Friday, March 16, 2012

Housing Bubble in Canada?/Eaton Vance CEF Dividend Reductions/Sold 100 GJS at $14.9 and Bought Back 100 of GYB at 17.2-Roth IRA

The Philly Fed's manufacturing index rose to 12.5 in March from 10.2 in February. Survey Results Suggest Continued Expansion in Manufacturing - Philadelphia Fed The new orders component fell to 3.3 from 11.7 in February. The employment component increased to 6.8 from 1.1.

Washington Trust (owned) increased its quarterly dividend to 23 cents from 22 cents. I still own 50 shares of the 100 shares bought at $15.26 (January 2010). This raise will give me about a 6% yield at my cost. Washington Trust Bancorp closed yesterday at $24.07, up 70 cents per share. I sold 50 of 100 WASH @ $22.44. (see snapshot at REGIONAL BANK BASKET STRATEGY GATEWAY POST)

New York Community Bancorp (own) broke above its 200 SMA and found some buyers yesterday. NYB Interactive Chart NYB rose 41 cents in trading yesterday to close at $13.55.

TICC Capital, a BDC, commenced a public offering of 4 million common shares, plus an over-allotment option for an additional 600,000. Stock offerings is one, among many, disadvantages to owning BDCs.

Dole Food Company (own as a LT) reported better than expected results for the 4th quarter last night.

S & P raised its credit rating on Dillard's senior debt to BB from BB-. TEXT I own the 7.75% senior bond maturing in 2027 (FINRA), having sold the exchange traded TP,  Dillard's Capital Trust I 7.5% Pfd., with its 7.5% coupon and a 2038 maturity, Prospectus.

1. Eaton Vance CEF Dividend Reductions: Several of the Eaton Vance closed end funds lowered their dividend payouts. Eaton Vance Equity Income Closed-End Funds Declare Distributions and Announce Distribution Changes  Among those funds, I own EOI, EXG and ETW. The largest cut was a 14.2% reduction in EXG's quarterly payout to $.244 per share. All of these funds have been supporting their payouts with returns of capital. Return of capital information is available to non-subscribers at the Morningstar site. As shown at that site, EXG has supported a large portion of its payout by returning its investors capital.  Morningstar refers to this practice as a "destructive return of capital", and I would not disagree with that characterization whenever the dividend is not substantially supported by earnings. 

Part of the problem for these funds is due simply to the catastrophic bear market from October 2007 to March 2009, which took away the option of supporting the dividend with realized capital gains. Given the use of tax loss carryforwards to offset future capital gains during the current bull run, this source of support will likely remain absent for awhile longer.  I would support a reduction in dividend payments in order to bring the amount paid more in line with earnings before application of the tax loss carryforwards. Other individuals will sell after a fund announces a dividend cut.  

The last shareholder report for EXG showed a total cost for its investments at $2.971 billion and a total value of $3.120 billion, as of 10/31/2011. (page 6: Eaton Vance Tax-Managed Global Diversified Equity). Even without using tax loss carryforwards, that kind of unrealized appreciation is not likely to provide much opportunities for consistent realized capital gains sufficient to support a large dividend payout. The market has improved since 10/31/2011, and the unrealized gain number is hopefully higher now. Still, I doubt that the current number would change my conclusion.  In note 1 D at page 14, the fund reveals that it has a capital loss carryforward of $1.141712317 billion. That kind of loss with just smother reasonably anticipated capital gains for an extended period.

Eaton Vance Tax-Managed Global Diversified Equity Income Fund (EXG) closed at $9.05 yesterday.

2. Housing Bubble In Canada?: I have read a number of articles recently relating to a possible housing bubble in Canada. Some of the statistics are worrisome. Housing prices have risen at a much faster rate than incomes. In developed economies, average wage increases are not going to be 10% to 20% per year, needless to say. When home prices are accelerating at a higher rate than wages, a decline in home prices becomes inevitable.

The Canadian consumer also has a worrisome level of household debt to disposable personal income. MarketWatch In 2011, the household debt to disposable income ratio was 153%, much higher than the highest level reached in the U.S. before the bursting of our housing bubble. (see also article at The Globe and Mail). This is a link to the table prepared by the Canadian government: National balance sheet accounts: Table 2 Household sector indicators – Not seasonally adjusted.

If I was running one of the large Canadian banks, and looked at those numbers, I would not dismiss them or try to explain them away. Instead,  I would substantially cut back on the origination of new mortgages. I would also hedge my existing portfolio as wells as sell down my mortgage position.

At its peak in the U.S., the household debt to disposable income ratio topped out close to 130%: Household Credit Market Debt Outstanding (CMDEBT)/Disposable Personal Income (DPI) This is a link to a chart at Bloomberg that contains a graph of this ratio for both the U.S. and Canada.

I would add that the savings rate is higher in Canada than the U.S. The U.S. personal  savings rate declined below 2.5% in the waning years of the housing bubble as consumer debt obligations exploded to the upside.

I do not own any of the Canadian financial institutions individually. I do own 300 shares of the BMO Dow Jones Canada Titans 60 Index, an ETF traded on the Toronto exchange, that is heavily weighted in those financial stocks. That is why I am monitoring the situation to some degree, though I would add that it is difficult enough to keep up with what is happening in the U.S. and it is obviously much harder to both comprehend and monitor developments in non-native lands. I have visited Canada once in my life and that was in 1968.

3. Pared Trade in ROTH IRA: Sold 100 GJS at $14.9 and Bought 100 GYB at $17.2 Last Wednesday (see Disclaimer): Both of these securities are Synthetic Floaters in the Trust Certificate form of ownership. The underlying security in both TCs is a Goldman Sachs bond. Both securities have $25 par values. That is where the similarities end.

The underlying security in GJS is a GS senior bond maturing in 2033.  Interest payments can not be deferred.

GYB contains a trust preferred from GS Capital, and that TP represents an undivided interest in a GS junior bond maturing in 2034. Interest payments can legally be deferred for up to five years, provided no activation of the stopper clause (e.g. by a dividend payment on the common stock or the GS equity preferred stocks). As a practical matter, I doubt that GS would ever defer an interest payment on its TPs, which would require the elimination of its common and non-cumulative equity preferred stock dividends, short of a bankruptcy filing. That kind of deferral and elimination to "preserve capital" would send clients to the exit by the droves.

Importantly for now, GJS has no minimum coupon and is currently paying monthly interest payments at .9% over the 3 month treasury bill rate. Prospectus That rate is of course hugging zero now. Consequently,  I have not received much income from this security, less than $2 per month for 100 shares, and will unlikely receive much of a rise for as long as the Fed continues its Jihad Against the Saving Class.

GYB pays quarterly at the greater of 3.25% or .85% over the 3 month LIBOR rate on a $25 par value.  Prospectus The minimum coupon is the applicable rate now. At a total cost of $17.2 and at the 3.25% coupon rate, the effective current yield would be about 4.72%, much better than the current yield of GJS. Moreover, over the long term, a .85% spread over a 3 month LIBOR rate would be better than a .9% spread over the three month treasury bill based on the historical spreads between those two rates. So part of the disadvantage of GYB's higher cost per share, in periods where the float provision becomes the applicable rate, would be negated by that slightly better float provision.

At a 6% 3 month Libor rate during a computation period, not likely to happen anytime of soon of course, the yield would be about  on an annualized basis. (.06% 3 month LIBOR + Spread of .0085%=.0685% x. $25 par value=$1.7125 divided by total cost of $17.2=.09956%)

Both securities have room to run to the upside, given their respective $25 par values, assuming no adverse GS credit event. I would not anticipate a substantial rise closer to the $25 par value unless short term interest rates were moving up during a well recognized period of FED tightening.

Long term GJS may be the better security given its greater discount to par value and a return to normal treasury bill rates.

The GJS shares were sold near break-even, achieved only after I averaged down by buying 50 shares at $13.25. I have previously exited the position at a profit.

I have had a successful trading history with GYB but most of the success was due to buying at much lower levels. (e.g.: Sold 100 GYB at 18.09-Bought at $10.95 in April 2009) Most of the more recent trades have been for slimmer profits.  (Sold 100 GYB @ 19.4-Bought at 17.97 and at 18.49; Bought 50 GYB at 18.63 in the Roth IRA and Bought 50 GYB @19.07-

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