Big Picture Synopsis
Stocks:
Stable Vix Pattern
Short Term: Slightly Bearish (waiting for a pullback)
Intermediate and Long Term Bullish
Bonds:
Short Term: Neutral to Slightly Bearish
Intermediate Term: Bearish
Long Term: Extremely Bearish
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Cyprus Bank Bailout-Tax on Small Depositors-Better or Worse than ZIRP?:
The Masters of Disaster have found a new way to force savers to pay for their mistakes. As a condition to receiving €10B for its troubled banks, the Cyprus President agreed with European finance ministers to levy a one time tax on bank deposits. The deal still has to be approved by the Cyprus Parliament. The proposed tax would be 6.75% on deposits under €100,000 and 9.9% over €100,000.
According to Reuters, the Cyprus government is willing now to exempt accounts with less than €20,000, but would take 6.75% of amounts between €20,000 and €100,000 and 9.9% over €100,000. That structure would raise less than required by the EU and is unlikely to pass anyway according to Reuters.
Based on a Bloomberg report published last night, three political parties including the communists have stated that they will oppose the bailout. If that is true, and those politicians remain steadfast in their disapproval, the government does not have enough votes to pass the bailout package which could lead to a collapse of the Cypriot banks.
Levying a tax on deposits is certainly a more direct way for savers to recapitalize improvident financial institutions, compared to the indirect way of taking savers money adopted by the Federal Reserve in its ZIRP monetary policy. In both cases, innocent citizens are required to pay for the mistakes of others.
Banks in Cyprus has been a bank haven for wealthy Russians due to lax banking laws. It has been widely reported that the banks were used for money laundering. As a result, Cyprus's banks had assets greater than 8 times the nation's GDP and deposits at approximately 4 times GDP.
The two large Cypriot banks lost a great deal of money investing in Greek government bonds.
This approach is not likely to restore confidence in a banking system.
It was not surprising to see gold rise yesterday, but I did expect more of a pop. After all, the signal sent by this latest development reinforces and rejuvenates gold bug fever and rational paranoia, in that it highlights and reinforces the following fears and concerns: (1) insured bank deposits are not really safe; (2) the government can tax just about anything, tangible or intangible, including a failure to act (e.g. individual mandate in Obamacare); (3) the power to tax can easily escalate into the power to destroy and to confiscate and then redistribute to others more favored; and (4) government guarantees can be withdrawn or changed in significant ways.
Still, I do not see anything happening in Cyprus as having a long term impact, even though a potentially dangerous precedent has been established at least in Europe.
In 2009, the EC made it clear that common shareholders and owners of junior debt would have to share the burden for any future state aid given to a particular company. (paragraph 26 at page 8 ec.europa.eu.pdf) This would be particularly important to the owners of hybrid securities whose distributions can be deferred once the common dividend is eliminated by the company.
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Retail Sales
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Cyprus Bank Bailout-Tax on Small Depositors-Better or Worse than ZIRP?:
The Masters of Disaster have found a new way to force savers to pay for their mistakes. As a condition to receiving €10B for its troubled banks, the Cyprus President agreed with European finance ministers to levy a one time tax on bank deposits. The deal still has to be approved by the Cyprus Parliament. The proposed tax would be 6.75% on deposits under €100,000 and 9.9% over €100,000.
According to Reuters, the Cyprus government is willing now to exempt accounts with less than €20,000, but would take 6.75% of amounts between €20,000 and €100,000 and 9.9% over €100,000. That structure would raise less than required by the EU and is unlikely to pass anyway according to Reuters.
Based on a Bloomberg report published last night, three political parties including the communists have stated that they will oppose the bailout. If that is true, and those politicians remain steadfast in their disapproval, the government does not have enough votes to pass the bailout package which could lead to a collapse of the Cypriot banks.
Levying a tax on deposits is certainly a more direct way for savers to recapitalize improvident financial institutions, compared to the indirect way of taking savers money adopted by the Federal Reserve in its ZIRP monetary policy. In both cases, innocent citizens are required to pay for the mistakes of others.
Banks in Cyprus has been a bank haven for wealthy Russians due to lax banking laws. It has been widely reported that the banks were used for money laundering. As a result, Cyprus's banks had assets greater than 8 times the nation's GDP and deposits at approximately 4 times GDP.
The two large Cypriot banks lost a great deal of money investing in Greek government bonds.
Cyprus has a guarantee on deposits of up to €100,000. Is that guarantee worth anything without a bailout? Cypriot banks held about €30B in insured deposits and €35B in uninsured deposits. The EU finance ministers wanted Cyprus to raise €5.8B as a condition to securing the €10B from the EU and the IMF.
The Cyprus President was willing to throw small depositors under the train in order to please Moscow. Cyprus was renegotiating a €2.5B loan from Russia.
This approach is not likely to restore confidence in a banking system.
It was not surprising to see gold rise yesterday, but I did expect more of a pop. After all, the signal sent by this latest development reinforces and rejuvenates gold bug fever and rational paranoia, in that it highlights and reinforces the following fears and concerns: (1) insured bank deposits are not really safe; (2) the government can tax just about anything, tangible or intangible, including a failure to act (e.g. individual mandate in Obamacare); (3) the power to tax can easily escalate into the power to destroy and to confiscate and then redistribute to others more favored; and (4) government guarantees can be withdrawn or changed in significant ways.
Still, I do not see anything happening in Cyprus as having a long term impact, even though a potentially dangerous precedent has been established at least in Europe.
In 2009, the EC made it clear that common shareholders and owners of junior debt would have to share the burden for any future state aid given to a particular company. (paragraph 26 at page 8 ec.europa.eu.pdf) This would be particularly important to the owners of hybrid securities whose distributions can be deferred once the common dividend is eliminated by the company.
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Retail Sales
Notwithstanding the increase in the payroll tax, the government reported that retail sales increased by 1.1% in February compared to January. Excluding gasoline purchases, retail sales rose .6%. The gain was 4.6% over February 2012. census.gov/retail.pdf
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General Mills
General Mills (owned) announced a 15% increase in its quarterly dividend, effective with the August 1, 2013 payment. The increase will be from the current $.33 per share to $.38. The next dividend will be $.33 and will be payable on 5/1/2013 to stockholders of record on 4/10/13.
GIS has paid dividends without interruption or reduction for 114 consecutive years.
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Armour Residential
ARMOUR Residential REIT cut its monthly dividend to $.07 from $.08. The seven cent monthly dividend was declared for the months of April, May and June.
ARR has been cutting its dividend every year as shown in the dividend history available at investor.armourreit.com
I decided to go with a blended dividend strategy with ARR by owning both its common and its preferred stock ARRPRA. The dividend yield on the cumulative preferred stock is lower but can not be cut or eliminated outside of bankruptcy. The dividend is paid monthly also on the preferred shares. The preferred dividend can only be deferred after ARR eliminates the common dividend. Bought 150 ARR at $7.46 & Bought 50 ARRPRA at $25.50
This is a link to a recent positive article about Armour published at Seeking Alpha.
This is a link to a negative article written by an investor who has shorted the common stock. Seeking Alpha I published a response to this article.
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Home Prices and Refinancings
The FHA reported that 1.074M mortgages were refinanced in 2012 under the HARP program. fhfa.gov. Dec12RefiReport.pdf Since inception, there have been 2.165+M refinancings under that program.
JPM predicts a 7% increase in home prices for 2013, whereas BAC estimates a 8% increase. Bloomberg
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Consumer Price Index for February:
Consumer Prices increased sharply in February at .7% on a seasonally adjusted basis with a .9% rise in gasoline prices accounting for almost three-fourths of that rise. Core CPI rose .2%. The annual increase without seasonal adjustments rose to 2%.
Intermediate and long term treasuries rose in price and fell in yields in response to this report.
The ten year treasury closed at 2% yield last Friday.
As of 3/15/13, the break-even on the 10 year TIP was 2.55%.
10 YEAR NOMINAL=2%
10 YEAR TIP= -55% Daily Treasury Real Yield Curve Rates
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Natural Gas Super Cycle
A recent article published by MarketWatch highlights the increasing demand for natural gas.
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Industrial Production:
Industrial production rose .7% in February, with manufacturing output increasing .8%. The capacity utilization rate for all industries increased to 79.6%. slightly below the long run average of 80.2. Industrial Production and Capacity Utilization
The Empire State Manufacturing general business conditions was reported at 9.2. Any number of zero indicates expansion.
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DSR and FOR Ratios
The debt service payment to disposable income ratio (DSR) declined in the 2012 4th quarter to 10.38, the lowest reading since the Federal Reserve started to compile data. Household Debt Service and Financial Obligations Ratios
Household Debt Service Payments as a Percent of Disposable Personal Income- St. Louis Fed
With lower debt service payments as a percent of disposable income, consumers have the capacity to save and/or to spend more of their disposable income.
The Financial Obligations to Disposable Personal Income ratio (FOR) was reported by the FED at 13.6. That is the sixth lowest FOR ratio on record, and the lowest since the 1980 4th quarter. The FOR ratio adds automobile lease payments, rental payments on tenant-occupied property, homeowner's insurance and property tax payments to the debt service ratio.
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TICC Capital (own):
After the close yesterday, TICC commenced the offering of 3M common shares, plus an over allotment of an additional 450,000. TICC is a BDC and share offerings are a known hazard for owners of this type of company.
In the recently filed annual report, net asset value per share was shown at $9.9 as of 12/31/12. (page 45: Form 10-K)
The shares were priced at $10.2.
I currently hold 100 shares in two separate accounts. Item # 1 Bought 100 of the BDC TICC at $9.8-ROTH IRA (February 2012); Item # 5 Added 100 TICC at $10.30 (January 2013),
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GS and MS Strategists Raise 2013 Target For S & P 500
The Goldman Sach's equity strategist raised his target for the S & P 500 yesterday to 1,625 from 1575. The Morgan Stanley strategist raised his target to 1,600 from 1,434. Bloomberg
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1. Bought 100 EGO at $9.30-Satellite Taxable Account (The $500 to $1,000 Flyers Basket Strategy) (see Disclaimer): EGO was bought last week. I mentioned near the end of my prior post that I would be discussing one other gold mining stock bought prior to the publication of that post.
Like its predecessor in time, The Lottery Ticket Basket Strategy, the Flyers Basket Strategy is viewed as high risk. And, for investments with serious risks of capital losses, risk is controlled by severely limiting the amount of the investment, rather than to avoid the security altogether.
Consumer Price Index for February:
Consumer Prices increased sharply in February at .7% on a seasonally adjusted basis with a .9% rise in gasoline prices accounting for almost three-fourths of that rise. Core CPI rose .2%. The annual increase without seasonal adjustments rose to 2%.
Intermediate and long term treasuries rose in price and fell in yields in response to this report.
The ten year treasury closed at 2% yield last Friday.
As of 3/15/13, the break-even on the 10 year TIP was 2.55%.
10 YEAR NOMINAL=2%
10 YEAR TIP= -55% Daily Treasury Real Yield Curve Rates
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Natural Gas Super Cycle
A recent article published by MarketWatch highlights the increasing demand for natural gas.
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Industrial Production:
Industrial production rose .7% in February, with manufacturing output increasing .8%. The capacity utilization rate for all industries increased to 79.6%. slightly below the long run average of 80.2. Industrial Production and Capacity Utilization
The Empire State Manufacturing general business conditions was reported at 9.2. Any number of zero indicates expansion.
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DSR and FOR Ratios
The debt service payment to disposable income ratio (DSR) declined in the 2012 4th quarter to 10.38, the lowest reading since the Federal Reserve started to compile data. Household Debt Service and Financial Obligations Ratios
Household Debt Service Payments as a Percent of Disposable Personal Income- St. Louis Fed
With lower debt service payments as a percent of disposable income, consumers have the capacity to save and/or to spend more of their disposable income.
The Financial Obligations to Disposable Personal Income ratio (FOR) was reported by the FED at 13.6. That is the sixth lowest FOR ratio on record, and the lowest since the 1980 4th quarter. The FOR ratio adds automobile lease payments, rental payments on tenant-occupied property, homeowner's insurance and property tax payments to the debt service ratio.
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TICC Capital (own):
After the close yesterday, TICC commenced the offering of 3M common shares, plus an over allotment of an additional 450,000. TICC is a BDC and share offerings are a known hazard for owners of this type of company.
In the recently filed annual report, net asset value per share was shown at $9.9 as of 12/31/12. (page 45: Form 10-K)
The shares were priced at $10.2.
I currently hold 100 shares in two separate accounts. Item # 1 Bought 100 of the BDC TICC at $9.8-ROTH IRA (February 2012); Item # 5 Added 100 TICC at $10.30 (January 2013),
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GS and MS Strategists Raise 2013 Target For S & P 500
The Goldman Sach's equity strategist raised his target for the S & P 500 yesterday to 1,625 from 1575. The Morgan Stanley strategist raised his target to 1,600 from 1,434. Bloomberg
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1. Bought 100 EGO at $9.30-Satellite Taxable Account (The $500 to $1,000 Flyers Basket Strategy) (see Disclaimer): EGO was bought last week. I mentioned near the end of my prior post that I would be discussing one other gold mining stock bought prior to the publication of that post.
Like its predecessor in time, The Lottery Ticket Basket Strategy, the Flyers Basket Strategy is viewed as high risk. And, for investments with serious risks of capital losses, risk is controlled by severely limiting the amount of the investment, rather than to avoid the security altogether.
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| 2013 Bought 100 EGO at $9.3 |
Company Description: Eldorado Gold Corp. is a mid-tier gold company with mines located in Turkey, China, Greece, Brazil and Romania.
I am primarily relying on a comprehensive report from Morningstar which currently has a 4 star rating on EGO and a $14 fair value estimate with a high uncertainty value. EGO Eldorado Gold Corp EGO is also assigned a "narrow moat".
Key Developments Page at Reuters
Company Website: www.eldoradogold.com
Over the past year, the shares have been on a roller coaster ride. The most recent up move started in July 2012 at $9.8 and ended at $15.96 in September 2012, and then started a range bound movement largely between $14 to $16 before collapsing to the $9.3 level. The largest part of that decline had occurred in 2013 with the stock falling from over $13 on 1/22/13. EGO Interactive Chart
I am primarily relying on a comprehensive report from Morningstar which currently has a 4 star rating on EGO and a $14 fair value estimate with a high uncertainty value. EGO Eldorado Gold Corp EGO is also assigned a "narrow moat".
Key Developments Page at Reuters
Company Website: www.eldoradogold.com
Over the past year, the shares have been on a roller coaster ride. The most recent up move started in July 2012 at $9.8 and ended at $15.96 in September 2012, and then started a range bound movement largely between $14 to $16 before collapsing to the $9.3 level. The largest part of that decline had occurred in 2013 with the stock falling from over $13 on 1/22/13. EGO Interactive Chart
A five year chart reveals a high of $21.48 on 9/5/11, when the P.M. London gold fix was at $1,895 per ounce. Kitco Inc. - Past Historical London Fix On the day of my EGO purchase (3/11/13), the P.M. London Fix was $1,579, so the spot price of gold had declined about 16.68% between 9/5/11 to 3/11/13. EGO declined approximately 56.7% during that same time period. So, the stock qualifies now for purchase under my Flyers strategy.
As noted in this Bloomberg article, a number of brokerage firms and hedge funds have turned negative on gold. After prices of anything goes down significantly, the Wall Street "analysts" will turn negative espousing numerous reasons why the decline will continue. And, after prices of anything goes up significantly, the "analysts" will turn positive, singing the praises of whatever it is that is going up in price. Those analysts are merely weather vanes, very astute in informing investors about the wind's direction rather than actually making a worthwhile weather forecast.
Kitco reported yesterday that HSBC looks for gold to recover in 2013 and to average $1,700 an ounce during the year.
An analyst interviewed the Gold Report, published by Seeking Alpha, had a positive comment about Eldorado. His version of all-in costs for the largest 13 gold miners is sitting near $1,600 an ounce. He is including in his cost estimate the costs associated with exploration and the building of new mines, some of the general and administrative expenses, operating cash costs, financing costs, and sustaining capital costs, all of which drain cash. Given the useful life of most new mines, the companies have a need to explore for and to build new mines just to stay in business long term. Generally, newer mines will have lower grades which are more expensive to mine, and that cost increase is frequently driven higher by the remote locations of many new mines. I thought that this article was worth reading for anyone investing in ("speculating in") gold mining stocks.
Eldorado's main mine, which accounted for 40% of its gold production in 2011, is known as Kisladag located in Turkey. The mine is expected to last more than 3 decades at 2011 production levels.
Another mine in Turkey, known as Efemcukuru, stated commercial production in December 2011 and is ramping up to full production. This mine is currently estimated to have less gold than Kisladag but will be lower cost due to higher grade ore.
In February 2012, Eldorado purchased for $2.4 billion European Goldfields which had one mine in operation, Stratoni, in Greece but two other shovel ready projects in Greece known as Skouries and Olympus. Skouries is a copper/gold project. It was attacked by armed intruders in February who destroyed office trailers and mobile equipment. The European Goldfields purchase also brought into the EGO fold a late stage project in Romania known as the Certej gold project.
In 2009, EGO acquired Sino Mines for $1.9B which brought into EGO's fold two mines in China, known as the Jinfeng and White Mountain, and a late stage project known as Eastern Dragon which is currently experiencing permit delays. In 2012, White Mountain had 80,869 ounces of gold production (cash costs=$625 per ounce):and Jinfeng had 107,854 ounces (cash costs=$817 per ounce) It is hard for me to see the accretive value in the Sino Mines acquisition unless Eastern Dragon overcomes its permit delays and proves to be a lower cost mine than the other two.
As noted in this Bloomberg article, a number of brokerage firms and hedge funds have turned negative on gold. After prices of anything goes down significantly, the Wall Street "analysts" will turn negative espousing numerous reasons why the decline will continue. And, after prices of anything goes up significantly, the "analysts" will turn positive, singing the praises of whatever it is that is going up in price. Those analysts are merely weather vanes, very astute in informing investors about the wind's direction rather than actually making a worthwhile weather forecast.
Kitco reported yesterday that HSBC looks for gold to recover in 2013 and to average $1,700 an ounce during the year.
An analyst interviewed the Gold Report, published by Seeking Alpha, had a positive comment about Eldorado. His version of all-in costs for the largest 13 gold miners is sitting near $1,600 an ounce. He is including in his cost estimate the costs associated with exploration and the building of new mines, some of the general and administrative expenses, operating cash costs, financing costs, and sustaining capital costs, all of which drain cash. Given the useful life of most new mines, the companies have a need to explore for and to build new mines just to stay in business long term. Generally, newer mines will have lower grades which are more expensive to mine, and that cost increase is frequently driven higher by the remote locations of many new mines. I thought that this article was worth reading for anyone investing in ("speculating in") gold mining stocks.
Eldorado's main mine, which accounted for 40% of its gold production in 2011, is known as Kisladag located in Turkey. The mine is expected to last more than 3 decades at 2011 production levels.
Another mine in Turkey, known as Efemcukuru, stated commercial production in December 2011 and is ramping up to full production. This mine is currently estimated to have less gold than Kisladag but will be lower cost due to higher grade ore.
In February 2012, Eldorado purchased for $2.4 billion European Goldfields which had one mine in operation, Stratoni, in Greece but two other shovel ready projects in Greece known as Skouries and Olympus. Skouries is a copper/gold project. It was attacked by armed intruders in February who destroyed office trailers and mobile equipment. The European Goldfields purchase also brought into the EGO fold a late stage project in Romania known as the Certej gold project.
In 2009, EGO acquired Sino Mines for $1.9B which brought into EGO's fold two mines in China, known as the Jinfeng and White Mountain, and a late stage project known as Eastern Dragon which is currently experiencing permit delays. In 2012, White Mountain had 80,869 ounces of gold production (cash costs=$625 per ounce):and Jinfeng had 107,854 ounces (cash costs=$817 per ounce) It is hard for me to see the accretive value in the Sino Mines acquisition unless Eastern Dragon overcomes its permit delays and proves to be a lower cost mine than the other two.
Recent Earnings Release: For the 4th quarter, EGO reported net earnings of $115M or 16 cents per share, beating the consensus estimate by 2 cents. Gold production rose 13% to 190,530 ounces, but costs rose 17% to $566 per ounce. That is not an all-in cost number. The company is currently planning for 2013 capital spending of $410 million. For 2012, the company reported basic earnings of $.44 per share, down from $.58 in 2011. The company paid C$.15 per share in dividend during 2012, up from C$.11 in 2011. Total gold production for 2012 totaled 656,324 ounces. SEC Filed News Release
Risks: Some of the risks are highlighted in some of the discussion above. There is a holdup in permitting for the Eastern Dragon mine in China. It may not have been a good idea to spend $1.9B to acquire mines in China. Greece has raised its corporate tax rate recently. There was also recently a large protest in a Greek town over a proposed EGO mine.
I discussed other risks applicable to gold miners in my last post. Besides the country risks, this companies are highly leveraged to the price of gold which is currently in a significant downtrend that has already caused a substantial decline in share prices. The all-in mining costs are substantially higher than the operating cash costs for a specific mine. Item # 5 Bought 50 AUY at $14.25
Any purchase of a gold mining stock now is analogous to catching that proverbial falling knife. Anyone willing to catch the falling knife needs to be prepared to lose money.
And, a substantial amount of their cash flow is eaten up with exploration and new mine development, a never ending cycle of keeping the company in business.
This is a link to the free cash flow numbers provided by YCharts: Eldorado Gold
I have a negative view of gold miners as investments, an opinion buttressed by EGO's share price decline since 9/5/11 noted above.
Future Buys and Sells: I will not buy anymore shares until I successfully trade this 100 share lot profitably. My hope is to sell the stock north of $12 within 12 to 18 months.
Yesterday's Closing Price: EGO: $9.65 +0.16 (+1.69%)
I discussed other risks applicable to gold miners in my last post. Besides the country risks, this companies are highly leveraged to the price of gold which is currently in a significant downtrend that has already caused a substantial decline in share prices. The all-in mining costs are substantially higher than the operating cash costs for a specific mine. Item # 5 Bought 50 AUY at $14.25
Any purchase of a gold mining stock now is analogous to catching that proverbial falling knife. Anyone willing to catch the falling knife needs to be prepared to lose money.
And, a substantial amount of their cash flow is eaten up with exploration and new mine development, a never ending cycle of keeping the company in business.
This is a link to the free cash flow numbers provided by YCharts: Eldorado Gold
I have a negative view of gold miners as investments, an opinion buttressed by EGO's share price decline since 9/5/11 noted above.
Future Buys and Sells: I will not buy anymore shares until I successfully trade this 100 share lot profitably. My hope is to sell the stock north of $12 within 12 to 18 months.
Yesterday's Closing Price: EGO: $9.65 +0.16 (+1.69%)
2. Bought 200 of the Bond CEF BTZ at $13.96-Regular IRA (see Disclaimer): BlackRock Credit Allocation Income Trust (BTZ) is a leveraged closed end bond fund.
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| 2013 Regular IRA Bought 200 BTZ at $13.96 |
I intend to sell my BTZ position held in a taxable account soon. I took a snapshot of that position shortly after buying 200 shares in the regular IRA on 3/13/13.
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| Main Taxable Account 222+ BTZ Shares as of 3/12/13 |
The general idea will be to collect several monthly dividends and then hopefully exit the position without a loss within the next 12 months. I am in a trading mode for leveraged closed end bond funds.
Security Description: This bond CEF will generally maintain more than 50% of its portfolio in investment grade bonds (mostly BBB rated) and the rest in junk. I could only find information as of 12/31/12:
BTZ was ex dividend on 3/13/13, the day after my purchase. The current monthly distribution rate is $.0785 per share. Distribution Dates and Amounts Announced for Certain BlackRock Closed-End Funds At that rate, the yield at a total cost of $13.96 would be about 6.75%.
On 3/12/13, this security had declined by seven cents, while major bond indexes were increasing slightly in price. I therefore anticipated a slight rise in the net asset value per share and an increase in the discount to net asset value which was already high for a bond fund.
As previously mentioned, three similar Blackrock bond CEFs were merged into BTZ last December and no longer exist. I owned one of those, PSY, and received shares of BTZ in exchange for my PSY shares. To date, there has not been an SEC filing detailing the portfolio positions for BTZ subsequent to the merge. The last filed shareholder report is for the period ending 10/31/12, when all four funds were still separate. BlackRock Credit Allocation Income Trust IV
BTZ Page at Morningstar (rated 2 stars, averaged 3 year discount=10.35%)
BTZ Page at the CEFA
Sponsor's Webpage: BTZ : Fund Profile : Products : Individual Investors : BlackRock
Data from 3/11/13 (day before purchase)
Closing Net Asset Value Per Share= $15.33
Closing Market Price=$14.03
Discount to Net Asset Value: -8.48%
Data from 3/12/13 (day of purchase)
Closing Net Asset Value Per Share= $15.36
Closing Market Price= $13.95
Discount to Net Asset Value= -9.18%
Data from 3/15/13 (after ex dividend)
Closing Net Asset Value Per Share= $15.31
Closing Market Price= $13.9
Discount: -9.21
Prior Trades: I am just content to collect some dividends and to hopefully exit the position without losing any money on the shares.
I have realized small profits on my positions so far:
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| 2012 BTZ 388+ Shares +$279.19 |
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| 2010 BTZ 200 Shares (two 100 Share Lots) Avg. Cost Per Share=$134.61 |
I may be pushing my luck with this last purchase. Leveraged bond funds are something that I do not want to own when interest rates start to go up in a meaningful way.
I also recently bough 100 shares in the Roth IRA: Item # 2 Pared Trade: Sold 100 GDO at $20.79 and Bought 100 BTZ at $13.83 (December 2012) I noted in that post that the shares closed that day with a net asset value per share of $15.32 and at a -9.73% discount.
It is more time consuming finding prior posts on a subject after the google search box quit working. I did find some prior discussions about BTZ: Item # 2 Added 50 BTZ at $11.24 (Oct. 2011); Item # 1 Bought 100 BTZ at $11.90 (September 2011); Item # 5 Bought BTZ at $11.45 in the Roth.
Rationale: (1) I am simply attempting to generate some income in a retirement account when money market funds are hugging zero yields. The trick will be to exit the position before interest rates can do material damage to the fund's performance. As with all CEFs, it is possible for the fund's net asset value per share to increase with the price remaining about the same or even going lower, which causes the discount to widen. The ideal situation for my exit strategy would be a steady or rising net asset value coupled with some narrowing of the discount to net asset value from 9.18%.
Risks: (1) CEF Prices are Determined by Frequently Irrational Investors: This is risk applicable to all CEFs. Irrationality can result in a CEF selling at a significant premium to net asset value or at an increasing discount even when the net asset value per share is going up.
(2) Rise in Interest Rates: When interest rates start to rise, the leveraged bond CEF would be one of the worst investments to own. The fund's borrowing cost would be going up at a time when the bonds are going down in value. Most likely, the discount to net asset value would be widening in that scenario-The Infamous Triple Whammy!
(3) Default and Credit Risk: Junk bonds have a significant default rate and can go down significantly in price even without a default as shown by what happened in the last recession. The average yield for junk bonds spiked to over 22.5%. BofA Merrill Lynch US High Yield Master II Effective Yield ( - St. Louis Fed
Future Buys/Sells: As noted above, I intend to sell the 222+ shares owned in a taxable account soon as I transition that position to the regular IRA.
Yesterday's Closing Price: BTZ: 13.92 +0.02 (+0.14%)
3. Bought 50 of the ETF HGI at $17.53-Roth IRA (see Disclaimer):
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| 2013 ROTH IRA Bought 50 HGI at $17.53 |
Security Description: The Guggenheim International Multi-Asset Income ETF (HGI) seeks to replicate, before fund fees and expenses, the Zacks International Multi-Asset Income Index.
Sponsor's Webpage: ETFs | Guggenheim Investments (expense cap at .65% through 12/31/15; total number of securities= 157 with a P/E of 12.2 and Price to Book of 1.5, both as of 3/12/13 )
The following snapshot captures only those holdings with greater than a 1% weight, just to give an idea of the kinds of companies owned by this fund:
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| Some Holdings as of 3/13/13 |
Distributions are paid quarterly at a variable rate. Based on the 2012 distributions totaling $.772 per share, the yield at a total cost of $17.53 would be about 4.12%.
The fund currently has a 4 star rating by Morningstar.
Prior Trades: I currently own 100 HGI shares in a taxable account. Item # 5 Bought 100 of the ETF HGI at $17.18 (January 2012)
I did sell 100 shares back in 2010 in the ROTH IRA: Sold 100 HGI at $16.93 in Roth
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| 2010 ROTH IRA 100 Shares +$617.53 |
Risks: The normal risks for a stock ETF that invests in international companies. The value and income tilt of this fund mitigates some of those risks. The expense ratio is viewed as high for an ETF.
Future Buys and Sells: I will periodically buy and sell shares of this ETF. Most likely, I would be a seller of the shares bought in the ROTH IRA at over $20 and a buyer of another 50 shares at below $16. If I bought a second 50 share lot at less than $16, I would lower my price target for the first lot to more than $19.
Yesterday's Closing Price: HGI: 17.47 -0.07 (-0.40%)
4. Sold 1 HCA 7.5% Senior Bond Maturing on 12/15/23 at $104.77 (Stocks, Bonds & Politics: Junk Bond Ladder Strategy)(see disclaimer): I am no longer updating prior posts relating to the junk bond ladder strategy. I am in a liquidation mode for most of my positions, viewing most junk bonds as overpriced in relation to their risks and yields. I currently expect to exit this strategy without suffering a a net loss on the bonds, notwithstanding several defaults. One of the defaults was an AMR bond, which has recovered in price and is now selling over par value. FINRA AMR 2016 I have sold that one too.
I bought this bond back in May 2011: Item # 6 Bought 1 Senior 7.5% HCA Bond Maturing 12/15/2023 at 96.854
HCA is a highly leverage owner of hospitals that has been borrowing even more money to pay special dividends to its common stockholders. I view that activity to be most unfriendly toward bond owners as noted when I recently sold another HCA bond. Item # 1 Sold 1 HCA 7.69% Senior Bond Maturing in 2025 at 104.18
FINRA - Investor Information on 2023 Bond
5. Initiated Position in the Mutual Fund ABRZX (see Disclaimer): Invesco Balanced-Risk Allocation Fund; A (ABRZX) is a balanced mutual fund that seeks "total return with low to moderate correlation to traditional financial market indexes". FactSheet.PDF
The managers are engaged in "tactical allocation" among a variety of asset classes (commodities, currency, bonds, stocks, precious metals, etc)
I discussed tactical/dynamic asset allocation in my last post. One of my earliest discussions was in a 2008 post. Stocks, Bonds & Politics: Static v. Dynamic Asset Allocation
I mentioned this fund in a June 2012 post titled Volatility and Asset Allocation (first paragraph). I had just read an article in the WSJ about a new breed of mutual funds that take into account volatility of asset classes when making asset allocation decisions. ABRZX was mentioned in that article.
MSN Money shows the performance at 12.92 for 2010, 10.3% in 2011 and 10.57% in 2012.
The fund is sold by Fidelity on a NTF basis with the load fee waived by the fund. ABRZX Summary - Invesco Balanced-Risk Allocation Fund Class A | Fidelity Investments I would never pay a load to buy a mutual fund.
The fund is mentioned in Brendan Conway's "Focus on Funds" column in Barrons.com.
Morningstar has a five star rating on ABRZX.
Sponsor's Webpage: Invesco | Fund Overview
Annual Report (period ending 10/31/12)
Prospectus (risks at pages 2-4). The fund uses derivatives, which creates leverage, to achieve its long positions:
The turnover is high. The MSN Money page referenced above shows a portfolio turnover rate of 282% which is not unexpected given the reliance on derivatives and the tactical allocation objective.
Yesterday's Closing Net Asset Value Per Share: ABRZX: $12.67 -0.01 (-0.08%)
6. Added to Position in the Permanent Portfolio (PRPFX)(see Disclaimer):
This "conservative" allocation fund is rated five stars by Morningstar and uses a static asset allocation approach.
The percentage weights will vary slightly over time but will be close to the following: 20% in gold; 5% in silver; 10% in Swiss Franc assets (e.g. Swiss government bonds); 15% in REITs and natural resource companies; 15% in "aggressive" growth common stocks (more aptly labelled value stocks in my opinion); and 35% in USD assets consisting primarily of treasuries (heavy into shorter maturities) and investment grade corporate bonds.
PRPFX at MSN Money
PRPFX at Morningstar
Sponsor's webpage The Permanent Portfolio Family of Funds
SEC Form N-Q listing the holdings as of 10/31/12
LAST SEC FILED SHAREHOLDER REPORT: SEC FORM N-CSRS
Given the plunge in gold and silver prices, the fund has held up relatively well in 2013, in that it has not lost value through 3/15/13. The stock selections remain relatively constant over time too.
The average annual return over the past ten years through 12/31/12 is 10.2% before taxes. Performance Page
Distributions are paid annually and are generally modest given the static allocation and relatively low selling activity. In 2012, the PRPFX paid a $.27 per share ordinary income dividend and a $.36 per share capital gain distribution. The reinvestment price was $48.37, representing a total yield at that price of only 1.3%.
I have been reinvesting the dividends and have not sold any shares. My unrealized gain is close to $3,000.
I view this fund as sort of disaster insurance. The fund did perform well in 2008 losing only slightly more than 8%.
I have discussed this fund on several occasions. I grouped it with PAUDX in my unusual allocation funds that now includes ABRZX discussed in Item # 5 above. Item # 2 Bought PAUDX/Unusual Allocation Funds
Yesterday's Closing Net Asset Value Per Share: PRPFX: $48.90 -0.05 (-0.10%)
Yesterday's Closing Net Asset Value Per Share: PAUDX: $10.98 -0.01 (-0.09%)
Yesterday's Close S&P 500 1,552.1 -8.6 (-.55%)
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This post is long enough.
I will discuss the addition of yet another gold mining stock to the Flyers basket strategy in my next weekly post. I also added one last week to the LT basket strategy. I am buying into the gold mining sector in small amounts due to the smashed stock prices in that sector and their potential for a price recovery. The buying is unrelated to the Cyprus shenanigans or to any other recent event. Instead, the buying is simply the end result of a typical selection process for stocks to be included in either the Lottery Ticket Basket Strategy or the $500 to $1,000 Flyers Basket Strategy.
The next post, scheduled for Monday, will be the monthly update on the regional bank and lottery ticket basket strategies.
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