Monday, May 13, 2013

BOUGHT FMIHX/Sold 100 of 250 VGI at $19.48/Sold 100 RRD at $12.41/Sold 50 AMJ at $47.99-ROTH IRA/Sold 100 EWM at 16.45/

Big Picture Synopsis

Stable Vix Pattern (Bullish)
Short Term: Slightly Bearish (expecting a 10%+ correction)
Intermediate and Long Term: Bullish

A stock market correction can happen at any moment. Such a correction would not be inconsistent with my longer term bullish thesis that powerful and positive forces are coalescing that will support decent U.S. GDP growth and better employment opportunities in a manner consistent with a long term secular bull market in stocks.  While corrections are always painful, I would welcome one right now. 

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

I am now predicting that the ten year treasury will be around 3.5% by this time next year which would cause about a 16% loss to a buyer at last Friday's closing yield of 1.9%.

All big picture opinions are constantly challenged with new information, without any interference from my ego or pre-existing beliefs, as if someone else had originally formulated the opinion.


Warren Buffett is, as one would expect, positive on stocks long term and negative on bonds.  I would of course agree with his statement that bonds are priced artificially high due to the FED's monetary policies and will lose a lot of value when interest rates normalized to market based rates. He referred to bonds as a "terrible" investment now.

FRB April Survey of Senior Loan Officers:

The FRB release its survey of senior loan officers. This is a quote from a pertinent part of that report: "domestic banks, on balance, reported having eased their lending standards and having experienced stronger demand in several loan categories over the past three months".


Commercial loan activity is perking up after doing a swan dive during and immediately after the Near Depression:

Commercial and Industrial Loans at All Commercial Banks - St. Louis Fed

Home Prices and Refinancings:

The FHFA reported that more than 463,000 refinances of mortgages owned just by Fannie and Freedie were completed in February. Feb2013Refinance.pdf Of those, 97,738 were completed under the HARP programmed designed to permit underwater homeowners to refinance. Over 15M mortgages owned by Fannie and Freddie have been refinanced through February 2013.

CoreLogic reported that its home price index rose by 10.2% Y-O-F in February, the largest Y-O-Y increase since March 2008 and the 12th consecutive such increase. CoreLogic Home Price Index

The data about home prices is important for several reasons.

A large number of underwater homeowners do not qualify for the HARP program, simply because their mortgage is not owned by Freddie or Fannie. As home prices increase, more of those homeowners are able to refinance at the current abnormally low rates and will consequently have more disposal income to spend to support the economy. A JPM study, summarized in a Bloomberg article, estimated that the number of underwater homeowners fell by almost 4 million last year due solely to the increase in home prices.

Another reason why the continue rise in home prices is important is the same reason why the decline was important. For most Americans, most of their wealth is reflected in their home's equity. Consumer confidence was adversely impacted by the rapid and steep decline in home prices.

I receive a constant stream of email's from Corelogic's free service called ePropertyWatch, notifying me of property sales in my neighborhood, the estimated value of my home based on those sales, any filings made in connection with my property at the register of deeds, and other information. I signed up for that service. Over the past couple of weeks, I received two emails that the value of my home had increased based on the most recent data.

I can also retrieve data about estimated value from Zillow which has a higher estimate of my home's value. Zillow has a chart of my home's estimated value going back to May 2003. The peak value was reached in December 2007. The property market in Middle Tennessee rose at a faster rate than historical trend between 2002-2007, but did not go parabolic with anything approaching 20%+ annualized increases that ultimately caused so much damage elsewhere. The decline from the peak was more of a gradual sloping decline, followed by a leveling out process and is now moving up at a decent clip returning to the April 2007 price level based on the last estimate.

Someone who bought a home in one of the parabolic markets, near the end of the parabola, will not likely see equity in their homes for a very long time. An example would be the San Jose, California market. Back in 2009, USATODAY reported that home prices had risen so fast in San Jose that only 16% of median household families could afford a median price house. What was a median price home in that city? The median price had hit $664,444 by January 2008 and had declined to $415,000 by early 2009. The median sales price for homes in Nashville was $164,000 for the 3 month period on 4/13/13, according to, and $356,450 in the affluent suburb of Brentwood, TN.

National Federation of Independent Businesses (NFIB)

The NFIB releases two surveys that are worth examining each month.

The first is called the "Jobs Report".  In the April report, NFIB noted that April was "another positive, albeit lackluster month for job creation-but small-business owners are expressing a bit more enthusiasm in hiring plans"

Emphasis Supplied by the NFIB in the above quote and in the following one:

"But the big news is that job creation plans rose 6 points, to a net of 6% of small employers now planning to increase total employment in the next three months".

Small businesses are the job creators in the U.S. Most big corporations are just pathetic and a disgrace in that regard.

In a recent SA comment, I referred to a recent ADP employment report that showed decent hiring by small  (1-49 employees) and medium businesses (50 to 499). The large businesses shrank jobs by -2,000!!!! ADP National Employment Report - January 2013 | NER It is a systemic problem that large American corporations are quick to shed jobs, to outsource   jobs to cheaper foreign workers and to move factories and operations to the lowest cost and least restrictive places in terms of regulations.

And, then those large corporations complain about those billions stashed in overseas subsidiaries, which they would bring back to the U.S., provided Congress changed the tax laws. But, Congress did change the tax laws when those corporations "promised" to use the repatriated funds to create jobs, and what happened then? The corporations who repatriated the most money shed jobs, using the cash to increase executive compensation and perks as well as returning more money to shareholders in dividends and share buybacks. Senate report Just disgusting in the extreme.

The second NFIB survey is called the NFIB Optimism Index.


Pembina Pipeline (Canada)

Pembina Pipeline reported first quarter revenues of C$1.2857B and an E.P.S. of C$30 cents. Adjusted cash flow per share from operating activities was reported at C$.7. The company pays monthly dividends. The total for the last quarter was $.41.

Bought 100 PBA at $29.21 (2/20/13 Post)

The stock reacted positively to the earnings news.

Closing Price 5/10/13: PBA: 33.97 +1.06 (+3.22%)

Inflation Predictions Embodied in TIP Pricing:

I would urge everyone to become proficient in calculating the inflation estimate embodied in the pricing of treasury inflation protected bonds.

The relevant information can be found at the U.S. Treasury Website:

Daily Treasury Real Yield Curve Rates

Daily Treasury Yield Curve Rates

The inflation rate prediction is simply the difference between the yield of the nominal non-inflation treasury and the TIP yield for the same maturity. This is called the break-even point, the annual amount of inflation necessary for the buyer of the TIP to break-even with the buyer of the non-inflation protected security. What this data is telling us is significant. All treasuries maturing in ten years or less have significant negative real rates of return before taxes, a result that is impossible in a free market that has inflation expectations. In short, all rates are artificial now and are being determined by QE and ZIRP rather than the market. The FED will have to end both. There is already considerable dispute among FED members about continuing QE. FRB: FOMC Minutes, March 19-20, 2013 (third paragraph after "Committee Policy Action")

We all should know that the FED can not continue buying debt and bloating its balance sheet much longer. By year end, the FED will own almost $4 trillion dollars of securities by continuing to purchase at the current $85B per month rate.

I discussed over the weekend in comments to several SeekingAlpha articles my expectations for future interest rate predictions.

The End Of QE Won't Kill This Bull Market - Seeking Alpha

My current prediction is that the 10 year treasury will rise to a 3.5% yield by this time next year and will hover in that area due to the restraining impact of ZIRP on the yield curve. With a 2% increase in the ten year yield, the buyer at the current rate would lose around 16%-17% of the vintage bond's value at the current coupon rate.

After the short rates are allowed to rise to market levels sometime in 2015, I expect the 10 year to discover it market price somewhere between 4.5% to 5%.

1. Bought FMIHX (see disclaimer): 

Closing Price Last FridayFMIHX: 20.01 +0.07 (+0.35%)

Security Description: FMI Large Cap is rated five stars by Morningstar and invests in a limited number of large capitalization stocks. The expense ratio is less than 1% and it is offered by several brokers on a NTF basis. Fund Purchase Information - MSN Money  

For the month endimg 4/30/13, the fund calculated its 10 year annualized return at 11.55% and at 10.45% for five years. FMI Mutual Funds 

I made the minimum initial investment of $2,500 last Thursday at $19.55 per share. After looking at this fund, and noticing that it was going to close to new investors on 6/30/13, I decided to stick a toe in the door with a minimum purchase, which at least allows me to make additional purchases when and if it makes sense to me.   

I had a favorable opinion of the fund's top 25 holdings: Top 25 - MSN Money In the top ten, the fund owned MMM, Berkshire (Baby "B" shares), Accenture and Sysco. Of the larger holdings, I would disagree with the large investment in Bank of New York (BK). Maybe it has started to do better: BK Interactive 5 Year Chart 

Income distributions have been primarily long term capital gains and secondarily from short term capital gains.  FMIMX Distribution Summary In 2012, for example, there was a $2.12186 per share long term capital distribution; a $.28379 short term capital gain distribution and only $.08649616 from income. Most of the ordinary income from common stock dividends will be eaten up by the fund's expenses. 

This is a link to the SemiAnnual Report for the period ending March 31, 2013: ‎fiduciarymgt.com3.pdf The holdings for FMIMX start at page 8 of that report

Prior Trades: None

Rationale: Notwithstanding the market reaching new highs and concerns about valuation or a correction, the large cap stocks still appear to me to be under valued as a stock sector, particularly in comparison to the Russell 2000 index of small cap stocks. 

This fund has a record of success over the past five and ten years, which includes the meltdown between September 2008 and March 2009. I would be pleased with 10% annualized returns over the next ten years. 

Since most of the dividends that have been paid historically are long term capital gains, that is more tax efficient given the 15% tax cap for most taxpayers, assuming their marginal rate is over 15%, compared to a bond fund where the distributions would be taxed at the taxpayer's highest marginal rate. 

Risks: Since I started to invest in stocks back in the late 1960s, I have learned that stocks are at times better at creating anxiety and steep losses rather than the hoped for returns. I have emphasized throughout this blog that stocks can produce tremendous annualized returns over prolonged periods, known generally as secular bull markets, and then cause considerable consternation over similarly long periods of time known as secular bear markets. The Roller Coaster Ride of the Long Term Secular Bear Market (May 2010);  The Big Picture Questions (August 2011). 

In retrospect, it would have been far better to make this investment on March 9, 2009 rather than now. But, as I have said in the past, an investor has the play the hand that is dealt.  

Future Buys: Likely to buy in small increments during stock market dips and corrections.

2. Sold 100 of the 250 VGI at $19.48 (see Disclaimer): I sold the shares bought in a satellite taxable account and kept the remaining 150 shares held in the ROTH IRA:

Snapshot of Trade:

Snapshot of History:

VGI History 100 Shares-Satellite Taxable Account

Snapshot of Profit:

2013 VGI 100 Shares +$87.95

Item #2 Bought 100 VGI at $18.46 (1/3/13 Post) On the day of purchase, VGI closed with a net asset value per share of $19.81 and at a -6.31 discount to the closing price. I caught the shares on an intra-day downdraft on 11/26/12 (day's range $18.42 to $18.69-VGI Historical Prices

Data as of 5/3/13 (Day after Sale)
Closing Net Asset Value Per Share: $20.76
Closing Price: $19.48
Discount: -6.17%

I still own 150 shares bought in the ROTH IRA where the dividends are tax free: Item # 4 Bought 50 of the Bond CEF VGI at $18.52 & Sold 100 SGL at $10.71-Roth IRA (11/29/13 Post); Item # 3 Pared Trade: Bought 100 VGI at $18.97 and Sold 82+ CWH at $22.31-Roth IRA.

VGI Page at Morningstar (Fund uses leverage and has a high expense ratio)

Closed-End Fund Detail | Virtus Investment Partners: Sponsor's webpage (link has been changed by the sponsor)

2012 SEC Filed Annual Report: Virtus Global Multi-Sector Income Fund (I do not care for the investment in an Argentina PIK note maturing in 2033 and hope that is only a short term trade, see page 7)

The annual report shows at page 21 (n.6) that the total expense ratio as of 12/31/12 was 1.74% excluding the interest cost and 2.19% with the interest expense. 

There was no return of capital in 2012: Tax Information.pdf

Closing Price Last Friday: VGI: 19.37 -0.08 (-0.41%)

3. Sold 100 EWM at $16.545 (see Disclaimer): This ETF popped on 5/6/13 after the ruling party narrowly won the recent election. Malaysia’s Governing Coalition Retains Power - NYT This ETF had been weak due to concerns about the opposition winning the election.

The Malaysia stock market is discussed in an article published in this week's One money manager opined that EWM was not "too pricey".

Snapshot of Trade:

Snapshot of Profit:

2013 EWM 100 Shares +$115.57
I have prematurely pared my stock position in the Asia-Pacific region in response to a slowdown in growth and the BOJ's policy to weaken the Yen that will hurt other export countries in the region. I am done paring having reduced my overall stock exposure in this region by more than $10,000.

Item # 1  Bought 100 of the ETF EWM at $15.23 (January 2013)

Closing Price Last Friday: EWM: $16.50

4. Sold 100 RRD at $12.41 (see Disclaimer): I am not a long term holder of RRD stock, but will buy a few shares when a combination of the price and dividend sufficiently tempt me to take a swing. 

Snapshot of Trade: 

Sold 100 RRD at $12.41
I took the following snapshot  of my position just before entering a limit order to sell at $12.41:

100 RRD Shares At the Time of Order Placement
As shown in this snapshot, the prevailing price was then $12.305. I entered a AON day limit order to sell the 100 shares at $12.41. I did not care particularly whether the order would be filled that day. I set the price above the market to more than compensate me for the brokerage commission cost. 

I realized a gain of $231.57 on this last RRD common stock flip.

Bought 100 RRD at $9.94 (November 2012)

I have received one $26 dollar dividend and will receive another on June 3, 2013 that was payable to stockholders of record as of 4/26/13. RR Donnelley Board of Directors Declares Quarterly Dividend  

With the two dividends, the total return was $283.57 or 28.31% based on a total cost of $1,001.45. The time period was slightly over 6 months. That is sufficient for this stock which I have sometimes called a "widow maker" for long term owners since 2006. RRD Interactive Chart

I recently flipped a small 50 share lot in the Roth IRA. Bought 50 RRD at $8.75 January 2013- Item # 3 Sold 50 RRD at $12.04-Roth IRA (April 2, 2013 Post) This was a repeat of another flip, where the purchase was at higher prices Sold 50 RRD at $11.92-Roth IRA July 2012-Bought 50 RRD at $10-ROTH IRA (May 2012)

I have also flipped other RRD bonds, including the 8.875% maturing in 2021 twice, and a Trust Certificate (PYS) containing a senior RRD bond maturing in 2029. Bought 50 PYS at 20.01 March 2010Add 50 PYS at 19.59 June 2010Sold 50 PYS at 20.76 July 2010Sold  50 PYS @ 24 November 2010Bought 50 PYS at 22.6 January 2011Sold 50 of the TC PYS at 23.2 April 2011 (Prospectus:

I still own one RRD senior bond maturing on 1/15/17:

Bought 1 R.R. Donnelley 6.125% Senior Bond Maturing 1/15/2017 at 89

FINRA - Investor Information on 2017 Bond

I would sell that bond at the current price but have never seen an online bid willing to accept 1 bond. 

The only conclusion which I can draw from the foregoing is that this company makes the Old Geezer nervous but not so nervous as to avoid its securities altogether. 

RRD did release better than expected first quarter results which was the underlying cause of a stock price spurt. SEC Filed Press Release 

Stock Quote: RRD

Closing Price Last Friday: RRD: $12.69 +0.30 (+2.42%) 

5. Bought 200 SGL at $10.56- Main Taxable Account (see Disclaimer):

I just discussed this CEF and have nothing to add to last week's post other than the new data points.

Item # 2 Bought Back 100 SGL at $10.57-Roth IRA (5/6/13 Post)

Data from Friday 5/4/13
Closing Net Asset Value Per Share: $11.52
Closing Market Price: $10.67
Discount: -7.38%

Data from Date of Trade Tuesday 5/7/13
Closing Net Asset Value Per Share= $11.5
Closing Market Price= $10.55
Discount: -8.26%

Morningstar Page on  SGL: Average 3 year discount -5.65

Closing Price Last Friday: SGL: $10.64 +0.05 (+0.47%)

6. Sold 50 AMJ at $47.99-Roth IRA (see Disclaimer): The JPMorgan Alerian MLP ETN is an exchange traded note that tracks an MLP index. The sponsor quit creating new units of this product in mid-2012 that has caused AMJ to trade significantly over its net asset value per share periodically. The spread to the indicative value was unusually large on 5/8/13, so I harvested my profit.

Snapshot of Trade:

Snapshot of Profit:

2013 AMJ 50 Shares +$490.94
Bought Roth IRA: 50 KWN at $24.85. 50 GJS at $13.77, and 50 of the ETN AMJ at $37.89 (12/19/12 Post)

I sold this one in a bout of profit taking and due to the stock price selling at a significant premium to its net asset value per share. This issue was discussed in several news articles published last week. I am certainly not bashful about harvesting profits, particularly in the IRA where capital preservation is the second most important objective after income generation.

Closing Indicative Value on 5/8/13: 46.22

Closing Indicative Value on Friday 5/10/12: 46.37

Daily values can be found at the sponsor's webpage: JPMorgan Alerian MLP Index ETN

I still own other MLP ETNs and one MLP ETF.  

Closing Price Last Friday: AMJ: 47.78 -0.30 (-0.62%) 


  1. I agree with you that a correction would be welcome, if only to relieve the tension of wondering when it's going to happen, and to provide a better buying opportunity. I just can't bring myself to add to or initiate any new positions right now. Do you believe that corrections are "healthy" for the markets in general?

    I have put FMIHX on my watch list. Thanks for your perspectives once again.

  2. Cathie: I view parabolic moves in any asset class as troublesome. When an upside parabola is identified for an asset class, or down to an individual security, the parabola has, more often than not, resolved itself by an equally severe down move. If the parabola is not justified by the fundamentals (e.g. stock market in 1999 or oil in 2008), the downside side risk is huge and destructive to overall market conditions. A parabola in a stock index, such as the one starting in U.S. stocks in 1995 and gaining momentum into 2000, can actually be harmful to the general economy when the parabola implodes in a downward spiral. Those are very dangerous parabolas.

    On an individual stock level, I see parabolas form all of the time.

    Take a look at Tesla's stock since around March 2013 for example. The company is expected to earn about 5 cents this year.

    Another example would be the GIS move this year. I would open up a long term max chart which shows a parabola this year for this stock. It is not a dangerous parabola since the fundamentals could justify the higher stock price. But, I would prefer to see that stock move back to around 45 and consolidate before moving back up to 50.

    I will sometimes buy the minimum amount of fund that has opened to investors after being closed for a long time (Vanguard Health which also lowered the minimum to $3,000) I exchanged out of the Vanguard Inflation Protected bond fund into the Health fund, as noted in a 7/8/11 Post. I then at least had the option could to add to that fund as I choose in small increments.

    The same process is at work with FMIHX and in VHCOX that I discussed buying in a 4/9/13 post when it opened for new investors. These are all good funds and I may or may not add more to them in the future. I have added to Vanguard Health since making the exchange.