Wednesday, March 27, 2013

TDIV, FJA/Bought 100 NGD at $9.39/Sold 352+ of the Stock CEF ETW at $11.173/Sold 50 Vale at $17.15/Added 50 GYLD at $26.73/Bought Back GDO at $19.95-Roth IRA

Big Picture Synopsis


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


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

Cyprus Bailout:

There was a lot of hand wringing earlier this week on whether the Cyprus bailout was a template for future EU bailouts.

When a bank fails and has to be seized by the government, uninsured depositors can lose some or all of their money. This has to be expected by anyone with money in excess of the insurance limit. And, senior unsecured and junior bondholders could easily find themselves holding worthless paper. That is how the system is supposed to work. Taxpayers are not supposed to bailout bond owners and uninsured deposits in a bank failure. That is the normal template for dealing with this kind of situation.

The template should not be the seizure of insured bank deposits or the bailing out of bondholders and uninsured deposits by the government directly or indirectly by the taxpayers.

I read a number of stories where citizens were interviewed by the reporter. The citizens blamed the EU for the failure of the two Cypriot banks, rather than the banks themselves or the government for its lax oversight.

A deep recession is unavoidable in Cyprus.

Billions of Euros have already left Cyprus, even with banking controls, as noted in this Reuters article. The reliance on banking as a source of growth is kaput, as one of the two Cypriot banks will be liquidated and the other will likely be downsized in the coming years.

Case-Shiller Home Prices and Federal Reserve Report on Home Value

The Case-Shiller home price index for the 20 largest metropolitan areas rose 8.1% in January year-over-year, the largest annual increase since June 2006. All 20 housing markets showed annual gains.

Separately, Federal Reserve data showed that homeowner's equity rose to $8.2 trillion in 2012, a gain of 25%.  Bloomberg

Architect's Billing Index for February:

This index is a leading indicator for nonresidential construction activity with a 9-12 month lag period.

The February AIA Billings Index was reported at 54.9, the strongest growth in billings since early 2008. The inquiries index was also strong at 64.8.  Billings and Inquiries

Census Bureau Report on Household Debt in the U.S.: 2000-2011

The Census Bureau released its household debt report last week. In 2011, 31% of U.S. households had no debt. The level of debt free households in 2000 was 26%. ‎ Those folks are the backbone of what I call the Saving Class.

In 2011, secured debt, which includes debt against one's primary residence and automobiles, accounted for 89% of all household debt. Home debt accounted for 78% of all secured debt.

The percentage of households having credit card debt decreased from 51% in 2000 to 38% in 2011.


Caterpillar, Oracle and FedEx: Warning Lights

Caterpillar reported last week that global retail sales fell 13% for the three month period through February, compared to a year ago. Sales declined 26% in Asia. SEC Filing: February 2013 Dealer Stats

FedEx reported last Wednesday that its third fiscal quarter earnings declined to $361M or $1.13 a share from $521M or $1.65 per share in the year ago period. Excluding costs associated with an employee buyout program, earnings were at $1.23 on a 4% increase in revenues to $11B. The consensus estimate was for $1.38. FedEx also reduced guidance for its fiscal 4th quarter to $1.9 to $2.1 per share. SEC Filed Press Release The stock declined $7.44 or 6.89% in response to that report (3/20/13).

Oracle reported that its fiscal third quarter revenues declined 1% to $9B, with new software licenses and cloud software subscriptions falling 2% to $2.3B. Hardware sales fell 23%. In response to this report, the stock declined 9.68% last Thursday, ORCL: 32.30 -3.47 (-9.69%), and another $.32 per share on Friday.

Those reports taken in tandem caused the OG to hyperventilate, but the overall market shrugged these reports off.

FHA Home Prices and Existing Home Sales

The FHA reported last week that home prices rose a seasonally adjusted .6% in January and 6.5% year-over-year. The U.S. price index is still 14.4% below its April 2007 peak.

The National Association of Realtors reported that existing home sales rose .8% in February to an annual rate of 4.98M, the highest level since November 2009. The median price rose 11.6% from a year ago.

Markit PMI Data Europe and U.S.

The Eurozone flash PMI data for March continued to decline with Markit reporting that its composite PMI index fell to 46.5 from 47.9 in February. Any number below 50 indicates contraction. This data series indicates that the EU downturn may intensify in the coming months.

The Markit flash PMI for U.S. manufacturing was reported at 54.9 in March, up from 54.3 in February. The new orders component rose to 55.9 from 55.4.

After the indecisive election in Italy, the political parties have been unable to agree on a governing alliance. The leader of the Italian Democratic Party, Pier Luigi Bersani, said today that only an insane person would want to govern Italy which he called a "mess".

Federal Reserve Predictions on GDP and Inflation:

The current predictions are contained in this document: FRB: March 20, 2013: FOMC Projections materials

The FED lowered its inflation prediction range for 2013 slightly from its December forecast. The new range is for PCE inflation at 1.3 to 1.7 in 2013; 1.5% to 2% in 2014 and 1.7% to 2% in 2015.  Real GDP is estimated at 2.3 to 2.8 in 2013; 2.9 to 3.4 in 2014; and 2.9 to 3.7 in 2015.

If the inflation predictions prove to be prescient, it would turn out to be a relatively benign environment for both stocks and bonds. If both the inflation and real GDP forecasts prove prescient, then that would be an optimal environment for stocks, particularly in relation to the low yields offered by bonds.



The First Trust NASDAQ Technology Dividend Index Fund (TDIV) now includes Apple as one of its holdings. When I first purchased this ETF, Apple was not included, just as well considering what happened to the share price since 9/19/12, when the shares closed at $702.1. AAPL Interactive Chart  The fund required the payment of a dividend for a minimum amount of time before the stock becomes eligible for purchase by the fund. Item # 1 Bought 50 TDIV at $19.95 (August 2012); Item # 1 Bought 50 TDIV at $19.94-ROTH IRA (October 2012);  Item # 3 Added 50 TDIV at $19.2 (October 2012)

RMT and RVT Quarterly Dividends

I am continuing to reinvest the quarterly dividends paid by the two Royce closed end funds that I currently own. Royce Micro-Cap Trust (RMT) and Royce Value Trust (RVT). I am a long term holder of both funds. To satisfy my urge to take profits, I will occasionally buy a third Royce CEF, Royce Focus Trust (FUND), and then sell those shares on a pop. Bought 200 of the Stock CEF FUND at $6.34-Sold 207+ FUND at $7.28RB Bought 300 of the CEF FUND at $6.22-Sold: 300 FUND @ $7.2.

The Royce Value Trust paid a $.19 per share quarterly dividend. The Royce Micro-Cap Trust paid a $.13 per share quarterly dividend.


Trust Certificate FJA

The trustee for the TC FJA decided to terminate the trust. It gave the owner of the call warrant notice of that intention, which triggered a ten day period for the call warrant owner to exercise the warrant, pay the owners of FJA the $25 par value plus accrued interest and then take possession of the underlying Embarq senior unsecured bonds. Notice of Underlying Securities Issuer of Concentrated Underlying Securities Ceasing to be a Reporting Company and the Subsequent Trust Termination to the Certificateholders for PPLUS Trust Certificates Series EQ-1 

Embarq was acquired by CTL: CTL Acquires Embarq.

The Embarq bond matures in 2036 and has a higher coupon at 7.995% than the TC at 7.1%. That means there is less than a $1000 par value bond behind each $1,000 par value in trust certificates.

The call warrant owner did not exercise their call option. Thereafter, the trustee distributed to the owners of the TC FJA 2 Embarq bonds and $305.75 in cash for every 100 shares. An owner of 100 shares did not receive $500, the difference between the par value of two bonds and the $2,500 par value of 100 FJA shares, due to the lower number of bonds owned by the trust as mentioned above.

The 2036 Embarq bonds are selling at over par value: FINRA

Underlying Bond Prospectus: SEC

I had sold my remaining shares in FJA in 2011 and had traded it profitably. (see snapshots at Stocks, Bonds & Politics: Trust Certificates: New Gateway Post); BOUGHT 100 of the TC FJA at $15.35 May 2009Bought another 50 FJA at $14.2 May 2009Sold 50 of 100 FJA at 24.75 December 2010Sold 50 of the TC FJA at $24.84 June 2011

Lexington Realty Trust will be redeeming its 7.55% Series D cumulative preferred stock at its $25 par value plus accrued dividends. Lexington recently sold 20 million shares at $11.7.

During the Near Depression period, I was able to buy this security at $6.60 and at $7.


1. Bought 100 NGD at $9.39 (The $500 to $1,000 Flyers Basket Strategy)(see Disclaimer): NGD is a gold miner. I view the purchase of any gold mining stock to be highly speculative and consequently limit my risk to insignificant sums by placing this stock in my Flyers Basket Strategy. 

Company Description:  New Gold Inc. (NGD) has four operating mines: Mesquite (gold); Peak (gold and copper); Cerro San Pedro (gold and silver); and New Afton (gold, silver and copper). New Gold Operations: Australia Mexico USA Producing Mines 

The New Afton mine, located in British Columbia, began commercial operations in July 2012. The company expects during the life of that mine an annual production of 85,000 ounces of gold; 75 million  pounds of copper; and 214,000 ounces of silver. New Afton

The San Pedro mine is located in Mexico and produced 138,000 ounces of gold and 1.9 million ounces of silver during 2012. Cerro San Pedro This mine commenced operations in 2007. During the 2012 4th quarter, this mine produced 401.3 ounces of silver and 32,100 ounces of gold. The average realized price for silver during the 2012 4th quarter was $32.46 and $1,578 for gold. (page 3: newsrelease)

The Mesquite mine is located in Arizona. Mesquite That mine produced 142,000 ounces of gold in 2012. Mesquite commenced operations in 2008.

The Peak mine is located in Australia. Peak Mines That mine produced 96,000 ounces of gold and 14,000 ounces of silver in 2012.  New Gold Operations Peak commenced operations in 1992.

Key Developments page at Reuters

Company Website: NewGold 

The share price has not been hit as bad as most other gold mining stocks. NGD was selling at less than a $1 in December 2008 and thereafter climbed to $13.9 by September 2011, when the gold price hit its peak of over $1,900.  The shares closed at $12.72 on 9/17/12 before retreating to the current range.  NGD Interactive Chart

Prior Purchases: NONE

Last Earnings Report: For 2012, the company reported net income of $199M or $.42 per diluted share, up from $179M in 2011. Revenues for 2012 rose to $791.3M from $695.9M in 2011. As of 12/31/12, NGD had $687.8M in cash and $163.3M in inventory with long term debt at $847.8M. SEC Filing 

Part of the long term debt consists of $300M in face value of 7% senior unsecured notes due in 2020 and $500M of of senior unsecured notes due in 2022.

For the 2012 4th quarter, NGD reported adjusted earnings per share of $.11 on $250.9M in revenues, up from $177.3 million in the 2011 4th quarter. Gold production during the quarter was 112,883 ounces. Earnings from mine operations were reported at $99.2M. Net cash generated from operations was $106M.

Cash costs for mine operations was very low at $254 per ounce. SEC Filed News Release 

Copper production increased by 236% in 2012 due to the start up of production at New Afton and a 13% increase in copper production at the Peak mine. Copper production for the 2012 4th quarter was reported at 20.9M pounds with an average selling price per pound of $3.52.

The company also discusses two developmental projects in this press release. One is El Morro located in Chile, with NGD having a 30% interest and Goldcorp being the other owner.

In 2013, New Gold estimates that it will produce 440,000 to 480,000 ounces of gold at a cash cost of $265 to $285 per ounce.

The company estimates that its "all-in" sustaining costs is $875 per ounce, but expects to reduce the sustaining cost by $100 an ounce "in each of the next few years". Seeking Alpha-Earnings Call Transcript

Rationale: (1) Reasonable Upside Potential Assuming Gold-Silver Prices Stabilize and Turn Up. While NGD is a low cost producer, profitability still hinges on the unpredictable gold and silver prices. Hopefully, gold and silver prices will stabilize around current levels and start to trend back up. If gold can move back over $1750 an ounce, it would be rationale to predict a return to the September 2012 price for NGD stock, somewhere in the $12 to $13 range. If the price continues to fall, I may become an involuntary long term holder of this stock.

A disadvantage is a lack of a dividend. Several gold mining companies have over 2% dividend yields at current prices.

Risks: (1) Country risks are not as pronounced compared to many other miners given the country locations of NGD's mines. The main risk is the prices for gold and silver, which are totally unpredictable in my opinion. If the gold price turned out to be $1,000 or $3,000 an ounce in a few years, I would not be surprised by either price. Other risks of gold mining stocks are outlined in my posts discussing the purchases of AUY and EGO. Bought 100 EGO at $9.3Bought 50 AUY at $14.25

The share price of gold miners tend to exaggerate price movements in the spot gold price. Last Tuesday, spot gold declined $7.4 to $1596.8 per ounce or just a .46% decline. NGD fell 2.56%. NGD: 9.15 -0.24 (-2.56%)

If NGD is successful in lowering more its already favorable "all in" costs numbers, then it consequently has less of a profit risk, due to a decline in gold price, than other miners with much higher all-in costs who could see there profits disappear with a significant decline.

As noted in this Kitco News item, Barclays expects that the 12 year rally in gold will end this year. The main culprit in Barclays opinion is selling in Gold ETFs, but an acceleration of the decline in jewelry demand and a "steep slowdown" in central bank buying will contribute to gold's problems.

In another Kitco News item, Societe Generale predicted gold would fall to $1,400 an ounce by year end.

No one really knows of course. The price goes down a few hundred bucks and the "analysts" and other card carrying herd members and fellow travelers turn bearish. Demand and price can turn on a dime, up or further down.

Future Buys/Sells: I would likely be a seller in the $13 to $15 range. I am not going to buy more shares until I sell the first 100 share lot at a profit. I would possibly buy back that 100 share lot when and if the price declined below $9, provided there is no material adverse development.

2. Sold 352+ of the Stock CEF ETW at $11.173 (see Disclaimer): The gain on this one was largely due to return of capital adjustments.

2013 Sold 352+ ETW +$753
As noted in the big picture synopsis section, I have turned negative in my short term stock outlook, and that negativity was reinforced with some recent earnings reports and European data, discussed in the introduction section above. I will frequently move into and out of stock CEFs and ETFs as a way to adjust my overall stock allocation. The disposition of my ETW shares was a very minor adjustment to my stock allocation.

This CEF recently changed to monthly dividends and went ex dividend on 3/19/13: Eaton Vance Tax-Managed Global Buy-Write Opportunities Fund (ETW)

ETW page at the CEFA

ETW page at CEFConnect

ETW page at Morningstar (rated 4 stars, average 3 year discount -9.83%)

I still have similar positions in two other Eaton Vance buy-write CEFs: Eaton Vance Tax-Managed Global Diversified Equity Income Fund (EXG) (436+ shares in IRAs) and Eaton Vance Enhanced Equity Income Fund (EOI) (405+ Shares). Both of those funds pay monthly dividends.

3. Sold 50 Vale at $17.15 (Stocks, Bonds & Politics: The $500 to $1,000 Flyers Basket Strategy)(see Disclaimer): I bought these shares last August: Bought 50 Vale at $15.9 I discussed in that post several potential negative factors, and those issues are still around.

2013 Sold 50 Vale $46.58
I can not spend much time monitoring the small positions in my LT and Flyer's Basket Strategies. After reviewing several recent reports and news items, I have turned negative on Vale.

Over the weekend, I decided to look at Vale again after reading a negative story about iron ore prices in "The Trader" column in this week's The article mentioned that a supply glut is developing with new mines, while demand from China is expected to slowdown. Needless to say, decreasing demand and increasing supply for any product spell trouble for the price.

A similar article about a possible crash in iron ore prices was published by Forbes.

It would not be surprising to see a slowdown in China's iron ore purchases due to overbuilding (e.g. the ghost towns) and the government's efforts to slowdown construction. I discussed the ghost towns in my prior post in relation to Xinyuan Real Estate. Update on Lottery Ticket and Regional Bank Basket Strategies/Sold 100 XIN at $5.82

China is also increasing its ability to recycle steel and to increase its ore supplies. And, that lower demand is occurring at a time when substantial new iron ore projects will soon be contributing to supply, primarily in Australia. The Goldman Sachs analyst claims that those new projects are past the point of cancellation.

Another negative for Vale is the recent cancellation of work at its Rio Colorado potash project in Argentina, Reuters, where it had spent about $2.2B through 2012. Vale needs to diversify, so the cancellation of this project after substantial expenditures is a major negative.

Morningstar currently has a 3 star rating on VALE and a consider to buy target of $11.4 or less. If the supply glut turns out to be accurate, and given the dependency of Vale on iron ore sales (about 70% and 90% of EBITDA), I would not be surprised to see a price lower than $10.

Stock Quote: Vale S.A. ADS

4. Added 50 of the Balanced ETF GYLD at $26.73 (see Disclaimer): This brings me up to 150 shares of this world balanced ETF.

I recently discussed this security and have nothing to add. Item # 2 Bought 100 of the ETF GYLD (50 in Roth IRA at $27.13)

Dividends are paid monthly which is always viewed positively.

Sponsor's website: Welcome to Arrow Shares

The expense ratio is high at .75%.

Quote: Arrow Dow Jones Global Yield ETF (GYLD)

5. Bought 100 of the Bond CEF GDO at $19.95 (see Disclaimer): The bond CEF Western Asset Global Corp Defined Opportunity Fund (GDO) has been bought and sold numerous times. At one time, I owned close to 1,000 shares.

With this last purchase, I am back to owning just 100 shares. I ran out of good alternatives for income generation more than two years ago. At least this bond CEF gives me a diversified worldwide bond portfolio and a current yield over 7%.

2013 Roth IRA Bought 100 GDO at $19.95

Security Description: Unlike most bond funds, GDO has a term date.

The fund will liquidate on or about 12/2/2024.

This gives the fund one of the characteristics of owning an individual bond, the promise to pay the investor at a time certain. Unlike the individual bond, however, this fund does not promise to pay a specific sum at a future date. The investor is GDO will receive their pro-rata share of the liquidation proceeds, which may be more or less than the current net asset value per share.

GDO page at CEFConnect. This is a new link that I am providing for CEFs. Some readers may prefer it to the Closed End Fund Association site.

GDO page at the CEFA

GDO page at Morningstar (rated 3 stars with no analyst report; 3 year average discount -4.58)

None of the 2012 dividends paid by GDO were classified as a return of capital:

Net Asset Value Per Share on 3/25/13 (day before purchase): $20.79
Closing Market Price: $19.92
Discount -4.18%

Net Asset Value Per Share on 3/26/13 (day of purchase)=
Closing Market Price= $19.97
Discount= -3.94%

Sponsor's Website: Legg Mason Individual Investor - GDO

List of Holdings

The fund is weighted in investment grade bonds, but has a significant junk bond exposure:

The fund had 249 holdings as of 12/31/12 with an average effective duration of 4.29 years. The fund was using a modest degree of leverage as of 12/31/12 as shown above under "reverse repurchase agreements".

Generally, I would anticipate that a bond with a duration of five years will rise 5% with a one percent decline in rates and decline by 5% with a 1% rise in rates.

Dividends are paid monthly. When I first purchased shares in 2010, the monthly dividend was $.13 per share. Now, it is $.12. GDO Monthly Distributions I would anticipate that the dividend rate will continue to trend down, particularly when more higher yielding securities mature and the fund is faced with non-optimal reinvestment options in the current abnormally low interest rate environment.

Prior Trades: I have probably linked some, but not all, of my trades on this security here: Bought 100 of the CEF GDO at $18.6 March 2010; Bought 70 of the CEF GDO in Regular IRA at $18.61 March 2010; Bought 200 of the CEF GDO at 18.63 and 18.53 (100 in Roth and 100 Taxable Account respectively) March 2010;  Bought 100 GDO at $18.57 April 2010; Bought Back 50 shares of GDO at 17.8 in the Roth IRA previously sold at $19.24 December 2010; Sold 100 GDO at $18.72 January 2012;  Sold 200 GDO at $19.18 June 2012; Sold Remaining GDO in Taxable Account at $19.69 July 2012Bought 100 Shares of GDO at $18.9 November 2012;  Sold 100 GDO at $20.79 December 2012; Pared Trade Roth IRA: Sold 120 GDO at $20.73-Bought 100 GSPRD at $21.38

The last trade yielded a $340.33 profit for shares purchased in December 2010.

Rationale: (1) I must be addicted to this security since I am unable to stay away for long after liquidating my position.

This fund does have several advantages.

I was able to buy it at a discount to net asset value. Many CEF bond funds sell at a premium to net asset value. If I held the fund until the liquidation date in 2024, purchasing GDO at a discount may enhance the profit or lessen the loss.

I also juice my dividend yield by buying the fund at a discount compared to a bond mutual fund selling at net asset value.

Yield is currently being juiced by the the spread between short term borrowing costs and the yield on bonds purchased with those borrowed funds.

The dividend yield is currently about 7.22% at a total cost of $19.95, which is tax free in the Roth IRA. Money will double in about 9.94 years at 7.22%. Estimate Compound Interest

The portfolio is well diversified which lessens credit risk compared to owning a few individual bonds.

The duration is relatively short which will mitigate interest rate risk.

While the fund has significant junk bond exposure, the fund is weighted in BBB rated or higher bonds.

Risks: I believe that readers of this blog are fully familiar with bond risks. The two major risks involve a rise in interest rates and credit risk. Since this fund invests in foreign bonds, currency risk, primarily involving the Euro, is an important risk.

Some of this material may be useful to anyone who is not familiar with the interest rate risk issue:

Rising Interest Rates and Your Bond Portfolio-Charles Schwab

Smart Bond Investing—Bond Funds: Comparing Bonds and Bond Funds - FINRA

Rising Rates and Your Investments: Securities Industry and Financial Markets Association (SIFMA)

Fidelity Learning Center: Risks of fixed income

Fidelity Learning Center: Bond vs. Bond funds

As mentioned above, I would anticipate that the dividend rate will gradually decline and that decline will likely accelerate as the fund nears its 2024 liquidation date, as the managers shorten the duration. 

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