Thursday, January 3, 2013

MOU Update/Cash Flow Tables for 12/31/12 Main Taxable Account/CEF Reinvestment Snapshots/Bought 100 of IF at $11.64/Bought 100 VGI at $18.46/Bought 50 MLPY at $15.35/Pared Trade Roth IRA: Sold 100 MPW at $12.25 and Bought 50 NLYPRD at $24.9

Big Picture Synopsis:
Stable Vix Pattern
Vix Asset Allocation Model Explained Simply
Mark Hulbert and the Use of the VIX as a Timing Model
Stocks:
Short Term: Neutral
Intermediate and Long Term: Bullish

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

2012 Major Stock Index Returns-All Green

DJIA: 7.3% (HP was a major drag, just kick it out of the DJIA)
S & P 500: 13.4%
Nasdaq: 15.9%
Russell 2000: 14.64%

Since the Washington politicians have moved slightly toward sanity, and do not seem overly anxious to derail a budding U.S. economic recovery, at least at the present time, I have raised my near term stock outlook to neutral. I am reluctant to move to short term bullish since there are plenty of opportunities remaining for Congress to undermine the U.S. economy.

One of those opportunities involve the need to increase the debt limit. A number of politicians of one political tribe would gladly cause a U.S. government default unless they receive substantial cuts in entitlement programs and other safety net programs for the poor. Generally, those demands are so large that no Democrat would acquiesce in the demand. Hopefully, there are a sufficient number of politicians from both tribes who are not legally insane and recklessly irresponsible, and consequently recognize the need for non-draconian spending cuts including long term changes in entitlement program spending.

Obama should dump Harry Reid as a negotiator and use Joe Biden exclusively. The tribes have to compromise given the current power structure and I just see Reid as an irritant in that process.

While the True Believers will never see it, it is apparent that Obama is more willing to compromise with the republicans than members of his party.  The latest proof of that statement is provided in a story at Politico, where it was reported that Reid threw some concessions Obama was willing to make into a fireplace. Harry Reid

Rather than dealing with Boehner, which seems like a total waste of time,  I would hope that the same path is followed in negotiations over the next two months, where the compromise bill comes out of the Senate and then delivered to the nutcases in the House for an up or down vote.

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The Russell 2000 Index closed yesterday at 873.42. RUT Two of my senior unsecured notes issued by Citigroup Funding, and guaranteed by Citigroup, pay the greater of 3% on a $10 par value or up to a percentage increase in the Russell 2000. Of those two notes, MOU is closer to its annual end date than MBC.

The relevant data points on MOU are as follows:

Starting Value as of 2/23/12=829.23
Maximum Level Violation Number=1,136.04
End Date For Current Annual Coupon Period: 2/23/13

Pricing Supplement

It would be reasonable to postulate that there will not be a maximum level violation caused by one close above the maximum level number of 1,136.04.

A Maximum Level Violation causes a reversion to the 3% minimum coupon irrespective of the percentage performance of the Russell 2000 between the Start and End Dates.

So, it is possible that I will receive more than 3% during the current annual period, assuming the Russell 2000 does not close below 854.1 on 2/23/13, the point where any increase would be greater than 3%.  How much, if any, more is anyone's guess. A close at 900 on 2/23/12 would result in a 8.5% coupon for example (900 minus starting value of 829.23=70.77 divided by 829.23=8.5%) A close at 1000, which seems far fetched now, would result in a 20.59% annual interest coupon.

Bought 100 MOU at $10.12 (April 2009)

As previously noted, I hit a big pay day with a 27.93% coupon in the annual period ending in February 2011. (see snapshot at MBC & MOU). The last annual coupon was 3.7% (see snapshot at Item # 3 MOU)

This senior unsecured note matures in 2014 at its $10 par value. In addition to the current coupon period, there will be just one more before maturity.

Citigroup 3.00% Principal Protected Notes linked to Russell 2000 Index (MOU) rose 20 cents yesterday to close at $11.2.

As previously noted, given my cost in these securities and the current low interest rates, I am content to receive the minimum coupon.  Item # 1 Added 100 MOL at $9.78

FINRA Information: Citigroup Fixed Coupon Bond Maturing in 2014-Current YTM 1.225%

List of unsecured Citigroup Funding Notes currently owned, all maturing in 2014:
Bought 100 MKN at 9.85
100 MKZ bought at 9.96
Bought 100 MKZ at 9.91 in the Roth IRA
Bought 100 MOU at $10.12
Bought 100 MBC at 9.84
Bought 100 MBC at 9.78
Bought 100 MTY at $10.03
Bought 100 MTY at 10.49
Bought 200 MOL at 9.95-Sold 100 MOL @ 10.3 November 2010
Added 100 MOL at $9.78

Item # 1 Principal Protected Notes
Item # 2Principal Protected Notes
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The ISM December 2012 Manufacturing rose back into expansion territory, rising to 50.7 from 49.5. The new orders component was unchanged at 50.3. Employment rose 4.3% to 52.7 from 48.4.

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A commenter to a SA article referenced this study, published in 2004, that purports to show that a "falling knife" strategy offered significant outperformance potential. The report can be found at  www.brandes.com/pdf My Lottery Ticket Basket strategy is a "falling knife" strategy. The first prerequisite is a smashed stock price. Most likely, any technical analyst would rate the stock a sell and the company would generally have a barrage of negative commentary from pundits and talking heads.

Stocks, Bonds & Politics: Lottery Ticket Strategy: New Gateway Post

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The Infamous Stringdusters received a write up in the NYT after headlining a show at the Bowery Ballroom in NYC. NYTimes.com My nephew, Andy Hall, is the dobro player.


1. Bought 100 of the Stock CEF IF at $11.6431 (Emerging Market Consumer Super Cycle Strategy)(see disclaimer):




Security Description: The Aberdeen Indonesia Fund (IF) is a closed end investment fund that invests in Indonesia stocks.

Sponsor's Fact Sheet: Aberdeen Indonesia Fund (expense ratio high at 1.43%)




The Morningstar data shows that the fund paid a $2.2795 per share distribution last December, of which $2.1603 was a long term capital gain distribution. (see also: Aberdeen Indonesia Fund, Inc. Announcement Of A Special Cash Election Distribution

For 2012, this fund paid income dividends of just $.1116 per share. For ordinary income generation by an Asian country fund, CEFs and ETFs for the Hong Kong and Singapore markets would be a better choice. 

Press Release 12/5/12: Aberdeen Indonesia Fund, Inc. Announces Performance Data And Portfolio Composition

Prior Trading: None. I have never bought a fund focused on Indonesia. There are two ETFs in this space with lower costs selling at or near their respective net asset values.

iShares MSCI Indonesia Investable Market Index Fund (EIDO)(expense ratio of .59%; 93 holdings)

Market Vectors® Indonesia Index ETF (IDX)(net expense ratio .57% until 5/1/13, then .64%; 41 holdings)(3 year performance at NAV through 11/30/12=14.17%)

Rationale:

(1) Super Cycle-Middle Class Consumers in Emerging Markets: I have already explained this rationale in a recent post. Item # 3 Bought 50 of the Stock ETF EELV at $27.2 (11/29/12). The importance of that super cycle has been masked by governments and consumer develeraging in developed markets, particularly the U.S. and Europe.

It is not difficult to do a google search about Indonesia's growth and come up with a host of recent informative articles about Indonesia's place in this Super Cycle. I just took a sample:

Middle-Class Consumption Soars - Bloomberg (May 2012)

Indonesia: The newest BRIC? CNN Money (October 2012)(7th largest economy by 2030)

Middle-Class Money Powers Indonesia's Rising Cities-CNBC (October 2012)

(2) Three Year Performance of 22.34% annualized NAV increase through  12/27/12 is better than the ETFs, and I can buy the CEF at a discount.

I looked at the following data shortly before making my purchase. 

Data Day Prior to Purchase (12/24/12)
Closing Net Asset Value Per Share: $12.93
Closing Market Price: $11.6
Discount:  -10.27 
Average 3 year Discount as of 12/24/12= -8.56%

Indonesia Fund Data Day of Purchase 
Closing Net Asset Value Per Share=$12.98
Closing Market Price= $11.62
Discount = -10.48%

Risks: Emerging market stocks have traditionally been more volatile than U.S. stocks with a higher beta. In the coming years, as more investors become confident about the emerging market story, that traditional pattern could change. Any fund focused on a specific country will have country risks (e.g. political upheaval) and currency risks for a U.S. investor. CEFs have their own unique risks including the expansion of the discount to net asset value subsequent to the purchase. The normal risks associated with stocks are of course present.

Future Buys: Anything is possible when playing a super cycle theme.

Aberdeen Indonesia Fund rose 27 cents in trading yesterday to close at $11.94.  As of yesterday's close the discount to net asset value per share had narrowed to -8.01.

2. Bought 100 VGI at $18.46 (see Disclaimer):


The Virtus Global Multi-Sector Income Fund (VGI) is a worldwide, multi-sector closed end bond fund.

I am not going to discuss this transaction, other than providing the usual links and data points, since I recently discussed it in a prior post. Item # 4 Pared Trade: Bought 50 of the Bond CEF VGI at $18.52 & Sold 100 SGL at $10.71-Roth IRA (11/29/12 Post) On the day of that purchase, the discount to net asset value closed at -6.31.

VGI Page at the CEFA

VGI Page at Morningstar: VGI (fund is leveraged)

Sponsor's Webpage: Virtus

SEC Filed Shareholder Report (6/30/12): Virtus Global Multi-Sector Income Fund

SEC Form N-Q (holdings as of 9/30/12): Virtus Global Multi-Sector Income Fund VGI is a new CEF. as shown in this report, the net unrealized gain as of 9/30/12 was $6.971M.

Monthly Dividends Currently at $.117 per share. Virtus Global Multi-Sector Income Fund Declares Distribution Assuming a continuation of that monthly rate, which is in no way assured, the dividend yield at a total cost of $18.46 is about 7.6%.

The data points that led me to buy a 100 shares are outlined as follows:

Quote: Virtus Global Multi-Sector Income Fund (VGI)

ETFs on Day of Purchase (12/27/12)
Investment Grade Corporates: LQD: 121.36 +0.39 (+0.32%)
Junk Corporate: JNK: 40.66 +0.06 (+0.15%)
"Preferred" Stock: PGX: 14.63 +0.02 (+0.14%)
International Corporate: IBND: 35.41 +.03 (ex div $.12)
Emerging Markets Local Bond: EBND $32.18 +.02 (ex div $.847)
Hypothesis: VGI NAV Per Share Likely Rising a Tad

VGI Data Day Before Purchase (12/26/12)
Closing Net Asset Value Per Share: $20.27
Closing Market Price: $18.63
Discount -8.09

VGI Data Day of Purchase (12/27/12)
Closing Net Asset Value Per Share: $20.3
Closing Market Price: $$18.59
Discount: -8.42 %
Discount at $18.46 price: -9%
Close on Day of Purchase 12/27/12: VGI: 18.59 -0.04 (-0.21%)
Conclusion: Hypothesis Correct-NAV rose 3 cents per share

Day After Purchase (12/28/12)
Closing Net Asset Value Per Share: $20.32
Closing Market Price: $18.74
Discount: -7.78%

When I placed a limit order at $18.46, the stock had declined almost 1% from the prior close even the net asset value per share rose by three cents that day.

VGI rose 30 cents per share yesterday and closed at $19.2. As of yesterday's close, the discount had narrowed to -5.93%.

3. Bought 50 MLPY at $15.35 (See Disclaimer):

BOUGHT 50 MLPY  at $15.35

Close on Day of Purchase 12/31/12: MLPY: 15.55 +0.22 (+1.43%)

Security Description: The Morgan Stanley Cushing High Income Index ETN (MLPY) is an exchange traded note issued by Morgan Stanley. The ETN attempts to track the Cushing MLP High Income Index. The tracking fee is .85%. The five year annualized return of that index is 12.92%. Fact Sheet .pdf

The last distribution was $.3408 per share with an ex dividend date of 10/10/12. Assuming a continuation of that rate, the yield would be about 8.85% at a total cost of $15.35.

The Morningstar page for MLPY shows an increasing quarterly distribution rate for every quarter since fund inception in 2011. Based on the last four quarterly payments ($1.209 in total), the yield would be about 7.88% at a total cost of $15.35

Sponsor's Website: Morgan Stanley


Top 10 Index Components as of 9/28/12  

The constituent index members as of 12/19/11 can be found at page 42 of the Prospectus.


The selections for inclusion in the index are made using the following criteria:


Rebalancing occurs on a quarterly basis.

The chart shows a trading range mostly between $15-$17 with some spurts above and below that channel. Morgan Stanley Cushing MLP High ETF Chart A recent high was hit at $17.33 on 10/8/12, shortly before the 10/10/12 ex dividend date. MLPY Historical Prices

Prior Trading: None

Rationale:  Income and Some Appreciation Potential:  My goal is a 10% annualized return which can be achieved with a very modest appreciation in the share price.

Risks: (1) Credit Risk of ETNs: The Exchange Traded Note is what the name connotes-an unsecured senior bond. When buying an ETN, the investor is exposed to the credit risk of the issuer. If Morgan Stanley ever implodes like Lehman, owners of MS unsecured senior bonds may be fortunate to recover 20 to 25 cents on the dollar. That risk is just one reason for limiting my exposure to just 50 shares.

(2) Near my Total Exposure Limit to Morgan Stanley: Whenever I buy a security, I will exercise some judgment on my total exposure limit applicable to all securities issued by that company. For an individual company, my current limit is $10,000 to all of its securities (common stock, preferred stock, bonds). My limit for MS is $6,000 but I prefer to keep it under $5,000. I did flip the common earlier this year for a small profit and have also booked profits on the equity preferred floating rate stock MSPRA.

I also own presently 250 shares of MSPRA, a MS equity preferred stock that pays qualified dividends the greater of 4% or .7% above the three month Libor rate. Prospectus The out-of-pocket funds in that security is currently $4,613.34 with commission costs. To bring myself under a total MS exposure of less than $5,000, I will need to see 50 MSPRA when and if that security can be sold over $20 which will allow me to exit my highest cost lot at break-even.

In the event of a MS bankruptcy, I would anticipate that security would become worthless. Advantages and Disadvantages of Equity Preferred Floating Rate Securities

While I suspect that many will discount the credit risk issue, it is not something to ignore or dismiss base on what happened in 2008.

(3) Other Risks Discussed in the Prospectus: There is always a risk with any narrowly focused fund. MLPs have a number of risks unique to them such as an adverse change in the tax laws. Prospectus .pdf  With yield being the criteria for selection, the fund may not be including the best MLPs based on more fundamental analysis but simply the riskiest. Other factors beside yield could lead an investor to choose different MLPs.

Future Buys: A purchase of another 50 shares is possible, as an average down, provided I have sold 100 MSPRA.

MLPY rose 48 cents per share yesterday to close at $16.08.

4. Year End Cash Flow-Main Taxable Account: I will frequently include snapshots of cash flow generation for a single day. The most basic and important part of my investment strategy is to generate a constant stream of cash flow that will be reinvested to produce more cash flow, creating a compounding effect over time. I am relying on a wide variety of security types to generate that flow. The following three snapshots show mostly flow for 12/31/12.  The list shows income being paid by common stocks, bond and stock closed end funds, individual bonds, one bond ETF (AUNZ), and stock ETFs. Depending on the day, I may be receiving more bond payments which would generally hold true for every 15th day of a month. At quarter end, I am likely to be weighted in CEF distributions which was the case on 12/31/12.

Cash Flow 1

Cash Flow 2

Case Flow 3
(Dividends paid by some foreign securities were credited after these snapshots were taken)

I will invest that cash flow regardless of what is happening in the market. I will make an effort to use it to buy whatever presents the best value using my judgment at the time.

5. Reinvesting More Stock CEF Dividends: Hopefully, I am correct about being positive on the stock market long term now. Normally, I will reinvest the dividends paid by most stock CEFs when the discount to net asset value exceeds 10%. I will hold back on some, taking the dividends in cash, in order to contribute to the cash flow generation, even when the discount exceeds 10%. I have started to move more toward reinvestment and away from cash payments.

I am making an exception to the greater than 10% discount for BCF, at the moment, since it is selling at a larger than normal discount to net asset value. The 4th quarter dividend was the first one used to buy shares in a long time.  BCF closed at a -7.48% discount on 12/31/12 after rallying. {closing price on 12/31/12:  BCF: 10.26 +0.35 (+3.53%)}

If I turn pessimistic over the intermediate term, I will likely change some of the reinvestments back to cash payments.

The reinvestment for the China Fund dividend of $283.21, generated by 87 shares, is not shown below since the broker is waiting on the reinvestment price. Most brokers will simply buy shares in the open market to satisfy their customers' requests to reinvest dividends. Fidelity will use, when available, the Depository Trust Company Discount Plan which is probably the source for the delay. I know that this plan is also used by Bridge Bancorp (BDGE), and I am still waiting for the reinvestment price for BDGE's dividend too. Item # 1 Continuation of Discussions Re: Broker Price Differences For Reinvested Dividends

I did have Adams Express set up to receive a cash payment, however, and that instruction was ignored by the broker:

ADX Instruction In Effect For Over 3 Months
Instead of receiving cash, I received more shares which I prefer to attribute to the Lord's intervention rather than computer error made at the brokerage firm:

ADX Reinvestment

I also reinvested dividends paid by these stock CEFs:

PEO Reinvestment

RMT and RVT Reinvestment 

FUND Reinvestment

BCF Reinvestment

GAM Reinvestment

EOI Reinvestment (Monthly Dividend)

SWZ Reinvestment
6. Pared Trade Roth IRA: Sold 100 MPW at $12.25 and Bought 50 NLYPRD at $24.9 (see Disclaimer): This may end up being a questionable paring. My decision making process started with a desire to harvest my profit in MPW. I had received three $.2 per share dividend payments and will receive later this month another payment. I bought the 100 shares in February 2012 at $9.9. Bought 100 MPW at $9.9-ROTH IRA


MPW Transaction to 12/31/12
MPW  Dividend of $.2 per Share Payable 1/5/2013
Pared Trade Confirmations: Sold 100 MPW at $12.25 and Bought 50 NLYPRD at $24.9
My total return for MPW was 32.2% which is a lot for a REIT common stock in less than a year, so I sold it.

Security Descriptions:  Medical Properties Trust (MPW) is a REIT that owns health care facilities. MPW is a common stock. As such, the dividend can be raised, reduced or even eliminated based on the performance of the company. The common shareholders of a REIT do have some legal protection in that the REIT must distribute at least 90% of its net income to keep its tax status. However, that obstacle can be removed by poor operating results particularly during a recession. During the Near Depression, several REITs did reduce their common share dividends, with a few eliminations, and a few elected to pay some dividends in stock rather than in cash.

MPW 3rd Quarter Earnings Release:  SEC Filed Press Release10-Q

In general without reference to any specific company, the common share dividend is less secure than an equity preferred dividend payable by the same company. In the past,  there are examples where a company substantially reduced or eliminated the common share dividend, while continuing to pay both cumulative and non-cumulative preferred dividends.

The non-cumulative preferred dividend has an enhanced danger of being eliminated after a "suspension" of the common share dividend. Companies will often refer to a common dividend elimination as a "suspension" of that dividend because it sounds better even though the result is the same. For both the non-cumulative preferred shareholder and the common shareholder, the elimination of a dividend means that it is just gone forever.

The cumulative preferred dividend stock may also be in danger of non-payment when the common share dividend is eliminated by the company. Since the equity preferred stock is more senior in the capital structure to common stock, a preferred shareholder has to be paid in full if the common shareholder receives any cash dividend, no matter how small. Once that common dividend is eliminated, then that impediment is removed and the company can defer paying the cumulative preferred dividend. Several financial institutions quit paying dividends on all of their equity preferred and trust preferred shares at the same time during the Near Depression period and its aftermath.

Unlike the non-cumulative preferred stock, however, the non-payment of a cumulative preferred dividend is not equivalent to an elimination but simply to a deferral. The owner of that cumulative preferred stock still has the legal right to receive that dividend provided the company elects to reinstitute its common share dividend. Then the owners of the cumulative preferred stock will need to be made whole. That day may come or it may never come. In bankruptcy, the obligation would be discharged and most likely the cumulative preferred stock, issued by a highly indebted financial institution or Mortgage REIT, would become worthless, just like the common stock.

I would never expect to receive anything if Annaly went bankrupt for either NLYPRD or NLY.  Anything above zero would be viewed as a miracle.

Annaly Capital Management Inc. Pfd. Series D (NLY.PD) is a cumulative preferred stock issued by Annaly Capital. As such, it is superior only to common stock and inferior to all debt in the capital structure.

This security has a 7.5% coupon on a $25 par value. There is no maturity date, a major disadvantage for this type of security. NLY may elect to redeem the security on or after 9/13/17.

Prospectus

My yield will be close to the 7.5% coupon rate which will be tax free in the ROTH IRA.

Money will double in about 9.58 years at 7.5%: Estimate Compound Interest

Rationale: (1) Income Only: I would be satisfied to sell this security at break-even after collecting a number of quarterly dividend payments. I would not expect much capital appreciation. Given the risks, I will not add more to this position and I am done buying preferred stocks issued by Mortgage REITs with this last purchase.

Risks: Annaly is a highly leveraged Mortgage REIT currently experiencing a serious compression in net interest margins. Other risks are discussed in the Security Description section above and are also generally discussed in Item # 2 Bought 50 CYSPRA at $25.2-ROTH IRA

Equity preferred stocks issued by highly leveraged institutions are highly sensitive to credit risk and interest risk concerns. A rise in interest rates would place downward pressure on the price of the fixed income equity preferred stocks. A significant rise in interest rates could cause a substantial decline in the value of these securities, as well as real and imagined fears about the credit risks. During the Near Depression period, it was easy to pick up equity preferred stocks, issued by REITs and financial institutions, at greater than 50% discounts to par value. So there is a lot of downside risk when buying near par value and not much upside potential.

Future Buys: Prohibited due to Risk

MPW closed at $12.32 yesterday.
NLY.PD closed at $24.9. The last ex dividend date was 11/28/12.

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