of $13+M. Novartis had a 10.29% weighting valued at $48+M with a cost basis of 15.6+M. Roche was at 16.26% with a market value of $76+M and a $30+M cost basis.
U.S. ADR One Year Charts for Nestle, Roche and Novartis:
NVS Interactive Chart
NSRGY Interactive Chart
RHHBY Interactive Chart (split 2 for 1 last February)
The fund has significant positions in several other Swiss based companies known to Stock Jocks, including UBS, Swatch Group, Swiss Life, ABB, Lindt & Srungli (chocolates), Syngenta, Weatherford, Credit Suisse, Richemont (luxury goods) and Actelion. Of those stocks, I currently have a position in Novartis.
Swiss Ordinary Shares-One Year Charts in CHFs:
ACTELION| ATLN.VX Interactive Chart
RICHEMONT| CFR.VX Interactive Chart
ABB | ABBN.VX Interactive Chart
SWISS LIFE HLDG| SLHN.VX Interactive Chart
Last Tuesday, I noted that Nestle had an unusually good day on no news that I could find. My Unilever positions (UN and UL) did well that day too.
Nestle ADR Closing Price 4/8/14: NSRGY: $77.60 +1.84 (+2.43%)
SWZ sold its entire position in Zurich Financial and Swiss Re during the 2013 4th quarter. I currently have a position in Zurich.
Sponsor's website: SWZ.com - Swiss Helvetia Fund
SWZ Page at Morningstar
The fund has a long history of periodically reaping long term capital gains: SWZ Dividend History
Recent Long Term Capital Gain Distributions Per Share:
Using Ex Dividend Dates Rather Than Payment Dates
2013: $.87
2011: $1.8
2010: $.264
2009: $.366
2007: $2.216
2006 $1.378
2005 $1.54
Snapshot of Last Reinvested Dividend Paid in 2014: SWZ ($515.46 paid)
Notwithstanding that stream of profit taking, the fund had $194+M in unrealized appreciation as of 12/31/13 out of a total market value of $471+M.
Needless to say, there are no, and have not been any to my knowledge in the past, capital loss carryforwards.
The fund recently repurchased 4,579,480 shares at $14.93 per share. SWZ
Prior Trades: My purchases in 2013 and 2012 are discussed in these posts. Item # 1 Added 50 SWZ at $12.22 April 2013; Item # 3 Added 50 SWZ at $10.64 November 2012
Rationale: This fund has a generally good long term track for a fund focusing on one nation's stocks including the three big blue chips: NVS, Roche and Nestle. During powerful market up moves, those blue chips will generally fall behind, sometimes way behind an average like the Nasdaq 100 or the S & P 500, but will hold up better during major downturns.
Overall, the fund was down 23.79% in 2008 based on net asset value per share and 22.89% based on market price. The five year annualized total return was 15.03% based on NAV through 4/3/14. That data is available at CEFConnect under the "performance" tab.
The fund also generally harvests, as noted above, significant long term capital gains and frequently boosts those distributions with lesser amounts of short term capital gains. The overall distribution, while not tax efficient given the large distribution amounts, does tilt toward the 15% U.S. cap for long term capital gains (applicable to most, though no longer all, U.S. taxpayers, NASDAQ.com).
I have not sold any shares in the taxable account. I would not expect a significant narrowing of the discount, say to -5%, and only temporary declines below 10%. Share price appreciation will require asset appreciation.
The fund does not use leverage. CEFConnect shows the expense ratio at 1.29%.
Risks: One of the potential risks and benefits is an exposure to assets price in the Swiss Franc (CHF). This was actually a detriment in 2011.
The Swiss Franc was rising fast and furious against the Euro and the USD until early September 2011, when the Swiss Central Bank crushed the CHF by massively creating Francs to buy Euros. Bloomberg, NYT One CHF went from buying over $1.3 USDs to $1.1 in a heartbeat. CHF/USD Currency Conversion Chart That decline flows through into the value of SWZ shares priced in USDs.
The owner of SWZ wants both the ordinary shares to go up and for the CHF to gain in value against the USD. My 2011 SWZ purchase was not timed optimally, occurring just before that massive intervention. Added 50 SWZ at $13.75 (8/2/11 Post) A few days later, I included SWZ in a scatter buy of CEF with cash flow, adding 30 shares at $12.98: Item Item # 3 Fear and Enhanced Volatility in Certain Classes of Income Securities/Added to CEFs BTZ SWZ GDV and ERH That purchase also occurred before the massive intervention.
As with other CEFs, the discount to net asset value can do many odd things. It is particularly frustrating to see it expand when the net asset value is going up. If the owned assets start to decline significantly, the percentage increase in the discount tends to be significantly greater than the percentage decline in the net asset value per share.
An extreme increase in the discounts for CEFs occurred in October 2008, with SWZ spiking to over a 25% discount to net asset value. Since 1995, the discount has only briefly fallen below 10% (i.e. a persistently large discount). A trader might use that marker to sell shares after a rise in net asset value per share and a narrowing of the discount from the time of purchase.
Closing Price 4/11/14: SWZ: $14.11 -0.03 (-0.21%)
5. MKN Redeemed at $10 Par Value: The PPN MKN, a senior unsecured Exchange Traded Bond, matured on 4/7/14. I owned 100 shares and received a payment of $1,000 plus $30 in interest for the last annual coupon period. The issuer was Citigroup Funding.
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| MKN Redemption $1,000 Par Value +$30 in Interest |
I made about $7 on the bond since my purchase at $9.85 back in January 2010.
MKN paid the greater of 3% or up to 33% based on the performance of the DJ-UBS Commodity Index during each annual coupon period. Pricing Supplement No. 2009
I received three coupons at the minimum 3% (2012, 2013 and 2014=$90)
I received two good paydays (2010 and 2011):
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| 2010 MKN $180.06 in Interest |
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| 2011 MKN $255.53 in Interest |
I started to invest in Citigroup PPNs back in 2010 when most of them could be bought at less than their $10 par value. I quickly ran up against my limit for exposure to securities from one issuer. All of the PPNs that I bought will mature in 2014. MKN is the second one to mature, the first being MOU. Received MOU Redemption Proceeds This Afternoon-28.4% Annual Coupon Confirmed
I am not aware of any good values in the PPN space at the moment, so I will reinvest the MKN proceeds in a fixed coupon equity preferred stock or a leveraged bond/preferred stock CEF yielding greater than 8% and currently earning its dividend.
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