WARNING ON CANADIAN ENERGY TRUSTS CONVERTING TO REGULAR CORPORATIONS:
Added Saturday Afternoon 2:05 P.m.: This is part of the warning that I am giving U.S. investors about Canadian energy trusts converting to regular corporations. I am referencing the conversion of 100 shares of Advantage Energy Income Fund Trust Units on a 1 for 1 basis for shares in Advantage Oil and Gas which occurred last year in my account at Fidelity on 7/14/2009.
I received my 4th corrected 1099 this month from Fidelity, which removed the non-existent $479, referenced in the post below, as a phantom dividend. This was the value of the Advantage Oil shares received in the exchange at the date of the exchange. Instead, and this may be closer to being accurate, Fidelity is now treating the conversion of my 100 shares of Advantage Energy Income Fund Trust Units as a SELL yielding proceeds of $479 on 7/14/2009 (the date of the conversion) with an unknown cost basis. This sell did not happen, so it is some kind of tax event, and is classified now as a long term capital loss even though I had never had any position for longer than 12 months. I was just a U.S. citizen doing nothing except noting a 1 for 1 exchange of the trust units for shares in a regular corporation, and I did not hold any shares for over a year. And, then when I sold the shares received on a one for basis for the original trust unit shares, called Advantage Oil and Gas, they are treating it as a second sale, this time of a short term nature, with my original cost basis of the old Advantage Energy Income Units, which makes no sense. There is no way that I will hold ERF and PVX when they convert to regular corporations. I may even sell them before I know whether or not this will happen for them, just to be sure to avoid another headache. This is just ridiculous.
I had to figure the above out on my own. Fidelity did not note on its corrected 1099 received today a change in the "Gross Proceeds Less Commissions" as being a corrected item. The IRS computer would kick my return out if I did not have the proceeds number matched up and I had already downloaded the information into turbotax. The gross sales number went up by $479 from the last corrected amount. This is the number representing the value of the stock on the date of the exchange which is now being treating as a sale with the gross proceeds realized to be the $479 value of the 100 Advantage Oil and Gas regular corporation shares received that day for the 100 shares of the Advantage trust units.
So every U.S. investor needs to decide, knowing about the foregoing in advance, whether or not to own a canadian energy trust when it converts into a regular corporation. For me the answer without equivocation is under no circumstances will I own one undergoing a conversion again.
I would doubt that many Fidelity customers would pick up on the change to the gross proceeds number. LB is quite a nerd's nerd. I know how I will account for this mess now.
The conversion from a trust to a regular corporation has to do with the tax change in Canada whereby these trusts will be taxed as regular corporations in 2011. Yields on royalty trusts sustainable? income trusts
************Original Post
On Friday, I received my third corrected 1099 from Fidelity sent in March. There was a new $479 dividend included in this latest version, allegedly paid by a Canadian company called Advantage Oil and Gas, which was never paid by the company. Instead, Advantage was a canadian energy trust that converted to a regular corporation on or about 7/14/2009. I received one share of the new corporation for each share of the trust held, and there was no change in the price of the security as a result of this exchange: AAV: Historical Prices for Advantage Oil & Gas Ltd On 7/14/2009, the value of the shares was $479. So the entire value of the shares in the new corporation was classified as a dividend to me. I wrote an email to Fidelity yesterday about the matter and the response was simply that it is the way the transaction was reported to them.
If this is a correct way to classify the conversion, then it is clearly disadvantageous to a U.S. taxpayer. In a few days after the conversion, I sold the shares after the conversion for a loss, and Fidelity reported the proceeds of the sale. I certainly will not wait for some similar result in my current holdings of Provident (PVX) and Enerplus (ERF) and will consequently sell them before anything similar is done by them. At a minimum, the tax issue is far too complicated for me to deal with it and that by itself would justify the disposal of other trusts before a conversion is made, speaking just for myself. And, reporting the manner consistent with Fidelity's 1099, which I will do, will create a phantom tax liability that can not be reasonably justified.
WARNING ON FILLS OF ODD LOT ORDERS:
I have not mentioned in this post a fill of 50 shares of STDPRB by Fidelity via Knight Trading at $18.85 on Friday. I am contesting the fill. I was rounding my lot up to 200 shares when this security was trading at 18.45 Bid and 18.49 Ask. It was actively traded. I therefore placed a bid to buy 50 shares via Fidelity at the market and it was filled by Knight at 36 cents higher than the ask price (CORRECTED FROM ORIGINAL POST THAT SAID 26 CENTS HIGHER), and far higher than the issue traded at anytime during the remaining part of the trading session. This has happened to me in this past. I will note Fidelity's response when I receive it.
1. Bill Gross on Bonds: I certainly agree with some comments by Bill Gross last week that the three decade bull market in bonds has run its course. BusinessWeek Bond funds have seen inflows of 409 billion over the past 14 months as many individual investors seek a yield alternative to money market funds and treasury bills yielding near zero. I suspect that this will end badly for them. The only question is when will the bear market start looking back with twenty-twenty vision.
Greenspan referred to the recent rise in treasury bond rates as the canary in the coal mine. Gross is concerned that profligate spending and borrowing by governments will lead to inflation and a rise in rates. Bloomberg.com For those who have not been around a long time, the bond market does go into a long term secular decline periodically. I would date the current long term bull cycle to the early 1980s when the Federal Reserve successfully stifled hyper inflation in the U.S.. The current SEC yield on BND, the Vanguard ETF for the total bond market, is 3.3% as of 3/25/2010: Vanguard - Vanguard Total Bond Market ETF Overview
2. Sold 40 FR at $8.2 (see Disclaimer): During the worse days of the bear market, I continued to invest small amounts in common stocks. During most of the period from September 2008 to March 2009, the strategy was to limit stock investments to cash flow generated by interest and dividends or to buy a new position with the proceeds realized from one sold. There were several days during the height of the bear market where I did scatter buys, where I took the cash flow received into my account and bought a small number of shares in a variety of companies on the same day. This restriction of stock buying activity never did apply to the purchases of bonds and bond like investments such as preferred stocks.
On one day in November 2008, I bought shares in First Industrial, New York Times, News Corporation, SL Green, CB & L Properties and Gannett. LATE DAY TRADES: GCI, CBL, FR, SLG, NYT, NWSA Of those buys the main laggard has been First Industrial which was bought at $6.19. I sold those shares on Friday at $8.2. I still own FR's cumulative preferred stock in an IRA, bought at $8.4 to yield over 21% per annum at my cost. I see no reason to sell those shares.
I made the most money on S L Green which more than doubled, and surprisingly a good percentage gain in the NYT and Gannett. I still own shares in CBL Properties bought at $3.7 and NWSA: purchased at $6.65. Both of those stocks are trading at over $18. And I still own shares in SLGPRC in both retirement accounts, an SL Green cumulative preferred stock, bought at $10.5 and $11.89, less than half of its current value. The 50 shares bought at $10.5 in March 2009 will give me 18% per year in dividend payments based on that cost. I see no reason to sell those shares. Bought SLGPRC Those shares are selling at near their $25 par value now. The income stream in the retirement accounts is more important to me than capturing the profit by selling those shares.
I also bought blue chips in the same way during that period. I view the strategy as a success and will do it again when the next bear cycle returns. The main point that I will make about the strategy was that I was able to do it without causing any psychological stress. I would have been on pin and needles if I had deployed large sums of money into stocks in October or November 2008, based on what happened subsequently. It was not until March 2009 that I felt comfortable enough to make a series of significant stock market purchases summarized in the posts from March and April 2009.
3. Bought 50 of the TC PYS at $20.01 (see Disclaimer): I mentioned to a reader in an email exchange last Friday that I would not be fooling with these long bond purchases if I was receiving 4% in a money market account, or any other viable alternative. I had tried to buy PYS at around $18 a few weeks ago. The order was not filled, and subsequently PYS began to rise in early December 2009. PYS: Historical Prices Based on that rise, I gave up on it until Friday. Uncle Ben's Jihad against savers is just wearing me down. What can I say? I am almost a liberal now in what I am willing to buy for yield, and that can be the only explanation for buying even 50 shares of PYS at $20.01 last Friday.
This TC has a senior bond from R.R. Donnelley and Sons ( RRD) as its underlying security. The bond matures on 4/15/2029. The QuantumOnline.com site shows that the bond is rated investment grade. I confirmed that information by checking the underlying bond information at FINRA. The BBB from S & P is investment grade.
This is a link to the Reuters description of RRD and to its key developments page. The consensus E.P.S. estimate for 2010 is $1.53 and $2.03 in 2011. RRD: Analyst Estimates
Interest is paid semi-annually in April and October. The coupon of the TC is just 6.3%, less than the underlying coupon of 6.625%. This is the link to the prospectus: www.sec.gov/
At a total cost of $20.01, the current yield of the TC is around 7.87%. The underlying bond at the last trade last Friday of 91.2 has a current yield of 7.264%. I always check this information. The underlying bond is actively traded, and I can check historical trades at the FINRA site. The YTM of the TC will also be higher than the underlying bond due in part to its larger discount to par value. At a cost of $21.01, the YTM for the TC is 8.78%. Morningstar Bond Calculator: Yield to Maturity, Returns, Taxable and Municipal Bonds The YTM captures the additional yield associated with the profit on the shares, assuming par value is paid on the maturity date.
I am already familiar with RRD. I am somewhat concerned about the debt load shown on the balance sheet: RRD: Balance Sheet for R.R. Donnelley & Sons Company The long term debt number as of 12/31/09 was 2.982 billion. However, I am relieved by the net cash flow number for operations being 1.4258 billion in 2009: (page 42: Form 10-K)
In February, RRD announced an all cash acquisition of Bowne (BNE) for 481 million. Press Release Filed with SEC.
RRD reduced its debt by 804.4 million in 2009: Press Release
I do not expect much for this buy and would be pleased to hold it for a year or two, collect a few interest payment and then sell it for a $1 profit. Any more profit than that buck would be viewed as gravy.
Since the crux of my strategy is to generate a cash flow to purchase securities, I view a number of these recent bond buys to fulfill that objective more than the current alternatives, and any capital appreciation would be considered an added benefit.
4. Sold 100 OPXT at $2.47 (see Disclaimer): This transaction constituted the second round trip for this LT. The shares were bought at 1.89. I will never understand Opnext's products. I sold the shares after reading this Barrons synopsis of Morgan Keegan's views on the stock.
5. Bought 50 ConocoPhillips at $51.35 (COP)(Dividend Growth Strategy)(See Disclaimer): My prior round trip on COP shares was a buy at $38.60 in March 2009 and a sell last October at $46.45. This is another one where it would have been more advisable to keep this dividend grower purchased at a favorable price for a long term hold.
I decide to repurchase the shares after Conoco announced its intention to raise its dividend by 10%. The dividend was raised from 50 cents to 55 cents. At a total cost of $51.35, the yield at that rate would be about 4.28%. COP has raised the dividend every year since the formation of COP eight years ago. Both the starting yield and the history of dividend increases are important criteria for selecting stocks under a dividend growth strategy.
ConocoPhillips also announced its intent to sell 1/2 of its stake in Lukoil and other assets. NYT That stake is worth about 4.7 billion at current prices. WSJ Those proceeds will go to share repurchases.
Conoco's aggressive acquisition era of the past decade is giving way to more focus on being more profitable rather than bigger for the sake of being bigger. The 36 billion spent to acquire Burlington Resources in 2006 was one that would have been better left undone. Item # 4 Bought 50 XOM at 67.81 Wall Street sold the shares in response to the news, but the strategy makes sense to me, provided the company executes it properly. (see generally discussion in Investopedia article)
The current estimates, which may change as a result of the divestitures, call for an E.P.S. of $5.92 in 2010 and $7.59 in 2011: COP: Analyst Estimates for ConocoPhillips An estimate for an integrated oil company is not the same as estimating Coca Cola's earnings. A wide variety of factors can cause wide swings in income. I am not sure that I would pay attention to any person's estimate of refining margins in calender 2011.
Price to sales is .56 and price to book is 1.23.
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