Wednesday, May 29, 2013

Bought 50 VEGI at $27.85/Low Volatility ETFs and Stocks as an Asset Class During Stable Vix Patterns/Large Corporations as Hoarders of Cash and Tax Avoiders/Bought 50 TCPC at $15.64-Roth IRA/Added 50 of the Bond CEF GHY at $18.3/Sold 100 NBD at $21.86-Roth IRA/

The size of the fonts in this post apparently was hopelessly screwed up by Blogger's software when I dragged and dropped an excerpt from the Federal Reserve's minutes. The post looked fine in draft form but I noticed immediately a problem upon publication which can not now be corrected after several attempts. If you have any trouble reading, I would suggest using the zoom in button in your browser to increase the font size. 

Big Picture Synopsis

Stable Vix Pattern (Bullish)
Short Term: Praying now for a 10%+ Correction
Intermediate and Long Term: Bullish


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

An article in USAToday last week referred to a UBS estimate that pent-up consumer demand is likely to lead to a 1% increase in consumer spending and a .5% increase in GDP over the next five years.   


Low Volatility Stock ETFs and Low Volatility for Stocks As an Asset Class-The Stable Vix Pattern

Zacks published an article discussing the two main U.S. low volatility stock ETFs. I own USMV BOUGHT 100 of USMV at $29.29 The gist of the article is that this ETF has shown lower volatility than the S & P 500 and has outperformed the S & P 500 since its inception. I would anticipate that the stocks owned in that fund would of course go down during a market correction, but would expect a smaller decline than a total stock market index and a far lower decline than the high beta and P/E stocks that do not have any dividend support for their stock prices. 

Several of these new ETFs were also discussed in an earlier report.


SPLV | S&P 500 Low Volatility: Current Expense Ratio (ER) .25%
EELV | S&P Emerging Markets Low Volatility ER .29% (after expense waiver)
IDLV | S&P International Developed Low Volatility ER .25% (after expense waiver)
XMLV | S&P MidCap Low Volatility ER .25%
XSLV | S&P SmallCap Low Volatility ER .25%

iShares U.S.

MSCI All Country World Minimum Volatility (ACWV): ER .2%
MSCI EAFE Minimum Volatility (EFAV): ER .2%
MSCI Emerging Markets Minimum Volatility(EEMV): ER .25%
MSCI USA Minimum Volatility(USMV): ER .15%

iShares Canada

XMV Canada Minimum Volatility ER .34%


SMLV - SPDR Russell 2000 Low Volatility ETF ER .25%
LGLV - SPDR Russell 1000 Low Volatility ETF ER .2%

A study published last year, which can be downloaded at SSRN, found that low volatility stocks in 31 markets outperformed high volatility stocks during a 1990-2011 time period. Another study came to the same conclusion for the 1968-2008 period.

I wrote a comment to a recent SA article about the low volatility ETFs pointing out that stocks as an asset class provide their returns during Stable Vix Pattern periods. Seeking Alpha


American Corporations and Taxes:

You have to love these American corporations who complain about their tax burden and then find out that they are not even paying any taxes or a lower effective rate than the average senior citizen. A number of stories appeared last week detailing how Apple avoided paying any taxes anywhere on tens of billions of overseas income. A good summary of Apple's tax dodge is explained in this  NYT article. The good news is that the Senate subcommittee has exposed Apple's tactic to other corporations who can now copy their tax legerdemains.

I read stories all of the time about the ruses used to escape paying taxes. A typical story from Reuters last December detailed how Amazon was using a shell company in Luxembourg and other countries to shuffle money around as a "tax shield" to lower its U.S. tax bill. The IRS was seeking $1.5B in back taxes and Amazon says that everything is kosher.

Back in 2004, the large corporations hoodwinked Congress to lower the repatriation tax on cash held overseas in exchange for their promises to use that cash to create jobs. Congress has a way of naming legislation in what sounds appealing only on the surface. Naming legislation is inherently a PR stunt. The legislation granting a reprieve on the repatriation tax was called the America Jobs Creation Act of 2004. Sounds good to me. We can all get behind that title, and congratulate our representatives on another job well done. 

Approximately $312B in cash was brought back to the U.S. and the 15 companies that repatriated most of the cash cut more than 20,000 jobs (and this was during an economic expansion). Those companies brought back $155B of the $312B in repatriated cash They did raise executive compensation for their top five executives by an average of 27% in 2004-2005 and another 30% in 2005-2006. Heck, why not give them a good chunk of the loot for securing the tax holiday in exchange for that promise to create jobs.

I can also understand the need for lower corporate taxes since that would contribute to that $5 trillion cash hoard during nothing other than sitting around and earning nothing, at least until the companies can figure out of way to increase executive compensation without shareholders squealing too much which is really easy when throwing them a dividend bone. (St Louis Fed Publication: Why Are Corporations Holding So Much Cash?)

I had to laugh when I read Uncle Warren's criticism of the timid nature of American CEOs. He refers to CEOs who cried "uncertainty when faced with capital allocation decisions", in spite of their businesses enjoying record levels of profits and cash. Yea crying for their mamas. Buffet said that "we didn't share their fears, instead spending a record $9.8 billion on plant and equipment in 2012" (page 5

And bank lobbyists are actually writing bills for docile politicians to soften regulations, hardly a front page news item.  NYT


Goldman and JPM Raise Targets for S & P 500

Last week, Goldman raised its target levels for the S & P 500 to 1,750 this year,1,900 in 2014 and 2,100 by 2015. 

J.P. Morgan strategists raised their 2013 target to 1,715.  The linked article also contains 20 buy recommendations from that firm, none of which are owned by our Beloved Dear Leader Headknocker.

A Wells Fargo startegist, Gina Adams, is not drinking the GS and JPM kool-aid, sticking with her price target of 1,390 which would be more than an ouch from the current level. MarketWatch


Some Recent Economic Data:

The Case Shiller home price index for 20 large metropolitan areas rose 10.9% Y-O-Y in March, the largest gain in seven years, with a number of areas showing strong double digit growth (e.g. L.A. +16.6%; Atlanta +19.1%; Portland +12.8%). WSJ (link to report) Prices are still well below their peak levels from 2006.  

Markit's U.S. May PMI for manufacturing declined to 51.9 from 52.1, but new orders picked up to 52.8 from 51.5.

Sales of new single family homes increased to a seasonally adjusted annual rate of 454,000 in April, up 2.3% from the revised March number and 29% above the 2012 April level.

New Homes Sold in the United States- St. Louis Fed

Initial claims for unemployment for the week ending 5/18 declined 23,000, more than expected, to 340,000.

4-Week Moving Average of Initial Claims - St. Louis Fed

The Federal Housing Finance Agency reported that its home price index rose 1.9% in the 2013 first quarter compared to the 2012 4th quarter, marking the seventh consecutive quarterly increase.

The Dallas Fed reported that manufacturing activity in Texas increased "sharply" in May.



The relevant data for this PPN's last annual coupon period is as follows:

Starting Value: 998.78 Closing Value of the Russell 2000 on 5/31/13

Maximum Level Violation Number: 1298.41
End Date: 6/2/2014 (page PS-2)

Final Pricing Supplement

This unsecured senior note will mature on 6/19/14 at its $10 par value.

This one has paid its minimum 3% coupon since I bought the shares, but did provide some excitement for the OG in the prior coupon period going down to the wire for a much bigger payday. MBC-Maximum Level Violation

Bought 100 MBC at $9.84Bought 100 MBC at $9.78

Assuming Citigroup survives to pay value on 6/19/14, the worst thing that could happen is another 3% coupon and a small profit on the bonds. A better than 3% YTM on a one year investment grade senior bond probably looks good to a lot of people now. There is a difference however. This security can pay more than a fixed rate coupon bond, a lot more than 3%.

I have had better luck with MOU, which is also linked to the RUT and has a 3% minimum coupon, with the last three coupons being 27.93%; 3.7% and 10.48%


Medtronic (own):

Medtronic (MDT) reported its 2013 fiscal 4th quarter earnings at $1.10 per share, seven cents better than the consensus estimate. International sales increased by 7% with emerging market revenues up 15%, both numbers on a constant currency basis. For F/Y 2014, MDT forecasted adjusted E.P.S. of $3.8 to $3.85.

This Seeking Alpha discusses the report.

The market reacted positively to the MDT earnings report: MDT: $52.35 +2.46 (+4.93%)

Yesterday's Close: MDT: 51.98 +0.65 (+1.27%)


Western Asset Global Corp Defined Opportunity Fund (GDO)(own): 

Western Asset Global Corporate Defined Opportunity Fund lowered its monthly dividend rate from $.12 per share to $.115.

GDO Page at Morningstar

CEFConnect Page for GDO

I have bought and sold this bond CEF on many occasions. I recently reinitiated a position. Bought 100 GDO at $19.8 April 2013; Bought Back GDO at $19.95-Roth IRA

Yesterday's Close: GDO: 19.64 -0.15 (-0.76%)


10 and 30 Year Treasuries:

Yesterday, the yield for the 10 year treasury rose to 2.15% from the prior close of 2.01%. The close on 5/2/13 was at 1.66%. Daily Treasury Yield Curve Rates

The 30 year bond rose to 3.31% from the prior close of 3.18%.

See Discussion in Item # 3 about the impact of what appears to be a minor rate rise on various types of bond funds.


1. Bought 50 of the BDC TCPC at $15.64-Roth IRA (see Disclaimer): I noted last Tuesday that TCP Capital shares were declining based on a typical problem inherent in owning shares in a BDC. The company had just floated a secondary. TCP Capital Corp. Announces Pricing of Public Offering of Common Shares This BDC sold 4.5M shares at $15.63 and may end up selling 675,000 more pursuant to the over-allotment option granted to the underwriters. TCP stated that it intended to use the proceeds to repay amounts outstanding under its $116M revolving credit facility. ‎ The rate for that senior secured credit facility is only Libor +44%. Page 2 Earnings Release

I took this snapshot of the quote page just before order entry.  


There was a lot of volume and a 1 cent spread between the bid and ask prices, so I just entered a market order for 50 shares:


On the day of my purchase (5/21), the stock closed at $15.63, down 57 cents for the day or 3.52%.

Security Description: TCP Capital is a Business Development Corporation that invests primarily in the debt of of private, middle market companies with enterprise values between $100M and $1.5B.

A list of this BDC's investments can be found in the last filed SEC Form 10-Q for the Q/E 3/31/13, starting at page 3. 10-Q. Scrolling through those names, I recognize only a few of the private companies, which is typical for BDC investments. Just scrolling through that 10-Q, TCP was an active trade of debt securities, particularly aircraft secured mortgages (pages 34-35)  

Key Developments Page at Reuters

Company Website: TCP Capital

One of the SeekingAlpha contributors who frequently write articles about BDC's has this one at the top of his list. BDC Rankings He focused on this BDC in a March 2013 article published by Seeking Alpha. The discussion is a reasonably good summary and provides some details that I will not mention when discussing a purchase. 

Prior Trades: None-first purchase

Last Earnings Report: For the 2013 first quarter, TCP reported net investment income of $.49 per share after preferred share dividends and net of $.15 per share in incentive compensation. Net asset value per share was reported at $14.91 as of 3/31/13 , up from $14.71 as of 12/31/12. TCP estimated net asset value per share at $15.14 on 4/30/13.

The weighted average annual effective yield on TCP's debt portfolio was about 11.1%. Approximately 69% of the debt portfolio at fair value had floating interest rates with 96% of the floaters having minimum rates. No investments were on non-accrual basis as of 3/31/13. TCP Capital Corp. Announces First Quarter 2013 Financial Results; Raises Quarterly Dividend to $0.36 Per Share; Net Investment Income of $0.49 Per Share; and Earnings of $0.60 Per Share

The quarterly dividend was increased by the Board on 5/8 to $.36 per share. The prior regular quarterly dividend was $.35 per share. The BDC did pay a .05 per share special dividend in March 2013 and in December 2012. Dividend History | TCP Capital

At the $.36 regular quarterly rate, the dividend yield would be about 9.2% at a total cost of $15.64 per share. The yield would increase with the payment of any special dividends.

Rationale: (1) Tax Free Income Generation in the ROTH IRA: While this BDC has some upside potential on the share price, the primary reason for buying it is to generate a high level of tax free income paid into the ROTH IRA. Of course, the dividend would be taxable when the shares are purchased in a taxable account and become, in effect, tax free dividends when paid into my ROTH IRA. I feel a need to make that point in case someone reads that sentence and interprets it in an obviously incorrect and boneheaded manner.

Money will double in about 7.88 years at 9.2%. Estimate Compound Interest

As noted in many posts dealing with BDC purchases in the IRA, I am primarily interested in capturing a few quarterly dividend payments, possibly up to two years, and then exit the position for whatever profit is available hoping to generate an annualized tax free return of 10+% which is easier to accomplish when the dividend is providing 9.2% of that return and the stock gain really just needs to be a percent or two in the green.

Risks: I have discussed the risks of BDCs throughout this blog. Needless to say, there is no free lunch for a 9.2% yield. One risk is highlighted by what happened to the stock price on the day of my purchase, a decline of over 3% precipitated by a share offering that is a common event among BDCs.

BDCs lend money to high risk credits.

BDCs, like REITs, have to pay out 90% of their net income to shareholders as dividends, and will consequently avoid double taxation for those distributions. By avoiding double taxation, the dividend will be higher than a typical C corporation that is taxed on the income before distributions to their shareholders. The problem is that the BDC is not keeping capital to grow and will frequently find that the capital growth path is through more and more share issuances.

I recently highlighted these risks and others when purchasing 100 shares of PSEC in the Roth IRA. S Bought 100 PSEC @ $10.2-Roth IRA November 2012

Whenever a firm spends a bunch of pages discussing risks, it is best to absorb what is being said in that regard. Annual Report at pages 19-33 (a bunch of pages talking about risks)

Future Buys: I will typically consider adding to BDC positions on downdrafts, which will occur after the company announces the sale of shares, and I will probably add to this one at a lower price.

Yesterday's Close: TCPC: $16.12 +0.15 (+0.94%)

2.  Added 50 GHY at $18.30-Taxable Account (see Disclaimer): The Prudential Global Short Duration High Yield Fund is a leveraged closed end fund that invests in short term junk bonds both foreign and domestic.


Bonds were plastered in yesterday's action. 

I have recently discussed this fund when making two odd lot buys. The longer discussion can be found in Item # 3 Bought 50 of the Bond CEF GHY at $18.77-Roth IRA (4/9/13 Post). The net asset value per share was then $19.02 and the discount was -.53. I later initiated a position in a taxable account. Item # 5 Added 50 GHY at $18.55 (4/30/2013). At that time, the net asset value per share was $19.07 and the discount was then -3.15.

As noted previously, this fund is paying a monthly dividend at $.125 per share. Since this is a new fund, I do not know for certain whether that dividend can be supported without a return of capital. I believe that the fund will need some capital gains to avoid a return of capital.

Assuming a continuation of that rate, which is in no way assured, the dividend yield would be about 8.2% at a total cost of $18.3

GHY Page at CEFConnect

Sponsor's Website: Prudential Global Short Duration High Yield Fund, Inc (duration at 2.7 years as of 4/30/2013-information found at bottom of the Performance page)

Credit Quality as of 4/30/13
Holdings - GHY

Data Day Before Purchase (5/21/13)

Closing Net Asset Value Per Share: $19.12
Closing Market Price: $18.43
Discount:  -3.61%

Data From Day of Purchase (5/22/13):

Closing Net Asset Value Per Share: $19.12
Closing Market Price: $18.23
Discount: -4.65%
GHY: 18.23 -0.20 (-1.08%)

On my day of purchase, the shares fell $.2 or 1.08% while the net asset value per share remained constant.

The foregoing data points highlight one risk associated with CEFs. The net asset value per share could be going up as the market price declines, creating a larger discount to net asset value.

Yesterday's Close: GHY: $18.05 -0.31 (-1.69%)

While the stock price took a hit, the net asset value per share closed at $19.06 yesterday, unchanged from the prior close.

There is a short term unleveraged junk bond ETF with a 2.19 year modified duration. SJNK - SPDR Barclays Short Term High Yield Bond ETF That security was certainly less volatile than GHY yesterday: SJNK: 31.02 -0.04 (-0.13%)

3. Sold 100 of the Leveraged Bond CEF NBD at $21.86-Roth IRA (see Disclaimer): The Nuveen Build America Bond Opportunity Fund is a leveraged closed end fund that owns long term Build America Bonds. The effective duration of this fund was 10.8 years as of 4/30/13. NBD - Nuveen Build America Bond Opportunity Fund

Snapshot of Trade:


Snapshot of History: 


I will receive one more monthly dividend of $11.05. The ex dividend date was on 5/13/13. With that payment, the total dividends paid by this 100 share NBD lot would be $107.9

Snapshot of Profit:

2013 ROTH IRA 100 NBD +$42.33
At this point in time, any profit realized on a bond fund is viewed as a victory. The total return would be $150.23 on a total cost of $2,136.63 or 7.03%. The holding period included 11 monthly dividend payments so the annualized 12 month return would be slightly better. 

Data Day Before Sale 5/21/13):
Net Asset Value Per Share: $23.99
Closing Price= $21.82
Discount= -9.05%

Data Day of Sale (5/22/13)

Net Asset Value Per Share: $23.73
Closing Market Price: $21.86
Discount: -7.88%
NBD: 21.86 +0.04 (+0.18%)

For this bond CEF, unlike GHY above, the market price rose 4 cents per share as the net asset value declined by 26 cents per share.

NBD Page at CEFConnect

Interest Rate Risk and Duration: The first page of this article published by First Trust shows the hypothetical losses for different types of bonds with a 1% rise in interest rates. The worst performers would be long term bonds which would include BABs.

Until the rise in rates actually happens, of course, an investor will not know the precise loss amount.

Just to get an idea for planning purposes of a potential loss range, I multiply the duration by the percentage rise in interest rates. I did not come up with that number myself, but simply borrowed it from a number of publications, notably this illustration from Vanguard and an article published by FINRA. A recent article published by Seeking Alpha explores the topic in relation to treasury securities.

The market has recently experienced a tiny rise in interest rates for 7-30 treasury maturities, so an investor can actually measure price changes for various types of bonds. I am going to measure only the price changes from 5/2 to 5/22:


7   Year Treasury 1.07% to 1.4% =  .33%
10 Year Treasury 1.66% to 2.03%= .37%
20 Year Treasury 2.44% to 2.83%= .39% 
30 Year Treasury 2.82% to 3.21%= .39% 
Daily Treasury Yield Curve Rates

That does not look so bad?

Duration 25.84 Yrs:  25+ Year Zero Coupon Treasury ETF (ZROZ) =  -10.43%  

PIMCO ETFs - Funds - PIMCO 25+ Year Zero Coupon U.S. Treasury ETF
Duration 16.78 Years: 20+ Year Treasury=   -6.4%
iShares Barclays 20+ Year Treasury Bond Fund (TLT)
Duration 13.97 Years: Long Term Corporate Bond=  -3.65%
LWC - SPDR Barclays Long Term Corporate Bond ETF
Duration 13.32 Years: Build America Bonds -2.46%
BABS - SPDR Nuveen Barclays Build America Bond ETF 
Duration 7.7 Years: Intermediate Investment Grade Corporate=  -2.33%
Investment Grade Corporate Bond Fund (LQD)
Duration 4.07 Years: Junk Bond ETF=  No Change (up $.01)
JNK - SPDR Barclays High Yield Bond ETF

And this is what happened yesterday (5/28/13):

ZROZ: 99.15 -3.85 (-3.74%) : PIMCO 25+ Yr STRIPS

TLT: 113.84 -2.96 (-2.54%) : iShares Barclays 20 Year Treasury
BABS: 60.38 -1.09 (-1.77%) : SPDR Nuveen Barclays Build America Bonds
LWC: 39.70 -0.91 (-2.24%) : SPDR Barclays Long Term Corporate
LQD: 118.34 -1.15 (-0.96%) : iShares Corporate Investment Grade

Bernanke hinted in testimony last Wednesday that the FED may taper some its buying in a few months, depending on economic conditions. The mere mention of that possibility sent the 10 year treasury reeling last Wednesday. That note has had an abrupt spike up since closing at a 1.66% yield on 5/2/13. Chart - The minutes of the FED's meeting on 4/30- 51/13 was also released that day which revealed significant disagreements among FED members about continuing QE. FRB: FOMC Minutes, April 30-May 1, 2013

"Participants also touched on the conditions under which it might be appropriate to change the pace of asset purchases. Most observed that the outlook for the labor market had shown progress since the program was started in September, but many of these participants indicated that continued progress, more confidence in the outlook, or diminished downside risks would be required before slowing the pace of purchases would become appropriate. A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth; however, views differed about what evidence would be necessary and the likelihood of that outcome. One participant preferred to begin decreasing the rate of purchases immediately, while another participant preferred to add more monetary accommodation at the current meeting and mentioned that the Committee had several other tools it could potentially use to do so. Most participants emphasized that it was important for the Committee to be prepared to adjust the pace of its purchases up or down as needed to align the degree of policy accommodation with changes in the outlook for the labor market and inflation as well as the extent of progress toward the Committee's economic objectives. Regarding the composition of purchases, one participant expressed the view that, in light of the substantial improvement in the housing market and to avoid further credit allocation across sectors of the economy, the Committee should start to shift any asset purchases away from MBS and toward Treasury securities."

Bill Gross believes that the FED will start tapering in September. ‎video.cnbc

I still own 150 shares of the functionally equivalent Nuveen BABs CEF NBB.

Fifty of those shares are held in the ROTH IRA. Item # 1 Bought 50 NBB at $20.73-ROTH IRA July 2012. As noted in that post, with three snapshots provided, I have traded that BABs CEF on multiple occasions for a total profit of $184.16, Sold 100 NBB at $20.13-ROTH IRA November 2011Added 50 NBB at $19.55 in the ROTH IRA September 2001; Sold 100 NBB at $20.07 November 2011Bought Back 50 NBB @ $18.4 in IRA December 2010; Sold 50 NBB @ $19.24 in the Regular IRA December 2010; Bought 50 NBB at $19.67 June 2010.

I bought 100 NBB in a regular IRA back in February. Bought 100 NBB at $20.85-Regular IRA February 2013

Both NBB and NBD are leveraged CEFs sponsored by Nuveen and pay monthly dividends. Both funds will liquidate on or about 12/31/2020.

NBB - Nuveen Build America Bond Fund (leverage adj. duration: 12.43 yrs)

NBD - Nuveen Build America Bond Opportunity Fund (leverage adj. duration: 11.5 yr.)

Closing Price Yesterday: NBD: $21.57 -0.19 (-0.87%)

4. Bought 50 NMFC at $15.03-ROTH IRA (see Disclaimer):  

2013 Roth IRA Bought 50 NMFC at $15.03

Security Description: New Mountain Finance Corp. is a Business Development Corporation that focuses on "defensive growth companies". 2012 Annual Report at page 1

Company Website: New Mountain Finance Corporation

Recent Stock Offerings: New Mountain sold 2M shares at $14.3 per share back in March. Another public offering was made in December 2012, with 3.57+M shares sold at $14.8. The BDC sold another 5.25M shares at $14.35 in July 2012. The IPO was in 2011 with 7,272,727M shares sold to the public at $13.75. A summary of the capital offerings can be found at New Mountain Finance;

This BDC is discussed in an article published by Seeking Alpha last March.

The stock popped back in April after Jack Hough favorably mentioned New Mountain in a Barron's article, published on Saturday 4/20/13, where he argued that several BDCs provided higher yields and less risks than junk bonds. Hough noted that New Mountain specialized in lending to companies that purportedly held up well during economic downturns. The stock rose from $13.82 to $15.6 on April

Later in April, as noted in Brendan Conway's blog, the analysts at Wells Fargo downgraded New Mountain to neutral from outperform based on that price run up and the risk of a near term capital raise. Their 2013 valuation range was then $15.5 to $16.5.

New Mountain recently declared a $.34 per share quarterly dividend. At that rate, the dividend yield would be about 9.05% at a total cost of $15.03. 

The quarterly dividend has remained at $.34 since the first regular payment in the 2012 second quarter. A special dividend of $.14 per share was paid in the 2012 4th quarter. 
Prior Trades: None

Last Earnings Report: New Mountain reported 1st quarter adjusted net income per share of $.34. Net asset value per share was reported at $14.31 as of 3/31/13. The net asset value per share was at $14.06 on 12/31/12, SEC Filed Press Release

I took a snapshot of the investment categories as of 3/31/13, which shows that first and second liens together constituted 94% of the firm's investments. 


Earnings Call Transcript - Seeking Alpha

A summary of the investments can be found in the last filed SEC Form 10-Q starting at page 6.

Rationale: The rationale is the usual one for small BDC investments in an IRA. I am hoping to realized a tax free 10% annualized return, with the dividend providing the bulk of that return. I only need to exit the position with a small profit on the shares to achieve that objective. I would classify this investment as successful after collecting 4 quarterly dividend payments and a disposition of the stock at over $15.5 per share shortly thereafter. If the stock hit the upper end of the WFC target range of $16.5, then that would likely be the best scenario since I view BDC capital appreciation to be generally limited considering the compensation paid to the managers, the risks inherent in the loans, the large dividend payout ratio and the constant stream of stock offerings.

Risks: The risks are the normal ones for BDCs, as outlined above in connection with the TCP Capital purchase and elsewhere in this blog. While New Mountain's debt portfolio is mostly first and second lien, the Wells Fargo downgrade summarized above noted that more subordinated loans were being made, which are more risky but carry higher yields.

New Mountain discusses the risks associated with its business, starting at page 25 of its last filed Annual Report and continuing until page 57. A twenty-two page description of risks is not something to be ignored by potential investors. It is like the warnings on some prescription medications. After reading the warning, the medicine might be far worse than the ailment that it allegedly treats.

I would also note that second lien debt can be more risky than the name implies when the first lien is large and the debtor's business has failed for whatever reason. When Reddy Ice went bankrupt, I owned 1 second lien bond that was exchanged for 43 shares of new common stock now traded infrequently on the Grey Market. In that example, the first lien bond was much larger at $300M than the second lien at 139+M.

Yesterday's Close: NMFC: 15.35 +0.22 (+1.45%)

5. Bought 50 VEGI at $27.85 (see Disclaimer): VEGI is one of the ETFs that can be bought commission free at Fidelity. I tried to buy shares with a limit order last week at a higher price, but it did not fill so I just went ahead and hit the ask price with a limit order rather than fooling with another limit bid at the then current bid price which was $27.85:


I am only going to discuss this stock ETF briefly.

A recent article published by the ETF Database compared the agricultural ETFs and found that VEGI had the lowest cost with a .39% expense ratio and had outperformed the others over the trailing 12 month period.

Security Description: The iShares MSCI Global Agriculture Producers Fund is, as it name explicitly states, is a global stock ETF that owns agricultural companies.

Sponsor's Website: iShares MSCI Global Agriculture Producers Fund (VEGI): Overview - iShares

Expense Ratio: .39%

Total Holdings: 132

Top Ten Holdings as of 5/24/13:


Rationale: After looking through the list of holdings, I realized that I did not own any of the stocks in this sector. I instantly gain some exposure by simply buying this ETF which is relatively low cost for a world sector ETF. There has also been a pullback in price for many of the top positions especially the potash producers looking at a few 2 year charts. I just noted the 2 year highs and the current price for a few of them:

Potash | POT Chart ($61.82 July 2011/$41.28 current)

Agrium | AGU Chart ($114.6 August 2012/$90.46 current)
YARA | YARO.ST Interactive Chart  (334.5/262.4)
CF Industries | CF Chart (229/189)

I had some negative comments about fertilizer companies several months ago that precipitated this pared trade: Item # 2 Sold 50 SOIL at $14.59 & bought GYLD I noted in that section two recent negative articles about fertilizer producers including this one published originally by Morningstar and republished at Seeking Alpha.

However, I have been reading some more positive articles about that sector recently. Seeking Alpha A summary of a recent Credit Suisse report recommending MON, AGU and POT was summarized in this Barrons article. POT also recently raised its dividend by 25%. PotashCorp - PotashCorp Increases Dividend by 25 Percent

Some Recent Earnings Releases from Major Holdings:

POT Q/E 3/31/13
AGU Q/E 3/31/13
MON Q/E 3/13 
SYT Q/E 3/31/13 Syngenta AG ADS
DE Q/E 4/30/13
ADM Q/E 3/31/13 Archer Daniels Midland

Some of the other holdings have been on a good run such as Monsanto which has the highest weighting:

Monsanto-MON Interactive Chart

There is a long term secular play in increasing agricultural production to meet a world population projected to hit 9 to 11 billion souls by 2050.  World Population in 2050

The Census has a nice clock that shows the current estimate and the numbers being added each second. Population Clock  The U.S. population is rapidly approaching 316M.

Risks: There are always additional risks to sector ETFs that do not apply to broad based ETFs like VTI which owns over 3,000 U.S. stocks covering every industry sector. A sector bet may not work out, even as the major market indexes continue to advance. A sector may contain a number of stocks that drag down the performance which has been the case with VEGI over the past several months as the fertilizer stocks declined in price. There is some currency risks associated with owning any foreign company. The USD has been rising in value against most major currencies which is a negative for a U.S. ETF that owns foreign stocks priced in those depreciating currencies. And it is not necessary to explain that there are risks to stock ETFs in general, particularly when there has already been a tremendous move since March 2009 of almost 150% in the S & P 500.

Future Buys: I will take another look at this one when and if the share price falls below $25.

Yesterday's Close: VEGI: 27.78 +0.07 (+0.26%) 

Monday, May 27, 2013

Update for Regional Bank and Lottery Ticket Basket Strategies/Sold LT Basket Strategy: 50 SIMG at $5.41, 30 BYD at $12.68, 40 BNCN at $10.02, & 35 DTLK at $10.93/SUTR, KEY, BHLB, BHB, PCBK, MNRK, UMPQ

The weekly post will be published on Wednesday. I have barely started writing it.

Both the Regional Bank and Lottery Ticket Basket strategies are updated on the last Monday of each month. The prices shown in the following tables are from last Friday. My basket strategies will have a large number of securities in them. The focus is on the overall return of the basket rather than on any component.

1. Update for Lottery Ticket Basket Strategy:

The Lottery Ticket Basket Strategy uses a deep contrarian value strategy, appropriately characterized as catching a "falling knife". A common criteria for the stocks contained in this basket is a smashed stock price at the time of purchase and an ugly looking chart. Any technical analyst would most likely have a sell rating on the stock.

Selections are made primarily on statistical criteria including price to book, price to sales, forward P/E, cash per share and/or free cash flow. I spend anywhere from thirty minutes to an hour researching a potential purchase prior to purchase.

For many selections, I may be pessimistic about the firm's future, but not as pessimistic as the market. I will also occasionally see a ray of light at the end of a dark tunnel. Since I expect failures, which are inevitable and unavoidable in this kind of approach, I limit my exposure to $300 per stock plus any prior trading profits. 

After experiencing some success with this strategy, I now have a requirement that my total investment in all LT holdings can not exceed my total realized gains for this basket strategy. My total exposure is currently under $7,000.

I am not finding much of anything to buy in this basket, other than gold mining stocks, but they look to hot to touch.

The name of the strategy aptly describes the risk. It is somewhat analogous in many cases to playing a hand of blackjack for the purchase amount knowing that the card count favors the house. It is a form of entertainment and an alternative to a casino visit. Based on the results to date, this strategy is far more likely to produce positive results even with the LB's skill at the tables. The primary purpose of the LT strategy is to entertain Right Brain, let it swing for the fences with up to $300, and keep the Nit Wit from interfering with Left Brain's management of Headknocker's portfolio.

Snapshots of realized gains can be found at the end of the Gateway Post on this topic: Stocks, Bonds & Politics: Lottery Ticket Strategy: New Gateway Post

Realized Gains To Date: $12,641.2

The total current investment is less than $7,000. The leading unrealized gain is in Forest City. The leading loser continues to be Velti.

Lottery Ticket Basket as of 5/24/13
A. Sold 40 BNCN at $10.02 (see Disclaimer): I simply decided to harvest a good percentage gain in this small N.C. based bank.

2013 BNCN 40 Shares +$101.33
Bought 40 BNCN at $7.09 as LT

May 2013 SEC Filed Investor Presentation

‎Q/E 3/31/13 10-Q

Closing Price on 5/24/13: BNCN: 10.75 +0.07 (+0.66%)

B. Sold 50 SIMG at $5.41 (see Disclaimer): It is okay to buy a stock in the LT strategy even though there is at best a woefully inadequate understanding of the firm's products, which is the case with SIMG for me. The selection can solely be based on statistical criteria. The stock rallied some after SIMG's recent earnings report, where the company reported a 13% Y-O-Y increase in earnings, a $.01 per share GAAP loss and a $.04 per non-GAAP profit. SEC Filed Press ReleaseEarnings Call Transcript - Seeking Alpha. SIMG beat the consensus forecast for earnings and revenues. The stock did rise some after that announcement so I sold it.

I am from the old school, so I find it difficult to become excited by a $.01 GAAP loss per share.

I will use not use non-GAAP earnings that simply exclude recurring expense items such as stock options. I will use non-GAAP where the GAAP earnings took a one quarter hit from an item such as merger related expenses. An example would be the recent earnings release from Berkshire Hills Bancorp (BHLB) discussed below in the regional bank basket section. However, if there is a write-off later on from an acquisition, such as what HP routinely does, then I will look only at the GAAP numbers. I am not going to allow a company to focus my attention on non-GAAP earnings when write-offs are destroying shareholder value.

Snapshot of Trade:

Snapshot of Profit:

2013 SIMG 50 Shares +$38.09
Bought as Lottery Tickets: 50 SIMG at $4.33

That completes my second round trip for SIMG as a LT. Bought 50 SIMG at $2.19-Lottery Ticket-Sold SIMG at $3.37

C. Sold 30 BYD at $12.68 (see Disclaimer): Boyd Gaming owns and operates casinos. Profile | I mentioned in my last update of this basket strategy that BYD shares had popped after Morgan Stanley had upgraded the stock to outperform, with a $12 price target, and the company reported better than expected earnings. The adjusted E.P.S. number was 1 cent. The GAAP E.P.S. was a negative 8 cents per share. Hard for even the RB to get too excited by that report. Q1-2013 8-K For virtually the entire period of ownership, starting in November 2010, I had an unrealized net loss based on my $9.78 purchase price. The price had slipped on occasion below $6. BYD Interactive Chart I now have a realized gain of $71.09. Okay, it is not going to pay for my nursing home expenses.

Snapshot of Trade

Snapshot of Profit:

2013 BYD 30 Shares +$71.09
Bough 30 BYD at $9.78 as an LT

Closing Price on 5/24/13: BYD: 12.60 -0.15 (-1.18%)

D. Sutor Technology (SUTR): Sutor is my only remaining Chinese small cap after I successfully exited Xinyuan Real Estate. Sold 100 XIN at $5.82 For a long time, I was in a deep percentage hole with my 100 share position until the stock started a 100% move from a $.96 share close on 1/24/13 to its current price. SUTR Historical Prices A casual observer would naturally assume that a 100+% rise would at least bring me into profit territory which would not be the case with this stock. I have had other examples of larger gains in my Lottery Ticket basket which only narrowed my percentage loss. This is sort of an inherent problem in a falling knife strategy.

While I did manage to harvest a 100+% total return in XIN, it took a 100% rise in SUTR to bring me somewhat closer to break-even. I need another 100% burst, and it would probably be advisable to refrain from spending a profit on this position until I actually see one. Sa La Vie.

Bought 50 SUTR at 2.81 as Speculative LTADDED 50 SUTR at $2

The stock had managed to work its way back up to $1.72 on 5/10/13. Sutor released its fiscal third quarter earnings report on May 13, 2013 and the stock rose to $2.05 on that day, which does not sound like much, except that it is a 19.18% rise on a percentage basis. Subsequently, the shares have floated back down to near the pre-earnings close.

Sutor is a Chinese manufacturer and distributor of "high-end finished steel products and welded steel pipes"

Sutor Technology Profile Page at Reuters

Sutor Technology reported a 27% Y-O-Y revenue increase to $139.5M and a 233.3% increase in its E.P.S to $.1 per share.

Earnings Call Transcript - Seeking Alpha

Only one analyst provides earnings estimates. The estimate from that analyst is for an E.P.S. of $.36 in the F/Y ending in June 2013 and $.45 in the 2014 F/Y.

SUTR Key Statistics YF at $1.88 Price Per Share-Earnings Data as of Q/E 3/31/13
Forward P/E 4.18
Price to Sales= .13
Price to Book= .34
Cash Per Share=.46
Book Value Per Share= 5.57

I would add that many American investors simply do not trust the accounting generated by Chinese companies, particularly the small ones. I have no opinion about SUTR's accounting and would not be qualified to render an opinion anyway.

Q/E 3/31/13 10-Q

Closing Price on 5/24/13: SUTR: $1.96 0.00

E. Sold 35 Datalink at $10.93 (see Disclaimer): Datalink provides data storage services. The description used by the firm has more words in it. Profile | Reuters

For the first quarter, DTLK reported GAAP E.P.S. of 6 cents, down from 12 cents in the year ago quarter. The adjusted non-GAAP E.P.S. was $.18, up from $.17.

I decided to harvest a good percentage gain.

Earnings Call Transcript - Seeking Alpha

Snapshot of Trade:

Snapshot of Profit:

2013 DTLK 35 Shares $104.49

Bought 35 DTLK at $7.49-LT Category October 2012

‎Q/E 3/31/13 10-Q

Closing Price 5/24/13: DTLK: 10.71 -0.08 (-0.74%)

2. Update for Regional Bank Basket Strategy

This strategy is explained in my Gateway Post on this topic:


I am not tracking reinvested dividends in the following table. The dividend yield showed in this table is calculated by Yahoo Finance based on last Friday's close. My dividend yield for each position will be different based on my total cost numbers. In most cases, with FNFG and VLY being notable exceptions, my dividend yield will be higher.

Needless to say, the dividend yield for each position is higher than the 2.01% yield on the 10 year treasury as of last Friday's close. Standard Chart - Most of the dividend yields are higher than the 3.17% yield on the 30 year treasury (Standard Chart -, and many of these banks are raising their dividends. A buyer of that 30 year treasury bond with a 3.17% is stuck with that yield until the bond is sold.

Over the life of this basket strategy, I anticipate that the dividends will provide 40% to 50% of the total return. I am generally keeping my total exposure between $40,000 to $50,000.

I mentioned in my last update that my RNST shares would likely not be around for this update. I did sell 155+ shares for a profit of $1,433.21, the largest gain in this basket strategy to date. Sold 155+ RNST at $23.9

The only new position since the last update was Access National (ANCX): Bought 50 ANCX at $12.11 (4/30/13 Post) All of my recent adds have been in micro caps with less than 200M market capitalizations, since I view virtually all of the larger banks to be either fairly valued or slightly overvalued based on forward estimated 12 month earnings. Most of these regional banks, including the best managed ones, have been suffering net interest margin compressions for several quarters Y-O-Y, a trend expected to continue until the FED ends ZIRP. E.P.S. is likely to either decline or increase slightly in 2013 and 2014.

Some of the banks in my basket may buck that trend due to the benefits flowing from recent acquisitions, but that remains to be seen. FMER, for example, recently completed a large acquisition and the consensus forecast is for an E.P.S. of $1.29 in 2013 and $1.42 in 2014. FMER Analyst Estimates The share price of FMER, however, has already moved up from a $15.55 close on 4/22/13, adjusted for the recent quarterly dividend, to $18.22 last Friday, a 17.17% spurt in slightly more than a month. The forward P/E on estimated 2014 earnings is 12.83 based on the $18.22 price, but the trailing P/E is 14.35. Generally, for well run banks, a trailing multiple of 15 is at the top end of my fair value range. There could be an earnings growth spurt when loan demand accelerates, loan losses stay at low levels and the net interest margin expands to normal market levels after the FED ends ZIRP.

Unrealized Gain FMER as of 5/245/13
The unrealized gain in my regional bank basket, after that RNST profit, is close to $3,850. Almost all of the positions increased some in value since the last update. Some of the leading gainers include FMER (+$174.2); FNFG (+$178.5); TRST (+$241.8); KEY (+$120.4); SYBT (+$112); MNRK (+$119); several up in the +$50 to +$100 range (e.g. BDGE, LBAI, BANC,WASH, VLY, PBCT, PCBK, TRMK, UMPQ); and importantly no significant detractors which is always important in a basket strategy. It obviously does not help to have six decliners canceling out the six top gainers.

The SPDR S & P Regional Banking ETF (KRE) closed at $31.01 on 4/29 and at $32.68 last Friday or a 5.38% gain, beating the 3.51% gain in the S & P 500 over the same period. My regional basket percentage gain was approximately 6.15% after taking out 50 ANCX, the 50 share add in WBCO from the following table and RNST from the prior one. The increase becomes 8.25% over this period when I include the dollar accretion in the RNST shares from $22.25, the price on 4/29, to the sales price at $23.9. but not including the accretion from the ANCX purchase and the WBCO add. I will do several times a year detailed calculations to compare this basket's performance against a regional bank ETF. Another factor is my dividend yield is much higher than the regional bank ETFs. The dividend yield on the SPDR S&P Regional Banking ETF is shown at 1.21%. Another one is slightly higher at 1.83%. iShares Dow Jones U.S. Regional Banks Index Fund (IAT) I have not calculated the regional bank basket yield at the current prices, but the composite yield would be over 4% (higher at my constant cost numbers)

Snapshots of trades can be found in the above referenced Gateway Post.

Realized Gains To Date: $12,295.02
Dividends 2010-2012: $4,690.79   (updated yearly)

A. Bar Harbor (BHB): Bar Harbor Bankshares reported first quarter diluted E.P.S. of $.81, up 1 cent from the 2012 1st quarter. The estimate, made by just one analyst, was for $.77 per share. BHB Analyst Estimates

A third party service calculated BHB's Texas Ratio at 9.19 as of 3/31/13, one of the lowest.

Bought 50 BHB at $30

Closing Price 5/24/13: BHB: 35.72 -0.18 (-0.50%)

B. Berkshire Hills (BHLB)Berkshire Hills reported "core" first quarter E.P.S. of $.54, up 20% from the 2012 first quarter core E.P.S. of $.45. Core earnings excludes "primarily" merger and integration expenses. Berkshire completed the acquisition of Beacon Federal during the last quarter. The consensus estimate was for $.55. BHLB Analyst Estimates

Earnings Call Transcript - Seeking Alpha

Bought 50 BHLB AT $21.66

Closing Price 5/24/13: BHLB: 27.07 +0.16 (+0.59%)

C. Pacific Continental: PCBK reported net income of $2.5 million for the 2013 first quarter which included $1.2M in pre-tax merger related expense connected with its recently completed acquisition of Century Bank.  SEC Filed News Release Adjusted E.P.S. was $.19, up from $.15 in the 2012 first quarter. The bank announced its regular quarterly dividend of $.09 per share and a special cash dividend of $.05 per share. The stock went ex dividend earlier this month. Pacific Continental Corporation Increases Regular Cash Dividend and Declares Special Cash Dividend for Second Quarter 2013 The bank has been declaring a special dividend, starting in the 2012 third quarter, and has raised the regular quarterly dividend by 1 cent per quarter since that time. Stock Splits & Dividends

Data as of 3/31/13:
Net Interest Margin: 4.29%
Adjusted Efficiency Ratio: 65% (excludes merger expenses)
Return on Average Assets: .7% (prefer over 1%)
NPA Ratio: 1.71%
Total Risk Based Capital Ratio: 16.62% (well capitalized 10%)

Added 70 PCBK AT $9Bought 30 PCBK  at $9.42

Strong Buy - May 6, 2013 -

Closing Price 5/24/13: PCBK: 11.50 -0.05 (-0.43%)

D. Keycorp: The KBW bank analyst does not believe the run up in Key's stock price this year is warranted based on comparative valuations. KeyCorp Run-Up Is Unjustified, Says KBW - TheStreet

KeyCorp increased it quarterly dividend rate by 10%. Before that excites anyone, the raise was to $.055 per share and KEY had a quarterly dividend of $37.5 for the 2008 second quarter that was cut in stages to one cent per quarter by the 2009 second quarter. KeyBank

Added 70 KEY at $8.77Bought 30 KEY at $8.75Added 40 KEY at $7.87

KEY: 10.66 +0.03 (+0.28%)

E. Monarch Financial: Monarch Financial announced a 20% increase in its quarterly dividend to 6 cents per share.

I currently own 100 shares and have booked one gain of $186.06.

Bought 120 MNRK at $8.65 (thereafter split 6 for 5); Sold 100 MNRK at $10.59Bought 80 MNRK at $9.97

Closing Price on 5/24/13: MNRK: 11.25 -0.03 (-0.27%)

F. Umpqua: Possibly, this is not the best possible name for a bank. Umpqua Holdings Announces Special Dividend and 50% Increase in Quarterly Dividend The new quarterly dividend rate will be 15 cents per share. The special dividend is $.05 per share.

Umpqua is at least moving back to its regular quarterly rate of $.19 per share that was in effect in 2008 before it was slashed to 5 cents per share in the 2008 4th quarter. Umpqua

Closing Price on 5/24/13: UMPQ: 13.60 -0.01 (-0.11%)

G. Valley National (VLY): Valley is now my largest dollar loser in this basket, and a weak hold based on forecasted earnings for 2013 and 2014. Valley National did declare its regular quarterly dividend of $.1625 per share. The payout ratio is slightly over 100%.  Valley National Dividend Information I have not reinvested the dividend to buy more shares.

The last earnings report was a disappointment. The bank reported an E.P.S. for the 2013 first quarter of  16 cents per share, down from 18 cents in the 2012 first quarter. Given the sluggish earnings, I would not be surprised by a dividend cut unless earnings growth can be restored relatively soon.

The unrealized loss is close to $850. VLY has issued 5% stock dividends during my ownership period. I see no reason whatsoever for stock dividends or splits on a stock trading in the single digits.

Shareholder and stock NYSE VLY information - Valley National Bank

Closing Price on 5/24/13: VLY: 9.27 +0.07 (+0.76%)