Wednesday, January 30, 2013

Bought 100 of the ETF GYLD (50 in Roth IRA at $27.13)/Sold 50 SOIL at $14.59/Bought 100 of the ETF ASEA at $17.09/Sold 150 of the ETF EMLP/Pared Trade Roth IRA: Bought 50 GAL at $31.89 and Sold 50 IYLD at $26.58/Added 100 TICC at $10.30

Big Picture Synopsis

Stable Vix Pattern
Short Term: Neutral to Bullish (provided Congress does not behave irrationally) 
Intermediate and Long Term: Bullish

Short Term: Neutral-Slightly Bearish
Intermediate Term: Bearish 
Long Term: Extremely Bearish

I changed my intermediate term outlook for bonds to bearish from slightly bearish. I also changed the short term outlook for bonds from "neutral" to "neutral-slightly bearish".

I believe that the Federal Reserve's purchases of mortgage backed securities and treasuries has substantially warped bond prices.  As a buyer, the Federal Reserve does not want the highest yields, but the lowest possible yields. Given the depth and breath of its buying, the Federal Reserve is determining prices and yields for all bonds throughout the maturity spectrum.

As soon as QE ends, probably by the end of this year or in the 2014 first quarter, there will be a rise in bond yields to reflect true market prices. I suspect that the market will start to correct before the FED announces the end of QE, and that may have already started to happen.

The current inflation forecast embodied in the 10 year TIP price is for annualized inflation exceeding 2.5%.

10 Year TIP Minus .53% as of 1/29//13 Daily Treasury Real Yield Curve Rates
10 Year Treasury Nominal: 2.03% as of 1/29/12 Daily Treasury Yield Curve Rates

When investment grade bond prices start to reflect the market's inflation outlook, and are no longer influenced by actual and anticipated QE programs, the bond losses for vintage issues will be severe, with the largest losses in higher quality longer term maturities. Intermediate and long term treasuries will go down more in price than high quality corporate debt with comparable maturities. The worst price impact will be felt on zero coupon long term treasury bonds.

A ten year treasury yield of 3.5% in one year will result in a substantial loss to a buyer now at 1.8%. I would consider a 3.5% 10 year to be a benign rate on a historical basis: 10-Year Treasury Constant Maturity Rate (more normal range 5% to 7.5% historically) A 5% ten year treasury rate would produce a lot of hang wringing by the pundits, but that rate is at least close to the long term average and would also be viewed as benign by me. A 5% yield on the 10 year treasury would not look benign to a buyer at 1.8%, needless to say.

I am basing this change in outlook on an opinion that QE will no longer even be arguably necessary in 2014. In my opinion, important and long term factors are already in place that will drive U.S. GDP growth for many years to come. That growth will be stronger than currently anticipated by the market.

Moreover, the FED's balance sheet just exceeded the obscene level of $3 trillion (FRB: Balance Sheet) and will approach the previously unimaginable and totally scary level of $4 trillion level by the end of 2013, assuming a continuation of its current buying frenzy. The Fed is now buying $85 billion a month in mortgage backed securities and treasuries. A $4 trillion balance sheet will look like debt monetization to virtually everyone, notwithstanding Bernanke's protestations to the contrary. FRB: Speech--Bernanke, Five Questions about the Federal Reserve and Monetary Policy--October 1, 2012 And, opposition to QE is unquestionably building at the FED as shown in the last minutes: FRB: FOMC Minutes, December 11-12, 2012

So, the underlying thesis is that QE will end within a year. The market will start to reflect that change before year end by decreasing bond prices and raising yields even before the FED makes any announcement.

If the FED continues its 0% to .25% through 2014, which I view as likely, inflation expectations may actually increase and undermine bond prices even further. The FED could lose its credibility as an inflation fighter and instead be viewed as a central bank promoting inflation.

I am just about totally turned off now by bonds. I look at my monitor list for exchange traded bonds and my basic response, as I scroll through the list, is to say "no way". The yields and the premiums to par value make those securities most unappealing to me.


This is a link to a number of interesting charts prepared by Oppenheimer. I tend to see things better with pictures rather than words. .pdf The chart at page 20 shows that many fixed income categories provided negative real rates of return as of 11/30/12. The chart at page 60 shows how asset classes have performed each year since 2002. Gold has been near or at the top in several of those years. Page 55 shows the performance by year of Muni bond sectors. A correlation chart of different types of bonds is shown at page 49. There is a negative correlation in the Credit Suisse Leveraged Loan Index to Barclay's U.S. Aggregate Government Bond Index. A chart at page 47 shows that high yield bonds and senior loans have traditionally outperformed treasuries in rising rate environments.  Sector performance within the bond category since 2002 is shown at page 45. Emerging market bonds have been on top 6 out of the last 10 years. A reason to buy or to sell?


FHA maintains a home price index. Federal Housing Finance Agency - House Price Index The FHA home price index rose .6% from October to November 2012, and 5.6% nationwide for the 12 months ending in November. .pdf

Floyd Norris devoted his NYT column to a discussion of the emerging housing recovery. He noted one interesting statistic about new home construction. Between January 1959 through September 2008, there was only one month when new home starts fell below an annualized rate of 800,000. Beginning in October 2008, there were 47 consecutive months when new home starts fell below that level.

The Commerce Department reported last week that new residential sales for December were at a seasonally annual rate of 369,000. This was 7.3% below the upwardly revised November rate of 398,000, and 8.8% above December 2011. The November rate was revised upward by 22,000. For 2012, the government estimates that 367,000 new homes were sold which was 19.9% higher than the 2011figure.

This chart show the devastation to this important sector of the economy caused by the bursting of the housing bubble:

New Home Sales
New Homes Sold in the United States - St. Louis Fed

Even Alan Abelson had some positive comments about the uptrend in housing in his Barrons column this week. Abelson noted that new housing starts in 2009-2011 "barely" exceeded demolitions.

Just in Cleveland, condemned homes are coming down at 600 per year. Cleveland condemned homes Flint Michigan received last year a HUD grant to demolish 300 homes. A large number of foreclosed properties, including those abandoned and in foreclosure limbo, will ultimately just be torn down due in large part to vandalism.

New homes have not kept up with population growth or new household formations. Just look at the historic plunge in new home starts during the last recession and its aftermath:

Housing Starts: Total: New Privately Owned Housing Units Starts - St. Louis Fed


This is a link to information at the New York Federal Reserve that shows the maturity breakdowns for the FED's QE4 treasury purchases:

FAQs: Purchases of Longer-term Treasury Securities - Federal Reserve Bank of New York

The Fed has turned itself into a money making machine with its money printing and bond buying:

Federal Reserve Makes $88.9 Billion in Profit | Committee for a Responsible Federal Budget

The speech given by Bernanke on 10/1/12 highlights the purpose for QE4:

FRB: Speech--Bernanke, Five Questions about the Federal Reserve and Monetary Policy--October 1, 2012

The FED is manufacturing abnormally low rates for the primary purpose of lowering the debt burdens of American households. The purpose is to create conditions for a "sustainable" economic recovery through lowering debt service payments long term. With both the DSR and FOR ratios now at levels last seen before the Age of Leverage, the Fed's job is largely already achieved except for the under water homeowners.

Financial Obligation Ratio (FOR) and Debt Service to Disposable Income Ratio (DSR) Data:

Household Debt Service and Financial Obligations Ratios

This may now be the most important chart around:

Household Debt Service Payments as a Percent of Disposable Personal Income (TDSP) - FRED - St. Louis Fed

With HARP program set to expire at the end of this year, and possibly another 1 million or so under water homeowners refinancing this year under that Federal program, the FED's job will be largely complete and consequently there would be no legitimate reason for continuing QE 4 into 2014. More homeowners, who do not qualify under the HARP program, will be able to refinance this year due to a rise in home prices, a trend that accelerated in 2012.

After more than three weeks from the dividend payment date, Fidelity finally credited me with the China Fund shares bought with the year end distribution:

Reinvestment Price $21.56 

I also received shares purchased with the last GE dividend:

4.448 Shares Bought at an Average Cost of $21.98

As mentioned in a prior post, I had changed my reinvestment to cash but the broker went ahead and bought more shares with the last dividend. The OG took that event as a sign from the LORD to keep using the dividend to buy more shares.

The Markit PMI data for U.S. manufacturing is showing a rebound. The reading for January 2013 was 56.1, a nine month high. New orders rebounded to 57.7.

The Markit PMI January manufacturing data for China hit a two year high.


An article in Reuters claims that Detroit is edging close to a bankruptcy filing. I would expect more such filings in the years to come. Labor costs for city employees, including health care and pensions, is estimated to eat up almost 50% of Detroit's operating budget for the F/Y ending in June. 

1. Bought 100 of the ETF ASEA at $17.09 (Emerging Market Super Cycle Strategy)(See Disclaimer):  

Security Description: The Global X FTSE ASEAN 40 ETF (ASEA) attempts to replicated, before fees and expenses, the performance of the FTSE ASEAN 40 index, which consists of the 40 largest companies in five Asian countries. Those countries are Indonesia, Malaysia, Philippines, Singapore and Thailand.   

Sponsor's webpage: Global X ASEAN 40 ETF - ASEA (expense ratio .65%)

The Sponsor summarizes the investment case in this fact sheet: Global X Funds

Prior Trades: None-New ETF

Rationale: (1) Yet Another Play on the Growth Markets for the Current Century: I will eventually write a Gateway Post on the super cycle in worldwide growth originating from emerging markets. For now, the latest and longest discussion can be found in Item # 3, Bought 50 of the Stock ETF EELV at $27.2

Risks: The risks are disclosed in summary fashion in the prospectus. I would call the risks normal for a stock ETF that invests in a narrow group of countries.

I am particularly concerned about country and currency risk. An example of country risk relevant to ASEA is the recent decline in Malaysia's stock market after a poll was released showing that the ruling political party may be in trouble. Reuters In times of stress, the USD is likely to gain in value against currencies like the Thai Baht or Malaysia's ringgit which was the case on 1/21/13 when the Malaysian market fell due to those election jitters. A detailed discussion of the political issues can be found in this recent Seeking Alpha article.That is just an example from one day of both the currency and country risk.

Future Buys: I may buy another 100 shares, probably in 50 share lots, only on downdrafts.

Yesterday's Close: ASEA: 17.01 +0.13 (+0.77%) 

2. Sold 50 of the ETF SOIL at $14.59 and Bought 50 of the ETF GYLD at $27.03 and 50 More in the ROTH IRA at $27.13 (see Disclaimer):

I also added 50 GYLD subsequently in the ROTH IRA:

Unfortunately, this ETF was currently selling a small premium to its net asset value when I made my purchases.

Security Descriptions: The Arrow Dow Jones Global Yield ETF (GYLD) is a new ETF that was launched last May. This ETF will attempt to track the Dow Jones Global Composite Yield Index. The fund will have roughly equal weighting, with quarterly rebalancing, in five asset categories:

Each of those sectors will contain 30 holdings.

Sponsor's Webpage: Arrow Shares

On the date of my purchase, the exposure was 60.81% to equities and 39.11% to fixed income.

A list of holdings can be found at GYLD Holdings.

I took a snapshot of a few of the 150 positions:

As of 1/28/13
The fund has been paying a variable monthly dividend. GYLD Distributions The ex dividend date will generally be early in the month. There was a special distribution of $.3427 that went ex dividend on 12/27/12, and no distribution is consequently planned for January 2013. As of 12/31/12, the distribution yield was calculated by the fund at 6.25%.

The expense ratio is high for an ETF at .75%.

Semi-Annual Report for the Period Ending 7/31/12: pdf

Prior Trades:  None for GYLD-New ETF: 

I bought the SOIL ETF last September and received one small annual dividend. Bought 50 of the Stock ETF SOIL at $13.96 

Rationale: (1) Increasing Income Generation: GYLD will have over a 5% greater yield than SOIL. I just received the annual dividend from SOIL, while GYLD pays monthly. I try to pick up securities that pay monthly whenever it makes sense to do so. My overall dominant strategy is to generate a constant cash flow that can be used to buy more income generating securities, creating a compounding effect over time. I can accomplish that objective better with securities that pay monthly better than lower yielding ones that pay annually. 

SOIL's annual dividend was $.161224 per share, Distributions, or about 1.1% at a total cost of $14.69.

(2) I recently read some brokerage reports that are negative about potash demand and prices for this year. (negative: Seeking Alpha and Morningstar report at Seeking Alpha) I thought the Morningstar article contained an interesting fact: 70% of the phosphate reserves are in Morocco and the western Sahara.

(3) I have a much broader sector and securities exposure with GYLD.  

Risks: (1) This ETF has the normal risks associated with a balanced world fund. The risks are generally discussed in the Prospectus at pp. 3-7. I would highlight the currency risks. The fund had approximately an 18% exposure to the EURO which has been gaining in value against the USD. EURUSD The Euros strength has been a tailwind for this fund's recent performance, as has the strength of the Australian Dollar against the USD. AUDUSD

A reversal of those favorable trends could result in a GYLD price decline unless the value of the securities priced in those currencies rise sufficiently to offset any currency conversion decline.

The currency exposures are set out in the sponsor's FACT Sheet.  

Future Buys: I will likely buy up to 100 more shares of GYLD, in 50 share increments, but only at more than 5% below my last purchase prices.

Yesterday's close: GYLD: 27.36 +0.10 (+0.37%)

3. Sold 100 EMLP at $22 (see Disclaimer): I will just briefly discuss why I exited my position on this ETF:

2013 Sold 100 EMLP $52.05

The First Trust North American Energy Infrastructure Fund (EMLP) that invests in electric utilities, MLPs and other companies that derive at least 50% of their revenues from operating or providing services in support of infrastructure assets such as pipelines, power transmission, petroleum and natural gas storage. First Trust North American Energy Infrastructure Fund (EMLP) I noted when purchasing this ETF that it had a high expense ratio of .95%. Item # 3 Added 100 EMLP at $21.32

I over estimated the income generation for this ETF. The last quarterly distribution was only $.139 per share, somewhat higher than the prior month. EMLP Distributions That works out be about 2.55% annualized which is viewed as insufficient.

I also sold the 50 shares of EMLP bought in a satellite taxable account for the same reason. Item # 2 Bought 50 of the ETF EMLP at $20.87

Unless the expense ratio comes down and the yield goes up significantly, I am not likely to buy this ETF back.

4. Pared Trade ROTH IRA: Sold 50 of the ETF IYLD at $26.58 and Bought 50 of the ETF GAL at $31.89 (see Disclaimer):

2013 Roth IRA Bought 50 GAL at $31.89

The IYLD shares generated a profit of $11.97 plus dividends of $35 since my purchase on 7/17/12 at $26.06.  That overall unsatisfactory total return is one reason for jettisoning the position.

Security Description: The  SPDR SSgA Global Allocation ETF (GAL) is a fund of funds that owns stocks and bonds worldwide. (roughly 60% to stocks/40% to bonds)

GAL Holdings and Weightings as 1/24/13:

Sponsor's Web page: GAL - SPDR SSgA Global Allocation ETF | State Street Global Advisors (SSgA)

Annual Report (6/3012):

GAL dividends are paid quarterly. The last dividend was $.33+ cents per share that went ex dividend on 12/27/12.

Prior Trades: I purchased 50 shares of IYLD at $26.06. I included a snapshot of the ETFs owned by that fund of funds in that post. The holdings have changed since that time and I do not view the current weightings favorably:

I am negative about bond funds in general and hyper negative on junk bonds and long term treasuries.

Rationale: (1) Trading A Balanced Fund Tilted Toward Bonds for One With More Exposure to Equities and Particularly International Stocks. Given the low low yield in treasuries, which are heavily weighted in IYLD, I am actually picking up more yield with GAL.

(2) Expense ratio is lower for GAL than IYLD: The IYLD expense ratio is .66% before a .06% fee waiver in effect through 12/31/14. Part of that expense ratio is the .41% in expenses from the owned ETFs. iShares Morningstar Multi-Asset Income Index Fund (IYLD): Overview - iShares The GAL expense ratio is shown at .35%. GAL - SPDR SSgA Global Allocation ETF | State Street Global Advisors (SSgA)

Risks: The risks are normal ones for a balanced world funds.

Prospecutus.pdf (risks discussed at pages 17-19).

Another risk is that GAL may be liquidated in the event it fails to attract enough assets. The total net assets was shown at 20.66M as of 1/24/13.

Future Buys: Given my views about longer term treasury bonds, I am not likely to buy IYLD back for years. I will most likely average down by buying another 100 GAL shares in my usual manner, which would involve splitting that 100 shares into two 50 share lots.

Yesterday's Close: GAL: 31.91 +0.14 (+0.44%)

5. Added 100 TICC at $10.30-Taxable Account (See Disclaimer):

Security Description: TICC Capital (TICC) is a business development corporation. As such, it avoids double taxation on distributions made to its shareholders.

To maintain that tax status, the BDC must distribute at least 90+% of its taxable income as dividends. This tax advantage will result in higher dividends but will deplete capital that will result in these corporations selling more shares, frequently at prices below blow book value per share. This may or may not work out for existing shareholders. Adding more funds to invest will invariably work out for the managers of these funds however. The base management fee of 2% is calculated on gross assets, see page 9 of Form 10-K. Then there is an incentive fee.

TICC did sell 3.45 million shares back in August at $9.65 per share. ‎ That was probably slightly below the net asset value per share at that time based on the third quarter earnings release.

As of 9/30/12, TICC's net asset value per share was $9.85, up from $9.3 as of 12/31/11. (page 3: 10-Q). A list of investments can be found in that last filed SEC Form 10-Q starting at page 4) The fund has few warrants and common stock positions (see pages 7-8). I would much prefer to see more common stock warrants as sweeteners for the loans. TICC does own a wide variety of CLO-Equity Investments that it values at $82+M as of 9/30/12 with a cost basis of $68+M.

A long term chart reveals a stock that was trading over $16 in 2007, plummeting to below $4 in Marcy 2009, and thereafter zooming to $12.88 by January 2011. Most of the trades over the past two years would be in a narrow channel between $8 to $10.5. TICC Interactive Chart - Yahoo! Finance

The dividend history is noted on the YF Chart by simply checking "dividends" under the "events" tab.

Barclay's started coverage of TICC earlier this month with an equal weight rating and a $11 price target. Given the dividend yield, actually hitting an $11 price in one year would be viewed as most positively.

Dividend History: TICC Capital Corp. | Investor Relations

The most recent dividend was $.29 per share. At that rate, the dividend yield would be about 11.26% at a total cost of $10.3.

Profile page at Reuters

Key Developments page at Reuters

Prior Trades:  I still own 100 shares bought in the ROTH IRA: Bought 100 of the BDC TICC at $9.8-ROTH IRA (February 2012). Given their risks, I will generally hold a BDC for no more than 2 years in a retirement account and will simply try to make some profit on the shares while harvesting a number of dividends. I would like to sell the shares bought in the ROTH IRA north of $10.5 during 2013.

Recent Earnings Release: TICC announced preliminary 2012 4th quarter results shortly before my last purchase. The company estimates that its GAAP net income will be between $.2 and $.24 per share, while its "core net investment income" will be in the range of of $.24 to $.26. SEC Filed Press Release The company estimated that none of the distributions made in 2012 will be classified as returns of capital. In addition, TICC stated that it had sold "12 CLO BB" assets for an aggregate $40.7M during the quarter and will realize a gain of approximately $12M. (CLO=Collateralized Loan Obligations). That sale will result in an "incentive" fee payment of approximately $1.7M to TICC's managers.

Rationale: (1) It is almost entirely about the income. The dividend history, summarized at page 36 of the 2011 Annual Report, Form 10-K, shows a consistent rise in the payout in the 2010-2012 period, though the rates declined from $1.06 in 2008 and $1.44 in 2007 (page 39). Hopefully, the 2008 period was analogous to the 100 year flood for BDC investors.

Risks (1) The general risks applicable to BDCs and to TICC in particular are discussed in the Form 10-K starting at page 18. Potential conflicts of interest are discussed at pages 28-29. Risks relating to TICC's investments are summarized starting at page 30.

BDCs make high interest loans to mostly private borrowers. Solid blue chip borrowers are not receiving loans at greater than 10% interest rates. The typical BDC loan is made to a risky borrower. Even senior secured loans made to such borrowers would be rated as junk when and if reviewed by a credit rating agency.

Future Buys: I am more likely to dispose of the 100 shares held in the ROTH IRA rather than to add more shares.

Yesterday's Close: TICC: 10.57 +0.20 (+1.93%)

Politics and ETC:

1. Russia and the Strange Case of Sergei Magnitsky/John Chambers Thinks Russia is a Great Place for Business: Steve Liesman wrote an interesting article about Sergei Magnitsky, a Russian lawyer jailed for defending his client and later tortured and murdered in jail. CNBC Russia apparently knows who committed the murder and has refused to prosecute.

The U.S. responded to this brazen act by denying corrupt Russian officials travel visas to the U.S.

Putin responded by denying American's the right to adopt Russian orphans.

Instead of prosecuting those responsible for Magnitsky's murder, the corrupt Russian legal system has decided to put the dead Sergei Magnitsky on trial, something that was not even done during the Soviet era show trials, without question an incredible act of chutzpah unparalled in the annals of history.

Magnitsky' real crime was exposing the fraud of others, as noted in this article: Amnesty International He was arrested shortly after he testified before Russian officials about a large scale tax fraud. See also, UK - The Independent

John Chambers believes that Russia is easier to do business in Russia than the U.S. Cisco's Next Frontier | Fox Business Video As noted by Liesman, other businessman privately say that Russia is just not worth the trouble. Maybe Chambers statement is a legal form of bribery. Any criticism of Russia  would likely result in a multitude of headaches, while any negative comment about Putin would likely  cause the arrests of Cisco officials for "tax evasion". 

Monday, January 28, 2013

Updated Tables Regional Bank Basket Strategy and Lottery Ticket Basket Strategy/Sold 30 DELL at $10.82/Added 150 TRST at $5.17/Bought 50 UNB at $19.45/MBVT, RNST, PCBK, KEY, TRMK

I am updating the tables for both the Lottery Ticket Basket Strategy and the Regional Bank Basket Strategy on the last Monday of each month. The prices shown in the preceding tables will be from last Friday's close.

My basket strategies will have a large number of securities in them. The focus is on the overall return of the basket rather than any component. 

1. Update for Lottery Ticket Basket Strategy: The Lottery Ticket Basket Strategy uses a deep contrarian value strategy appropriately characterized as catching a "falling knife". A common criteria for the stocks contained in this basket is a smashed stock price at the time of purchase and an ugly looking chart. Any technical analyst would most likely have a sell rating on the stock. Selections are made primarily on statistical criteria including price to book, price to sales, forward P/E, cash per share and/or free cash flow. For many selections, I may be pessimistic about the firm's future, but not as pessimistic as the market. I will also occasionally see a ray of light at the end of a dark tunnel. Since I expect failures, which are inevitable and unavoidable in this kind of approach, I limit my exposure to $300 per stock plus any prior trading profits. 

After experiencing some success with this strategy, I  now have a requirement that my total investment in all LT holdings can not exceed my total realized gains for this basket strategy.  

Total Realized Gain: $11,632 
Total Current Investment: $8,638 

Snapshots of all trades where the profit or loss exceeds $30 can be found at the end of this post:

Lottery Ticket Basket Portfolio as of 1/25/2013

Of those positions, I am most inclined to keep Forest City Enterprises long term and to possibly remove it from the LT category (Last Friday's close: FCE-A: 17.33 +0.09). Forest City is a large non-REIT real estate company. It was able to grow nicely during optimal times as shown in this long term chart: FCE-A Interactive Chart It had the peddle to the medal leading up to and into the Near Depression which did not work out well for its shareholders. The stock topped out at around $70 in 2007 and was searching for a bottom at less than $4 by March 2009. I played it as a LT selection initially BOUGHT 50 SHARES OF FCEA AT 6.3-FOREST CITY COMMON-Sold FCE at $13.23 (allowed to go over $300 due to prior profits: Realized gain on 50 shares=$327.48, see snapshot in Gateway Post).

The last purchase was just 30 shares bought in January 2012:

FCE-A Up 46.31% as of 1/25/13
The most high profile Forest City project is Atlantic Yards in Brooklyn.

Company Website: Forest City - Real Estate Management, Development and Services - Live, Work, Shop, Stay, Mixed-Use - Home

(Bonds are rated B3 by Moody's: FINRA)

My largest percentage unrealized gain is in RRsat Global Communications (RRST), an Israeli company. Bought 50 RRST at $3.95-LT Category (March 2012). Back in November 2012, the company declared a year end dividend of $.52 per share. RRsat Reports Third Quarter 2012 Results and Declares a Special Dividend With that dividend, I have a total return of almost 100%. I have no idea what I am going to do with those shares:

RRST UP 89.1% as of 1/25/13
The most successful recent purchases have been Qlogic bought on 12/7/12 and up 29.74% (discussed below); Tetra Technologies bought on 10/15/12 and up 40.09%; and Alumina bought in September and up 25.51%. A few others have had modest gains since their purchase, including Datalink bought last October and up 15.2% and STKL bought in December and up 16.16%. The worst recent purchase was Velti, also bought in October, which has declined 36.85%.

The overall basket has also done better over the last few months due also to some positions returning to profitability after being deep in the red. I had one reader ask me about ING which had fallen a lot after my purchase. I replied that I was not worried about the stock which was a true statement on two levels. One of those levels is that I owned only 30 shares and would not be concerned even if the price went to zero with that kind of capital exposure. ING stock is now back into positive territory with a 9.3% gain. EDG is another one that has recovered and is now up 7.64%.

Nokia is up 38.2% since my purchase:

A. Nokia: On 1/10/13, Nokia shares soared after the company announced better than expected Lumina sales and a probable forecasted profit its mobile phone business, excluding items. Nokia exceeds previous Q4 2012 outlook for Devices & Services and Nokia Siemens Networks » Nokia – PressBloomberg NYT The company sold 4.4M Lumina phones in the last quarter and 86.3M total handsets. Nokia also announced that Nokia Siemens Networks would have revenue of €4B and operating margins of 13% to 15% which was also viewed by many investors as good news. A positive article on the Nokia Siemens joint venture can be found at Forbes.

Positive on Nokia's Announcement:  Seeking Alpha

Remaining negative after the announcement: Seeking Alpha

Other positives include the following:

Nokia Partners with China Mobile to Launch the Lumia 920T, the First TD-SCDMA Windows Phone » Nokia – Press

Nokia and RIM enter into new patent license agreement » Nokia – Press While that press release does not provide any details, Nokia does state that RIM will make a one time payment to Nokia and ongoing payments.

Bought 50 NOK at $2.88-LT Category (May 2012)

Nokia shares did decline after reporting better than expected 4th quarter earnings. The company reported non-IFRS E.P.S. of €.06, up from a loss of €.29. Sales declined 20% to €8.041. Nokia justifiably scrapped its annual dividend to preserve capital. The company paid out €.20 per share last year. SEC Form 6-K

Last Friday's Close: NOK: 4.20 -0.06 (-1.41%) 

B. SuperValu: Headknocker would prefer a do over for the RB's SVU Lotto purchase, Bought 40 SVU as LT at $6.98, "not one of the RB's finer moments but it is all about the future, Go Vandy", a voice was heard in retort.

As noted in prior posts, this company took on too much debt when it acquired Albertsons. Over the past several months, SVU has been shopping itself to potential buyers.

On 1/10/13, the company announced an agreement with a Cerberus Capital Management (CCM) consortium to sell Albertsons, Acme, Jewel-Osco, Shaw's Market stores and related pharmacies. The terms of the deal are described in this press release. SUPERVALU Announces Definitive Agreement for Sale of Five Retail Grocery Banners to Cerberus-Led Investor Group An entity formed by the CCM consortium will assume $3.2B in debt. I am assuming for now that such assumption would include all of the debt originally issued Albertsons, but would not include the 2014 and 2016 bonds originally issued by SVU.

The press release contains a description of what will be left in the new SVU after the transaction is completed:

New Supervalu

I prefer the new SuperValu without the $3.2B in debt to the old SVU with that debt.

Positive comment on SVU after the deal: Seeking Alpha

C. Sold 30 Dell at $10.82 (see Disclaimer): The RB gave this transaction about two seconds of deep thinking which was about 1.9 seconds more than usual. If the NitWit had asked for LB's opinion, LB would have crunched the million or so variables and then concluded that there was a 93.10284756354% probability that Dell was about to announce that it was exploring a possible sale, thereby realizing an even larger gain for our Dear Leader Headknocker.

2013 Dell 30 Shares +$43.37
IDC estimated a 6.4% decline of global PC sales in the 4th quarter, with Dell's sales falling over 20% year-over-year in the quarter, according to that research firm. Bloomberg

After I sold the Dell position, Gardner released its 4th quarter estimate of PC sales. That firm estimated a 4.3% decline. Gartner had Dell's PC share fall to 10.2% in the 2012 4th quarter from 12.2% in the 2011 4th quarter. Gartner

The IDC report was sufficient for me to jettison the recently purchased Dell Lotto Ticket: Bought 30 Dell at $8.85

Subsequent to this sale, word leaked out that Dell was exploring going private.

Floyd Norris pointed out in a recent NYT that Dell had spent $39.7B buying back stock and the company was then worth $22. Tech companies have convinced many investors not to worry about excessively generous stock options since the company would reduce the dilution by buying back stock. In most cases, those stock options are simply a legerdemain for transferring shareholder money primarily to pockets of management.

D. Qlogic (own): QLogic announced better than expected "preliminary" results for its fiscal third quarter. The previous guidance has been non-GAAP $.14 to $.19 from continuing operations. The new guidance was $.19 to $.2.

That announcement was made on 1/15/13 before the market opened and caused a $.56 or 5.5% spurt in the stock price. QLGC Historical Prices

Subsequently, QLogic reported adjusted earnings per share of 20 cents for its fiscal third quarter ending 12/30/12. Cash generated from operations was reported at $32.7. The company ended the quarter with $495.2M in cash.

Last Friday's Close: QLGC: 11.80 +0.98 (+9.06%)

Lottery Ticket Buy: 30 QLGC at $8.83

2. Update for Regional Bank Basket Strategy:  This strategy is explained in the following post:


I am not tracking reinvested dividends in this table. The dividend yield shown in the table is calculated by Yahoo Finance and is based on last Friday's close. The basket underperformed the regional bank ETFs last Friday. Almost every position was up since the last table was posted: Update for Regional Bank and Lottery Ticket Basket Strategies

Regional Bank Basket as of 1/25/2013

Total Realized Gain: $9,921
Total Dividends 2010-12: $4,615

My most problematic holding in this basket is First Niagara: First Niagara Dividend Slash; First Niagara: Just Another Incompetent Bank Board of Directors

A. Trustmark (own): For a few banks in my basket, the earnings reports for the 2012 resulted in stock sell-offs. Those reports were decent and represented improvements over the 2011 4th quarter, but confirmed that an earnings slowdown would likely continue into 2013, marked by continued compression in net interest margin.

For example, I recently bought back 50 shares in Trustmark. Bought 50 TRMK at $21.54.

This is what happened on the day of this bank's earnings release: TRMK: 22.80 -0.85 (-3.59%). The bank reported 2012 4th quarter E.P.S. of 43  cents, up from $.38 in the year ago quarter.  The consensus estimate was for 44 cents.

This was some of the other data as of 12/31/12:

Total Risked Based Capital Ratio: 17.22%
Tangible Common Equity to Tangible Assets=10.28%
Net Charge Offs to Average Loans: .29%
Return on Assets=1.1%
Net Interest Margin=3.94% (down from 4.19% as of 3/31/12)
NPL Ratio=1.41%
Coverage Ratio (excluding impaired loans)= 174.46%
Coverage Ratio=95.6%

Overall, those numbers are good, and non-performing loans declined to the lowest level in 6 quarters. The Board also declared the regular 23 cents per share dividend. So what was the problem?

The E.P.S. number of 43 cents represented a decline from the prior three quarters.

This is the problem in a nutshell:

E.P.S./Net Interest Margin:
$.43 in the 2012 4th quarter/3.94%
$.46 for the 2012 3rd quarter/4.06%
$.45 in the 2012 2nd/ 4.15%
$.47 in the 2012 1st quarter/4.19%

 SEC Filed Press Release

I am keeping this position, at least up to a point. The bank has excellent capital ratios and has used the banking debacle to expand its service territory through FDIC assisted acquisitions. The decline in the net interest margin is understandable given the Fed's monetary policies. The dividend is well covered by earnings, and the yield is over 4% at my cost.

As I noted in the post discussing this last purchase of TRMK shares, it is viewed as a positive that the bank did not cut the dividend during the Near Depression. However, it is viewed negatively that the dividend has not been raised since the 4th quarter of 2007, though that is understandable given the circumstances.

Last Friday's Close: TRMK: 23.07 +0.19 (+0.83%)

B. Keycorp (own): A favorable article about KeyCorp was recently published by Barrons.

I liked the first sentence of the article that made a football analogy to what Woody Hayes once said, "focus on the basics and good things happen".

Without question KeyCorp lost its moorings in the period leading up to the Near Depression. The author of the article refers to "poor loan-underwriting standard" that were exposed during the meltdown, causing KEY to write off $3.9 in bad loans and to sell two dilutive stock offerings. Morningstar estimates that those two large share offerings diluted pre-crisis shareholders by 60%.

To add insult to injury, the quarterly dividend was slashed to 1 cent from 38 cents. Under new management, the quarterly dividend has been raised to 5 cents. As of 9/30/12, NPLs had been slashed to 1.3% of total loans, and the tangible common equity ratio stood at 10.4%. And the 2.5B in TARP money was repaid in 2011.

I thought that the description "poor loan underwriting standards" was excessively generous to KEY's former management.  Bunch of wild and crazy guys in my book.

Beth Mooney is the current CEO and she sounds and acts like a sensible person. Mooney is returning KeyCorp to the basics, blocking and tackling using the football analogy again, and has turned KEY into an "infinitely more focused" bank with a more predictable, less risky earnings and revenues streams. As noted in the article, about 45% of revenues come from fee income businesses, compared to 26% for its peers.

My last add was in December 2012: Added Regional Bank Basket: 40 KEY at $7.87

I have maintained that an investors focus for both KeyCorp and Huntington Bancshares has to be long term. I am more confident about those two banks over the long haul, meaning five to fifteen years from now, rather than over the next one or two. It will simply take a long time for the shares and the dividend to work their respective ways back to pre-crisis levels. Immense damage was done to these banks by their crisis leaders. The former CEO of KEY had over a $5M annual compensation package in 2006.

KeyCorp traded over $38 in 2007: KEY Interactive Chart
HBAN Interactive Chart 

Link to 2012 4th quarter earnings report: SEC Filed Press Release

Last Friday's Close: KEY: 9.29 +0.05 (+0.54%)

C. Added 150 TRST at $5.1667 (see Disclaimer): This transaction brings me up to 620 shares plus shares bought with reinvested dividends. The position is divided into two separate taxable accounts. This last purchase was made in a main taxable account and lowers my average cost per share to $5.33. I intend to sell those shares at some point, probably somewhere in the range of $5.8 to $6 assuming of course the market gives me that opportunity. I would then keep the shares bought in a satellite taxable account. I am reinvesting the dividend in both accounts.

Bought 150 TRST at $5.1667

TRST is a bank holding company that operates, through Trustco Bank, 138 full service banking offices in NY, NJ, Vermont, Massachusetts and Florida. It is primarily concentrated in the NY.

SEC Investor Presentation 11/15/12 (86 branches in 14 NY counties, see page 5)

When I bought these shares, I only had the third quarter results.

Q/E 9/30/12
SEC Filed Press ReleaseSEC Form10-Q
Net Income: $15.8M vs. $14.4M
E.P.S.=$.104 vs $.10
Net Interest Margin: 3.21% (down from 3.29% 2011 3rd q)
Efficiency Ratio: 49.18%
NPL Ratio: 1.92%
Coverage Ratio: 90%
NPA Ratio: 1.36%
Total Risk Based Capital Ratio: 17.42% (holding company)
Total Risk Based Capital Ratio: 17.71% (Trustco Bank NY)
Tangible Equity to Tangible Assets Ratio: 8.27%
Return on Average Assets: .89%
Dividend Yield at Total Cost of $5.17= 5.077%
Dividend Yield Based on Current Annual Payout of $.2625 per share
Dividend Declaration
Payout Ratio: 66.51%

Subsequent to my purchase, Trustco released its 2012 4th quarter results:

Q/E 12/31/12
SEC Filed Press Release
Net Income: $9.8M up 12.5%
E.P.S.= $.104 vs. $.093
Net Interest Margin: 3.21%
Efficiency Ratio: 53.11%
NPL Ratio: 1.96%
Coverage Ratio: .9
NPA Ratio: 1.1%
Tangible Equity to Tangible Assets: 8.24%
Return on Average Assets: .91%
Annualized Charge-Offs to average loans: .37%
Full Service Branches: 138

2012 Earnings vs. 2011
2012 Net Income $37.534 vs. $33.087
2012 E.P.S. = $.4 vs. $.389
Dividend: $.263 unchanged
Payout Ratio: 65.6% down from 67.71%

A negative is that the dividend was slashed from 16 cents per quarter to 11 cents in the first quarter of 2008, and then slashed again to $.0625 in the 2009 second quarter. A small and inconsequential raise to  the current payout of $.0656 took place in the 2010 second quarter. Trustco Bank Stock Splits & Dividends While the current dividend yield is north of 5%, this dividend history is a major negative.

Another negative, previously discussed, was the sale of 15.64M shares at $4.6, back in July 2011. Form 8-K I did not see any good reason for that issuance. Item # 1 TRST (July 2011 Post). That stock issuance was at a price prevailing in 1995. TRST Interactive Chart

The bank did not participate in TARP (page 5 of 2009 form10k), so there was no reason to sell stock in order to pay back the government.

Along with the dividend cut, the unnecessary share offering has probably placed this stock in the doghouse among a lot of investors.

The current price is at levels prevailing in 1996 which is obviously not good for long time shareholders, nor does it place TRST's management in a positive light. I am a relatively new shareholder whose average cost is near the current price. Given the bank's branch network and their location, the bank has recovery potential and may be attractive to a more competently run bank desiring to expand into NY.

Last Friday's Close: TRST: 5.15 -0.03 (-0.58%)

D. Renasant (own): I thought that RNST's 4th quarter report was noteworthy in that it managed to expand its net interest margin by 13 basis points to 3.97%, compared to 3.84% in the 2011 4th quarter. The bank reported net income of $7.3M or .29 cents per share, beating the consensus estimate by 1 cent. Renasant Corporation Announces 2012 Fourth Quarter and Year-end Results Nonetheless, the stock sold off after the results.

I quit reinvesting the dividend.

Bought 50 RNST at $14.14Bought: 50 RNST at $13.70Sold 50 RNST at $14.91Added 50 RNST at $15.85

Last Friday's Close: RNST: 19.06 -0.04 (-0.21%)

F. Pacific Continental (own): PCBK reported earnings of 19 cents, which included some merger related expenses. Pacific Continental Corporation Reports Fourth Quarter and Full Year 2012 Results The consensus estimate was 19 cents, but I do not know if the 6 analysts included or excluded the one time merger expense. As of 12/31/12, the total total risk based capital capital ratio was excellent at 18.15% (well capitalized 10%); the net interest margin was 4.11% (down from 4.59% as of 12/31/11); NPL ratio=.97%; coverage ratio=193.29%; efficiency ratio=64.26%; tangible book value per share was $9.05; tangible common equity to tangible assets was 11.94%; and return on average assets was .99%.

The contraction in the net interest margin is the only negative development, but the overall number is still above average.

Importantly from my perspective, PCBK raised its quarterly dividend by one cent to 8 cents and declared a special dividend of 8 cents. Pacific Continental Corporation Increases Regular Cash Dividend and Declares Special Cash Dividend

Added 70 PCBK AT $9 (and removed from LT category); Bought 30 PCBK as LT at 9.42

G. Bought Back 50 Shares of UNB at $19.45-In A Satellite Brokerage Account (see Disclaimer):

The stock went ex dividend on 1/23/13: Union Bankshares

Sold 50 UNB at $19.5-Bought 50 UNB at 18 (July 2010)

Bank Website: Community Banking for Northern Vermont and New Hampshire

Branches Located in Northern Vermont (14) and Western New Hampshire (4): Union Bank Branches

UNB expanded into New Hampshire in 2011.

Main Office in Morrisville, VT: Union Bank Morrisville, VT Main Office

Dividend History: Union Bankshares, Inc. (current rate $.25 in effect since 2nd Q. 2009 when it was reduced from $.28, the annual dividend was raised from 71 cents in 2001 to $1.12 in 2007)

The dividend yield at a total cost of $19.45 is about 5.14%.

UNB did not participate in TARP:

2011 Annual Report:  UNB

For the 4th quarter of 2012, the bank reported net income of $2.2 million or 50 cents per share, up from $1.7M or $.39 per share in the 2011 4th quarter.  Of the net income number, $1.24M was due to the sale of securities and real estate loans. There was also extraordinary charges including a prepayment penalty of $875,000 incurred when "high rate Federal Home Loan Bank" advances were prepaid. The income tax expense also increased by $193,000. Total assets and total loans increased by 4% and 6% respectively during 2012. The bank provides few details until it files Form 10-Q which is aggravating.

The 10-Q for the September 2012 quarter contains the following pertinent information: 9.30.12 UNB 10-Q

E.P.S. $.44 vs. $.32
Net Interest Margin: 4.32%
Return on Average Assets: 1.4%
Return on Average Equity: 19.21%
Efficiency Ratio: 66.68%
NPA Ratio=.86%
NPL Ratio=.76%
Coverage Ratio=128.23%
Total Capital Ratio=12.17% (bank)
Tier 1 Capital to Risk Weighted Assets: 10.97%
Tier 1 Capital to Average Assets: 7.56%
Net Charge Offs= .16%

Prior Round-Trip: Bought 50 UNB at $18 (July 2010)-Sold 50 UNB at $19.5 (July 2011)

Last Friday's Close: UNB: 19.52 -0.53 (-2.64%)

H. Merchants Bancshares (own): An excellent article about Merchants Bancshares was published in SeekingAlpha and I left some comments to that article. I noted that the bank increased earnings during the last recession.  (page 47 of 2009 Annual Report: SEC Form 10-K)

The SA  article is the most detailed report on this small bank that I have read to date.

Of all of the banks that I own, it easily had the best NPL and NPA ratios during the Near Depression. In the third quarter of 2012, it had zero loan charge offs, and an NPA asset ratio of just .16%.

As you would expect, the bank declined to participate in the TARP program. SEC Filed Press Release

One downside to being a responsible banking enterprise is that earnings growth can be anemic at times.   After all, the bank is focused on loaning money to borrowers that can service the loan payments.

The 2012 4th quarter report highlights the good, as well as the earnings growth issue.

Net Income: $3.84M up from $3.71M in the 2011 4th quarter
E.P.S.= $.61 vs. .$59 (+3.3%)
Net Interest Margin: 3.2% down from 3.51%
Efficiency Ratio: 60.74%
Return on Average Equity: 13.08% down from 13.77%
NPL Ratio=.27%
Coverage Ratio=397%
NPA Ratio=.17%
Total Risk Based Capital Ratio=16.05%, up from 15.81%
Tangible capital ratio=6.92% (unchanged)
Book Value Per Share=$19.84, up from $18.29 for 2011 4th Q
(Note: MBVT has no intangible assets)

For 2012, total assets grew 6% and deposits increased by 7.91%. E.P.S. for 2012 was reported at $2.42, up from $2.35.

This is what I find comforting:

Annual E.P.S.
2012  $2.42
2011  $2.35
2010  $2.51
2009  $2.04
2008  $1.96
2007  $1.77

The jump in 2010 was largely due to a higher than normal non-interest income number of $11.631M vs. 10.315M in 2009, discussed at page 31 of the 2010 10-K. Non-interest income would include gains on securities sales, operation of a trust company division, service charges, debit card income and overdraft fees.

The Bank paid a $5.54 per share in dividend in 2004 that included a large special dividend of $4.5 per share. The current dividend is 29 cents per share, with the next ex dividend data as 1/29/13: Dividends | Investor Relations | Merchants Bancshares inc.

This kind of investment is not going to be a home run, a triple, or double. A 8-10% annualized return with the dividend would be more than satisfactory.

I have netted one round trip profit ($160.10) on a 50 share lot. Bought 50 MBVT at $22.9-SOLD 50 MBVT at $26.5 (July 2011). I currently own 50 shares: Bought 50 MBVT at $26.25 (May 2012). If I have an opportunity to sell at $32.25 on or before May 2015, I may not sell but I would view this position to be a successful

{at $32.25, excluding commission costs, the return on the stock would be about 22.86% at a purchase cost of $26.25, plus the 4.4% annualized dividend yield at a total cost of $26.25 with no dividend increases currently expected by me given the conservative nature of this bank. This hypothetical  would produce about a 12% annualized return over a three year period}.  

Tuesday, January 22, 2013

Pared 50 of 250 MSPRA at $20.8/Bought Roth IRA 100 ARR at $6.86 & 100 BKCC at $10.38/Bought 200 of the Stock CEF 200 BIF at $6.67/ Bought 600 of OPM:CA at $2.65 CADs-Toronto/Pared Trade: Bought 100 GSPRD at $21.18 and Sold 50 GSPRA at $21.73

Big Picture Synopsis

Stable VIX Pattern
Short Term Neutral
Intermediate and Long Term: Bullish

Short Term: Neutral
Intermediate Term: Slightly Bearish
Long Term: Extremely Bearish

The investment strategy team at Goldman Sachs is predicting a 6% return in the S & P 500 this year and a 6% annualized return over the next five years. How many of these overpaid Wall Street hotshots have proved their ability to predict much of anything?

Personally, I would be pleased with 30% this year, followed by four years of a zero increase. I could then use 2014-2017 as vacation time from the stock market after taking some profits.

In the first installment of Barron's 2013 Roundtable (subscription required), Abby Cohen and Gabelli mentioned one of my favorite statistics to support her positive views, the DSR ratio, though they did not use that acronym. Cohen stated that "monthly debt payments relative to income are at the lowest level since the 1990s". Gabelli noted that "consumer wealth is at a record level and consumer debt is falling".

Cohen also mentioned that the FED model for valuing the market, which compares the stock market's earnings yield with the long treasury yield, suggests year end fair value for the S & P 500 at 1750.

The WSJ published earlier this week the DJIA returns during each President's term starting with William McKinley in 1897. The DJIA returned 71.71% in Obama's first term and 111% in Clinton's first term.  The S & P 500 rose 85% during Obama's first four years as President.

Ten Year Treasury Mispricing

The break-even yield for the ten year TIP, the market's future inflation estimate, is hovering around 2.5%

Break-Even Calculation:
Take the 10 Year TIP Yield
Daily Treasury Real Yield Curve Rates

And Add the 10 Year Nominal Yield:
Daily Treasury Yield Curve Rates
=Break-Even, the level of inflation at which investments in both instruments will be the same.
TIPS Liquidity, Breakeven Inflation, and Inflation Expectations (2011-19, 6/20/2011)

Ten Year TIP -.68
Ten Year Nominal= 1.86%
Break-Even=2.54% Estimate Annualized Inflation for the next 10 years

The ten year nominal treasury rate is forecasted by the market to produce an annualized negative real rate of return of close to .6%. How is that rational?

My theory is that the FED can not influence the break-even spread, but it has warped the free market in the nominal 10 year yield through its bond buying program. What would be the ten year treasury yield now in a free market where the Fed is not buying anyting? 3.5%? 4%? If the market believe that the FED has ended its QE programs permanently, I suspect that the 10 year would float up to a 3.5% yield within one year thereafter based on the market's current 10 inflation forecasts.

If the 10 year treasury nominal yield is off, then other rates that trade at spreads to treasury yields would likewise be off.

Junk bonds are selling at what I would call scary yields now given their risk. For the first time ever, the Merrill Lynch High Yield bond index fell recently below a 6% yield: BofA Merrill Lynch US High Yield Master II Effective Yield

And, for the first time, the junk bond yield minus the earnings yield on the S & P 500 (trailing 12 months) is below zero. Chart- Business Insider Think about that for a second.


The Labor Department reported that inflation was unchanged in December on a seasonally adjusted basis. CPI rose 1.7% Y-O-Y without seasonal adjustment.

I am still waiting for evidence of Zimbabwe like inflation in the U.S. predicted by Peter Schiff and Marc Faber back in 2009 while appearing on the Glen Beck show. Of course, Schiff will simply say that the civil servants working in the U.S. government, who compile the numbers, are engaging in some kind of massive conspiracy to hide the true state of affairs. Schiff is of course engaged in self promotion for profit, just another person who has found a highly profitable niche appealing to a fringe element of investors by constantly predicting financial Armageddon around the corner (e.g. Harry Dent).

Mortgage Applications and New Home Construction:

The Mortgage Banker's Association reported a 15.2% jump in mortgage applications for the week ending 1/11/13, compared to the prior week. The refinancing share of those applications remained unchanged at 82%.  The average rate for 30 year FHA backed loans was reported at 3.39%. Mortgage Applications Increase in Latest MBA Weekly Survey

Last Thursday, the government reported a surge in new home construction. .pdfWSJ


More Thoughts on Stock Cycles:

The S & P 500 has had an incredible run off the March 9, 2009 low of 676.53. On the next day, the index rose 43.07 points, or 6.36%, to close at 719.6. S & P 500 Historical Prices I am using March 10, 2009 as the probable start date of a new long term secular bull market in stocks. I would have used the word "possible" for the first two or three years. 

In the first two or three years after the snapback rally from a catastrophic stock market decline starts, it is not relevant whether I characterize the rally as a cyclical bull market in a long term secular bear market or the start of a long term secular bull market. Either way, the investor needs to play the rally. Snapbacks from the catastrophic phase of a long term bear market are the norm. 

Every long term secular bull market starts its life looking like that cyclical bull rally in the long term secular bear market. So, it is hard to know in real time whether the rally is one or the other. Eventually, the investor has to fish or cut bait.

In every long term bear market, there are strong cyclical bull markets, particularly after the catastrophic phase of the secular bear market, defined to mean by me as a fairly quick decline of nearly 50% or more. No one would quibble with my use of the term "catastrophic" in that context.

Generally, the snap back rally from the catastrophic decline will be extremely powerful and will generally be among the to ten largest percentage gains in stock market history.

Some of the gains in the Great Depression are still among the largest on record. The catastrophic phase of that long term secular bear market occurred at the start-between October 1929 to 1933. The S & P  index declined 86.2% before hitting bottom in 1932.

This is a link to a DJIA chart that shows a bottom of 41.22 in 1932 following by a huge snap back rally that took the average up to 194.4 by early 1937, when the government's stimulus policies were withdrawn. For someone buying their first stock in 1932, that was a generational opportunity, though not so good for an early 1929 buyer on 90% margin.

Looking back, it was clear that the rally starting in 1933 was simply a countervailing snapback rally off lows reached during the crash period. Still, the rally needed to be played irrespective of its classification.

Sooner or later, however, a decision needs to be made on whether the long term bull market has started or whether the cyclical bull is running out of steam with the long term bear market about to assert its nasty power once again. Does the investor sell the rip after two, three or four years? Or, go into buying the dips and a long term holding mode, the more appropriate strategy for long term secular bull markets with nips and tucks here and there along the way?

I ask myself whether the problems underlying the long term bear have been largely resolved and whether there are in place drivers for the next long term bull. That sounds like a simple inquiry. In 1982, I stated to myself that the Federal Reserve had squashed inflation which was the underlying cause of a long term bear market in both stocks and bonds. That one was easy. Clear as a bell. The current problem is more murky. 

I started to address those same issues in 2009, and there are a large number of posts on this subject.  Some of those posts refer to years like 1974, a catastrophic phase of a long bear market which was followed by a powerful two year snapback rally. The bear market continued for another six years after that snapback rally ran its course.   

More on 1982 or 1974 (September 2009)

In those posts, I identify the driver for the next bull market as the powerful demand forces growing by leaps and bounds throughout the developing world. It would not be fair to characterize many of those markets as "emerging" anymore but simply as the "growth markets". China will after all likely surpass the U.S. in GDP growth by 2030, probably a few years sooner. 

The underlying problem was too much debt among consumers and their governments in a few developed countries, including the U.S. and several European countries. Resolution of those myriad problems is harder to track than the central bank's successful campaign against inflation. 

The U.S. consumers in aggregate have successfully deleveraged, as shown in the Federal Reserve's DSR and FOR ratios. Household Debt Service and Financial Obligations Ratios Those ratios show that consumers in aggregate now have more money to save and/or to spend due to their debt service obligations returning to pre Age of  Leverage levels, which I define as roughly starting in 1985 when both the U.S. government and the American public went into increasing stages of debt insanity. 

Of course, a large segment of the population needs to perform more work to reduce their debt loads. The deleveraging is continuing at a rapid pace as more homeowners, including those under water, refinance their mortgages at the current abnormally low rates. Many are doing so under the government's HARP program.  

And, I do know some citizens who are going from no mortgage debt and a zero DSR ratio to a much higher DSR simply because they can borrow money on their homes at less than 3% for 15 years. I have been tempted myself, but why bother. 

The U.S. government is making far slower progress in addressing its debt and budget problems. Maybe the government will be bailed out by some spending restraints and higher taxes already implemented as part of the fiscal cliff deal, plus about eight years or so of decent GDP growth. 

Still, I believe that the market is sensing that most of the serious problems have either been solved or are close to resolution, and the remaining problems will no longer be an impediment to above average worldwide GDP growth fueled by the "growth markets" with help from the rejuvenated American consumer and consumers and governments in more responsible developed nations (e.g. Canada, Australia, Germany, Netherlands, and Singapore) 

The long term bull market that started in 1982 had an enormous run before hitting a roadblock in 1987. The first leg topped out after five years. That move started on August 13, 1982 with a close at 102.42. By 8/31/1982, the S & P 500 index had risen 14.87%. The move had barely begun. Historical Prices

The first leg expired at 336.77 on August 25, 1987 Historical Prices The market had just gone too far, too fast, and prices were subsequently reset in the weeks thereafter culminating with the 1019/1987 plunge to 224.83. Historical Prices I would call that reset a somewhat scarier than normal reset within the context of an ongoing long term dominant secular bull market.

The S & P 500 recovered its August 1987 price by August 1989: Historical Prices After some understandable action during the 1990-1991 recessionary period, the next leg started in 1991 from around the August 1987 levels that took the S & P 500 up to an October 1997 high of 983.12.

I break this prior long term secular bull market down as follows:

First Leg-5 years
Reset-Digestion-Recovery: 4 years 
Second Leg-7 years
Overall ANNUALIZED return in the S & P 500 adjusted for inflation with dividend reinvested: 14+%
Annualized Returns of the S&P 500

To achieve that 14% return, an investor could not be sitting out the first leg or the second leg.   

For now, I am calling the market's action since 3/9/2009 as the first leg of a long term secular bull market. If that proves to be the case, it will be the first one to start at the end of a catastrophic decline. I will be using the VIX Asset Allocation Model to reduce my stock allocation after a Trigger Event.

The 1/1/49 to 1/1/66 long term secular stock bull market had less drama, with relatively minor and shorter pullbacks:

First Leg 1/1/49 to 7/30/56
Digestion 8/1/56 to 10/1958
Second Leg: 10/58 to 12/31/1961
Digestion and Recovery 1/1/62-8/1963
Last Leg: 8/1963 to 1/1/66
S&P 500 Index Chart
Total Gain Adjusted for Inflation and Reinvestment of Dividends: 14.4% Annualized
Annualized Returns of the S&P 500

I foresee a significant possibility of a stock market bubble forming within the next one to  three years based primarily on the monetary policies of the Fed and other central banks. The Fed is forcing investors into risk assets by turning cash into trash and creating artificial negative real rates of return on higher quality bonds. This could create a stampede into stocks driving prices into an unsustainable parabolic pattern within the next 1 to 3 years.

1. Bought 100 ARR at $6.86 and 100 BKCC at Roth IRA at $10.38 (see Disclaimer):

Security Descriptions: Armour Residential REIT (ARR) is a Mortgage REIT.

BlackRock Kelso Capital  (BKCC) is a business development corporation (BDC).

Both REITs and BDCs can avoid taxation at the corporate levels for income distributed to their shareholders. This will generally result in greater dividend yields, compared to regular "C" corporations. The downside is that BDCs and REITs lose their capital cushion for rainy days and to grow the business organically with that capital.

Prior Trades: None for BKCC.

I discussed the purchase of 150 ARR in a recent post. Item # 1 Bought 150 ARR at $7.46 (10/11/13). I have nothing to add to that discussion other than the following. The company did announce in December an  authorization to buy up to $100 million in stock. And, my last purchase at $6.86 was 8% below the prior one. The decline was -4.6% adjusted for dividend payments made after the last purchase. Lastly, ARR subsequently reduced the monthly dividend from 9 cents per share to 8 cents. Mortgage REITs have been reducing their payouts due to margin compression largely due to prepayments on higher yielding securities.

I also own 50 of ARRPRA. Bought 50 ARRPRA at $25.50

ARR News Releases: Home - ARMOUR Residential REIT, Inc.

Last Earnings Report for BKCC:  For the Q/E 9/30/12, the company reported net investment income of 32 cents per share and 30 cents on an adjusted basis. BKCC paid out 26 cents per share in dividends during the quarter.

This is how the company described the yields on its investments:

10-Q at page 44
Form 10-QPress Release

Net asset value was reported at $9.55 per share as of 9/30/12.

A list of BKCC's investments can be found in last filed 10-Q starting at page 15: Form 10-Q

BlackRock Kelso Capital - Overview

Rationale: (1) Solely About the Tax Free Income Generation in the ROTH IRA. The general idea is to return 10% annually in the ROTH. If I can manage that return solely with the dividend, then it is only necessary to avoid losing money on the stock. My round trip commission for the 100 ARR will be $14, so I will simply need to wait until I can sell the 100 shares at over $7 after harvesting maybe a year or so of monthly dividends payments.

Last year, I had a 10.7% return in the Roth IRA with almost no individual stocks, other than a few REITs and BDCs, and over $20,000 in cash earning nothing for most of the year.

Risks: (1) A Common Downside for both REITs and BDCs Is the Flip Side to their Benefit of High Dividends: Almost all of the income is being paid out to the common shareholders. While that produces a higher than normal dividend, the downside is that the capital is no longer available to weather business cycle downturns and to grow the business organically. The need for capital is often met, particularly by BDCs, by a constant stream of share issuances. In the past several years, many of those issuances by BDCs have been been blow book value per share. So, there is clearly a price paid for the high yields.

Unlike PSEC and some other BDCs which are serial issuers of common stock I did not find any recent stock issuance by BKCC which is a positive from my perspective. I did note a January 2011 sale of $158M in a senior secured note maturing in January 2016 with a 6.5% coupon. I may have missed it, but the last share issuance appears to be in October 2010, when the company sold shares at $11.95. BlackRock Kelso Capital - Press Releases

(2) Net Interest Margin Compression for Mortgage REITs Due Primarily Refinancing Risks: The current operating environment is far from optimal. Mortgage REITs have already received the benefits of low borrowing costs. Many of the securities bought with those borrowed funds are being redeemed due to prepayments. The reinvestment of those proceeds will be in lower yielding mortgage securities, resulting in a compression of the net interest margin and lower income for the REIT.

(3) Leverage Particularly for Mortgage REITs: Borrowing boatloads of short term money to buy longer term securities is inherently risky. As long as short term borrowing costs remain low, the Mortgage REITs should be able to earn something on the spread, though there are still a number of ways the REIT could lose money such as a decline in value of the mortgage securities and/or hedges going the wrong way.

(4) For BDCs, their loans are at high rates for a reason. They are loaning money to mostly private companies that would have trouble raising capital except at high rates from private equity. BKCC reported a net realized loss on its investments of $73.216+M for the first nine months of 2012, resulting primarily from two investments.  (page 47 of 10-Q).

(5) Dividend Cuts: The last annual report for BKCC shows substantial dividend cuts. The quarterly rate was 43 cents per share in 2008, which was cut to 16 cents in 2009. (Form 10-K at page 42) Hopefully, that period will be known as the stock market equivalent of the 100 year flood.

See Annual Report Risk Sections:

2011 Annual Report for BKCC: Form 10-K

2011 Annual Report for ARR: armour_10-k

Future Buys: Not Likely for either one. I am extremely cautious in investing in both Mortgage REITs and BDCs.

Quote: BlackRock Kelso Capital (BKCC)

Quote: Armour Residential REIT (ARR)

Close on 1/22/13

ARR: 7.00 +0.08 (+1.16%)

I view BKCC as a marginal purchase.

BKCC: 10.52 +0.07 (+0.67%)

2. Bought 200 of the Stock CEF BIF at $6.67 (see Disclaimer):

Security Description:

This fund only provides weekly updates of net asset value per share.

Data as of Friday 1/11/13:
Net Asset Value Per Share=$8.67
Market Price: $6.69
Discount= -22.84%

Subsequent Data 1/18/13:
Net Asset Value Per Share=$8.75
Market Price=$6.84

CEFA Page (shows total expense ratio at 2.84% with leverage and a 1.559% management fee)

This fund is heavily weighted in Berkshire Hathaway.

In 2012, the fund paid out $.29 per share in dividends and $.11 in 2011. This fund is not a big dividend yield vehicle, unless it changes course and decides to harvest more meaningfully some of its long term capital gains which I do not foresee happening. Many investors may like the long term holding of stocks like Berkshire.

BIF Page at Morningstar (rated 4 stars; three year average discount at 18.83%; light leverage use)

SEC Form N-Q for the period ending 8/31/12: Boulder Growth & Income Fund As of that date, Berkshire represented 26.3% of the fund's holding, probably more now due to BRK's appreciation since that date:

BRK/A and BRK/B Holdings as of 8/3/12

BRK-A Interactive Chart
BRK-B Interactive Chart

Last SEC Filed Shareholder Report for the period ending 5/31/12: Boulder Growth & Income Fund

Prior Trades: NONE.  I have bought and sold 100 shares of the Boulder Total Return (BTF) back in 2010. I realized a gain of $175.07, see snapshot at Item # 2 Bought 200 FOFI at $6.77

Rationale: (1) Capital Appreciation with Very Modest Income Potential: I generally like the portfolio. The large Berkshire stake and the fund's discount to net asset value are also attractive to me.

Risks and Disadvantages: (1) The main disadvantage from my perspective is the expense ratio excluding the leverage costs.

Given the high concentration in Berkshire stock, that fact alone can add both risks and benefits.

This one may have a perception problem among investors as evidenced by its unusually high discount to net asset value. There may be several reasons for that abnormally high discount, some rational and others less than rational.  The large discount may be due in part to the high expense ratio, the lack of meaningful dividend support due in large part to the lack of turnover, investor perceptions about the management company including those issues discussed in this Morningstar article about Boulder. So, this fund has some issues.

The remaining risks are typical for stock CEFs.

Quote: Boulder Growth & Income Fund (BIF)

Close on 1/22/13: BIF: 6.88 +0.04 (+0.58%)

3. Pared 50 of 250 MSPRA at $20.8 (see Disclaimer): In a recent post, I discussed paring this position after I added MLPY, a senior unsecured note issued by Morgan Stanley. I was over my comfort level in total exposure to MS securities. Item # 3 Bought 50 MLPY at $15.35 MLPY is an ETN that tracks the Cushing MLP High Income Index.

Prior to this sale, I owned 150 shares of MSPRA in my main taxable account and another 100 in a satellite taxable account.

I took this snapshot of my 150 share position shortly before selling 50 shares:

150 MSPRA Snapshot Shortly Before Sale of 50 Shares

As shown in that snapshot, the highest cost shares were sold using FIFO accounting. Those shares were purchased in December 2010. Bought 50 MSPRA at $19.71

2013 MSPRA 50 Shares $38.58
I received a quarterly dividend payment of $38.33 on 1/15/13 for the 150 shares held in the taxable account:

In that account, my average cost per share prior to the sale was $18.78. The average cost for the remaining 100 shares in that account is $18.23. This is a standard trading technique that I use for a wide variety of securities, particularly those that experience severe bouts of volatility which is the case for equity preferred stocks in general.

In an August 2011 post, I noted a day when the pricing of these securities varied intra-day by extraordinary amounts. Item # 1 Fear and Enhanced Volatility in Certain Classes of Income Securities There were crushed during the Near Depression period.

Stocks, Bonds & Politics: Advantages and Disadvantages of Equity Preferred Floating Rate Securities

Security Description: Morgan Stanley Non-Cumulative Pfd Stock Series A (MS.PA) is a non-cumulative equity preferred stock that pays qualified dividends at the greater of 4% or .7% above the three month LIBOR rate on a $25 par value. Prospectus Every word in that description is important.

Since I have owned this security for several years, on and off, I can confirm that the dividends have been classified as qualified in my 1099s. also show MSPRA as paying qualified dividends.

Prior Trades: I have harvested some small gains on this security already. The largest gains were in 2010:

MSPRA 100 and 50 Shares: Realized Total Gain +$962.87

Bought 100 MSPRA at 12.88 in May 2009-SOLD 100 MSPRA at 21.43Bought 50 MSPRA at 15.7-Sold MSPRA at 18.50Bought 50 MSPRA @ 19.57 in IRA-Sold 50 MSPRA at 21.03 in Roth IRA.

The remaining 100 shares bought in the main taxable account are discussed in these two posts: Added 50 MSPRA at 19.54 January 2011Bought 50 MSPRA at $16.6 September 2011

The purchase of 100 shares in the satellite taxable account is discussed in this post from March 2012: Item # 3 Added 100 MSPRA at $18.9 (commission=$7).

Snapshot of  Satellite Account Position as of 1/16/13:

Recent Earnings Release for MS: Morgan Stanley reported adjusted E.P.S. of 45 cents for the 2012 4th quarter, beating the consensus estimate of 27 cents. Morgan Stanley Reports Fourth Quarter and Full Year 2012

Rationale: (1) Almost Entirely Risk Reduction: Given what happened during the Near Depression, I am naturally circumspect about preferred stocks issued by investment banks. The Lehman equity preferred, LEHPRG, is of course worthless now. I am really not concerned about MS at the moment, but I will still keep my overall exposure to MS securities lower than KO for example.

(2) Harvesting a Gain After 2 Years of Dividend Payments and Lower My Average Cost Some for the Remaining Shares-Standard Operating Procedure Here at HQ

The shares did have a nice pop on the day of my sale:

1/16/13 Close: MS-PA: 20.85 +0.50 (+2.46%)

Future Buys: I am always interested in acquiring this security at a price below $20, provided there is no adverse credit developments at MS. I would have to liquidate 50 MLPY before or soon after acquiring another 50 of MSPRA, due to my maximum exposure limit to MS securities.

Quote: Morgan Stanley Non-Cumulative Pfd Stock Series A (MS.PA)

Close on 1/22/13: MS-PA: 21.03 +0.08 (+0.38%)

4. Bought 600 OPM: CA at $2.65 CADs-Toronto Exchange (See Disclaimer): This purchase was in part a response to this Seeking Alpha article on Sunopta, and the comments to that article involving Opta Minerals which is majority owned by Sunopta (STKL). I discussed Opta briefly when I purchased my latest Lottery Ticket in STKL. Lottery Ticket Buys: 30 SMS at $9.26, 50 STKL at $5.85 & 30 QLGC at $8.83

I used some of my existing CADs to pay for this purchase:

2013 Bought 600 OPM:CA at $2.65 CADs

Security Description: Opta Minerals Inc. (OPM) is a micro cap stock traded on the Toronto exchange. At the $2.65 CAD price, the total market capitalization is approximately $48 M CADs. Sunopta, an organic food company, owns 66.2% of OPM's stock. Clearly, STKL has no business owning a stake in this company. It is a non-strategic asset.

Link to Opta Information at the Toronto Stock Exchange: Stock Market Quotes (p/b shown at 1.035)  A ten year chart shows that this stock hit its peak at over $6 back in 2007.

According to a description provided by the company, Opta sources and distributes industrial minerals, "from traditional copper and coal blasting slag to patented silica-free abrasives, construction grade and golf course sand, water filtration media and jet cutting gamets". Opta Minerals Inc. - About Us Those products are used in a wide variety of industries: Opta Minerals Inc. - Industries We Serve (detailed description of product uses) Opta is an interesting little company that I would characterize as cyclical. For this investment to work, I would want to see an improving economy in both Canada and the U.S.

Last Earnings Report: The 212 third quarter report looked promising to me. Earnings increased to 1.45M or 8 cents per share, compared to 3 cents in the 2011 third quarter. Revenues increased 36.8%. Net income for nine months increased 38.8% to $4.282M from 3.086M. E.P.S. for the first nine months was 23 cents per share, up from 17 cents in the 2011 comparable period.

The company has completed three small acquisitions. One recent one was WGI Heavy Metals for C$.6 per share in cash. WGI is primarily involved in the processing and sale of industrial abrasive minerals, and the sourcing and sale of ultra-high pressure waterjet cutting machine replacement parts and components. optaminerals.pdf

Another 2012 acquisition was Babco Industrial Corporation, located in Saskatchewan, an industrial processor and supplier of petroleum coke, synthetic slag, ladle sand and crushed graphite.

Back in 2011, Opta commenced a strategic review of its options, which could have included a potential sale of the company but suspended that process in December 2011: Press_Release .pdf When announcing that suspension, Opta also announced the acquisition of Inland RC, a manufacturer of pre-cast refractory shapes, injection lances and electric furnace deltas. I know zilch about those products and have no desire to learn more.

Rather than discussing the potential benefits of these acquisitions, I will simply refer anyone interested to the SeekingAlpha article on Sunopta that goes into more detail

Rationale (1) Solely the Potential for Capital Gains: Possible Sale and Turnaround Potential

Risks (1) Small Company With a Lot of Products Operating in Cyclical Businesses-Lots of Moving Parts Can Cause Things to Go Wrong Here or There

Quote: Opta Minerals-(TOR: OPM)

I would label this purchase as speculative.  No shares were traded today.

5. Pared Trade: Bought 100 GSPRD at $21.177 and Sold 50 GSPRA at $21.73-In a Satellite Taxable Account  (see Disclaimer): 

RB noted that this was a Nerd Machine trade, picayune in the extreme, typical nickel and dime mind set of the Lame Brain LB that has cost Headknocker trillions over the years.

Sold 50 GSPRA at $21.73 and Bought 100 GSPRD at $21.177

Since this post is already long enough, and frequent readers are already familiar with these securities, my discussion will be out of format and brief.

Both GSPRA and GSPRD are non-cumulative equity preferred stocks issued by Goldman Sachs with $25 par values. Both securities have the same risks and are in pari passu (equal in priority and rights). Both are senior to common stock only in the capital structure and junior to all bonds.

GSPRA pays the greater of 3.75% or .75% above the 3 month LIBOR: Prospectus

GSPRD pays the greater of 4% or .67% above the 3 month Libor: Prospectus

GSPRD has a higher current yield by approximately .4%. The higher yield is caused by both a .25% higher  coupon and a lower cost per share. The GSPRD yield at a total cost of $21.18 is about 4.72%.  The GSPRA yield at a total cost of $21.73 is about 4.31%.

The small difference in the LIBOR float of .08% can not make up the yield differential based on original cost, when and if the LIBOR float is activated by a rise in the 3 month LIBOR rate sufficient to trigger an increase in the respective coupons. So, LB concluded that GSPRD was being mispriced in relation to GSPRA. For as long as the respective minimum coupons remain operative, the yield advantage for GSPRD will remain at about .4% annualized.

Advantages and Disadvantages of Equity Preferred Floating Rate Securities

History of the 50 shares of GSPRA:

50 GSPRA: History Since Purchase in July 2011 at $20.86
Bought 50 GSPRA at 20.86

I recently bought 50 GSPRD in the main taxable account: Bought 50 GSPRD at $20.6

Both of these stocks go ex dividend for their quarterly distributions on 1/23/13:

Goldman Sachs Group Inc. Dep. Shs Pfd. Series D (GS.PD)

Goldman Sachs Group Inc. Dep. Shs Pfd. Series A (GS.PA)

The disparity in current yield widened in today's trading (1/22/13):

GS-PA: 22.38 +0.58 (+2.66%)

GS-PD: 21.30 +0.09 (+0.42%)


I had one other purchase that I will discuss in the next post, which plays into the emerging market super cycle theme.

Politics and Etc:

1. Republicans Opposed the Modest Tax Decrease Proposed by Kennedy:  When republicans were actually concerned about the deficit, they actually opposed tax decreases. I was generally aware that President Kennedy proposed to cut the highest marginal rate from 91% to 70% and the bottom rate from 21% to 14%. Until I read Bruce Bartlett's column in the NYT, I did not realize that republicans and southern Democrats who are of course republicans now opposed that modest reduction since it would increase the budget deficit. In the House, 126 republicans voted against Kennedy's tax reduction proposal. (link to 1963 article in NYT