Friday, July 1, 2011

ADDED 50 WMT at $52.68/Bought Back 100 APF at 16.84/MKZ/Chicago PMI/Greek Parliament Approves Austerity Plan

The Shiller  P/E 10 number uses GAAP earnings.

The P.M. London gold fix for 6/30/11 was at $1505.50.  MTY has not yet suffered a maximum level violation. MTY Down to the Wire and MTY. The current annual period ends on Wednesday 7/27/2011, see page PS-2 Final Pricing Supplement.

The Greek Parliament actually approved the cuts necessary to implement the austerity plan. Maybe the U.S. can avoid a default now. S & P said yesterday that it would downgrade U.S. debt to "D" from AAA unless the debt limit is raised by August 4th. Apparently many in the GOP would prefer that result than to agree on any tax increase for their benefactors.

I did buy the double short ETF on 7-10 year treasuries yesterday, mostly as a hedge for my corporate bond portfolio and insurance against the GOP House members going off the deep end and taking the country with them, as a matter of their principles or so they say. It is just extremely irresponsible to hold a debt limit increase hostage to anything.

It will be interesting to see which side blinks first. I doubt that the GOP will approve a tax increase for the the wealthy or hedge fund managers, so it will have to be the Democrats. The GOP politicians are fully aware that the money spigot can be turned off, or down, by voting for any tax increase on the wealthy. Instead, their near unanimous vote on the Ryan budget showed their desire to cut tax rates for their benefactors even more, while requiring the middle class and the poor to bear the entire brunt of their proposed budget cuts. GOP Comes Out of the Closet on Medicare David Stockman and the GOP/GOP Reaffirms Commitment to Ryan's Plan for Medicare, Medicaid and Food Stamps (May 2011 Post)  The GOP Budget Plan and The Middle Class.

Ezra Klein details what caused the republicans to walk out of discussions, even after the Democrats agreed to the goal of 2.4 trillion in spending cuts over 10 years and the parties had agreed to 1 trillion in cuts. Irresponsible is just not an adequate word to describe their behavior.

The Democrats, of course, believe the wealthy need to transfer large chunks of their income to the Democrats' constituencies, and the tax code is simply the means for effectuating that wealth transfer.  The Democrats do seem intent on raising the marginal tax rate back to 50% on high income earners when all taxes are added up, including the higher taxes imposed by the "health reform" law. (see item # 8 in  Kiplinger magazine article).

There is a option for the President in the event the GOP causes the U.S. to default on its sovereign obligations.  Section 4 of the 14th Amendment to the U.S. Constitution provides that the "validity of the public debt of the United States, authorized by law, . . . shall not be questioned". Some legal scholars argue that this provision would give the President the right and the responsibility to pay the nation's obligations in the event the Congress behaves in an irresponsible manner. (see The Atlantic and article written by Bruce Bartlett  for The Fiscal Times) Support for that interpretation is found in the Supreme Court's decision in Perry v. United States, 294 U.S. 330 (1935). While that argument may in the end prove successful, a resort to it would not prevent a loss of confidence among U.S. lenders.

The Chicago PMI number released yesterday was much better than expected by the consensus estimate. That gauge rose to 61.1 from 56.6.

Recently uncovered evidence casts doubt on whether prosecutors will pursue the sexual assault case against the form IMF head Dominque Strauss-Kahn, according to an article in the NYT. That evidence allegedly calls into question the credibility of the accuser.

1. ADDED 50 Wal-Mart at $52.68 on Wednesday (Large Cap Valuation Strategy)(see Disclaimer): The decline in the VIX last Wednesday caused me to repurchase the 50 shares of WMT sold at $ 56.17.

The current consensus E.P.S. for the F/Y ending in January 2012 is $4.47. Earlier in 2011, WMT increased its annual dividend 21% to $1.46 per share. Investor Relations 

In 2001, WMT had earnings of $1.49 and paid out 28 cents per share in dividends. ( 2002 F/Y Annual Report at p. 13). Now, was the price of WMT shares higher or lower in 2001 compared to the present?   The price is about the same, unadjusted for subsequent dividend payments.  WMT Historical Prices There has not been a stock split since 1999.  

For an entire decade, the stock has gone up and down, mostly in a $50 to $60 range, and has ended up going nowhere.  This can be seen using the chart at Google Finance and adjusting the bar underneath the volume to show only the 2000 to present period. 

Yet, the earnings and dividends have continued to increase over the past decade at a good clip.   The problem is not WMT but the investors who bid the stock up to a $50+ price in 2001 when earnings were hovering around a $1.5 per share.  

I have no idea when the worm will turn for WMT shares. So, I move in and out with some regularity. (see, e.g. Bought 100 WMT at $49.55 (9/2009 Post)-Sold 100 WMT

I am reinvesting the dividends to buy additional shares. 

Morningstar has a 4 star rating on WMT shares.

This brings me back up to 100+ shares, with the other 50 bought at about the same price last March. Added 50 WMT at 52.21 (3/10/11 Post).

One knock against WMT is that same store sales have been falling for Walmart U.S. SEC FILED Press Release for Q/E 1/2011 Press Release for Q/E 4/30/11 It remains to be seen whether WMT will be able to turn this trend around for its Walmart U.S. operations (which excludes Sams Club), or whether the trend over the past few quarters is mostly due to the current high unemployment rate in the U.S. and the after shocks from the Near Depression. I suspect that the later reason has more to do with it.

See also: Item # 1  WMT and the Large Cap Valuation Strategy (March 2011 Post). 

2. MKZ (OWN):  I noted that the annual interest payment for the "principal protected" note MKZ was paid yesterday. MKZ is an unsecured senior note issued by Citigroup Funding and guaranteed by Citigroup as provided in the prospectus. Thus, the buyer of this kind of note is subject to the credit risk of Citigroup Funding and Citigroup. This note matures on 7/11/2014. Pricing Supplement

As previously noted, MKZ paid its minimum coupon of 3% after suffering what I call a maximum level violation during its annual coupon period. MKZ Reversion to Its 3% Guarantee Since I own 100 shares, bought at $9.96, I received $30 in interest for this note's second annual period which ended on 6/23/2011. The third annual coupon begins on the same day.

This note pays the greater of 3% or up to 31%, based on the percentage gain of the DJ-UBS Commodity Index during the annual coupon period, with the usual proviso on reversion to the 3% minimum. To make this calculation, I need to know the "starting value" of that index on the first day.

Based on the information at the, the DJ-UBS index closed at 155.967 on 6/23/2011.  The maximum level during the current period is therefore 204.317 (1.31 x. 155.967= 204.31677). One close above that maximum level during the current annual period will cause this security to pay the 3% guarantee, irrespective of where the DJ-UBS index closes on 6/25/2012.  However, if there is no maximum level violation, and that index closes at say 200 for illustration purpose only, then the annual coupon would become 28.23% (200 minus 155.967=44.033 divided by 155.967=28.23%)

So, if Citigroup survives to pay off this note in 2014, the worst that can happen is a 3% coupon for each annual coupon period, plus a loss of around $3 on the shares since the commission cost took my total cost slightly above the $10 par value. The upside is the potential for a coupon of up to 31%. Another note tied to the same index has hit twice so far. Bought 100 MKN at 9.85  MKN Closes with a 25.56% Gain in the Commodity Index-No Maximum Level Violation  Note ON MKN (18% coupon for 1st Annual Period) Snapshots of those interest payments can be found at MTY (5/9/11/ Post). As noted in that post, I own 8 "principle protected" notes issued by Citigroup Funding whose coupon payments are tied to an index or to the price of gold.

So given the different annual coupon periods for MKN and MKZ, there is a justification for owning both of them. Both were bought at less than par value. There is simply no way to know what will happen during the current year. Maybe MKZ will hit this year.  

The 3% minimum coupon needs to be kept in perspective too. If I went into the bond market now, and purchased a fixed coupon Citigroup bond, my yield to maturity for such a bond maturing in 2014 would be around 2.7%. FINRA - Investor Information on C.HDI  FINRA - Investor Information on C.GOR Both of those bonds are selling at premiums to their par value. The YTM includes the loss on the bond at maturity.

I am consequently receiving a larger minimum yield, due to my total cost numbers, with both MKZ and MKN, but I have the potential for more, possibly much more, compared to the buyers of those fixed coupon bonds. So, unless I become spooked about the credit risk, I intend to hold these notes until maturity.

See also: Item # 1 MKZ and MKN Now (2/2011 Post); MKZ vs. MKN (December 2009); MKZ (June 2010).

3. Bought Back 100 of the CEF APF at 16.84 on Wednesday (see Disclaimer): I sold earlier in the year 200 shares of APF for a gain of $292.96:

The movement in the VIX has caused me to repurchase 1/2 of that position.

I have discussed this CEF in several prior posts. Sold 100 of APF at 17.32 (April 2011);  Added 100 of APF at 15.64;  Bought 100 CEF APF at 15.08Added 100 of the CEF APF at $15

This stock fund invests in companies from the Asia-Pacific region.

As of 6/29/2011, the net asset value per share was $18.89.  That information can be found at the sponsor's web site, Daily Prices and at the Closed-End Fund Association.  The discount as of the close on 6/29 was at -10.64%.

The expense ratio is 1.15%, which is low for this kind of international fund.

This fund recently completed a tender offer for its shares at a small discount to net asset value. While institutional owners like that kind of deal, I would prefer to see the fund spend that kind of dough buying the shares on the open market, when the discount to net asset value is close to 10% or preferably higher.

This is a link to the last filed SEC Form N-Q, listing the fund's holdings as of 3/31/2011.

This is a link to the last SEC filed shareholder report for the period ending 12/31/2010.

This is a link to the APF page at Morningstar.

The VIX declined 4.34% to close at 16.52. That decline also resulted in the sale of a double short stock ETF for a small loss. I will discuss the trades from Thursday in the next post. 


  1. CNPF declares 1st dividend .065= about 4.3%

  2. I do not own CNPF. The recent fluctuations in share price are mostly due to exchange rate fluctuations. Those fluctuations could easily have more of an impact on the price of CNPF than the change in value of its owned securities.

    You may want to keep an eye on the CAD/USD exchange rate or just monitor FXC, the ETF for the Canadian dollar. If FXC is going up in value, I would expect to see a rise in CNPF, and the converse would also be true.

    Since my position in CADs was purchased at lower exchange rates, and I view my Canadian Dollar strategy to be a very long term one, I am not concerned about current exchange rates. I buy securities using my CADs on the Toronto exchange and take all distributions in CADs.

    For CNPF, an investor needs to be concerned about the exchange rate fluctuations.

    Also, while I have not checked the value of that fund's individual holdings, I would not be surprised to find that most of the preferred stocks are selling near or above their par values. When rates start to increase, assuming this ever occurs in our lifetime, then it would be reasonable to expect the price of CNPF to fall and it would be difficult for me to see much of an increase in price except due to exchange rate fluctuations.

  3. thx for that, the FXC chart just broke out, it looks like going to 104-5 previous high so I'm ok for $25/month in income on 400sh for the time being I guess. I paid 15.

    Couldn't help myself selling some GYB at 19.93 paid 19, some are chasing it now, see that?

  4. Your dividend rate will also be impacted by the exchange rate. The distributions will be paid to the fund in CADs. When fixing the amount of USD distributions to the owners of CNPF, the amount will be impacted by the exchange rate. A stronger CAD vs. USD will mean those CAD distributions will buy more USDs, resulting in a higher rate than justified by the yield in CADs, and the converse will be true.

    I suspect that your distribution is being adversely impacted by the 15% Canadian withholding tax. The 1099 for 2011 will reflect how much tax was paid related to your shares.

    I have seen the impact on the dividend level resulting from the rise in the CAD primarily from a large position owned by my father in Sun Life (SLF), which he received in a demutualization. That firm has been raising the dividend every year, but the rate has gone up a lot more for the U.S. citizen over the past two years after those CADs are converted into USDs.