Tuesday, January 17, 2012

Bought 50 of the ETF VWO at $39.73/Added 90 ERF at $24.69 USDs/Sold 100 GDO at $18.46

Last Friday, the DJIA declined over 100 points after several news services reported that S & P planned to downgrade the sovereign debt ratings of several European nations. After France confirmed that it would lose its AAA rating, the market rallied into the close, with the DJIA losing only .39% by the close.

The market's tepid reaction to this news is attributed to a belief that the downgrades were anticipated by investors. I would not be so sanguine about it, viewing it as merely the latest shoe to drop in the ongoing blowback from the Age of Leverage. What Will Produce Growth after the Age of Leverage? (September 2009 Post); Underlying Cause of the Current Long Term Bear Market is Too Much Debt (June 2010 Post).

After the market's close last Friday, S & P did downgrade the sovereign debt ratings of several European countries. Portugal was reduced to the junk grade of BB. France and Austria lost their "AAA" ratings and are now at AA+. Spain was downgraded to A and Italy to BBB+. The downgrades for Portugal, Spain and Italy were two notches Bloomberg CNBC Reuters NYT  WSJ

Subsequently, S & P downgraded the European Financial Stability Fund to AA+ from AAA. This was anticipated after France lost its triple A rating. France's ten year note has barely budged in response to the downgrade. FR 10Y Govt Bond Benchmark

Another story circulating last Friday was that Greece and its private creditors had reached an impasse on a debt swap. Reuters Bloomberg

Late last week, Germany reported that its economy declined slightly during the 4th quarter. Germany's debt is still rate "AAA" by S & P.

S & P also rates Canada and Australia at "AAA". I own Canadian government bonds through a low cost ETF traded on the Toronto exchange. BOUGHT 200 CLF:TO AT 20.20 CAD Added 100 CLF:TO-Sold 100 CPD:TO  Bought 100 of ETF CLF:TO at 20.10 CAD Dividends are paid monthly to me in Canadian dollars. (website: CLF - Claymore 1-5 Yr Laddered Government Bond ETF) I currently own 400 shares and plan to do nothing other than sit on those shares and just let the Executor of my estate decide what to do with them, hopefully many years in the future.

I would note that PIMCO has recently introduced two USD denominated ETFs that buy Canadian and Australian debt securities. The trading volume is so far minuscule. PIMCO Canada Bond Index Fund (CAD) PIMCO Australia Bond Index Fund  (AUD) Of course, the buyers of those ETFs are subject to currency exchange risks. I am only interested in buying AUD since I prefer to buy the low cost ETFs for Canadian bonds on the Toronto exchange using my existing CAD stash. Canadian Dollar (CAD) Strategy

I raised some cash late Friday, particularly in the IRA, in response to these developments, based on a fairly typical knee jerk response by the OG. It just seems likely that Europe will continue to weigh down the markets and the risk remains to the downside. El-Erian's  analysis of the downgrades seems to be on the mark to me. It will not be until Thursday that I will be able to summarize those sales.

The decline in the EURO is also signaling more trouble ahead for the eurozone. FXE declined $1.43 or 1.12% to close at $126.33 last Friday.

1. Bought 50 of the ETF VWO at $39.73 Last Wednesday (see Disclaimer): By buying this security in my Vanguard brokerage account, I did not have to pay a commission. VWO is a low cost ETF from Vanguard covering emerging markets. The expense ratio is just .22%. and the fund owns over 900 stocks. Vanguard - MSCI Emerging Markets ETF - Overview I am just grateful that I sold this ETF last year at $50.22. I also disposed of Schwab's emerging market ETF on the same day at $29.99. This stock category subsequently fared poorly for the remainder of 2011.  China's stock market was a major drag last year. I expect more volatility with emerging market stocks, compared to the S & P 500, and the U.S. major markets are plenty volatile now.

Two year chart links for the SSE Shanghai Composite Index IndexBSE SENSEX Index (India); IBOVESPA - Index (Brazil); and HANG SENG INDEX.

Vanguard MSCI Emerging Markets ETF closed at $39.62 last Friday.

2. Sold 100 of the Bond CEF GDO at $18.46 Roth IRA Last Tuesday (see Disclaimer): While this bond CEF has paid a good monthly dividend, I have had a small loss on the shares for virtually the entire period of my ownership. Until recently, part of that loss was due to an expansion of the discount to net asset value from the date of my purchase. The market price, in relation to the net asset value, has recovered some over the past few days, at least to the point where GDO was selling at a small discount to its net asset value per share. Last Tuesday, the last data available to me when I sold the 100 shares, the net asset value per share was at $18.72 per share, and the closing price that day was $18.44. The discount to net asset value was then -1.5%. Last Wednesday, the shares closed at $18.51, with a net asset value of $18.74 per share, thereby reducing the discount to -1.23.

I sold the 100 shares at near break-even, excluding the monthly dividend. Particularly when the dividend yield is over 8%, I am content to break-even on the shares of a bond CEF. 

I still own 120 GDO shares in the ROTH IRA, bought at a lower price. Bought Back 50 shares of GDO at 17.8 December 2010 I can not find a blog reference to the 70 shares bought shortly thereafter at a total cost of $17.75 per share: 

GDO 220 Shares ROTH IRA Before 100 Share Sale

I will consider buying the 100 shares back when and if such a purchase would lower my average cost for the remaining 120 shares. 

I also own  shares in a taxable account. I quit using the dividend to buy additional shares in the taxable account several months ago. I have always took the dividend in cash in the ROTH IRA, which is the norm in that account.  

I previously sold 75 GDO in the ROTH IRA at $19.24. Those shares were part of a 100 share lot bought at $18.63. The remaining 25 shares of that lot were sold last Wednesday along with 75 shares bought at $18.47 (April 2010).

Western Asset Global Corp Defined Opportunity Fund closed at $18.45 last Friday.

3. ADDED TO ENERPLUS (ERF) at $24.69 USDs Last Thursday (Canadian Dollar (CAD) Strategy)(see Disclaimer): I noticed last Thursday that Fidelity converted my 100 shares of HUSKF into the Toronto exchange listed HSE:CA. I had an odd number of Enerplus shares, ERF:CA, and was not able to sell them on the Toronto exchange since only round lots were accepted by my broker. I therefore bought 90 of ERF on the NYSE to round up to a round lot in case that I want to sell all of my shares on the Toronto exchange at some point.

I may end up buying more Canadian securities this way since my commission is lower when buying on U.S. exchanges.

My last purchase was a buy at 23.95 CADs: Bought 100 Enerplus (December 2009). I thereafter sold 200 ERF  @ 28.05 CAD.

Prior to converting to a regular corporation in 2011, Enerplus was an income trust and did not have to pay Canadian income taxes at the corporate level on the income distributed to its unit holders. This is basically the same kind of tax structure permitted in the U.S. for REITS and Business Development Corporations that allow such companies to frequently pay rich dividends, assuming they have the net income to pay out in dividends. A change in Canadian tax law caused these income trusts to convert into regular corporations. I would generally expect their dividend rates to decline due to double taxation, i.e., the corporation pays income tax at the corporate level and shareholders pay a tax on that part of the income distributed to them as dividends.

ERF is currently paying a monthly dividend of 18 Canadian cents per share. According to the company, this dividend is treated as a qualified dividend under U.S. tax law. Enerplus - News Releases I would not make a prediction on how much longer that rate will continue. In addition to the tax law change, the dividend will be impacted by drilling success, energy prices, production rates and costs.

As noted in this article at Investopedia, primarily concerning another firm's exploration activities in the Bakken shale region, ERF has 74,000 acres in that region and expects to increase production to 20,000 to 25,000 BOE per day by 2014. Bakken formation- Wikipedia

This is a link to the SEC filed news release announcing third quarter results. www.sec.gov  As shown in that report, the firm's production is weighted in natural gas which I would view as a negative based on current prices.

Daily net production averaged 83,139 barrels of oil equivalent per day in 2010.

Morningstar does have an analyst report for this company. The stock is currently rated four stars.

Enerplus (ERF) closed at $24.53, up 31 cents, last Friday on the NYSE. On the Toronto exchange, ERF:CA rose 46 cents to close at 25.12 CADs. FXC, the currency ETF for the Canadian Dollar, declined 43 cents last Friday to close at $97.24. The decline in the CAD against the USD would have resulted in ERF rising less in USDs. 

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