Tuesday, January 24, 2012

Sold 100 GDO at $18.72/Bought 100 TY at $14.82/FNLC

This is a link to a recent article in SmartMoney that summarizes some of the advantages and disadvantages of closed end funds.

I do not recall Felix Zulauf being optimistic about stocks.  I do pay attention to his opinions since he is both articulate and intelligent. I never have his certainty, born no doubt out of a considerable amount of arrogance, but will assign probabilities to his dire predictions.

In last week's Barron's Roundtable (subscription), he made the following predictions:

A. China's GDP will slow to a 7.2% this year, while the U.S. economy will grow in the 1 to 1.5% range.

B.  The deflationary pressures are intensifying. The market "could" drop 20% from the first quarter high. The global stock markets will top out in the first quarter. Thereafter, the cyclical bear market, started last spring, will reassert itself and continue into the later half of 2012 or into early 2013.

C. The U.S. dollar will have temporary strength. The 10 year treasury may decline to a 1 to 1.2% yield, which will mark the end of the long term secular bull market in bonds. Emerging market currencies and stocks will decline, and he recommends shorting the emerging market ETF EEM. He believes that it "could" fall at least 20% later this year. That is his minimum expectation. Emerging market ETFs are doing very well so far in 2012. EEM rose 40 cents yesterday to close at $41.78, up 10% so far in 2012. I would add that it would not be that unusual for emerging market ETFs to fluctuate within the range predicted by Zulauf,

D. Given his bearish view of China's growth he recommends shorting the Australian dollar. One way to short the AUD, which I would not do, would be to short FXA, the currency ETF for the Australian dollar which rose .55% yesterday to close at $105.62.  On the last trading day of 2011, FXA closed at $102.61 and subsequently paid a dividend of $.312 a share. FXA Historical Prices

E. He does not believe there will be a positive outcome to Europe's sovereign debt and bank problems.

Last year, his long recommendations, for the most part, failed miserably. 2011 Roundtable Report Card - Barrons.com

1. Continued to Pare GDO By Selling 100 at $18.72 Last Thursday-Taxable Account (see Disclaimer): This transaction brings me down to 236.082 shares of the bond CEF GDO, held in a taxable account, with another 120 held in the ROTH IRA after a recent pare.  Sold 100 GDO at $18.46 The rational for selling these shares is discussed in that post. The shares sold last Thursday at $18.72 were bought in March 2010 at $18.46. So, I broke even on the shares and received almost two years of dividends. At a total cost of $18.72, the dividend yield is close to 8.17% at the current monthly distribution rate of $.1275. 

The OG is content accepting that yield without losing money on the shares. 

GDO went ex dividend for its monthly distribution on Wednesday, the day before the last sale so I will receive one more monthly dividend on the 100 shares sold last Thursday. 

On the day of my sale, the net asset value per share was $18.78.

Yesterday, Western Asset Global Corp Defined Opportunity Fund closed at $18.69 with a net asset value of $18.84. 

2. First Bancorp (FNLC)(own: REGIONAL BANK BASKET STRATEGY)This bank is a minor position in the regional bank basket. First Bancorp reported 4th quarter net income of $3 million, or 29 cents per share, up one cent from the year ago quarter.  I am not pleased with the increase in non-performing loans to 3.21% of total loans, compared to 2.39% at the end of 2010. The efficiency ratio is in the top 15% of its peer group at 49.74%. The average for the peer group is 65.45%. As of 12/31/2011, the estimated leverage capital ratio was 8.15% (Well capitalized 5%>); tangible book value per share was $11.3; NPAs to total assets stood at 2.32%; the net interest margin was 3.28%; and the return on average tangible common equity was 11.05%. 

After selling my highest cost shares at a small profit, I am down to 51+ shares. Bought 50 FNLC at $12.79

First Bancorp closed yesterday at $15.79 and has about a 4.94% yield at that price.

3. Bought 100 of the stock CEF Tri-Continental (TY) at $14.82 Last Thursday (see Disclaimer):  TY is a closed end fund that managed to survive the Great Depression. The inauspicious IPO date was 1/05/1929. Fund Details  

I am hesitant to buy much in this fund due to its lackluster 10 year record. Those returns are provided by the sponsor at the foregoing linked page. It has admittedly been a tough ten years for stock investors. A 1.11% average annual return over that ten year period is okay under those circumstances. I can certainly attest to the fact that the last ten years have not been optimal ones. 

The main appeal to me is that the fund was selling at over a 15% discount to its net asset value at the time of my purchase. Another appeal for the OG is that the fund mostly buys large cap value stocks. This is a link to the top ten holdings as of last month:  Portfolio Details I took a snapshot: 

The fund also has a relatively low expense ratio at .6%. 

Tri-Continental page at the CEFA

Morningstar rates the fund at 3 stars. 

Link to Last Filed SEC Form N-Q:  www.sec.gov 

Link to last SEC filed shareholder report: SEC Form N-CSR 

On the day of my purchase, the stock closed at $14.8, with the fund having then a net asset value per share of $17.45, creating a discount of -15.19 to NAV.

Tri-Continental closed at $14.9 yesterday. The net asset value per share as of 1/23/2012 was $17.53, creating a discount to net asset value at that time of -15%. 

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