Tuesday, March 12, 2013

JOBS/SAMBX/Bought 50 AUY at $14.25/Added 50 RSOPRB at $24.75/Update on MBC/Bought 50 SNLN at $20.11-Roth IRA/Bought 200 ZTR at $12.835/Dynamic Asset Allocation/More on CWH/Stan Druckenmiller's Dire Forecast

Big Picture Synopsis

Stable Vix Pattern
The Use of the VIX as a Timing Model
Short Term: Slightly Bearish
Intermediate and Long Term: Bullish

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

Stan Druckenmiller, the best performing hedge fund manager over a three decade period, had some interesting comments in a hour long interview with Stephanie Ruhle on Bloomberg Television. He does not believe that the market's move off the March 2009 low is the start of a long term secular bull market. Unsustainable spending on programs for the elderly will eventually result in an economic crisis worse than the 2008 financial meltdown. There were 40 million Americans over 65 according to the 2010 U.S. Census and that number is expected to grow to 55 million in just seven years as more baby boomers reach that age. Even before the baby boomers started to retire, federal spending on just Medicare, Social Security and Medicaid had risen to 44% of the government's $3.7 trillion in expenditures during 2011, up from 34% in 1990. In his view, the federal government torpedoes the economy, sooner or later.

He is also in the camp that believes risk assets are being "subsidized", an interesting word choice, by ZIRP and QE. An elderly saver invested in certificates of deposit would probably use that word too.

His interview is also presented in a long video clip which I watched in its entirety: Video - Bloomberg In a two plus minute segment, he outlines his views that seniors "are stealing" from future seniors. Video - Bloomberg If he wants to convince people to change their ways, less pejorative and inflammatory language would be in order.

Stanley Druckenmiller had an annualized return of 30% without a losing year while managing the hedge fund Duquesne Capital and a Soros hedge fund. Washington Post

I would certainly agree with him that the current entitlement spending path is unsustainable and will be an enormous multi-decade burden on young people. I do not foresee the  U.S. government's budget and debt problems being a problem for the stock market for another decade, give or take a couple of years. Some headway is being made to lower the budget deficits with increases in revenues and spending decreases. There will also likely be in the coming years more changes in the transfer programs that will slow down the rate of increased spending. A number of those changes have occurred already in the Social Security program and now it is time for Medicare.

Dynamic-Tactical Asset Allocation

As noted in numerous prior posts, I engage in a dynamic and tactical asset allocation rather than using a static asset allocation model. Stocks, Bonds & Politics: Static v. Dynamic Asset Allocation (December 2008 Post)

The tactical asset allocation approach is far more difficult and requires an assessment of relative valuations of asset classes, likely correlations among asset classes and an informed opinion about the big picture macro issues that significantly influence performance.

Morningstar just published an article about five funds that engage in tactical asset allocation. I own one of them, PAUDX, managed by Rob Arnott. One of the funds, GMWAX, has a $10M minimum purchase requirement. Another one is from Blackrock, MDLOX, and has a three star rating from Morningstar. That fund can be purchased on a NTF basis from many brokerage firms and will have a relatively low minimum purchase amount which will vary among brokers. It does have a front end load. Fidelity offers MDLOX on a NTF basis, and the load fee is "waived through Fidelity's NTF program". BlackRock Global Allocation Fund Investor A Shares | Fidelity Investments I do not own it.

Those managers use relative valuations of asset allocations and then move their allocations to each asset class up or down based on their opinions about relative valuation. Bonds would be viewed as less desirable at their current abnormally low yields compared to stocks. There would be periods when stocks are clearly overvalued, such as 1999-2000, when a zero allocation to stocks could be rationally defended by an asset allocation manager (unlikely to happen since the manager would likely be fired)   In my opinion, with 10 year TIPs in negative yield territory, we are now seeing the bond version equivalent of 1999 for stocks.

If an investor fully understood the dynamics of what was happening in the housing market prior to 2008, including the parabolic rise in home prices far outstripping the rise in incomes, the liars loan (ALT-A), the subprime loans and so on, a massive reduction in one's stock allocation was in order, irrespective of your risk tolerance, age, financial resources, situational risks or lack thereof, or anything else relating to you. An investor can not ignore what is happening in the real world when making asset allocation decisions. There are simply times when there has to be a significant shift in asset allocations for reasons related to the worldwide economy, inflation and/or relative valuations among asset classes.

The VIX Asset Allocation Model is one example of a dynamic timing mechanism. VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX PatternVIX and S & P Compared 1990 to 1997Vix Charts from 2004 2005 2006 Stable VIX Patterns Phase 1 and Phase 2

Another involves my frequent discussions about long term cycles, as well as the causes for the birth, longevity and death of each long term cycle. The Roller Coaster Ride of the Long Term Secular Bear MarketThe Big Picture QuestionsThe Importance of Identifying the Underlying Causes of Long Term Bull and Bear MarketsTo Professor Siegel: Time for a Re-Think;  More on Failures of Standard Asset Allocation Models and Target Funds/Use of Volatility in an Asset Class to Make Adjustments to an Asset Allocation

It simply can not be ignored that the S & P 500 returned over 14% annualized after inflation and with dividends reinvested between 1/1/1949 to 12/31/1965 and between 1/1/1982 to 12/31/1997.

And the returns during long term stock bear markets will generally be a negative 1% or so computed on the same basis (e.g. 1/1/1966 to 12/31/1981 or 1/1/1998 to 12/31/2008). A roller coaster is an appropriate analogy for long term bear markets. The investor goes up and down, sideways, around and around you go, then up and down again, until finally the ride ends having gone nowhere.

Stock market roller coasters are a lot of fun for traders like our LB but not particularly beneficial to long term investors or those maintaining a static allocation to stocks. Fifteen years of going nowhere is a long time in an investors life, particularly given the generally short time span, later in life, when many investors are able to start saving in meaningful amounts before having to spend their savings (e.g. highest income years and kids out of college)

I derive the data on the S & P's historical returns from this website which only allows me to use annual data.

CAGR of the Stock Market: Annualized Returns of the S&P 500

The prior long term bull market actually started in August 1982

Another interesting chart of long term interest rates going back to 1790: Seeking Alpha. Does the current point in that chart provide any comfort to me as a bond investor?

Home and Lumber Prices

CoreLogic reported last week that home prices rose 9.7% in January 2013 compared to January 2012, the largest increase since April 2006. ReutersHome Price Index (HPI) by CoreLogicCalculated Risk

Trulia reported the national asking home price rose 7% year-over-year.

The Mortgage Banker's Association reported a 14.8% increase in mortgage applications for the week ending 3/1/13, compared to a week earlier. The refinance share of this activity was essentially unchanged from the previous week at 77%.

In February, the price for CME lumber for March delivery rose above $400 per thousand board feet in February 2013, the highest price since April 2005. The price bottomed at around $150 in 2009. Lumber  Price Chart


The Labor Department reported last Friday that nonfarm payroll employment increased by 236,000 in February.  Employment Situation Summary The unemployment rate edged down to 7.7%. The expectation was for 160,000 jobs and a 7.9% unemployment rate. The average work week increased by .1 to 34.5 hours. Average hourly earnings rose 4 cents to $23.82. The U-6 number decreased to 14.3 in February from 14.4 in January. Table A-15. Alternative measures of labor underutilization There were revision in December and January that netted out to 15,000 fewer new jobs for those two months.  January suffered the downward revision from +157,000 to +119,000, whereas December was revised up to +219,000 from +196,000.

(see Brian Westbury's take on this report: ‎www.ftportfolios.com/PDF)

(see Robert Johnson's comment on positive economic date: Morningstar)

The ADP reported last week that private businesses added 198,000 jobs in February. The consensus estimate was for 175,000. ADP National Employment Report - February 2013 | NER ADP revised its January number to show +215,000 from +192,000. This report is released before the Labor Department's report.

Super Cycle in Natural Gas and U.S. Manufacturing

A key component to U.S. GDP growth will be an abundance of relatively low cost natural gas. An article published by CNBC summarizes a recent Morgan Stanley report which discusses the positive long term implications for the U.S. economy. The abundance of natural gas will give U.S. manufactures a competitive edge and manufacturing will start production once again of less expensive goods currently produced in low wage emerging markets. This will be a long term process, gradually increasing over several decades.

I discussed the relevance of the natural gas to U.S. manufacturing gaining a competitive advantage in a previous post. (Introduction-"Relevance of Energy to More Manufacturing Jobs in the U.S. in Pared Trade Roth IRA: Sold 120 GDO at $20.73-Bought 100 GSPRD at $21.38/Sold 3 Harland Clarke 9.5% Senior Bonds Maturing in 2015 at 98/Sold 81+ AMAT at $12.86/Bought 100 NBB at $20.85-Regular IRA/ Pared Trade Toronto Exchange: Sold 500 XTR at C$12.5 & Bought 200 XDV at C$22.21/Sold 100 NRBAY at $11.265)


SeekingAlpha Article on NLY and GSE Mortgage Pre-Payments-An example of Multiple Error Creep:

I am going to discuss this article as an example of what I call multiple error creep.

A Seeking Alpha author cited a small 3.8% decline in mortgage applications for the week ending 2/22/13 as support for his contention that the refinancing well was drying up.

The rate of pre-payments is relevant on the issue of whether Annaly Capital (NLY) would continue to be adversely impacted by pre-payments of mortgages owned by Fannie and Freddie. As older and higher yielding mortgages are repaid, NLY's net interest margin will continue to contract since short borrowing costs can not go any lower.

I pointed out in the comment section that one week does not make a trend, citing several previous releases from the Mortgage Banker's Association showing increases in applications, as well as the FHA reports on accelerating HARP refinancings of GSE owned mortgages.

He then become arrogant and condescending, claiming how well informed and connected he was on this issue. He claimed that many of the refinancings under the HARP program were temporary. Say what, a "temporary refinancing" is an oxymoron.

The FHA reports that I cited referred to completed refinancings of mortgages owned by Fannie and Freddie. ‎fhfa.go/Nov2012RefiReport.pdf The report also includes all other refinancings of mortgages owned by these GSEs. The SA author did not place any credence in those reports since they included temporary refinances in his opinion, and he had called the FHA about why those were included in the total.

As most of us already know, or at least the adults among us in both age and attitude, the old mortgage in a refinancing is paid off with a new loan, with different terms, and a new mortgage is the placed on the property reflecting those new terms. How exactly would the old mortgage spring back to life after being paid off?

Even with all of his expertise and vast knowledge in the area, the SA author had simply confused the federal HAMP loan modification program with the refinancing program under HARP. A modification of an existing loan can be temporary. A refinancing is of course completed once the old loan is paid off and a new mortgage placed on the property.

He finally had to acknowledge that I was right about the HARP refinancing activity but then claimed it was not important to this thesis. Why would refinancing activity involving GSE owned mortgages be unimportant to his opinion? The last published FHA report, which contains data through November 2012, shows that HARP refinances accelerated to 130,000 in November compared to 70,000 for October. The total number of Fannie and Freddie mortgage refinances were 573,153 in November, up from 441,017 in October. (page 9). The average interest rate was 3.35% on a thirty year mortgage, down from 6.48% in September 2008 (page 2).

I was not actually making a claim that refinancing activity was or was not about to level off. Instead, I was simply pointing out that the author's data did not support his conclusion which was clearly the case.

When making judgments about the data, it is important to both collect all of the data and then to make an intelligent and unbiased judgment about what the data tells you. ERROR CREEP and the INVESTING PROCESS

I have not linked this article here since it is not worth anyone's time reading, even though it was selected as a SA editor's pick.

Commonwealth REIT (CWH)

The Stifel Nicolaus analyst was quoted in a  Bloomberg article as saying that CWH's board was "controlled by external manager RMR, is in a unique position of blatantly acting in the best interest of RMR" rather than as a fiduciary for the shareholders. Amen to that comment. RMR receives generous management fees from CWH.

CWH's Board unilaterally amended the corporate by-laws that requires an owner of more than 3% of the outstanding shares to wait three years before seeking to remove a trustee. And, if there is still hostile shareholders owning more than 3% in 3 years, why not extend that period to 5 or 10 years?

RMR is controlled by Barry Portnoy and his son Adam who also sit on CWH's Board of Trustees. There are three alleged "independent" trustees. RMR is also the management company for Government Investors Trust (GOV), Select Income REIT (SIR), Hospitality Properties Trust (HPT) and Senior Housing Trust (SNH). While I have owned shares in CWH, GOV and SIR, I no longer have any position. The share prices will have to fall significantly from current levels to tempt me again.

An article in the WSJ.com noted that a representative from one large shareholder, Luxor, was excluded from a luncheon where CWH was pitching its dilutive share offering. CWH had changed the luncheon from the Four Seasons to the InterContinental hotel, in an effort to thwart that shareholder from attending and later had to blockade the representative from attending once that person tracked down the new location.

I certainly hope that the dissident shareholders continue their legal action against the Board and are successful in challenging all measures taken by the Board to entrench RMR, including the staggered Board terms, the "slow hand" poison pill and the recent change in the bylaws, with the ultimate goal being the replacement of the entire Board and the firing of RMR. I mentioned earlier that shareholders are not allowed to vote "against" any Board member up for election. I actually vote my shares in every company that I own, and I have never seen a company offer shareholders only an option to vote for a Board member or to abstain, other than for RMR controlled REITs.

I probably would not consider buying back CWH's shares south of $15 after recently liquidating my position. Eliminated CWH at $24.18

Stifel cut CWH to sell, noting that RMR, with $77M in high margin revenues at stake, "is directing the Board to fight to the finish", using shareholder money of course to wage that fight. If Corvex and Related are able to arrange financing, the Stifel analyst believes that the offer will be in the $20 to $25 range due to the recent dilution. If RMR prevails, the analyst believes that the price will sink to around $15 which is also my estimate.

Individual investors interested in REITs managed by RMR need to assess the drawbacks of  external management and whether RMR is managing those REITs in the best interests of shareholders or in RMR's best interest.

After the close yesterday, CommonWealth REIT announced that it had sold its remaining shares (9.95M) in Government Properties Trust (GOV). The transaction was an underwritten offering at $25.2 per GOV share.

RVT and RMT Dividends

Two Royce closed end funds that I own went ex dividend earlier this month for their quarterly distributions. Royce Value Trust, Inc. (NYSE: RVT) Declares First Quarter Common Stock Distribution of $0.19 Per Share; Royce Micro-Cap Trust, Inc. (NYSE-RMT) Declares First Quarter Common Stock Distribution of $0.13 Per Share

The 2012 annual report for the Royce closed end funds was recently filed with the SEC. sec.gov

Since inception on 11/26/86, RVT's average annual return through 12/31/12 was 10.33% (page 10; cumulative total return with dividends and participation in rights offerings 968%-page 11).

Floating Rate Mutual Fund (SAMBX)

I bought at Schwab a floating rate bank loan mutual that had a relatively low expense ratio of .61%. RidgeWorth Seix Floating RT High Inc I (SAMBX) This fund will invest at least 80% of its net assets in a combination of first and second lien senior floating rate loans and other floating rate securities. SAMBX currently has a 4 star rating from Morningstar. SAMBX is an "institutional" share class, but the fund was available to retail investors at Schwab on a NTF basis. Fidelity and TD Ameritrade required the payment of a fee. The expense ratio is similar to the two floating rate ETFs, BKLN and SNLN (see Item #1 below), both of which also own junk rated floating rate loans. I would never pay a fee to buy any mutual fund, particularly a low yielding bond fund.

A recent article published by Seeking Alpha contains a chart from Morningstar that shows bank loans have a positive correlation to inflation, and the correlation is greater at .37 than TIPs at .07 and commodities at .24. (see generally: "Profit From Asset Correlations" at the WSJ.com; and Assetcorrelation for correlation matrixes) Correlations between asset classes are dynamic and change over time. (see, e.g. Chart of five year treasury and the S & P 500 since 1952, Figure 2 at Forbes and my May 2009 post Stocks, Bonds & Politics: Instability & Volatility in Asset Correlations)


1. Bought 50 SNLN at $20.11-ROTH IRA (see Disclaimer): SNLN is a new junk floating rate bond ETF.

2013 Roth IRA Bought 50 SNLN at $20.11
Security Description: The Highland/iBoxx Senior Loan ETF (SNLN) is a new bond ETF that tracks the Markit iBoxx USD Liquid Leverage Loan Index consisting of the 100 most liquid leveraged loans. These floating rate loans will generally be senior secured bank loans to highly leveraged companies that have been subject to leveraged buyouts. Notwithstanding the secured status of the loans, they will be invariably rated as junk. While I have not checked the ratings of the bank loans owned by this fund, I would be surprised to find any of them rated investment grade.

The expense ratio is .55%.

Sponsor's Website: Highland iBoxx Senior Loan ETF

Link to list of holdings: Pyxis_iBoxx_Senior_Loan_ETF_Full_Holdings_Report.pdf

Dividends are being paid monthly at a variable rate. I anticipate that the yield for an entire year will be between 5% to 5.5% assuming no change in the current abnormally low 3 month LIBOR rate.

Prior Trades: None (new ETF: inception date 11/6/12)

Rationale: (1) Tax Free Income Generation in the ROTH IRA: The current dividend rate is likely to exceed 5% annualized at my cost and will increase when and if short term rates start to increase. I have started to take starter position in floating rate bank loan funds, anticipating an end to the FED's ZIRP within two years. For now, I am avoiding U.S. investment grade floating rate ETFs since their yields are generally 1% or lower.

(2) Low Interest Rate Risk: The bank loans are floating rates and are generally repriced every 90 days or so. If short term interest rates were to rise, the coupons would reset at higher rates, thereby providing interest rate risk protection when and if short term rates ever start to rise again.

Risks: The risks are virtually the same as another ETF, BKLN, that also owns junk senior secured debt. Bought 50 of the Floating Rate Bond ETF BKLN at $25.05 When the debt has first lien status, the junk rating telegraphs a leveraged company, with an enhanced risk profile, and a likely significant hit to the principal amount of the bond after a default. I decided to go with SNLN in the ROTH IRA, rather than BKLN, due to its lower expense ratio.

See also, "Principal Risks" section in the Prospectus starting at pp. 3-5

Future Buys: I will consider rounding up to 100 shares with a purchase at or below $19.5. Otherwise, I will simply collect the dividends on the 50 shares, and hopefully sell the shares for a 7%-10% total return after collecting a year or more of dividends. I will not likely buy more than 100 shares of a junk floating rate bank loan fund in a retirement account. In a taxable account, I may gradually take BKLN up to 200 shares.

I am not likely to even start a position in an investment grade floating rate fund for a year, unless the FED signals an early end to ZIRP before that time.

Yesterday's Closing Price: SNLN: 20.20 +0.01 (+0.05%)

2. Bought 200 of ZTR at $12.835 (see disclaimer): I place a market order for 200 shares when the bid/ask was $12.83/$12.84. The order was filled with 100 bought at the bid price and the other 100 bought at the ask price.

2013 Bought 200 ZTR at $12.835

Security Description: ZTR is a balanced CEF. As of 2/28/13, the fund had 67.88% of the portfolio in stocks.

The Zweig closed end funds are now part of Virtus Investment Partners.

Sponsor's Website:  Closed-End Fund Detail | Virtus Investment Partners

Morningstar page on ZTR (rated 2 stars; average 3 year discount -9.8%; no leverage; support of dividend with return of capital; see also 2012 tax information .pdf)

ZTR Page at the CEFA

Monthly Fact Sheet (February): virtus.com .pdf

Top Ten Holdings as of 2/28/13:

Top Ten Holdings as of 2/28/13
The Zweig Total Return Fund: The preceding link is to the fund's SEC filed shareholder report for the period ending 6/30/12 (shows some written call options on individual stocks; prior to 2012, the fund was engaging in a destructive return of capital, see line item "return of capital" at page 18; expense ratio shown at .92%)

The fund had a 1 for 4 reverse stock split on 6/27/12.

ZWEIG TOTAL RETURN FUND SEC Form N-Q (holdings as of 9/30/12)

Data on 5/4/13-Day before purchase
Closing Net Asset Value Per Share= $14.43
Closing Market Price: $12.81
Discount to Net Asset Value= -11.23

Prior Trades: None

Rationale: (1) Decent Balanced Portfolio with Dividend Income: The fund changed its distribution from quarterly to monthly last year and reduced the annual managed distribution rate. The quarterly dividend amount was a destructive return of capital which is one reason for the two star rating by Morningstar. The analyst at Morningstar opined in her analysis that the fund had engaged in a destructive return of capital in 15 out of 20 years. Another 2012 change was to reduce the amount of cash in the portfolio which had been large.

The current distribution is to distribute 7% of the Fund's net asset value on an annualized basis (down from the previous 10%), including all available investment income. The last declaration was for $.084 per share with a 3/7/13 ex date. The Zweig Total Return Fund At that rate, the dividend yield would be about 7.85%. Even at that reduced annual rate, the fund will have to realized capital gains in order to avoid a return of capital in the future.

I looked at the portfolio and am comfortable with most of the holdings. Personally, I would not to see DuPont in a top ten list. The fund also has a position in Amazon which I would not buy at current levels, but I may be wrong about that stock too.

Risks: (1) Bond Allocation Is Mostly In U.S. Treasuries: I do not own any treasuries. In a rising rate environment, treasuries will generally decline in price more than other bonds due to their perceived lack of credit risk. I am not comfortable with this funds allocation to treasuries. I am willing to accept as a contrarian bet against my own opinion about those securities. I may be wrong about the future course of interest rates.

(2) Normal Risks Associated with Stocks and Closed End Funds: With any CEF, the price and the price in relation to net asset value is determined by market participants.

Future Buys and Sells: I am not likely to buy more of this fund due to its past reliance on destructive returns of capital and its allocation to treasury bonds. I will likely trade the shares when I can sell for a 10% or so annualized total return. I have other stock CEFs like Adams Express, RVT and RMT where I am a long term owner. By buying and selling some other CEFs, I largely satisfy my trading urge which I recently did when liquidating my position in FUND. Sold 207+ FUND at $7.28 (2/20/13 POST)

Yesterday's Closing Price: ZTR: 12.86 +0.02 (+0.16%)

3. Update on MBC: The Citigroup Financial 3.00% Min Coupon Princ Protected Nts for Russell 2000 Index (MBC) is an unsecured note with a $10 par value that matures in 2014 that pays the greater of 3% or up to 30% based on the percentage gain in the Russell 2000 from its Starting Value during each annual coupon period.  Final Pricing Supplement The issuer is a wholly owned subsidiary of Citigroup who guarantees the notes as provided in the prospectus.

While this note is called a "principal protected note" (PPN), that name conveys an erroneous perception in some individual investors who fail to read the prospectus. Unsophisticated individual investors have been known to believe that these unsecured senior notes have a status in bankruptcy similar to a FDIC insured bank deposit. That is, of course, not the case. If Citigroup went into bankruptcy before this note is paid off, as Lehman did, the owners of its PPNs would be in the same position as the owners of all other senior unsecured notes and could receive somewhere between 15 to 25 cents on the dollar in a bankruptcy reorganization or liquidation. I am no longer concerned about such an eventuality with my Citigroup Funding PPNs, all of them mature in 2014. Citigroup would have collapsed in my opinion in 2008 without massive government assistance.

There is a catch to MBC's coupon payment. If the Russell 2000 closes a single day above that 30%, MBC will pay only 3%, irrespective of the percentage gain in the pertinent coupon period. I call that event a Maximum Level Violation.

MOU, another PPN tied to the Russell 2000, finished its last annual coupon period in February 2013 and paid a 10.483% coupon on its $10 par value.

I last discussed MBC in a recent post: Stocks, Bonds & Politics: Status of Citigroup Funding PPNs: MOU, MBC, MKN, MKZ

MBC ends its current coupon period on 5/21/13.

Russell 2000 Starting Value:  764.64
Maximum Level Violation Number: 994.032

There has not yet been a close above 994.032 during the current coupon period. If there was such a close on or before 5/21/13, MBC will pay 3% at its annual coupon.

The Russell 2000 closed yesterday at 942.5 last Friday(3/8/13). RUT: Russell 2000 This one may be very close as to whether or not there will be a Maximum Level Violation. I would not mind seeing a 5% pullback in the Russell 2000 index soon, just to give this PPN some breathing room. If there is none, the coupon will likely be a good one.

This one is certainly in danger of crossing the Maximum Level number before the closing date. The Russell 2000 closed yesterday at RUT: 942.51 +0.01.

If there was no Maximum Level Violation, and the Russell 2000 closed at 942.5 on 5/21/13, the coupon would be 23.26%. One close above 994.03, only 6.74% above last Friday's close, and the coupon becomes 3%! The price will fall precipitously from current levels if and when there is a Maximum Level Violation and may start to decline as the Russell 2000 moves closer to 994.

I own 200 shares bought below the $10 par value: Bought 100 MBC at $9.84Bought 100 MBC at $9.78 I would not buy this unsecured senior note at its current price.

Quote:  Citigroup Financial Inc. 3.00% Min Coupon Princ Protected Nts for Russell 2000 Index

4. Added 50 RSOPRB at $24.75-Taxable Account (see Disclaimer): I really did not way to buy this cumulative preferred stock, but I wanted to increase the cash flow in my main taxable account.

Security DescriptionResource Capital Corp. 8.25% Cum. Redeem. Pfd. Series B (RSO.PB) is a cumulative equity preferred stock issued by the REIT Resource Capital. RSOPRB has a 8.25% coupon and a $25 par value. The security is perpetual unless RSO elects, at its option, to redeem it on or after 10/2/17. The security has a typical "stopper" clause that would prevent RSO from deferring the preferred stock dividend unless it first eliminates cash payments on its common stock. Prospectus Supplement

Prior Transactions: I bought 50 shares in the ROTH IRA back in December. Item # 3 Bought Roth IRA: 50 BANCL at $25.20, 50 IDE at $16.15 & 50 RSOPRB at $24.9/ Bought 100 APF at $14.55 A more detailed discussion of this security can be found in that post. 

Recent Earnings Release: Resource Capital reported adjusted FFO of $.22 per share for the 4th quarter. GAAP net income was reported at $.14. RSO paid out to the common shareholders a $.2 per share dividend during the quarter. Book value was reported at $5.61 per share as of 12/31/12, up from $5.48 as of 12/31/11. The commercial real estate portfolio consisted of 85% senior whole loans. During 2012, he company closed $157.7M of senior whole loans with a weighted average yield of 6.7% including origination fees. The company had $99.3M in unrestricted cash at the end of the 4th quarter. SEC Filed Press Release

Q4 2012 Earnings Call Transcript - Seeking Alpha

Rationale: I discussed the rationale when I last bought these preferred stock. The only rationale for its purchase is to generate some income in an abnormally low interest rate environment engineered by the Federal Reserve in its 4+ year Jihad Against the Savings Class and Responsible Americans.

The stopper clause provides some protection against a payment deferral, in that a common share cash dividend has to be eliminated in its entirety before RSO can defer the RSOPRB dividend and RSO has to pay the common dividend when it has taxable income in order to maintain its tax status as a REIT. 

Risks: I discussed the risks when I last these shares. One risk is that the potential downside to this kind of security is a zero price, while there is minimal upside when bought near par value. Given the high leverage, RSO's equity preferred stocks would likely become worthless in a bankruptcy. Those types of securities are junior to all debt and senior only to common stock. 

Future Buys/Sells:  I am not likely to buy more shares. The goal will be to harvest a 8% to 10% annualized return

Yesterday's Closing Price: RSO-PB: 24.85 +0.05 (+0.20%)

5. Bought 50 AUY at $14.25 (Stocks, Bonds & Politics:  The $500 to $1,000 Flyers Basket Strategy)(See Disclaimer): Yamana Gold (AUY) is a gold exploration and production company headquartered in Toronto, Canada. The shares also trade on the Toronto exchange under the symbol YRI. Due to the recent weakness in the CAD versus the USD, the stock had a lower price than on the Toronto exchange. The shares closed at C$14.68 in Toronto on the day of my purchase  (3/8/13) and at $14.28 in the U.S. Using the Yahoo Finance Currency Converter, $14.28 USDs converted into C$14.69 late last Friday.

Closing Price on Day of Purchase (3/8/13): AUY: $14.28 +0.04 (+0.28%)

Company Description: Yamana is a gold producer with "significant gold production, gold development stage properties, exploration properties, and land positions in Brazil, Argentina, Chile, Mexico and Columbia"

The company reported total gold equivalent mineral reserves at existing projects and projects in development at 17.9 million ounces, as of 12/31/12, an increase of 5% from 2011. The total proven and probable silver reserves were 89,121 ounces. Cooper mineral reserves were 2.7 billion pounds of copper at an average grade of .31% copper:

AUY Mineral Reserves As of 12/31/12 
SEC Filed Press Release

AUY anticipates spending $110-$115 million in exploration during 2013.

Gold mining stocks have taken a beating over the past several months as the price of gold has fallen precipitously.

Yamana's stock price closed at $20.39 on 11/8/2012, and had fallen 30% from that high price when I decided to take a nibble. AUY Interactive Chart A gold stock ETF, Market Vectors Gold Miners ETF (GDX), hit $66.63 on 9/8/11 and closed at $37.11 on 3/8/13, a 44% slide. GDX has declined 27.8% since 11/8/12. Spot gold, using the London P.M. fix had declined 8% from 11/8/12 ($1,717) to 3/8/12 ($1,579.5). Kitco- Past Historical London Fix

AUY is rated 4 stars by Morningstar with a fair value estimate of $20. I would certainly be a seller at $20 and most likely at a lower price.

Company Website: Yamana Gold Inc. - Home

AUY is currently paying a quarterly dividend of $.065. Yamana Gold Declares Quarterly Dividend

The current consensus estimate is for an E.P.S. of $1.13 in 2013 and $1.5 in 2014. AUY Analyst Estimates

Yamana Gold Profile Page at Reuters

Key Developments page at Reuters

Gold stocks were discussed in a recent Barrons article. One mutual fund manager mentioned Yamana as his favorite due to its relatively low cost of production, around $500 per ounce, and its free cash flow. Hopefully, the FCF numbers will start to look better once the newer mines go into full production, assuming that gold prices cooperate by remaining at least at current levels or preferably moving much higher.  As to cash cost number referenced by that analyst, that number does not include all costs, as noted in item # 6 in the "risk" section below.

An author of an article about Yamana published by the Motley Fool referred to the company as the "most effective and reliable" gold mining company. One reason for that opinion is that AUY's net profit margin of 31.3% is "almost exactly" where it was two years ago, notwithstanding cost pressures. Another recent favorable AUY article was published at the Seeking Alpha website.

Prior Trades: I have traded AUY in the past. I sold 100 AUY shares in November 2009. Item # 9 Sold AUY at C$14.2

In the IRAs, where I occasionally use gold stocks as a hedge for my bonds, I bought AUY at $8.98 and later sold those shares at $11.4. Item # 3 Sold Some AUY (October 2009)-Bought Yamana Gold as a Lottery Ticket (August 2009). This was viewed as a Lottery Ticket purchase at the time:

2013 AUY 30 Shares +$51.23

I also bought 100 shares in February 2010. Bought 100 AUY at $10.55 in Roth

I had one trade in 2007:

2007 AUY 100 Shares (two 50 share lots) +$66.73
I would not be a long term holder of any gold mining company.

Recent Earnings Release: For the 4th quarter, AUY reported adjusted earnings of $.26 per share on revenues of $629.5M. The company produced a record of 1.2M gold equivalent ounces (GEO) during 2012, a 9% increase over 2011,with operational cash flow reported at $1.4 per share. GEO includes silver production at a ratio of 50 to 1.

Last year marked the first full year of production at AUY's Mercedes mine in Mexico which produced 126,010 GEO or 20% above AUY's guidance. There was also a 22% production increase at AUY's  Fazenda Brasiliero mine. SEC Filed Press Release; AUY SEC Filing The Ernesto and Pilar gold projects in Brazil are expected to begin commercial operation by mid-year. Ernesto/Pau-a-Pique and Pilar The C-1 Santa Luz, Brazil project is slated for commercial production in "early 2013. Yamana Gold Inc. - Operations - Development & Advanced Exploration - C1 Santa Luz The locations of these mines are shown on this map: Operations Overview

Cash costs per GEO were $525 for the year and $517 for the 4th quarter. The average realized gold price for 2012 was $1,670 per ounce, up from $1,567 in 2011 ($1,237 in 2010).

Earnings Call Transcript - Seeking Alpha

Rationale: (1) I am trying to catch a falling knife by starting to nibble in gold mining stocks. There is appreciation potential provided gold prices stabilize at current levels and start to move back up. Personally, I view gold as an impossible to value asset. Gold produces nothing and has no earnings,  P/E,  P.E.G. or any any other ratio or number used by investors to value stocks. Unlike oil, copper and other industrial metals, its practical use is primarily in jewelry.

Humans have always considered gold as a store of value compared to currencies that are frequently debased by governments and lose their purchasing power to inflation over time. A large number of individuals would be more comfortable owning a 1 ounce gold coin  rather than the equivalent amount in paper money issued by our dysfunctional and overly leveraged government.

Risks (1) Decline in Gold Prices: Gold mining companies are a leveraged play on gold prices. If gold continues in a downward trajectory, AUY stock will continue to decline too, possibly at a faster percentage rate which has been the case since 11/8/12, as noted above.

(2) Country Risks: There are obviously numerous risks faced by companies operating in Latin America. Nationalization and arbitrary increases in taxes are just two of many significant risks. Let's just call the foregoing "regulatory instability". While businesses in the U.S. whine and complain constantly about the U.S. government, the U.S. is an oasis of peace and tranquility compared to the places where gold mining companies frequently have operations now.

(3) Gold Stocks Are Currently Falling Knifes: One of the basic selection criteria for the both the Lottery Ticket and the Flyers Basket strategies is a a smashed stock. The stock chart will frequently look like the stock has jumped off a cliff. Consequently, the purchase of such a security is analogous to catching a falling knife. I will limit my monetary exposure to such securities.

The gold fund managed by John Paulson lost 18% in February and 26% this year.

(4) Stock Sales: Historically, AUY has raised capital to fund its development projects with massive stock issuances. Hopefully, AUY has enough cash and cash flow to avoid such issuances in the future.

(5)  Gold Is Not a Productive Asset: Personally, I view gold as an impossible to value asset. Gold produces nothing and has no earnings,  P/E,  P.E.G. or any any other ratio or number used by investors to value stocks. Unlike oil, copper and other industrial metals, its practical use is primarily confined to jewelry. Gold has whatever value fickle human beings place on it, and its price.

Buffett has a negative view on gold bugs and gold as an investment (see page 19 this letter to Berkshire's shareholders: ‎berkshirehathaway.com/letters/2011ltr.pdf) He makes the common sense observation that the world's gold stock would be worth $9.6 trillion at $1,750 an ounce. Would you whether have that gold or use that money to buy all U.S. cropland with an annual output of about $200 billion annually, 16 Exxon Mobils with its prodigious earnings and still have a trillion or so of walking around money? This letter was dated 2/25/12.

(6) Cash Costs Per Ounce Do Not Include All Costs: The cost for producing one gold equivalent ounce, mentioned above, includes the direct costs for operating the mine including production taxes, mining, processing, selling and royalty costs. Historically that number does not include all of the other costs including financing, sustaining costs, reclamation and mine-closing costs, company administrative costs, company income taxes, etc.

Goldcorp recently stated that its "all-in sustaining cash cost" which includes maintenance capital expenditures is estimate to rise 21.4% in 2013 to $1,000 an ounce. The World Gold Council is working on a an "all-in" cost calculation that would give investors more transparency and accuracy that will hopefully be finalized by mid-2013. Forbes

Yesterday's Closing Price: AUY: 14.20 -0.08 (-0.56%)


I may be adding more gold mining stocks in both my Flyers and Lottery Ticket basket strategies. Both strategies involve a contrarian approach and are appropriately characterized as catching a falling knife. Sometime, I would refer to those strategies as analogous to catching a bowling ball thrown from the top of the roof. The gold mining stocks have become eligible for purchase under those two strategies based on their recently smashed stock prices and consequently really ugly looking charts that would flash sell to a technician without much, if any, further consideration.

I may buy 50 of an ETF in my $500 to $1000 Flyers Basket Strategy. I have bought some out of favor ETFs in that strategy. An example would be the 1 star rated FVL. ITEM # 1 Bought 50 FVL at $12.95 (August 2012)

Since I basically agree with Buffett's rational analysis about gold stocks and gold, with just one caveat, I am not inclined to invest much money in gold mining stocks since my opinion about them is weighted toward the negative. My caveat is that humans have had, and will always continue to have a natural affinity for the yellow metal, especially when it is all shiny, and that affinity is on steroids for those humans who view governments and their depreciating paper money with more than an average level of suspicion.

Gold is timeless in its appearance. When I was thirteen, I bought a five dollar U.S. Liberty gold piece minted in the 1880s. The coin does not show its age while I certainly look different. I admittedly have a natural affinity for the St. Gaudens design for the $20 gold pieces minted by the U.S. between 1907-1933. The U.S. mint has started to reproduce that design in gold bullion. U.S. Mint Online Product Catalog

This post is long enough. I will discuss one purchase made prior to publication, in the next post. I added another gold miner to my Flyers strategy yesterday afternoon.