Tuesday, April 2, 2013

Added 100 of the Canadian Stock CEF CGI at C$16.03/Sold 50 RRD at $12.04-Roth IRA/Initiated Position in Vanguard Wellington Fund (VWELX)/Added to PAUDX/Sold 100 GSPRD at $23.71-Roth IRA/Cash Flow Main Taxable Account for 3/28 and 4/1/BCF Reinvestment

Big Picture Synopsis

Stable Vix Pattern

Short Term: Slightly Bearish (expecting a correction)
Intermediate and Long Term: Bullish

I keep waiting for the inevitable 10%+ correction but the market is not cooperating. 

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

Reinvestment of BCF Dividends:

The BlackRock Real Asset Equity Trust (BCF) is a buy-write closed end fund that invests in natural resource stocks. As of 12/31/12, the fund had a 43.4% weight in metals and mining stocks.

The shares have recently been selling at a modest discount to net asset value per share. CEFConnect Distributions have been supported by a return of capital. The fund recently cut its quarterly dividend from $.2718 per share to $.2215.

Due in part to this fund's poor performance, I decided a few months ago to reinvest the dividend to buy more shares.

2013 1st Quarter BCF Reinvestment
I am not surprised that the fund has performed poorly over the past year (down -4.21% on a NAV basis through 3/28/13). Stocks like BHP, VALE, FCX, and other material stocks have gone done in value. I recently jettisoned my small position in Vale after watching most of my profit disappear.

Notwithstanding my opinion about some of the companies owned by this fund, I run an extremely diversified portfolio and will maintain some exposure to currently unfavored industry sectors, usually through funds.

There are several reasons for that approach.

First and foremost, I may be wrong about my near and/or intermediate term prognosis. Iron ore stocks, for example, may have already bottomed, with the worst possible news already factored into stock prices. I do not believe that is the case but what do I really know about the demand and supply issues facing iron ore companies in the coming years sitting at a desk in the SUV Capitol of the World starring out a window now to see a Bradford pear tree in full bloom.

The second main reason for maintaining exposure, irrespective of my big picture opinion, is that it is extremely difficult to call the bottom.

And, a related rationale to the second reason is that it is frequently best to buy when prices are low, slice potential purchases into smaller amounts when catching that falling knife and space those purchases out over time.

Sponsor's webpage: BCF : Fund Profile


Cisco (own) increased its quarterly dividend to $.17 per share from $.14. I am reinvesting that dividend to buy more shares.

Cisco announced last year that it intended to return annually, at a minimum, 50% of its free cash flow to shareholders via dividends and stock repurchases.

For the year ending 1/31/2013, Cisco had approximately $10.742B in FCF according to YCharts: Cisco Systems

Barclays raised its target for Cisco to $27 from $24, noting that the firm is returning more cash to its shareholders and is adding software value to its products in an effort to improve margins. Barrons.com

I may buy back the 50 shares that I sold shortly before the last earnings report. Item # 1 Sold 50 Cisco at $21.06  (2/20/13 post). I may not stick to my prior price target for an add which was less than $19.

Five Year chart: CSCO Interactive Chart

ISM reported an unexpected slide in U.S. manufacturing index in March. The PMI index fell to 51.3 from 54.2 in February. The new orders component fell to 54.5 from 61.5. Employment did rise to 54.2 from 52.6.

The Markit PMI manufacturing index for March was stronger at 54.6. In that compilation, the new orders index was at 55.4, unchanged from February, while the employment index rose to 54.6 from 53.5.

David Stockman's Op-ED NYT

Stockman believes that the monetary and fiscal stimulus programs are merely inflating another bubble that will end in a "zero-sum austerity and virulent political conflict, extinguishing even today's feeble remnants of economic growth". NYT He blames the Federal Reserve and virtually every President since FDR, including Reagan, as well as both political parties, for contributing to the coming financial disaster.

In his view, there will be nothing to stop the next collapse and consequently recommends that investors hold cash. Many of his biases are evident in the article.

What has the U.S. received from massive fiscal and monetary stimulus other than a great deal more debt and a Fed balance sheet on steroids?

Since March 2000, Stockman points out that real family income growth has declined 8%; full time middle class jobs have dropped by 6%; and the real net worth of the bottom 90% has declined by one-fourth, while food stamp recipients have more than doubled to 59 million.

I view Stockman's forecast as plausible, but not the most likely scenario within the time frame he envisions. The odds of his bleak forecast occurring will increase with time in my opinion, as in more likely in ten years than in five and far more likely in 15 than in 10 years.

I would generally agree with his assessment that the current dysfunctional American political system is incapable of effectively dealing with the soaring federal debt problems.

Both parties are at fault, as are the American people, a clear majority of whom have grown accustomed to receiving benefits provided by borrowing ever increasing amounts of money.

A day of reckoning will move forward in time when interest rates return to normal levels and beyond. In 2011, the government paid $454+B in interest on the debt, and the rates are abnormally low by historical standards. Government - Interest Expense on the Debt Outstanding It would be reasonable to forecast that the interest payments will start to exceed $1 trillion annually starting at some point within ten years.

However, I would anticipate that spending reductions and revenue increases over the next several years will push out the day of reckoning, possibly by as much as fifteen years.

The next long term secular bear market is likely to be a really bad one, much worse than the last one.

As to the other part of the puzzle, the FED's money printing spree, I have no idea what will happen when the FED starts to unwind its holdings, likely to be close to $4 trillion by the end of the year, and I believe that no one else really knows either. Currently, the FED's balance sheet has grown to over $3.2 trillion. FRB: Recent balance sheet trends - Credit and Liquidity Programs and the Balance Sheet

The current policies of both political parties are not working, and have not worked, for most Americans.

Jeffrey Sachs Op-ED NYT

Sachs is basically in agreement with Stockman that current policies are not working for most people.  NYT Since 2008, he points out that 3.1M jobs have been created for college graduates while 4.1M jobs have been lost for high school graduates or those without a high school education. He views the problems as long term and structural. His approach for dealing with the problem is radically different from Stockman's recommendations and generally call for more federal government expenditures on infrastructure and job training.

The Obama stimulus program, passed in 2009, failed to focus on long term infrastructure spending that needed to happen anyway. Instead, as Stockman noted, there were a lot of transfer payments that ended up in "money dumps" to state and local governments. Stockman also viewed the tax breaks contained in that stimulus program as ineffective, nothing more than putting a few dollars of borrowed money in consumer's pockets in the hope that they would buy a flat screen TV or at least eat out at Red Lobster. I would agree with Sachs generally that federal stimulus programs need to be targeted better with long term objectives in mind. But, the federal government may have blown most of its wad on poorly designed and short term stimulus programs.


1. Added 100 of the Canadian CEF CGI:CA at C$16.03 (Canadian Dollar (CAD) Strategy)(see Disclaimer):

2013 Added 100 CGI at 16.03 CADs
Security Description: Canadian General Investments (TOR: CGI) is a leveraged Canadian stock closed end fund that invests primarily in Canadian companies. 

Sponsor's website: Morgan Meighen & Associates (fund manager)

One of the attractions for me is that this CEF trades at a large discount to its net asset value. 

Net Asset Value on 3/26/13 (day before purchase)= $22.76
Closing Market Price= C$16.15
Discount to Net Asset Value Per Share= -28.91%

2012 Annual Report: 2012_Annual_Report.pdf

I reviewed the Annual Report prior to buying more shares.  Canadian General Investments (CGI) was founded in 1930 and has been managed since 1956 by the Canadian investment firm known as Morgan Meighen & Associates. A $10,000 investment in 1987 would have grown to $123,000 by 12/31/2012 or at a 10.6% compound annual growth rate. Over 50 years, a $10,000 investment would have grown to $2.1M. For the ten year period ending in December 2012, the compound annual return was 10.2%, even after a plunge of 55.9% in 2008.

Net asset value per share at the end of 2012 was at $21.8 which translates into a 4.21% increase in 2013, plus one quarterly dividend, through 3/26/13. The fund has been held back in 2013 in part by its exposure to Canadian mining companies and to Apple, one of the few U.S. companies owned by the fund.  

During 2012, the fund paid four quarterly dividends of 6 cents per share, plus a year end capital distribution of $.52.  

The Annual Report shows both the cost and value of each position as of 12/31/12. Several positions have large unrealized gains, indicating to me a long holding period. Some of those positions include the following:

Name                  CAD Cost/CAD Value as of 12/31/12
Catamaran           $3.615M/ $$25.229M (needs to trimmed)
Dollarama           $7.52M/ $21.517M
Enbridge             $5.557M/ $23.22M
Pacific Rubiales  $2.985M/ $11.53M
TransCanada      $7.091M/ $12.024M
Russell Metals     $3.232M/ 10.331M
Canadian Pacific $7.18M/ $13.1M
Apple                  $7.428M/ $14.849M (value at $530.32 per share)
Franco Nevada    $11.049M/ $25.817M
Labrador Iron      $4.882M/  $23.18M (needs to be trimmed)
Canadian Utilities $3.154M/ $10.032M

Overall, the value of the holdings as of 12/31/12 was $603.16M at a total cost of $378.238M

The fund does use leverage through C$150M of relatively low cost preferred shares:

Top Ten Holdings as of 3/22/13:

Since the Canadian Dollar has fallen some against the USD over the past several weeks, I used USDs to pay for this transactions, leaving my existing CAD stash undisturbed for now. CAD/USD Currency Conversion Chart I am a long term holder of Canadian Dollars. 

Prior Purchases: I previously bought 100 shares last year and received the 2012 capital gain distribution for those shares. Bought 100 of the CEF CGI:CA at 15.78 CAD-Toronto Exchange

Rationale: (1) Competent Long Term Investors with Fund Selling at A Huge Discount to Net Asset Value Per Share: This CEF is selling at an unusually large discount given its long term performance. The fund did not perform well in 2008 and has a mediocre record over the past five years. Nonetheless, its 10 and 25 year records are good.

As of yesterday's close, the fund reported that its net asset value per share was C$22.78. The shares closed at C$16.03, creating a discount to net asset value per share of 29.63% at that time.

(2) More Exposure to Hard Asset Companies: Since the fund invests primarily in Canadian companies, it will have a high concentration in the material and energy sectors, which will at times prove advantageous and disadvantageous during other periods, such as now. Gold mining and most Canadian natural resource companies have not performed well over the past several months.

(3) Long term investing approach: This is desirable in long term secular bull markets. Even in long term bull markets, some positions need to be pared with proceeds deployed to fund other more promising purchases.

If the huge winners are not eliminated or at least trimmed, eventually the fund will pay a price. Even large profits can be wiped out in long term bear markets, particularly during the catastrophic phase (e.g. 1929-1932; 1974; and 2008-March 2009).

Eventually most companies will go bankrupt or be absorbed by another company in a never ending cycle of creative destruction. As years pass into decades, the risks of unforeseen and potentially devastating events increase. Stocks, Bonds & Politics: Duality of Long Term Risks (March 2009); Stocks, Bonds & Politics: Long Term Stock Risks and Situational Risk/Managing Lost Opportunity Risk in a Long Term Secular Bull and Bear Markets (March 2009)

For every General Electric, General Mills or IBM, there are hundreds of well known or long forgotten firms that have been swept into the dustbin of history.

A few large percentage gainers owned by this fund probably needed to be trimmed some in 2013 and 2014.   

Risks: The risks are normal ones for stock CEFs. One risk is that the discount will expand even with an increase in the NAV per share. Since this is a Canadian fund, owning mostly Canadian stocks, there is a currency risk for a U.S. investor. The value of my CAD holdings have fallen approximately 4.8% in value due solely to the decline in the CAD/USD exchange rate since mid-Setpember 2012.

The gains and losses from my Canadian securities are computed by converting CADs back into USDs. So it is possible for me to have a loss on a transaction even with a gain on the shares, provided the the decline in the CAD since the purchase more than offsets the realized gain based on my CAD purchase and sell prices.

The converse is also true. I could conceivably have a gain for U.S. tax reporting purposes when I actually experienced a loss, which would occur when the CAD has appreciated against the USD more than to offset the security loss based on the prices paid in CADs. It does not matter to me as a long term holder of CADs. My CAD stash is not impacted by the foregoing tax reporting nit. I settle all my sale transaction in CADs and all of my dividends are paid in CADs.

2. Initiated Position in Vanguard Wellington Fund (VWELX)(see Disclaimer): Last Thursday, when the S & P 500 hit an all time record, unadjusted for inflation, I could not muster much courage to buy anything. My default was to reinvest some of the proceeds realized after liquidating my small position in the Vanguard LifeStrategy Growth fund late last year. Item # 3 Sold All of the Mutual Fund VASGX

I took snapshots of my holdings in several Vanguard funds last year. Except for reinvestment of dividends, there has been no other activity in the Vanguard Equity Income, Vanguard Health and Vanguard Star since those snapshots were taken. Item # 3 Vanguard Star and Life Strategy Growth Funds; Item # 5 Stock Funds Table (contains snapshots of Vanguard Equity Income fund and Permanent Portfolio positions as of 10/2012)

I exchanged all of my shares in the Vanguard Inflation Protected Securities Fund (VIPSX) into the Vanguard Health Fund (VGHCX) in July 2011. Item # 3 Exchanged VIPSX for VGHCXMSN Money page for VGHCX) I am not much of a fan for the current negative TIP coupons. Daily Treasury Real Yield Curve Rates

Rather than adding to existing positions  in the Vanguard Equity Income Fund or the Vanguard Health Fund, or even the balanced Vanguard Star Fund, I decided to initiate a position in the low cost Vanguard Wellington Fund (VWELX), rated 5 stars by Morningstar.

Wellington is a balanced fund that will generally have 60% to 70% in stocks and the remainder in bonds. While I am negative on bonds, I may be wrong. A voice was heard to say that the "OG is certainly prone to a multitude of errors but the LB has never been wrong".

It is certainly conceivable that the Federal Reserve's benign inflation forecast will turn out to be prescient. And, Bernanke may even be right that deflation is still the greater danger.

Sponsor's Webpage: Vanguard - Vanguard Wellington Fund Investor Shares

The expense ratio is .25%.

Stock Holdings: Stocks (large caps)

Top Bond Holdings: Bonds

I took a snapshot of the top stock holdings as of 12/31/12, and I would just note that the fund had over $1B in the first eight names:

Some Stock Holdings as of 12/31/12

As of 2/28/13, the fund owned 101 stocks, with an overall 65.33% portfolio weighting, and 586 bonds weighted at 32.58%, with the remainder in short term reserves. The average duration of the bond holdings was 6.3 years. The average maturity was 9.3 years.

MSN Money page for VWELX

I owned this fund for about six months in 1996, buying at $25.39, collecting two dividends and then selling at $27.66 in November 1996. Vanguard still has that history which popped up under my "recent transaction history" for this fund.  Most likely, I jettisoned it since it was viewed as too staid for the Stock Stud at the time.

3. Sold 50 RRD at $12.04 Roth IRA (see Disclaimer): I will not keep individual stocks, other than a limited number of REITs and BDCs, in a retirement account for long.

2013 Roth IRA Sold 50 RRD at $12.04
I bought these 50 shares in January and received one quarterly dividend. Item # 3 Bought 50 RRD at $8.75

2013 Roth IRA 50 RRD +$150.48
RRD is not viewed favorably as a long term holding anyway. It has been a widow maker for long term owners. After hitting $47 in 2007, the stock has traded in the single digits as recent as this year. RRD Interactive Chart

For the 2012 4th quarter, RRD reported a non-GAAP E.P.S. of $.43 on a 2.2% decline in revenues to $2.7B, compared to the 4th quarter of 2011 when it earned $.46 on a non-GAAP basis. <! Press Release issued by R.R. Donnelley & Sons Company on February 26, 2013 The GAAP loss, which included a non-cash impairment charge, was $($4.7) per share.

This last trade marked by second round trip in the Roth over the past year. Sold 50 RRD at $11.92-Roth IRA (July 2012)-Bought 50 RRD at $10-ROTH IRA (May 2012)

I have also traded RRD senior unsecured bonds and a TC containing a senior RRD bond. Stocks, Bonds & Politics: Trust Certificates: New Gateway Post (snapshots of PYS trades)

I still own 100 shares of RRD bought in a taxable account. Item # 2 Bought 100 RRD at $9.94-Sold 1 RRD 8.875% Bond Maturing in 2021 at 101.355

I am down to just 1 senior unsecured RRD bond. Bought 1 R.R. Donnelley 6.125% Senior Bond Maturing 1/15/2017 at 89 (August 2011); FINRA Information on RRD 2017 Bond

4. Added to PAUDX (see Disclaimer): PIMCO All Asset All Authority Fund D, (PAUDX) is one of my three unusual asset allocation funds. This fund is managed by Rob Arnott who is engaged in what I call tactical or dynamic asset allocation. His goal is to beat CPI by 6.5%. This fund has the best return among world asset allocation funds over the past five years through 12/31/2012 according to Morningstar. Item # 2 Stocks, Bonds & Politics:  Bought PAUDX/Unusual Allocation Funds

A major risk is that Arnott is currently using a great deal of leverage which is unusual for a mutual fund. I will consequently keep my exposure to this fund small. While that leverage has benefited the fund so far, it also creates significant risks to the downside during a sudden and steep slide in the fund's investments.

PAUDX has a five star rating from Morningstar which reduce its rating from "Gold" to "Silver" based on liquidity concerns arising from the fund's leverage.

PAUDX is a fund of funds. It will invest in the institutional class shares of other Pimco mutual funds.


The list of top holdings found at MSN Money has a short stock fund as the largest holding which has not helped fund performance so far. I do not believe that position can be justified since March 2009 so I would disagree with Arnott on this component in the PAUDX asset allocation.

I am not making a statement looking backwards with 20/20 hindsight. With the advent of the Federal Reserve's QE program in March 2009, the continuation of ZIRP, the federal government's stimulus programs and the inescapable conclusion that the financial system had been saved by March 2009, a continuous short position in the market could not be justified based on an intelligent assessment of those factors. I do not know how long PAUDX has had this large short position in stocks.

Sponsor's webpage: PIMCO | PIMCO All Asset Fund

Through 3/28/13, this is the fund's annualized returns taken from the sponsor's website:

5.  Sold 100 of 250 GSPRD at $23.71-ROTH IRA (see Disclaimer): Goldman Sachs Group Inc. Dep. Pfd. Series D (GS.PD) is an equity preferred stock that pays non-cumulative, qualified dividends at the greater of 4% or .67% above the three month LIBOR rate on a $25 par value. Prospectus

 I sold the shares held in the ROTH IRA:

2013 ROTH IRA Sold 100 GSPRD at $23.71
I recently bought those shares in a pared trade: Pared Trade Roth IRA: Sold 120 GDO at $20.73-Bought 100 GSPRD at $21.38 (2/6/13 Post). I view that pared trade as successful. GDO subsequently declined below $20 and GSPRD rose 10.89% unadjusted for the dividend payment. I decided to harvest the gain and possibly go back to GDO with the sale proceeds from GSPRD.

I realized a short term capital gain of over $219.25 and received one quarterly dividend:

2013 Roth IRA 100 GSPRD $219.25
I still own 100 shares of GSPRD bought in the Vanguard taxable account: Bought 100 GSPRD at $21.18 and Sold 50 GSPRA at $21.73 I took a snapshot of information relating to recent trades in that account shortly after selling the 100 shares held in the ROTH IRA.

I also still own 50 shares held in my main taxable account. Bought 50 GSPRD at $20.6 (December 2012).

Advantages and Disadvantages of Equity Preferred Floating Rate Securities

Floaters: Links in One Post

6. Snapshots of Cash Flow into Main Taxable Account for the Last Business Day in March and April 1: I will periodically take snapshots of my cash flow from dividends and interest payments into my main taxable account to illustrate several points.

First, the central theme of my investment strategy is now and has been the generation of income and the purchase of more income generating securities with that cash flow, creating a compounding effect over time.

Second, I will use a wide variety of securities to generate that cash flow. An emphasis is placed on diversity of income sources. The foregoing snapshots include interest payments made by individual bond holdings, business development companies, closed end funds, common stocks, mutual funds, and ETFs.

Third, I have developed a constant stream of income. Payments are received throughout the month, though there is a concentration of payments on the first and last business day of each month, as well as on the 15th. I also own a number of securities that make monthly payments. In the forgoing snapshots, dividend monthly payments are made by the following CEFs: EOI, ETW (sold), BTZ, IGR and ERC. A few other CEFs which pay monthly dividends, including CSQ and IGD, pay during the month. The following six snapshots are from 3/28/2013 and 4/1/13:

A monthly dividend of over C$40, payable on the 28th, was received on 4/2, after these snapshots were taken, and was paid by the 700 share position in iShares 1-5 Year Laddered Government Bond Index Fund, - (TOR) CLF