Friday, October 5, 2012

CVO/ADDED 70 AEG at $5.28/Added 50 NLY at $16.85-ROTH IRA/Added 100 RVT at $13.03

S & P placed the credit ratings of Cenveo's debt on CreditWatch with negative implications.  TEXT-S&P S & P is particularly concerned about Cenveo's leverage, available borrowing capacity, and the repayment of the $98.5M senior subordinated note maturing on 6/1/13 (as of 8/8/12: Second Quarter 2012 Earnings Release 8.8.12) I own 1 second lien note maturing in 2018. That note is currently rated at B- with a 5 recovery rating in the event of a default. Bought 1 Cenveo 2nd Lien at 92.499 (May 2012). I sold out of the 2013 subordinated note. Sold 2 Cenveo 7.875% Senior Sub Bonds Maturing in 2013 at 95

A favorable report on Cisco from MKM Partners is summarized at

Corning (own) raised its quarterly common dividend to 9 cents per share from $.075.

Bridge Bancorp (own) declared its regular quarterly dividend of 23 cents per share.  Through Fidelity, I am able to buy shares with this dividend at a 5% discount.

The. P.M. London fix for gold yesterday (10/4) was $1,791.75. LBMA | Gold Fixings  As noted in an earlier post, a close above $1,777.35 on 11/19/12, assuming no Maximum Level Violation (MLV), would trigger an increase in MOL's 2% minimum increase. Added 100 MOL at $9.78 The Starting Value in the current annual coupon period is $1,742.5 and the Maximum Level is $2,073.57.

{e.g. an Ending Value (EV) on 11/19/12 at $1,850, with no MLV, would result in a 6.17% coupon; EV at $2000, with no MLV, would results in a 14.776% coupon; a EV at $1770 would result in the minimum 2% coupon. Another place you bets, and take your chances}

MOL Prospectus This unsecured senior note will mature in November 2014 at $10 and can not be redeemed earlier by the issuer (see page PS-16). Assuming no default by the issuer, there will be at a minimum three more 2% coupon payments before redemption on 11/26/14 or close to 3% annualized. Any payment above 2% would be viewed by me as a bonus. I own 200 MOL.

Yesterday's Close: MOL: 10.00 0.00 (0.00%)

Yesterday's Close:  VIX: 14.55 -0.88 (-5.70%)


With the Fed likely to continue its Jihad Against the Saving Class into 2015, having started its Crusade in late 2008, Randall Forsyth recommends buying Mortgage REITs and Gold. Barrons When interest rates start to rise, the Mortgage REITs will need to sold. Individuals who do not wish to pick their own Mortgage REITs can purchase an ETF. Forsyth mentions iShares FTSE NAREIT Mortgage Plus Capped Index Fund (REM). I own 200 shares of that ETF. (REM : Holdings)

Another one is offered by Market Vectors: Mortgage REIT Income ETF (MORT) The one offered by Market Vectors has a gross expense ratio of 1.19% which is capped at .4% until 9/1/13. REM has a .48% expense ratio.

Mortgage REITs are also discussed in Forsyth's column published back in June 2011, which is mentioned in a prior post. Mortgage REITs

I would not want to own any of these securities in a rising rate environment, likely to last for several years, as their borrowing costs increase when the value of their holdings would likely be falling. These companies are highly leveraged which will only magnify their problems in such an environment.

Even now, these REITs are being hurt by the narrowing spread between their borrowing costs, already at rock bottom levels, and the yield on their long dated mortgage portfolio. Prepayments, a known risk for these companies, decrease the interest spread, primarily due to mortgage refinancings, which causes the Mortgage REITs to lose higher yield mortgages that can only be replaced with lower yielding ones, thereby decreasing the interest rate spread when borrowing costs are relatively constant. And prepayments of securities bought at a premium to their redemption value will result in losses.

(see also my 9/2/11 Post: Decline in Mortgage REITs Linked to Prepayment Risks)

Bloomberg reported earlier this week that mortgage prepayments in August were at the highest level in seven years.

Due to their risks, I will not invest much money in Mortgage REITs, but I am comfortable with very small positions at the moment. As noted below in Item # 2, I just added 50 shares of Annaly Capital Management, bringing my total up to just 100 shares.

1. Promoted Aegon common stock from the Lottery Ticket Basket Strategy to The $500 to $1,000 Flyers Basket Strategy Added 70 shares at $5.28 (see Disclaimer): This brings my total to 122 shares, with two shares bought with the recently reinstituted common share dividend paid on 50 shares. I bought that odd lot as a Lottery Ticket. Bought Lottery Tickets: 50 AEG at $6.36 (December 2009).

The most recent dividend payment was €.10 share, which translated into $7.21 for 50 shares:

Of that amount, I used $5.94 to buy 1 share. The dividend was reinstituted recently after being eliminated during the financial crisis. The annual rate was $.86 in 2008.

Although I no longer own any Aegon hybrid securities, I managed to trade many of them for large percentage gains. Aegon Hybrids: Gateway Post In 2011, for example, I sold 200 shares of AEB for a $2,356.27 realized long term capital gain on a total investment of $1,297.05. Needless to say, those purchases were made during the Dark Period. (see snapshots at the end, preceding linked post).

While Aegon is based in the Netherlands, about 70% of its pretax earnings are generated from its U.S. operations. Aegon owns Transamerica. The company offers life insurance, annuities, pensions and individual savings products.

During the financial crisis, Aegon received €3 billion in aid from the Dutch state which has been paid back in full.

In the 2012 second quarter, Transamerica reported a 11% increase in new life insurance sales. Aegon reported pretax underlying earnings of €443 million, up 10% from the 2011 second quarter. The company also reported a capital surplus of €8B. The earnings release for this quarter is filed with the SEC, Form 6-K.

Morningstar has a four star rating on the stock with a fair value estimate of $9.

Based on the earnings reports through 6/30/12 and a $5.3 share price, the AEG Key Statistics calculated by YF include the following:

Forward P/E 6.79
Price to Sales: .24
Price to Book: .28
Five Year Estimated P.E.G.=.39

Stock Quote: Aegon N.V. ADS
Yesterday's Close: AEG: 5.42 +0.12 (+2.26%)

2. Added 50 NLY at $16.85 Last Wednesday-ROTH IRA (see Disclaimer): This is an average down from a prior 50 share buy which has generated four quarterly dividends so far. For Mortgage REITs, the goal is simply to collect the dividends and to ultimately sell the stock for any profit whatsoever, a penny in share profit would be viewed as more than satisfactory. These securities are bought solely for their dividend yield which is tax free when paid into the ROTH IRA.

For the reasons discussed in the introductory section above and elsewhere in this blog, I will keep my exposure to Mortgage REITS modest and will hopefully sell all of them before interest rates turn up significantly. There is no shortage of risks associated with these companies, as detailed in this article found at Seeking Alpha.

As with other Mortgage REITs, Annaly's dividend has been trending down. Annaly Dividends The last dividend was 50 cents per share, with a 9/27/12 ex dividend date.

S & P has a three star rating on the stock. S & P estimates that NLY's net interest rate spread will shrink to 1.55% in 2012 from 2.04% in 2011. S & P has a $17 twelve month target price. Zachs has a $18.3 target price.  In mid-September, J.P. Morgan downgraded NLY to neutral from overweight and reiterated a $17 price target.

Most likely, I would sell 50 of the 100 shares anywhere between $17.7 to $18 which would result in a profit on those higher cost first purchased lot. To get that price, I suspect that I would need a jump just before an ex dividend date.

I would anticipate that the dividend would trend down in subsequent quarters. At a $2 annual rate, the yield would be about 11.87% at a total cost of $16.85.

As of 6/30/12, the leverage was at 6.0.1 and the annualized interest rate spread was 1.54% (down from 1.71% on 3/31/12 and 2.45% as of 6/3011). SEC Filed Press Release

Stock Quote: Annaly Capital Management
Yesterday's Close: NLY: 16.64 -0.25 (-1.48%)

3. ADDED 100 of the Stock CEF RVT at $13.03 Last Wednesday (see Disclaimer): RVT is the symbol for the closed end stock fund Royce Value Trust. This purchase brings my total to 483.634 which includes the recently received shares), purchased with the last quarterly dividend (5.168 @$13.18).

While the Royce Closed End Funds have adopted a managed distribution plan, the dividend rate will be variable. The policy is explained in the last dividend declaration:

3Q Distributions Declared for Royce Closed-End Funds

As shown at the sponsor's webpage, this CEF has an average 25 year return of 10.01% through 9/30/12. The five year average annual return is a -1.46. The fund faired poorly during the Near Depression period as shown in the chart displayed at the sponsor's site. Still, even with that understandable five year performance, a $10,000 investment on 11/26/1986 would be worth $117,234 by 6/30/12.

On the day prior to my purchase, RVT closed at $13.09 and had a net asset value per share of $14.91, creating a discount to net asset value at that time of -12.21. The closing net asset value on the day of my purchase was $14.85. Yesterday, the fund closed with a $15 per share net asset value and at 12.6% discount to its net asset value per share.

RVT Page at the Closed-End Fund Association

RVT is given a Gold Shield rating by Morningstar.

Sponsor's Webpage: Royce Value Trust (RVT)

Link to the last SEC filed shareholder report (period ending 6/30/12).

My last open market purchase was for 50 shares at $12.37 (June 2012). I have been reinvesting the dividend.

The fund does use leverage in the form of $220M in 5.9% cumulative preferred stock. Royce Value Trust Inc. 5.90% Cum. Pfd. (RVT.PB)

Stock Quote: Royce Value Trust
Yesterday's Close: RVT: 13.11 +0.05 (+0.38%) 

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