S & P 500 1,900.53 +8.04 (+0.42%)-First Close Above 1900
VIX: 11.36 -0.67 (-5.57%)
TLT: $112.70 +0.60 (+0.54%) : iShares 20+ Year Treasury Bond ETF
GLD: $124.51 -0.16 (-0.13%) : SPDR Gold Trust
VNQ: $74.13 +0.64 (+0.87%) : Vanguard REIT ETF
KRE: $38.14 +0.18 (+0.47%) : SPDR S&P Regional Banking ETF
TDIV: $25.75 +0.22 (+0.86%) : First Trust NASDAQ Technology Dividend ETF
Big Picture Synopsis:
Stocks:
Stable Vix Pattern (bullish)
Short Term: Market Needs a 15% Correction
Intermediate Term: Slightly Bullish
Long Term: Bullish
A GMO employee wrote a missive, republished at Morningstar, titled "Looking for Bubbles", where he postulates eight reasons supporting his opinion that stocks are now in a bubble.
Ralph Acampora believes that "we've got another 15 years" of the current long term secular bull market. However, he is expecting a 20% to 25% correction in Nasdaq Composite, S & P 400 (mid caps) and the Russell 2000. Large cap stocks will fare better in his view, declining 10% to 15%.
At the moment, I am not comfortable with either stocks or bonds. I view the Russell 2000 to be overvalued, and the S & P 500 is at the top of my fair value range.
At the sponsor's page for the Russell 2000 ETF IWM, the P/E is shown as 28.73 as of 4/30/14: iShares Russell 2000 ETF | IWM Needless to say, that is a high number. It is really much higher. By clicking the "(i)" symbol next to that P/E number, the sponsor discloses that the earnings are not GAAP numbers and are instead operating earnings, that is "ex items". In addition, the sponsor excludes companies with losses and pretends than any P/E over 60 is 60. Garbage in-Garbage Out.
Birinyi and Associates has the TTM GAAP number as 80.19 as of 5/23/14 for the Russell 2000 and the forward P/E "based on operating earnings" at 18.45. P/Es & Yields on Major Indexes-WSJ.com
Tobias Levkovich, who is the chief equity strategist at Citigroup, argues in an interview at Yahoo Finance's Daily Ticker, that the Shiller cyclically adjusted P/E is flawed since it does not "normalize" both interest rates and earnings. When modified by interest rates, the Shiller P/E would be currently below the average valuation, rather than way above it.
Morningstar had an interesting analysis about the performance of mutual funds based on their costs. Funds were divided into five cost categories (1 to 5) and into various asset classes. As the fund cost became cheaper, the performance improved, with funds rated in the lowest cost percentile outperforming those in the second lowest, and so on. Morningstar
At the moment, I am not comfortable with either stocks or bonds. I view the Russell 2000 to be overvalued, and the S & P 500 is at the top of my fair value range.
At the sponsor's page for the Russell 2000 ETF IWM, the P/E is shown as 28.73 as of 4/30/14: iShares Russell 2000 ETF | IWM Needless to say, that is a high number. It is really much higher. By clicking the "(i)" symbol next to that P/E number, the sponsor discloses that the earnings are not GAAP numbers and are instead operating earnings, that is "ex items". In addition, the sponsor excludes companies with losses and pretends than any P/E over 60 is 60. Garbage in-Garbage Out.
Birinyi and Associates has the TTM GAAP number as 80.19 as of 5/23/14 for the Russell 2000 and the forward P/E "based on operating earnings" at 18.45. P/Es & Yields on Major Indexes-WSJ.com
Tobias Levkovich, who is the chief equity strategist at Citigroup, argues in an interview at Yahoo Finance's Daily Ticker, that the Shiller cyclically adjusted P/E is flawed since it does not "normalize" both interest rates and earnings. When modified by interest rates, the Shiller P/E would be currently below the average valuation, rather than way above it.
Morningstar had an interesting analysis about the performance of mutual funds based on their costs. Funds were divided into five cost categories (1 to 5) and into various asset classes. As the fund cost became cheaper, the performance improved, with funds rated in the lowest cost percentile outperforming those in the second lowest, and so on. Morningstar
Bonds:
Short to Long Term: Slightly Bearish Based on Interest Rate Normalization
I have raised my cash level in my main Roth IRA to much higher than normal levels, selling mostly preferred stocks yielding less than 7% at their sales' prices and low yielding bonds. My IRAs are almost entirely invested in bonds, bond funds and bond like investments such as preferred stocks, REITs and BDCs. It will probably take a couple of more posts before I describe everything that I have done up to now.
While a 20% cash allocation in my taxable accounts is a standard number, moving it down or up a few percentage points from time to time, I will normally keep no more than $5,000 in cash in retirement accounts rather than a percentage of investable assets. I am now over $20,000. Over the past several months, I have been using profits from bond and preferred stock sales to nibble on a few Vanguard stock ETFs which can be bought commission free in my Vanguard Roth IRA.
******************
Recent Developments:
CorStar reported that commercial real estate prices increased during the 2014 first quarter. The lower value property index was up 17.1% Y-O-Y. The higher value property index returned during the quarter to within 5% of its peak number. Details
The chief of the NY FED, William Dudley, expects inflation, as measured by the PCE price index rather than the CPI, "will drift upwards over the next year, getter closer to the FOMC's 2 percent objective". (CPI is already at 2% Y-O-Y). The Economic Outlook and Implications for Monetary Policy-Federal Reserve Bank of New York
However, Dudley sees "little prospect of inflation climbing sharply over the next year or two". He recognizes that there is some disagreement among economists about the slack in the labor market. "Assuming asset purchases end sometime this fall", "we currently anticipate that a considerable period of time will elapse between the end of asset purchases and lift-off", referring to a raise in the federal funds rate and the end of ZIRP. The timing and pace of those increases will be data dependent, including the response by the financial markets, levels of unemployment and inflation. Normally, as noted by Dudley, federal funds would be about 4.25% when PCE inflation is at 2%, but he expects the level to be "well below" 4.25% when PCE inflation hits 2%.
The Atlanta Federal Reserve keeps two inflation indicators that it calls "sticky" and "flexible". The sticky price index, a weighted basket of items that change price slowly, rose at a 3% annualized rate in April. The flexible cut of CPI-a weighted basket of items that change price relatively frequently-rose at an annualized rate of 3.4% in April. Sticky Price CPI - Federal Reserve Bank of Atlanta
Markit's flash U.S. manufacturing PMI was reported at 56.2 in May, up from 55.4 in April. markiteconomics.pdf
HSBC's flash China manufacturing PMI was reported at 49.7 in May, a five month high, and up 48.1 in April.
However, Dudley sees "little prospect of inflation climbing sharply over the next year or two". He recognizes that there is some disagreement among economists about the slack in the labor market. "Assuming asset purchases end sometime this fall", "we currently anticipate that a considerable period of time will elapse between the end of asset purchases and lift-off", referring to a raise in the federal funds rate and the end of ZIRP. The timing and pace of those increases will be data dependent, including the response by the financial markets, levels of unemployment and inflation. Normally, as noted by Dudley, federal funds would be about 4.25% when PCE inflation is at 2%, but he expects the level to be "well below" 4.25% when PCE inflation hits 2%.
The Atlanta Federal Reserve keeps two inflation indicators that it calls "sticky" and "flexible". The sticky price index, a weighted basket of items that change price slowly, rose at a 3% annualized rate in April. The flexible cut of CPI-a weighted basket of items that change price relatively frequently-rose at an annualized rate of 3.4% in April. Sticky Price CPI - Federal Reserve Bank of Atlanta
Markit's flash U.S. manufacturing PMI was reported at 56.2 in May, up from 55.4 in April. markiteconomics.pdf
HSBC's flash China manufacturing PMI was reported at 49.7 in May, a five month high, and up 48.1 in April.
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American Realty Capital Partners (ARCP)(own 300 ARCP; 50 ARCPP)
After agreeing to buy the Red Lobster real estate portfolio for $1.5B in a sale-leaseback transaction (500 restaurants), ARCP changed its mind about spinning off it shopping center properties to shareholders. Instead, American Realty Capital Properties signed a "letter of intent" to sell its multi-tenant shopping center portfolio to Blackstone for $1.975B in cash at what ARCP called "a cap rate that is more than 100 basis points lower than the 7.9% cash cap rate for the Red Lobster portfolio".
On the same day, last Wednesday, American Realty Capital Properties also announced that it had commenced a public offering of 100,000,000 shares (over-allotment up to 15M shares)
The offering was upsized to 120,000,000 shares, with a 18M share over-allotment option, and was priced at $12 per share. SEC Filing Prior to the announcement, the shares had close at $12.9, ARCP Historical Prices.
The market reacted negatively to the foregoing, sending the shares to a 52 week low on 51.88+M shares.
My last transaction was to sell 100 shares of ARCP held in the Roth IRA: Sold 100 of 400 ARCP at $13.35 (5/17/14 Post)
American Realty announced last Thursday that the underwriters exercised their option for the entire 18M share over-allotment, bringing the total to 138M shares sold at $12.
During the conference call on 5/8/14, the CEO Nick Schorsch was asked about a prior statement, where he reportedly stated that ARCP "would not issue equity below I think you mention $14.50 or so".
Schorsch made this statement on 5/8/14: "we are not anxious to issue stock at $12 or whatever it is at the moment"
Page 4: Earnings Call Transcript | Seeking Alpha
Closing Price 5/21/14: ARCP: $12.26 -0.64 (-4.96%)
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In the first two items below, I discuss buying just 30 shares in two deepwater drilling companies. Given the current risks in this sector, discussed below, I capped my total exposure at $3,000 and then divided that amount into two purchases. Both RIG and ESV pay good dividends-currently-and have depressed valuations based on the market's concerns about re-lease rates, an over supplied market, and litigation risks.
American Realty Capital Partners (ARCP)(own 300 ARCP; 50 ARCPP)
After agreeing to buy the Red Lobster real estate portfolio for $1.5B in a sale-leaseback transaction (500 restaurants), ARCP changed its mind about spinning off it shopping center properties to shareholders. Instead, American Realty Capital Properties signed a "letter of intent" to sell its multi-tenant shopping center portfolio to Blackstone for $1.975B in cash at what ARCP called "a cap rate that is more than 100 basis points lower than the 7.9% cash cap rate for the Red Lobster portfolio".
On the same day, last Wednesday, American Realty Capital Properties also announced that it had commenced a public offering of 100,000,000 shares (over-allotment up to 15M shares)
The offering was upsized to 120,000,000 shares, with a 18M share over-allotment option, and was priced at $12 per share. SEC Filing Prior to the announcement, the shares had close at $12.9, ARCP Historical Prices.
The market reacted negatively to the foregoing, sending the shares to a 52 week low on 51.88+M shares.
My last transaction was to sell 100 shares of ARCP held in the Roth IRA: Sold 100 of 400 ARCP at $13.35 (5/17/14 Post)
American Realty announced last Thursday that the underwriters exercised their option for the entire 18M share over-allotment, bringing the total to 138M shares sold at $12.
During the conference call on 5/8/14, the CEO Nick Schorsch was asked about a prior statement, where he reportedly stated that ARCP "would not issue equity below I think you mention $14.50 or so".
Schorsch made this statement on 5/8/14: "we are not anxious to issue stock at $12 or whatever it is at the moment"
Page 4: Earnings Call Transcript | Seeking Alpha
Closing Price 5/21/14: ARCP: $12.26 -0.64 (-4.96%)
*************************************
In the first two items below, I discuss buying just 30 shares in two deepwater drilling companies. Given the current risks in this sector, discussed below, I capped my total exposure at $3,000 and then divided that amount into two purchases. Both RIG and ESV pay good dividends-currently-and have depressed valuations based on the market's concerns about re-lease rates, an over supplied market, and litigation risks.
1. Bought 30 RIG at $42.86 (see Disclaimer):
Snapshot of Trade:
Company Description: Transocean Ltd. (RIG ) is the largest offshore drilling rig contractor in the world.
Last Fleet Status Report: April 2014 deepwater.com/ Apr 2014.pdf
According to that status report, seven deepwater rigs, defined as drilling in 40,000 drilling depth, were under construction, with two expected deliveries in the 2014 second quarter and both under contracts until 2017. Several more were apparently under contract with construction starting at some point in the future.
As of 3/31/14, RIG had over $10B in long term debt. (see note 10 at page 13, 10-Q)
Transocean's Board has approved a $3 annual dividend per share paid in quarterly installments of $.75 per share. This would give me a yield of 7% based on a total cost per share of $42.86, at least for the current year. The dividend is being sourced out of "additional paid-in capital" (page 33).
I would not count on that dividend remaining the same. RIG's dividend history does not establish any long term trends even as a dividend payor. In fact, no dividend was paid at all between June 2002 to April 2011. The rate was only $.03 per quarter between May 8/2000 and May 2002. Transocean Ltd. (RIG) Dividend History
I don't think that an investor can look at that dividend history and assume a continuation of a $3 or anywhere close to that amount. This year's dividend is being sourced from paid-in capital.
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| RIGs Average Daily Rates by Type and Utilization Rates |
According to that status report, seven deepwater rigs, defined as drilling in 40,000 drilling depth, were under construction, with two expected deliveries in the 2014 second quarter and both under contracts until 2017. Several more were apparently under contract with construction starting at some point in the future.
As of 3/31/14, RIG had over $10B in long term debt. (see note 10 at page 13, 10-Q)
Transocean's Board has approved a $3 annual dividend per share paid in quarterly installments of $.75 per share. This would give me a yield of 7% based on a total cost per share of $42.86, at least for the current year. The dividend is being sourced out of "additional paid-in capital" (page 33).
I would not count on that dividend remaining the same. RIG's dividend history does not establish any long term trends even as a dividend payor. In fact, no dividend was paid at all between June 2002 to April 2011. The rate was only $.03 per quarter between May 8/2000 and May 2002. Transocean Ltd. (RIG) Dividend History
I don't think that an investor can look at that dividend history and assume a continuation of a $3 or anywhere close to that amount. This year's dividend is being sourced from paid-in capital.
After the close on the date of purchase, Transocean announced that it intends to create a entity to own 8 midwater drilling rigs operating in the UK North Sea during the 2014 second half. The new entity will be called Caledonia Offshore Drilling Company. At an "appropriate" time, Caledonia would be separated from Transocean.
List of Rigs to be Owned by Caledonia:
At the time of my purchase, RIG has a 4 star rating from Morningstar and a fair value estimate of $52.
At the time of my purchase, S & P rated RIG at 4 stars with a $54 twelve month price target.
Both S & P and Morningstar note that the drilling industry is facing a decline in day rates for ultradeepwater rigs.
Key Developments page at Reuters
RIG Website: Home
SEC Filings: EDGAR
Prior Trades: None that I can remember
Recent Earnings Report: Transocean declined 4.3% after reported much better than expected first quarter earnings, 1-Q 2014 Earnings Press Release Excluding items, the company reported an adjusted profit of $1.43 (or $1.25 with items), handily beating the consensus forecast of $1.02. Costs and expenses declined 6% and average daily revenue rose by 14% from the 2013 first quarter.
The purported explanation was that RIG has a 20 floaters coming off contract in both 2014 and 2015, which makes the market nervous, and the company did not really change the outlook according to one analyst. Barrons.com
SEC Form 10-Q for Q/E 3/31/14
The market currently has pessimistic assumptions built into RIG's earnings numbers near term. The 2014 consensus forecast is $4.42, which is then projected to decline to $3.71 in 2015. In a recently published Seeking Alpha article, the author refers to those projections as "extremely pessimistic" and divorced from reality. The market has a tendency to assume the worst, and the consensus forecast for a company like RIG will include a number of unrealistic projections.
This report is discussed in this Seeking Alpha article.
Rationale: Over the next year, I will receive a dividend yield of about 7% paid in 4 installments based on my purchase price. The current price is depressed based on pessimistic future assumptions that may not be as bad as feared by market participants. Consequently, with less worst news, the stock has some potential for capital appreciation. It just seems to me that a lot of bad news is built already into the stock price.
I do not sure yet whether the dividend, sourced from "paid-in capital", will be subject to the Swiss withholding tax. Consequently, I would not buy this security in a retirement account until I know one way or the other. I suspect that it will not be taxed by Switzerland.
Risks: The company describes risks incident to its business starting at page 11 of its 2013 Annual Report 10-k
The first three pages deal with risk associated with the Deepwater Horizon event (April 2010).
In January 2013, RIG reached a settlement with the U.S. government for $1.4B (fines and penalties for alleged violations of federal laws). That settlement is being paid in installments through 2017. There is still ongoing civil litigation as described starting at page 17 of the recently filed 10-Q. One reason for splitting my exposure between RIG and ESV is due to the unknowns and unknowables involving RIG's potential liabilities in this ongoing litigation.
Norway has an ongoing criminal tax case against RIG, described at pages 8-9 of the recently filed 10-Q. RIG claims that its returns are materially correct.
RIG admits that the ultra deepwater drilling segment is challenging now and is oversupplied. Earnings Call Transcript | Seeking Alpha ("recognizing that we are in a challenging business environment", page 2; "the outlook for 2014 and 2015 remains challenging with respect to oversupply of ultra-deepwater" and "we continue to see weak deepwater and midwater markets and as in previous oversupply cycles, the most capable rigs will compete down potentially displacing lower specification units", page 6)
It is also possible that oil prices may decline as more supply comes to market, making deepwater production less competitive compared to land based shale exploration and production.
Over the years, I have noted a tendency of drillers to overbuild which causes downward pressure on daily rates as newer rigs come on the market. This issue is discussed in Motley Fool article.
Future Buys/Sells: Given the ongoing issues involving RIG, I am not likely to buy more shares. The shares are a potential to pop based on better than expected re-lease rates during 2014, or a positive development in the ongoing Deepwater Horizon litigation which is simply unknowable at this time. I would not even hazard a guess as to what might happen.
Closing Price 5/23/14: RIG: $42.55 -0.06 (-0.14%)
2. Bought 30 ESV at $50.51 (see Disclaimer):
Snapshot of Trade:
Company Description: ENSCO PLC (ESV) is an offshore driller based in the U.K. with a fleet of 79 rigs.
Key Developments Page at Reuters
The company recent 1st quarter results and the status of its 79 rig fleet are discussed in this Seeking Alpha article.
At the time of my purchase, Ensco PLC Class A was rated 4 stars by Morningstar with a $62 per share fair value estimate.
The U.K. does not apply a withholding tax.
Ensco raised its quarterly dividend last year from $.5 to $.75 per share. ENSCO plc (ESV) Dividend History However, between August 2000 and the 2010 first quarter, the company paid out only $.025 per share. I would not call that a reliable high dividend history.
ESV is discussed in this Seeking Alpha article published on 5/15/2014 and in another Seeking Alpha article published on 5/22/14. This is a link to a favorable article recently published at the Motley Fool website discussing Ensco PLC's First Quarter results.
Prior Trades: None
Recent Earnings Report: For the 2014 first quarter, Ensco reported adjusted E.P.S. of $1.31 (GAAP at $1.25), down from $1.36 in the 2013 first quarter. Revenues rose 3% to $1.187B due to "an increase in the average day rate". The average day rate increased 14% to $239,000. "Reported utilization, which includes the impact of uncontracted rigs and planned downtime" declined to 78% from 86% in the 2013 first quarter. The effective tax rate was 16.6% vs. 13.9% a year ago. The company ended the quarter with $122.5M in cash and long term debt of $4.7073B. The coupons and maturity dates of that debt can be found at page 9 of the recently filed 10-Q.
At the time of purchase, the consensus E.P.S. estimate for 2014 was $5.71 and $5.97 for 2015.
Rationale: This security, like RIG, will generate some current income in 2014. Hopefully, conditions will improve, or not be as bad as currently reflected in the stock prices, as we come closer to 2015.
Risks: The company discusses risks incident to its business starting at page 14 of its 2013 Annual Report. ESV-2013.12.31-10K
Many of the same risks, discussed above except for the Deepwater Horizon related items, also apply to Ensco.
Closing Price 5/23/14: ESV: $51.35 -0.17 (-0.33%)
3. Bought Back 50 FNLC at $15.6 (see Disclaimer):
Snapshot of Trade:
Company Description: First Bancorp (FNLC) is a bank holding company that owns "The First" regional banks operating along the coastal region of Maine: The First Locations As of 12/31/13, the bank had 16 offices. FNLC-2013.12.31-10K The bank owns those locations, except for the land on which the Ellsworth branch is located and the Camden office and the drive up facility in Southwest Harbor that is leased. (page 20)
The current quarterly dividend is $.2 per share. The dividend was not cut during the Near Depression. The bank did maintain the same payout of $.195 per share between the 2008 third quarter and the 2014 first quarter when it was raised to $.2. Adjusting for a 200% stock dividend paid in 2004, the bank did raise the quarterly rate from $.033 in the 1998 4th quarter to $.195 in the 2008 4th quarter. The First Bancorp: Dividend History (company website data)
Prior Trade: Bought 50 FNLC at $12.79-Sold 52 FNLC at $15.55 (June 2012)Snapshot of Profit=$123.88)
Recent Earnings Announcement: The First Bancorp reported 2014 first quarter net income of $3.4M or $.32 per share, up from $.27 in the year ago quarter.
Net Interest Margin: 3.13% vs. 3.06%
Efficiency Ratio (non-GAPP): 55.9%
NPL Ratio: 1.63% vs. 2.42% 2013 first quarter
NPA Ratio: 1.3% vs. 2% "
Charge-Offs to Total Loans Annualized: .12%
ROTE: 11.51%
ROA: .95%
Dividend Payout Ratio: 62.5% at quarterly rate of $.2 per share
The capital ratios are good:
Page 66 FNLC-2014.3.31-10Q
SEC Filed Press Release
Rationale and Risks: FNLC appears to be a well run small bank. The dividend yield is good. Prospects for dividend growth, however, are muted due to current operating conditions. Earnings and dividend growth will be subdued due to net interest margin compression impacting all banks to various decrees and higher costs relating to new government regulations passed since the Near Depression.
The bank discusses risks incident to its business starting at page 10 of its 2013 Annual Report: FNLC-2013.12.31-10K
Closing Price 5/23/14: FNLC: $16.18 +0.15 (+0.94%)
4. Sold 106+ STK at $16.53-Roth IRA (see Disclaimer):
Snapshot of Trade:
Snapshot of Roth IRA History:
Dividends Received on 100 Shares=$278.97
Snapshot of Profit:
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| 2014 STK 106+ Shares +36.55 |
I reinvested two dividend payments and made a profit on those shares.
In retirement accounts, Vanguard does not make a cost basis adjustment for return of capital.
Total Return: $315.52 or 19.49%
Security Description: The Columbia Seligman Premium Technology Growth Fund (STK)
Data from day of trade 5/7/14:
Closing Market Price: $16.54
Closing Net Asset Value: $16.24
Premium: +1.85%
CEFConnect Page for STK
Last SEC Filed Shareholder Report: Columbia Seligman Premium Technology Growth Fund
Rationale: The discount to net asset value went from a -2.95% discount at the time of purchase to a 1.85% premium. I also collected several dividend payments and exited the position at a profit.
Future Buys/Sells: I will want to see a greater than 10% discount to net asset value before considering a repurchase of these shares. Overall performance for the past 3 years is far from impressive. Annualized total returns for the past three years, through 5/16/14, was only 3.39% and 6.95% since inception. I will also want to see better performance numbers.
I would compare a sector managed fund with ETFs in the same sector. The annualized total return for XLK is 15.1% over the past three years through 5/22/14. Technology Select Sector SPDR (XLK).
I do not own XLK but I do own TDIV, which is a new fund that was up 30.99% in 2013: First Trust NASDAQ Technology Dividend (TDIV); sponsor's page-First Trust NASDAQ Technology Dividend Index Fund Holdings (TDIV)
Bought 50 TDIV at $19.95 (8/28/12 Post); Added 50 TDIV at $19.2 (10/15/12 Post) Closing price 5/23/14: TDIV: 25.75 +0.22 (+0.86%)
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| TDIV 100 SHARES AS OF 5/23/14 |
5. Added 30 CHN at $19.89 (see Disclaimer):
Snapshot of Trade:
This purchase brings me up to 204+ shares.
Security Description: The China Fund (CHN) is a closed end investment company that owns stocks based in China, Hong Kong and Taiwan.
Data From Day of Trade 5/7/14:
Closing Market Price: $19.92
Closing Net Asset Value Per Share: $22.66
Discount: -12.09%
Average 1 Year Discount: -11.9%
Average 3 Year Discount: -10.15%
Average 5 Year Discount: -8.83%
According to CEFConnect, the annualized total return for ten years, ending on 5/7/14, was 13.5% based on net asset value per share and slightly less based on market price.
Sponsor's website: The China Fund, Inc. - Home
The China Fund, Inc. - Distribution history
SEC Filed Shareholder Report Period Ending 10/31/13: The China Fund (five year cumulative return shown at 132.38% based on net asset value through 10/31/13, page 1)
I am going to list the holdings as of 10/31/13 just to show how much the managers have changed since that last report.
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| TOP TEN Holdings as of 10/31/13 |
Top Ten Holdings as of 3/31/14:
So the managers are not sleeping at their desks and are very active in portfolio changes.
Since I first bought shares, this CEF has made the following distributions, sourced mostly from long term capital gains:
Per Share
2011: $3
2012: $3.25
2013: $3.31
While I have an unrealized loss in the shares due to those large distributions, I am in the green on a total return basis.
DATA on CHINA: China | Economic Indicators
Rationale: This fund owns a few of the usual names that would normally be found in a China fund. Many of the top holdings would not be that well known to investors outside of Asia or China. It has done much better over the past three and five years than the SSE Composite Index, which topped out at 3412 back in July 2009 and was near 2200 in mid-May. The Hong Kong market has been better but mostly showing a lot of chop over the past five years. HANG SENG INDEX
CEFConnect has CHN's annualized total returns based on net asset value at +11.75% over the past five years.
Risks: The risks are discussed in the prospectus. The risks are the normal ones for a foreign country stock fund whose pricing is in USDs (currency risks). There is obviously a lot of country risk connected with China's stocks due to significant and adverse changes in government policy. China's growth is decelerating, and it is not known whether it will be able to avoid a hard landing as the government tries to transition the economy into one that is more tilted toward consumer spending rather than large infrastructure builds and exports.
I read a story recently where the authorities required Soho to quit airing American TV shows including the totally innocuous "Big Bang Theory". TIME.com Iran arrested some young people for making a dancing video. ‘Happy’ Iranians arrested for dance video
That is not as bad as Sudan threatening to execute a pregnant Christian woman because the authorities claimed that she had renounced her Muslim upbringing and would not denounce Christianity. CNN.com However, it is close to being on the same asinine mental wavelength.
Closing Price 5/23/14: CHN: $20.28 +0.04 (+0.20%)
6. Bought 50 of the ETF IFGL at $31.27-Commission Free at Fidelity (see Disclaimer): This ETF was purchased commission free at Fidelity.
Snapshot of Trade:
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| 2014 Bought 50 IFGL at $31.27 |
Sponsor's webpage: iShares International Developed Real Estate ETF | IFGL
Holdings as of 5/9/14: 194
Expense Ratio: .48%
Rationale: This purchase was commission free at Fidelity. I pick up exposure to international real estate companies as part of my REIT Common and Preferred Stock basket. Of the holdings, I have only owned Wharf Holdings, listed at number 10 in this fund's weighting. In the next item, I discuss buying back 50 Wharf shares.
Six of the top ten holdings are headquartered in Japan or Hong Kong. IFGL Holdings
The dividend yield is also good assuming that distributions remain near the 2012-2013 levels. IFGL Distributions The quarterly dividends are erratic as to the amounts with the largest payment made in the 4th quarter. Last year, the fund paid out $2.64+ per share in the 2013 4th quarter, and $1.088+ in the 2012 4th quarter. The fund labelled those distributions as income rather than capital gains. In addition to the $2.64+ per share distribution, the fund made three quarterly distributions totaling $.963+ per share bringing the year's total up to $3.6 per share.
Risks: There are the normal risks for an international real estate sector fund (e.g. risks related to currency, market and equity, asset class, concentration, and country). Those risks are summarized starting at page S-3 of the summary prospectus.
I would note that many real estate companies have a tendency to have the pedal to metal going into recessions with their stocks thereafter getting crushed during the downturn and its aftermath. The last recession was just worse for many of them given its severity. I took a snapshot of a chart and performance numbers that include the Near Depression period just to emphasize this point and drive it home:
While I am not familiar with any of these companies other than Wharf, generally speaking, I would expect them to be highly leveraged with debt which aggravates matters during recessions and periods of rapidly rising rates.
Closing Price 5/23/14: IFGL: $31.84 +0.28 (+0.89%)
7. Sold 158+ BDN at $15.28 (See Disclaimer):
Snapshot of Trade:
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| 2014 Sold 158+ BDN at $15.28 |
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| 2014 BDN 158+ Shares +$72.31 |
Rationale: I am transitioning into higher yield REITs. BDN had the lowest yield among the REITs currently owned.
The currently quarterly rate is $.15 per share which was last raised from $.1 per share in 2010 first quarter. The quarterly dividend was $.44 in 2008, which is an undesirable dividend history.
At that $.15 rate, the dividend yield would be about 3.9% at the $15.28 sale's price.
Future Buys: I will consider buying this one back at less than $12.5 per share provided BDN has raised its quarterly dividend rate. My last purchase was a 50 share add back in November 2012: BOUGHT 50 BDN at $11.7 (11/2/2012 Post) I viewed the REIT as undervalued when I last added some shares. There is still recovery potential for this office REIT, provided the economy continues to improve. An improving economy will improve occupancy rates that have been trending under 90% for BDN and many other office REITs since the Near Depression.
Closing Price 5/23/14: BDN: $15.24 +0.20 (+1.33%)
8. Back Back 50 WARFY at $13.08 (The $500 to $1,000 Flyers Basket Strategy)(see Disclaimer):
Snapshot of Trade:
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| 2014 Bought Back 59 WARFY at $13.08 |
Company Description: Wharf (Holdings) Ltd. (4:HKG) is a Hong Kong conglomerate operating in 3 business segments: (1) property development in China, (2) investment properties (e.g. Wharf Estates and Harbor City) and (3) logistics, hotels, communications, media and entertainment. The Wharf (Holdings) Limited
I bought the ADR shares traded on the U.S. pink sheet exchange. WARFY Wharf Holdings Ltd (1 ADR=2 ordinary shares)
Closing Price Hong Kong Ordinary Shares 5/8/14: HKD 50.7 -.65 (-1.27%)
At that price, the P/E is 11.88 according to Bloomberg, based on the estimated 2014 E.P.S. of HKD 4.27. Price to be book is shown at .5575. The next distribution will go ex dividend on 5/26 at HKD 1.2 per ordinary share, of HKD 2.4 per ADR or roughly $.31 per ADR share (2.37% yield at a total cost of $13.08 per share for that dividend). A lower dividend is generally paid in September, with that payment being HKD.50 per share last year. Assuming a similar dividend in September 2014, the total would be HKD 3.4 per ADR or about $.44 (3.36%) at the 5/8/14 current exchange rate.
0004.HK Interactive Chart (peaked at HKD 75 back in May 2013 and now trading below 200 say SMA)
After converting HKD's into USDs, and taking into account that 1 ADR equals two ordinary shares, I entered a limit order bid at $13.08:
Converting HKD 50.7 into USDs:
$6.54 x. 2=$13.08 per U.S. ADR
Prior Trade: Item # 6 Sold 50 WARFY at $14.51 (4/26/14 Post)(snapshot of profit=$99.68)- Bought 50 Wharf Holdings at $12.2 (4/1/14 Post)
Recent Earnings Report: This company reports earnings semi-annually. The last report was for the period ending 12/31/13. I would just note the projected and TTM P/E ratios compiled by Bloomberg and noted above.
Link to 2013 Annual Report: wharfholdings.com/.pdf
Rationale: As I noted when buying shares at $12.2 in April, my gut tells me that this HK conglomerate is undervalued at present. The HK listed shares show a steady incline from around HKD40 in July 2012 to a top near HKD79 in May 2013, when real estate stocks around the world headed south as U.S. interest rates spurted up from absurdly low levels to less absurd low levels. The shares then hit HKD47 earlier this year before moving up some. 0004.HK Interactive Chart
Risks: I discussed the risks when buying my last 50 share lot, noted and linked above.
Closing Price 5/23/14: WARFY: $14.55 +0.56 (+4.00%)
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