Big Picture Synopsis
Stocks:
Short Term: Hoping for a 10+% Correction
Intermediate and Long Term: Bullish
Bonds:
Short to Long Term: Slightly Bearish
I have changed my bond forecast again. Based on the low inflation numbers contained in the pricing of both the 10 and 30 year TIPs, the bond losses will be limited to the amounts projected by interest rate normalization, UNTIL THERE IS A MATERIAL INCREASE OR DECREASE IN INFLATION EXPECTATIONS!
The yields on treasuries can only go up so far with inflation expectations running as low as they are now. Bond investors view the U.S. treasuries to be without a credit risk component built into the yield. All other bonds have a credit risk component and are priced off the yields of comparable maturity treasuries based primarily on the market's assessment of credit risk for taxable securities. Once treasury yields quit going up, the remainder of the bond market will likely settle down too.
The break-even number for the ten year is currently below 2%. That number is the best market forecast for the average annual inflation rate. J.P. Morgan | Tips on TIPS It is a dynamic number and will change based on subsequent events.
I am estimating that the 10 year will top out in the 4% to 4.25% within two years, so close to 1/2 of the total projected loss has already occurred in the move from a 5/1/13 yield of 1.66%. About a week ago in a SA comment, I estimated that the ten year would hit a temporary plateau in the 2.5%-2.6% range. The market will simply wait for more definitive news about unemployment and the economy before making a sustained move up or down from that range.
The projected loss in the 10 year treasury can decline with a material and persistent decrease in inflation expectations from current levels, and the losses will likely increase in the event inflation expectations accelerate from current projections. I thought that it would be helpful to congregate those current forecasts in one post:
The projected loss in the 10 year treasury can decline with a material and persistent decrease in inflation expectations from current levels, and the losses will likely increase in the event inflation expectations accelerate from current projections. I thought that it would be helpful to congregate those current forecasts in one post:
Inflation Forecasts as of Thursday 6/28/13
Break-even is the difference in the real and nominal yields and represents the average annual CPI necessary for the buyer of the TIP to break-even with the buyer of the non-inflation protected treasury.
Data Derived From-
Data Derived From-
Break-Even=Annual Average Inflation Forecast
5 Years:
TIP Yield: -.35%
Nominal Yield: 1.41%
Break-even= 1.76%
7 Years
TIP Yield: .06%
Nominal Yield: 1.96%
Break-Even= 1.9%
10 Years:
TIP Yield: .53%
Nominal Yield: 2.52%
Break-Even= 1.99%
20 Years:
TIP Yield: 1.12%
Nominal Yield: 3.22%
Break-Even= 2.10%
30 Years:
TIP Yield: 1.31%
Nominal Yield: 3.52%
Break-Even= 2.21%
Given the carnage in bond CEFs that has resulted in usually large discounts to net asset value per share, I changed several of my dividend distribution options for bond CEFs to reinvestment.
Treasury notes and bonds recovered some late last week after the weaker than expected first quarter real GDP report and some comments by NY FED President William Dudley. Dudley comments: Federal Reserve Bank of New York; Reuters Dudley did not say anything different from BB. He did note that the Federal Reserve had been too optimistic in many of its prior forecasts and placed more emphasis on asset purchases continuing provided the economy heads down rather than up.
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Recent Economic Reports:
In a surprise negative development, the government revised down first quarter real GDP to 1.8% in its final estimate, down from 2.4% in the second estimate. News Release: Gross Domestic Product Consumer personal expenditures were revised from 3.4% to 2.6%. The downward revision in PCE was driven by lower spending on services, including legal services (a good thing?), personal care and health care.
The Case Shiller home price index for 20 large metropolitan areas posted its largest monthly gain in April. The composite index rose 2.5% in April, compared to March, and was up 12.21% Y-O-Y which was the fastest pace since 2006. San Francisco has the largest annual gain in home prices with a 23.9%, followed by Los Vegas at 22.3%; Phoenix at 21.5%; and Atlanta at 20.8%. Press Release
Orders for durable goods rose 2.6% in May to a seasonally adjusted $231B. Excluding defense and aircraft, business investment rose 1.1%, the third consecutive increase. census.gov.pdf
Real disposable income increased .4% in May, up from .3% in April. Real PCE increased .2%. Personal savings as a percentage of disposable income increased to 3.2% from 3.%. The price index for PEC increased .1% in May after declining .3% in April. The core PCE price index also increased .1% in April. News Release: Personal Income and Outlays
In his news conference, Bernanke linked the end of the FED's asset purchases to unemployment being in the "vicinity" of 7% "with solid economic growth supporting further job gains" (page 5: federalreserve.gov.pdf) He also made it clear that those asset purchases were for the purpose of jump starting the economy.
Bill Gross believes that a 7% unemployment rate by the middle of next year is "a long shot". Barrons.com I would not view it as a long short but a probable event. I thought that I would just make a note and refer back to his prediction and mine next June or whenever the rates hits 7%. He also makes what I would label a silly argument that households will be under some kind of economic stress with the recent rise in mortgage rates, ignoring the tens of millions who have already refinanced at ridiculously low rates.
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MKZ Ends Annual Period Paying 3% Annual Coupon:
The PPN MKZ ended its annual coupon period on 6/24/13. This PPN is linked to the DJ-UBS Commodity Index. The Starting Value for that index was 130.56. The Closing Value on 6/24/13 was 126.42. DJ-Index:DJUBS Historical Quote Prices - WSJ.com
Since the DJ-UBS did not gain more than 3% over its starting value, MKZ will pay its 3% minimum coupon on 7/1/2013. The ex interest date was 6/26.
This unsecured senior noted issued by Citigroup Funding, and guaranteed by Citigroup as provided in the prospectus, will mature on 7/11/14. Par value is $10.
The relevant data points for the last annual coupon period are as follows:
Starting Value: 126.42
Maximum Level Violation: 165.61 (126.42 Starting Value x 1.31)
END DATE: 7/3/2014
As long as there is no close in the DJ-UBS Commodity Index over 165.61 (Maximum Level) on or before the END DATE, MKZ will pay the greater of 3% or the percentage gain in the DJ-UBS commodity index over its Starting Value (up to 31%).
I own 200 shares: Bought 100 MKZ at $9.96 December 2009; Bought 100 MKZ at $9.91 in the Roth IRA December 2009
Prospectus: Pricing Supplement
Last Friday's Close: MKZ: 10.27 -0.15 (-1.48%)
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RVT and RMT Reinvestment:
I own two closed end stock funds managed by the Royce fund group.
Sponsor's webpages: Royce Value Trust (RVT) and Royce Micro-Cap Trust (RMT)
I have changed my reinvestment option on RMT to payment in cash, simply because I do not want any more shares. The 10 annualized RMT performance is 9.25% based on net asset value, CEFConnect.
RVT Page at CEFConnect (discount as of 6/27/13=-10.07%)
RMT Page at CEFConnect (discount as of 6/27/13=-10.99%)
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BCF Reinvestment:
One of my two worst performing stock ETFs is the BlackRock Real Asset Equity Trust (BCF). This is not surprising given its ownership of commodity producers. As of 3/31/13, this fund had a 37.4% weighting in metals and mining. It would be hard to find a recent winner in that industry sector. The top two holdings as of 3/31/13 were BHP Billiton and Rio Tinto.
I am just happy that I have had no individual positions in those two stocks:
BHP Interactive Chart
RIO Interactive Chart
Fortunately, I sold out of my BCF position in the IRA before the price decline began in earnest. Item # 3 Sold 152 BCF at 10.38-Roth IRA (realized gain on the share=$223.02).
The share price decline is made worse by significant return of capital distributions. CEFConnect
Most of my current allocation to non-energy commodity stocks is through this fund, which is the reason that I am holding onto my shares. Eventually, the worm will turn for those companies. Most commodities are in a bear market with no light at the end of the tunnel. Consequently, I am not buying shares in the market. Instead, I am lowering my average cost per share through reinvestment and will just wait it out:
Sponsor's Website: BCF : Fund Profile
The discount to net asset value was -7.43% as of 6/27/13. The average five year discount was -5.32 as of that date. ("pricing history" tab at CEFConnect)
Last Friday's Close: BCF: $8.69 +0.09 (+1.05%)
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TICC Reinvestment:
TICC Capital (TICC) is a BDC. I own 250 shares, of which 100 are held in the ROTH IRA. I am not reinvesting the dividend on those shares. I have elected to reinvest at least temporarily the dividend paid by the 150 shares held in the taxable account, at least until the price consistently trades above $10.
I recently averaged down in that taxable account: Added 50 TICC at $9.85 Net asset value per share was reported at $10.02 as of 3/31/13.
This is a link to a recent Seeking Alpha article discussing TICC.
Last Friday's Close: TICC: $9.62 +0.03 (+0.31%)
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Roth Conversion:
I owned several bond CEFs in a regular IRA at Fidelity. I opened a ROTH IRA at that firm and moved last week five CEF positions from the regular IRA to that new ROTH IRA account. The largest loser was 100 shares of GGN. The market value of those positions at the time of conversion will be included in my taxable income in 2013, but the amount will be lower due to their loss in value since May 1.
I did similar type conversions starting in October 2008 for a similar reason.
Eventually, I will have to include the amount taken out of a regular IRA as income, but I can soften the blow by opportunistic conversions when the price of the asset has fallen significantly in value.
*****************
Treasury notes and bonds recovered some late last week after the weaker than expected first quarter real GDP report and some comments by NY FED President William Dudley. Dudley comments: Federal Reserve Bank of New York; Reuters Dudley did not say anything different from BB. He did note that the Federal Reserve had been too optimistic in many of its prior forecasts and placed more emphasis on asset purchases continuing provided the economy heads down rather than up.
******************
Recent Economic Reports:
In a surprise negative development, the government revised down first quarter real GDP to 1.8% in its final estimate, down from 2.4% in the second estimate. News Release: Gross Domestic Product Consumer personal expenditures were revised from 3.4% to 2.6%. The downward revision in PCE was driven by lower spending on services, including legal services (a good thing?), personal care and health care.
The Case Shiller home price index for 20 large metropolitan areas posted its largest monthly gain in April. The composite index rose 2.5% in April, compared to March, and was up 12.21% Y-O-Y which was the fastest pace since 2006. San Francisco has the largest annual gain in home prices with a 23.9%, followed by Los Vegas at 22.3%; Phoenix at 21.5%; and Atlanta at 20.8%. Press Release
Orders for durable goods rose 2.6% in May to a seasonally adjusted $231B. Excluding defense and aircraft, business investment rose 1.1%, the third consecutive increase. census.gov.pdf
Real disposable income increased .4% in May, up from .3% in April. Real PCE increased .2%. Personal savings as a percentage of disposable income increased to 3.2% from 3.%. The price index for PEC increased .1% in May after declining .3% in April. The core PCE price index also increased .1% in April. News Release: Personal Income and Outlays
In his news conference, Bernanke linked the end of the FED's asset purchases to unemployment being in the "vicinity" of 7% "with solid economic growth supporting further job gains" (page 5: federalreserve.gov.pdf) He also made it clear that those asset purchases were for the purpose of jump starting the economy.
Bill Gross believes that a 7% unemployment rate by the middle of next year is "a long shot". Barrons.com I would not view it as a long short but a probable event. I thought that I would just make a note and refer back to his prediction and mine next June or whenever the rates hits 7%. He also makes what I would label a silly argument that households will be under some kind of economic stress with the recent rise in mortgage rates, ignoring the tens of millions who have already refinanced at ridiculously low rates.
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MKZ Ends Annual Period Paying 3% Annual Coupon:
The PPN MKZ ended its annual coupon period on 6/24/13. This PPN is linked to the DJ-UBS Commodity Index. The Starting Value for that index was 130.56. The Closing Value on 6/24/13 was 126.42. DJ-Index:DJUBS Historical Quote Prices - WSJ.com
Since the DJ-UBS did not gain more than 3% over its starting value, MKZ will pay its 3% minimum coupon on 7/1/2013. The ex interest date was 6/26.
This unsecured senior noted issued by Citigroup Funding, and guaranteed by Citigroup as provided in the prospectus, will mature on 7/11/14. Par value is $10.
The relevant data points for the last annual coupon period are as follows:
Starting Value: 126.42
Maximum Level Violation: 165.61 (126.42 Starting Value x 1.31)
END DATE: 7/3/2014
As long as there is no close in the DJ-UBS Commodity Index over 165.61 (Maximum Level) on or before the END DATE, MKZ will pay the greater of 3% or the percentage gain in the DJ-UBS commodity index over its Starting Value (up to 31%).
I own 200 shares: Bought 100 MKZ at $9.96 December 2009; Bought 100 MKZ at $9.91 in the Roth IRA December 2009
Prospectus: Pricing Supplement
Last Friday's Close: MKZ: 10.27 -0.15 (-1.48%)
****************
RVT and RMT Reinvestment:
I own two closed end stock funds managed by the Royce fund group.
Sponsor's webpages: Royce Value Trust (RVT) and Royce Micro-Cap Trust (RMT)
RVT Page at CEFConnect (discount as of 6/27/13=-10.07%)
RMT Page at CEFConnect (discount as of 6/27/13=-10.99%)
*******************
BCF Reinvestment:
One of my two worst performing stock ETFs is the BlackRock Real Asset Equity Trust (BCF). This is not surprising given its ownership of commodity producers. As of 3/31/13, this fund had a 37.4% weighting in metals and mining. It would be hard to find a recent winner in that industry sector. The top two holdings as of 3/31/13 were BHP Billiton and Rio Tinto.
I am just happy that I have had no individual positions in those two stocks:
BHP Interactive Chart
RIO Interactive Chart
Fortunately, I sold out of my BCF position in the IRA before the price decline began in earnest. Item # 3 Sold 152 BCF at 10.38-Roth IRA (realized gain on the share=$223.02).
The share price decline is made worse by significant return of capital distributions. CEFConnect
Most of my current allocation to non-energy commodity stocks is through this fund, which is the reason that I am holding onto my shares. Eventually, the worm will turn for those companies. Most commodities are in a bear market with no light at the end of the tunnel. Consequently, I am not buying shares in the market. Instead, I am lowering my average cost per share through reinvestment and will just wait it out:
 |
| Reinvestment Average Cost Per Share=$8.57 |
The discount to net asset value was -7.43% as of 6/27/13. The average five year discount was -5.32 as of that date. ("pricing history" tab at CEFConnect)
Last Friday's Close: BCF: $8.69 +0.09 (+1.05%)
********************
TICC Reinvestment:
TICC Capital (TICC) is a BDC. I own 250 shares, of which 100 are held in the ROTH IRA. I am not reinvesting the dividend on those shares. I have elected to reinvest at least temporarily the dividend paid by the 150 shares held in the taxable account, at least until the price consistently trades above $10.
 |
| Reinvestment Average Cost Per Share=$9.33 |
This is a link to a recent Seeking Alpha article discussing TICC.
Last Friday's Close: TICC: $9.62 +0.03 (+0.31%)
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Roth Conversion:
I owned several bond CEFs in a regular IRA at Fidelity. I opened a ROTH IRA at that firm and moved last week five CEF positions from the regular IRA to that new ROTH IRA account. The largest loser was 100 shares of GGN. The market value of those positions at the time of conversion will be included in my taxable income in 2013, but the amount will be lower due to their loss in value since May 1.
I did similar type conversions starting in October 2008 for a similar reason.
Eventually, I will have to include the amount taken out of a regular IRA as income, but I can soften the blow by opportunistic conversions when the price of the asset has fallen significantly in value.
*****************
Snapshot of Trade:
Snapshot of Profit:
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| 2013 Sold 100+ XRX +$192.87 ($128.69 ST; $64.18 LT) |
Bought 40 XRX at $7.55 October 2011 (as part of LT strategy-later promoted to the Flyer's Strategy); S Added 60 XRX at $7.1 September 2012
Rationale: This is just profit taking in a non-core position, something that I routinely do.
After selling my position, this negative article about Xerox was published by Seeking Alpha.
At the time of purchase, I will establish a potential range for selling a small, non-core position like the 100 shares of XRX. A number of factors will influence the setting of a target price, including recent earnings reports, the strength and viability of competitors, the reliability and rate of E.P.S. growth, P/E and other valuation metrics, and a two year chart.
The chart for XRX suggested to me that buy in the $7 to $7.5 or so range would be okay as an entry point and around $9.5 would likely be a decent exit number. XRX Interactive Chart I five year chart reveals a potential upside in the $10-$12 with $6.5 being the downside risk point barring really terrible news.
I also noted when establishing a potential target price that the S & P report had slapped a two star rating on the stock with a $7 price target, so I did not want to set my sights too high.
I have also noticed some recent negative information about corporate IT spending. The most recent example was reflected in the recent earnings report from Accenture discussed in this Barrons' article, which caused a downdraft in the stock price yesterday: ACN: $71.96 -8.26 (-10.30%)
Last Friday's Close: XRX: $9.07 -0.11 (-1.20%)
After selling my position, this negative article about Xerox was published by Seeking Alpha.
At the time of purchase, I will establish a potential range for selling a small, non-core position like the 100 shares of XRX. A number of factors will influence the setting of a target price, including recent earnings reports, the strength and viability of competitors, the reliability and rate of E.P.S. growth, P/E and other valuation metrics, and a two year chart.
The chart for XRX suggested to me that buy in the $7 to $7.5 or so range would be okay as an entry point and around $9.5 would likely be a decent exit number. XRX Interactive Chart I five year chart reveals a potential upside in the $10-$12 with $6.5 being the downside risk point barring really terrible news.
I also noted when establishing a potential target price that the S & P report had slapped a two star rating on the stock with a $7 price target, so I did not want to set my sights too high.
I have also noticed some recent negative information about corporate IT spending. The most recent example was reflected in the recent earnings report from Accenture discussed in this Barrons' article, which caused a downdraft in the stock price yesterday: ACN: $71.96 -8.26 (-10.30%)
Last Friday's Close: XRX: $9.07 -0.11 (-1.20%)
2. Bought 50 NBB at $18.55 (see Disclaimer): In late May, I significantly reduced my exposure to leveraged CEF Build America Bonds funds by selling NBD, a functionally equivalent Nuveen BABs CEF to NBB. Item # 3 Sold 100 NBD at $21.86-Roth IRA The reason given for that disposition was my concern about a loss due to interest rate normalization. That disposition left me with 150 Shares of of NBB. I am now back up to 200 shares.
Last Monday's Close for NBD: $19.45 -0.45 (-2.26%)
While I avoided the subsequent loss in NBD, I recognize that further losses are certainly possible by acquiring shares in any leveraged BABs CEF, so I decided to limit my purchase to just 50 shares for now and possibly buy another 50 when and if there is another 10% loss in market value. I suspect that the carnage could continue awhile longer in the intermediate term maturities, but the decline in longer term bonds could start to slow based on their own normal spreads to inflation expectations.
6/24/13
30 Year Nominal Yield 3.56%
30 Year TIP Yield= 1.45%
Break-even= 2.11%
20 Year Nominal Yield= 3.27%
20 Year TIP Yield = 1.22%
Break-Even= 2.15%
1/03/06 (Example: Before QE)
20 Year Nominal = 4.37%
20 Year TIP= 2.06%
Break-Even= 2.31%
Snapshot of Trade:
Security Description: The Nuveen Build America Bond Fund is a leveraged closed end bond fund that invests in taxable municipal bonds issued under the Build America Bond program that is no longer in existence. NBB - Nuveen Build America Bond Fund
As noted at the sponsor's website, this fund has a contingent term provision. If there are no new issuances of BABs or similar U.S. treasury subsidized taxable municipal bond within 24 months ending on or before 1/1/2013, and there were none, the fund will terminate on or about 6/30/20. NBB will consequently be a term bond fund that liquidates in about 7 years. The managers of this fund may have to be nimble trading long bonds as that deadline approaches.
As of 3/31/13, the market value of NBB's assets was $732.719+M purchased at a total cost of $622.63+M (page 21). The net unrealized gain number would be much smaller now. As of 3/31/13, the fund had only a net unrealized loss of $1.738M and an unrealized gain of over $111M, which just shows how well these bonds were performing before the worm turned in early May.
Needless to say, the price of this long term bond fund has tanked since the bond rout began, falling from a $21.8 price as of 5/1/13 to a closing price of $18.7 last Monday. NBB Interactive Chart Adjusted for two monthly dividend payments, the decline in market price over that brief period was 13.87%. The net asset value per share, adjusted for the two dividends, declined over the same period from $23.2 to $20.887 or 9.97%. During rapid declines in net asset values, I would expect that the percentage decline in market price to significantly exceed the percentage decline in net asset value per share.
The fund is currently paying monthly dividends at the rate of $.1135. The CEFConnect page shows that this dividend has been supported by income. Assuming a continuation of that rate, which is in no way assured, the yield would be about 7.34%.
The average duration is shown at 9.86 years, with an average maturity of 27.56 years. This fund has a lot of interest rate risk.
Last Monday's Close for NBD: $19.45 -0.45 (-2.26%)
While I avoided the subsequent loss in NBD, I recognize that further losses are certainly possible by acquiring shares in any leveraged BABs CEF, so I decided to limit my purchase to just 50 shares for now and possibly buy another 50 when and if there is another 10% loss in market value. I suspect that the carnage could continue awhile longer in the intermediate term maturities, but the decline in longer term bonds could start to slow based on their own normal spreads to inflation expectations.
6/24/13
30 Year Nominal Yield 3.56%
30 Year TIP Yield= 1.45%
Break-even= 2.11%
20 Year Nominal Yield= 3.27%
20 Year TIP Yield = 1.22%
Break-Even= 2.15%
1/03/06 (Example: Before QE)
20 Year Nominal = 4.37%
20 Year TIP= 2.06%
Break-Even= 2.31%
Snapshot of Trade:
 |
| Bought 50 NBB at $18.55 |
Security Description: The Nuveen Build America Bond Fund is a leveraged closed end bond fund that invests in taxable municipal bonds issued under the Build America Bond program that is no longer in existence. NBB - Nuveen Build America Bond Fund
As noted at the sponsor's website, this fund has a contingent term provision. If there are no new issuances of BABs or similar U.S. treasury subsidized taxable municipal bond within 24 months ending on or before 1/1/2013, and there were none, the fund will terminate on or about 6/30/20. NBB will consequently be a term bond fund that liquidates in about 7 years. The managers of this fund may have to be nimble trading long bonds as that deadline approaches.
NBB is a leveraged fund. NBB Fund Data Page As such, the fund borrows money at the currently abnormally low short rates to buy long term bonds. That works out only when the value of those bonds purchased with borrowed money are not declining in price which has been the case over the past several weeks. Then the leverage causes the loss in net asset value per share to go down more.
In an optimal environment, the fund can earn additional income based on the difference between the average yield of the short term borrowings and the yield on the bonds purchased with those borrowed funds. It is also important for the bonds purchased with borrowed funds to rise in value, creating capital gain opportunities.
Needless to say, the reverse can also happen when one of those two variables change and would become worse when both go negative, i.e., short term borrowing costs increase at a time the bonds are losing value. A leveraged bond fund is not an appropriate investment in a rising interest rate environment due to an acceleration in inflation expectations and will suffer significant losses during a period of interest rate normalization
In an optimal environment, the fund can earn additional income based on the difference between the average yield of the short term borrowings and the yield on the bonds purchased with those borrowed funds. It is also important for the bonds purchased with borrowed funds to rise in value, creating capital gain opportunities.
Needless to say, the reverse can also happen when one of those two variables change and would become worse when both go negative, i.e., short term borrowing costs increase at a time the bonds are losing value. A leveraged bond fund is not an appropriate investment in a rising interest rate environment due to an acceleration in inflation expectations and will suffer significant losses during a period of interest rate normalization
This is a snapshot of the portfolio composition and credit quality breakdown taken from the Annual Report:
SEC Filed Annual Report: Period Ending March 31, 2013
As of 3/31/13, the market value of NBB's assets was $732.719+M purchased at a total cost of $622.63+M (page 21). The net unrealized gain number would be much smaller now. As of 3/31/13, the fund had only a net unrealized loss of $1.738M and an unrealized gain of over $111M, which just shows how well these bonds were performing before the worm turned in early May.
Needless to say, the price of this long term bond fund has tanked since the bond rout began, falling from a $21.8 price as of 5/1/13 to a closing price of $18.7 last Monday. NBB Interactive Chart Adjusted for two monthly dividend payments, the decline in market price over that brief period was 13.87%. The net asset value per share, adjusted for the two dividends, declined over the same period from $23.2 to $20.887 or 9.97%. During rapid declines in net asset values, I would expect that the percentage decline in market price to significantly exceed the percentage decline in net asset value per share.
The fund is currently paying monthly dividends at the rate of $.1135. The CEFConnect page shows that this dividend has been supported by income. Assuming a continuation of that rate, which is in no way assured, the yield would be about 7.34%.
The average duration is shown at 9.86 years, with an average maturity of 27.56 years. This fund has a lot of interest rate risk.
Closing Price Day of Purchase 6/24/13: NBB: $18.70 -0.54 (-2.81%)
6/24/13: BAB: 27.72 +0.04 (+0.13%) PowerShares Build America Bonds ETF
TLT: 108.85 +0.45 (+0.41%) : iShares Barclays 20+ Year Treasury ETF
Data as of Friday 6/21/13
Closing Net Asset Value Per Share: $20.72
Closing Market Price= $19.24
Discount = -7.14
Data as of Monday 6/24/13 (date of purchase)
Closing Net Asset Value Per Share= $20.66
Closing Market Price: $18.7
Discount= -9.49%
Discount at $18.55 Purchase Price: -10.21%
Average Discounts as of 6/21/13
1 Year 5.35%
3 Year 3.83%
CEFConnect shows the average duration at 9.86 years.
Prior Trades: Prior to this buy, I owned 150 shares bought at higher levels, as discussed in these posts: Item # 1 Bought 50 NBB at $20.73-ROTH IRA June 2012; Bought 100 NBB at $20.85-Regular IRA February 2013
6/24/13: BAB: 27.72 +0.04 (+0.13%) PowerShares Build America Bonds ETF
TLT: 108.85 +0.45 (+0.41%) : iShares Barclays 20+ Year Treasury ETF
Data as of Friday 6/21/13
Closing Net Asset Value Per Share: $20.72
Closing Market Price= $19.24
Discount = -7.14
Data as of Monday 6/24/13 (date of purchase)
Closing Net Asset Value Per Share= $20.66
Closing Market Price: $18.7
Discount= -9.49%
Discount at $18.55 Purchase Price: -10.21%
As of last Friday (6/28/13), the discount to net asset value per share narrowed to -7.32% based on a NAV of $20.89 and a closing share price of $19.36.
Average Discounts as of 6/21/13
1 Year 5.35%
3 Year 3.83%
CEFConnect shows the average duration at 9.86 years.
Prior Trades: Prior to this buy, I owned 150 shares bought at higher levels, as discussed in these posts: Item # 1 Bought 50 NBB at $20.73-ROTH IRA June 2012; Bought 100 NBB at $20.85-Regular IRA February 2013
I have realized gains in this security to date of $184.16 (snapshots at Item # 1): Sold 100 NBB at $20.13-ROTH IRA November 2011; Added 50 NBB at $19.55 in the ROTH IRA September 2001; Sold 100 NBB at $20.07 November 2011; Bought Back 50 NBB @18.4 in IRA December 2010; Sold 50 NBB @ 19.24 in the Regular IRA December 2010; Bought 50 NBB @ 19 November 2010; Bought 50 NBB at 19.67 June 2010.
Rationale: I am simply attempting to earn some income generated by a high quality bond portfolio. A lot of the losses due to normalization have already occurred in the long term bonds. While more can be reasonably anticipated, the amount is likely to be less than in the intermediate term bonds that are further away from normalized rates. I was also able to buy NBD at greater than a 10% discount to its net asset value per share which provides some insulation against further deterioration in NAV but not to an increase in the discount due to market fluctuations.
Still, I have sufficiently impressed by the downdraft in both market prices and net asset values to slice an order now into small parts that will at least allow me psychologically to buy another odd lot at a lower price without being concerned about the pre-existing unrealized loss, which would be insignificant given the purchased share amount.
Risks: Anyone unaware of the risks associated with leveraged bond CEFs has had a rude awakening over the past several weeks. Net asset values per share have plummeted due to the rise in intermediate and long term interest rates, and that rapid descent is of course exacerbated by borrowing money to buy more of a declining asset.
BABs are also long term bonds and the long maturities are particularly subject to interest rate risk. So far, however, the rise in rates has pretty much hit all intermediate and long term maturities roughly the same, an expected result when the rise is not due to inflation expectations increasing but due solely to interest rate normalization.
Another possible risk or benefit is the 2020 liquidation date. If the bonds owned by the fund are higher than now as that liquidation data comes around, then that would provide a possible capital gains opportunity for a long term shareholder, defined as someone other than the OG. The risk is that the bonds would be declining in price.
However, if the inflation forecast embodied in the seven year TIP proves prescient, currently at 1.9%, then it is hard to see much damage if any coming from rising rates due to inflation. The price damage would then be the anticipated damage from interest rate normalization.
Another potential risk arises from the sequester. Some of the BABs have provisions that allow the issuer to redeem the bonds in the event the federal government cuts its subsidy which has happened due tot he sequester. MSRB MSRB Reminds Investors, Market Professionals to Assess Terms of Build America Bonds and other Direct-Pay Bonds in Light of Federal Sequester I would not say that there is yet an avalanche of redemptions but several issuers are apparently contemplating redemption. More Issuers Contemplate BAB Redemptions The federal government is still paying most of its subsidy; and long term interest rates have already gone up.
This last risk is sufficient, however, to keep my exposure to BAB bond funds low. The average price of the bonds owned by NBB was 134.18 as of 4/30/13, less now, so any redemption at par will likely cause a decline in net asset value. I discuss this risk in a September 2012 post: Introduction Stocks, Bonds & Politics.
Last Friday's Close: NBB: $19.36 -0.06 (-0.31%)
3. Bought 50 CZNC at $19.15 (REGIONAL BANK BASKET STRATEGY)(see Disclaimer):
Snapshot of Trade:
Security Description: Citizens & Northern is headquartered in Wellsboro, Pennsylvania and is the holding company for the Citizens and Northern Bank which has 25 branch offices in seven PA counties and one in NY.
The annual rate for the dividend in 2008 was $.96 per share which was reduced to $.72 in 2009 and then to $.39 during 2010. The bank thereafter started to raise the dividend, paying $.58 per share in 2011 and $.84 in 2012. This kind of dividend history is, of course, view unfavorably, but at least the bank has almost returned to the 2008 level. This small bank does not maintain a dividend history database at its website. I acquired those numbers from page 11 of the last filed Annual Report. 10-k
The last quarterly dividend payment was $.25 per share. SEC Filed Press Release At that rate the dividend yield at a total cost of $19.15 is about 5.22%, one reason for buying some shares. The general idea is for dividends to account for approximately 40% of my total return over the life of this basket strategy which started in mid-2009.
When evaluating these small regional banks, it is also important to see how the bank performed during the recent Near Depression period, and most of that data can also be gleamed from page 11 of the aforementioned 2012 Annual Report. The bank experienced a bad 2009 losing $4.4 per share, but did bounce back with an E.P.S. of $1.45 in 2010 and $1.92 to in 2011. The 2009 loss was not due to core operations, but a after tax charge on a non-temporary impairment on available-for-sale securities of $55.859M which on cursory examination was due to owned pool trust preferred securities: 2010 Annual Report at page 14
The bank owns each of its branch facilities except for two that are leased. (page 7) I view that positively.
Prior Trade: Sold 100 CZNC at $16.53 September 2011; Bought 50 CZNC at $11.77; Added 50 CZNC at $10.46
Last Earnings Report: I may regret buying this one back after realizing a good profit on just 100 shares. The last earnings report had some items going the wrong way. Hopefully, the rise in intermediate and long term rates will have a beneficial impact on net interest margins later this year, as the cost of funds from depositors continues to hug zero.
SEC Filed News Release
DATA Exhibit 1
Data Exhibit 2
1st Quartervs. 2012 First Quarter:
Net Income: $4.706M / $5.587M (wrong way)
E.P.S.=$.38 / $.46 (wrong way)
Net Interest Margin= 4.18% / 4.41% (still good but big decline)
NPL Ratio: 1.42%/ 1.18% (wrong way)
NPA Ratio: .83%/ .7% (still good though rising a bit)
Coverage Ratio: 75.79%/ 89.74% (prefer over 100% for new position)
Return on Average Equity: 10.31% / 13.15%
Return on Average Assets: 1.5% / 1.72% (1.5% is still a good number)
Tangible Book Value Per Share= $13.88/ $13.06
Some of the compression in net interest margin was due to a lower average loan balance and a decline in deposits, both viewed negatively by me.
SEC Form 10-Q Q/E 3/31/13
The efficiency ratio is shown at 48.77% for 2012, which is good. (page 12-10k)
The capital ratio are excellent:
Only one analyst provides earnings estimates. For 2013, that analyst forecasts an E.P.S. of $1.62 and $1.58 for 2014. CZNC Analyst Estimate Hopefully, the bank will beat the 2014 forecast and generate at least single digit E.P.S. growth Y-O-Y.
Rationale: Since regional banks have been performing well lately, even on significant down days for the market, I decided to take my exposure up a tad by adding back a small position in one previously sold at a good percentage profit. CZNC also has an above average dividend yield.
Risks: The main risk is probably E.P.S. stagnation or worse, a continued decline in E.P.S. numbers Y-O-F. That kind of action has already left CZNC in the dust as other regional bank stocks have rallied over the past several days. There are the usual risks associated with banks, including boneheaded loan decisions, contraction in net interest margin due to a variety of factors including but not limited to the QE, a lower deposit base (banks pay depositors almost nothing now, so a lower deposit number is not good for net interest margins), and/or lower loan generation. Recessions are also bad news for banks, as loan losses accelerate.
A more benign environment would be increasing deposits, which costs the bank almost nothing given ZIRP, coupled with increased new loan generation at higher yields. CZNC's loan and deposit number for the last quarter were going in the wrong direction and hopefully will improve in the subsequent quarters.
Last Friday's Close: CZNC: $19.32 -0.03 (-0.16%)
4. Added 50 GDO at $17.58-Roth IRA (see Disclaimer): I have repeatedly bought and sold this bond CEF.
Snapshot of Trade:
Recent History Roth IRA Snapshot:
I successfully exited my position last February by selling 120 shares at $20.73, noted in the preceding snapshot, and realized a gain of $340.33 (snapshot at item # 4 Sold 120 GDO at $20.73) I then had a less than optimal re-entry with two subsequent purchases: Bought Back GDO at $19.95-Roth IRA (4/1/13 purchase); Bought ROTH IRA 50 GDO at $18.7 (6/7/13 purchase noted above). The downdraft in both market price and net asset value was swift.
Security Description: The Western Asset Global Corp Defined Opportunity Fund is a closed end bond fund that uses a modest amount of leverage, last reported at less than 15%.
The fund uses a small amount of leverage.
Unlike most bond funds, GDO has a term date.
The fund will liquidate on or about 12/2/2024.
This gives the fund one of the characteristics of owning an individual bond, the promise to pay the investor at a time certain. Unlike the individual bond, however, this fund does not promise to pay a specific sum at a future date. The investor is GDO will receive their pro-rata share of the liquidation proceeds, which may be more or less than the current net asset value per share.
GDO page at CEFConnect.
GDO page at the CEFA
GDO page at Morningstar (rated 4 stars with no analyst report)
None of the 2012 dividends paid by GDO were classified as a return of capital: leggmason.com/PDF
Data as of 6/25/13-Day Before Purchase (Tuesday)
Closing Net Asset Value Per Share: $19.63
Closing Market Price: $17.63
Discount: -10.19%
Data Day of Purchase 6/26/13
Closing Net Asset Value Per Share= $19.76
Closing Market Price= $17.7
Discount= -10.43
GDO closed last Friday at a -8.6% discount to net asset value per share, based on a NAV of $19.89 and a closing market price of $18.18.
The recent discount to net asset value per share represents a significant increase to the 1, 3 and 5 year averages as of 6/25/13:
1 Year=3.96%
3 Year=2.73%
5 Year=4.54%
That information can be found under the "pricing history" tab at CEF Connect.
Without making an adjustment for the 2 monthly dividends, which would lower the following loss calculations slightly on a total return basis, this fund has suffered the following declines since May 1:
5/1/13 to 6/25/13
Market Price Decline: -11.25% ($21.06 to $17.63)
Net Asset Value Per Share Decline: -6.8% ($21.07 to $19.63)
Prior Trades: The following is a list of most of my trades in addition to the ones mentioned above: Bought 100 of the CEF GDO at $18.6 March 2010; Bought 70 of the CEF GDO in Regular IRA at $18.61 March 2010; Bought 200 of the CEF GDO at 18.63 and 18.53 (100 in Roth and 100 Taxable Account respectively) March 2010; Bought 100 GDO at $18.57 April 2010; Bought Back 50 shares of GDO at 17.8 in the Roth IRA previously sold at $19.24 December 2010; Sold 100 GDO at $18.72 January 2012; Sold 200 GDO at $19.18 June 2012; Sold Remaining GDO in Taxable Account at $19.69 July 2012; Bought 100 Shares of GDO at $18.9 November 2012; Sold 100 GDO at $20.79 December 2012; Pared Trade Roth IRA: Sold 120 GDO at $20.73-Bought 100 GSPRD at $21.38
Rational: I am just going to copy a previous discussion on both the rationale and risks. Obviously, recent events highlight the risks, but the rapid decline also makes this bond more attractive for current income too.
This fund does have several advantages.
I was able to buy it at a discount to net asset value. Many CEF bond funds sell at a premium to net asset value. If I held the fund until the liquidation date in 2024, purchasing GDO at a discount may enhance the profit or lessen the loss.
I also juice my dividend yield by buying the fund at a discount compared to a bond mutual fund selling at net asset value.
Yield is currently being juiced by the the spread between short term borrowing costs and the yield on bonds purchased with those borrowed funds.
The dividend yield is about 7.85% at a total cost of $17.58, which is tax free in the Roth IRA. Money will double in about 9.17 years at 7.85%. Estimate Compound Interest
The portfolio is well diversified which lessens credit risk compared to owning a few individual bonds.
The duration is relatively short which will mitigate interest rate risk.
While the fund has significant junk bond exposure, the fund is weighted in BBB rated or higher bonds.
Risks: I believe that readers of this blog are fully familiar with bond risks. The two major risks involve a rise in interest rates and credit risk. Since this fund invests in foreign bonds, currency risk, primarily involving the Euro, is an important risk.
Some of this material may be useful to anyone who is not familiar with the interest rate risk issue:
Rising Interest Rates and Your Bond Portfolio-Charles Schwab
Smart Bond Investing—Bond Funds: Comparing Bonds and Bond Funds - FINRA
Rising Rates and Your Investments: Securities Industry and Financial Markets Association (SIFMA)
Fidelity Learning Center: Risks of fixed income
Fidelity Learning Center: Bond vs. Bond funds
As I have mentioned several times previously, I would anticipate that the dividend rate will gradually decline and that decline will likely accelerate as the fund nears its 2024 liquidation date, as the managers shorten the duration.
Last Friday's Close: GDO: $18.18 +0.15 (+0.83%)
5. Bought 100 WTBA at $11.67 (REGIONAL BANK BASKET STRATEGY)(see Disclaimer):
Snapshot of Trade:
Security Description: West Bancorp (WTBA) is the holding company for the West Bank that provides banking services in Iowa. West Bank currently has 8 branches in the Des Moines metropolitan area, two in Iowa City and one in Coralville. The bank received approval to operated a loan production office in Rochester, Minnesota as a branch effective 7/1/13: WTBA 2013.06.19 Form 8K
West Bancorporation recently repurchased 1,440,592 shares at $10.95 from the insurance company American Equity Life Holding Company. The total consideration of $15.774+M will be financed using borrowed funds.
During the Near Depression, WTBA did cut its dividend from an annual rate of $.64 in 2007 and 2008 to $.09 in 2009 and then to $.05 in 2010. The annual dividend rate was thereafter raised to $.17 in 2011 and then to $.36 in 2012. (page 26, 2012 WTBA-2012.12.31-10-K) The bank suffered a $.97 per share loss in 2009 and bounced back in 2010 with a profit of $.64 in 2010. The E.P.S. numbers rose again in 2011 to $.74 and to $.92 in 2012. The decline started in 2008 with an E.P.S. of $.44 which was down from the $1.05 E.PS. in 2007. (page 16 WTBA-2011.12.31-10K)
Only two analysts provide earnings estimates. Their consensus forecast is for an E.P.S. of $.94 in 2013 and $.94 in 2013. WTBA Analyst Estimates For the shares to gain much traction from the current level. the bank will need to beat that 2014 forecast by at least six cents. Otherwise, the shares are probably close to being dead money for now, except for the dividend.
While WTBA did participate in TARP out of an "abundance of caution", the bank repurchased the government's preferred stock in June 2011 without borrowing money or issuing new stock. WTBA 2011.06.29
Closing Price on Day of Purchase-6/26/13: WTBA: 11.65 -0.27 (-2.27%)
Maximum YF Chart: WTBA Interactive Chart
As with a large number of small regional banks, the stock priced topped out in 2006 rather than 2007, which was in retrospect an early warning of things to come. WTBA's high price was in April 2006 at $19.88. The bottom was hit in the Fall of 2009 at around $4.4 and the stock has been moving steadily up in fits and starts since that bottom, moving in what I would call a 45 degree positive angle.
Prior Trades: None
Recent Earnings Report:
WTBA-SEC Filed Press Release
WTBA-2013.03.31-10Q
1st Quarter 2013 vs. 1st Quarter 2012
Net Income: $3.948M/ $3.977
E.P.S.= $.23 / $.23
Net Interest Margin: 3.36% / 3.5%
Efficiency Ratio: 53.87% / 51.82%
NPL Ratio: .76% / 1.26%
NPA Ratio: 1.17% / 1.65%
Coverage Ratio: 219.77% / 214.02% (p. 35 10-Q)
Charge Offs: .02%/ .06% (page 35 10-Q)
Return on Average Assets: 1.12% / 1.23%
Return on Average Equity: 11.84%/ 12.82%
Tangible Common Equity Ratio: 9.5% / 9.56%
Texas Ratio: 11.03% / 15.28%
NPL and NPA ratios for March 2012 quarter taken from 2012 first quarter 10-Q at page 36 WTBA-2012.03.31-10Q.
The capital ratios are good:
Page 61: WTBA-2013.03.31-10Q
Rationale: This small regional banks stubbed its toe during the Near Depression but is well capitalized with an excellent Texas Ratio. The recent stock repurchase adds some risk since it is being funded with additional borrowings but will significantly reduce the share count. As of 3/31/13, there were 17,403,882 shares outstanding.
The small position in this bank also gives me some geographic diversification in my regional bank basket. WTBA is my first Iowa based bank.
I did note that the Board "accepted the resignation" of its Chairman and CEO in July 2009. SEC Filed Press Release Part of the 2009 loss was due to a $23M goodwill impairment associated with prior acquisitions. 2009 2nd Q Earnings Press Release (bank also took a $15M charge for loan losses in the 2nd Q of 2009).
Last Friday's Close: WTBA: $11.75 -0.22 (-1.84%)
6. Sold 111+ HCBK at $8.74 (REGIONAL BANK BASKET STRATEGY)(see Disclaimer)
Snapshot of Loss:
I decided to go ahead and harvest my loss in Hudson City Bancorp that is in the process of being acquired by M&T Bank(MTB) in a stock and cash deal. HCBK was one of my mistakes in the regional bank basket. Over 11 shares were acquired through reinvestment of dividends. I have been taking the recent dividends in cash. Please note the identity of the trader who bought 50 of the 100 shares: Bought 50 HCBK at $13.27; RB Adds 50 HCBK at $12.15
This loss reduces my realized gain for this basket to $11,873.37 but also increases my unrealized gain. The unrealized gain is now over $5,300 excluding any gains or losses from shares purchased with dividends which I am not tracking in my YF table.
The regional bank basket was easily my best performing sector play during June.
The two largest unrealized losses are in VLY and FNFG, both hovering in the $700 to $800 range depending on the day. The unrealized loss in FNFG has been going down since that bank sacked the CEO.
Rationale: I am simply attempting to earn some income generated by a high quality bond portfolio. A lot of the losses due to normalization have already occurred in the long term bonds. While more can be reasonably anticipated, the amount is likely to be less than in the intermediate term bonds that are further away from normalized rates. I was also able to buy NBD at greater than a 10% discount to its net asset value per share which provides some insulation against further deterioration in NAV but not to an increase in the discount due to market fluctuations.
Still, I have sufficiently impressed by the downdraft in both market prices and net asset values to slice an order now into small parts that will at least allow me psychologically to buy another odd lot at a lower price without being concerned about the pre-existing unrealized loss, which would be insignificant given the purchased share amount.
Risks: Anyone unaware of the risks associated with leveraged bond CEFs has had a rude awakening over the past several weeks. Net asset values per share have plummeted due to the rise in intermediate and long term interest rates, and that rapid descent is of course exacerbated by borrowing money to buy more of a declining asset.
BABs are also long term bonds and the long maturities are particularly subject to interest rate risk. So far, however, the rise in rates has pretty much hit all intermediate and long term maturities roughly the same, an expected result when the rise is not due to inflation expectations increasing but due solely to interest rate normalization.
Another possible risk or benefit is the 2020 liquidation date. If the bonds owned by the fund are higher than now as that liquidation data comes around, then that would provide a possible capital gains opportunity for a long term shareholder, defined as someone other than the OG. The risk is that the bonds would be declining in price.
However, if the inflation forecast embodied in the seven year TIP proves prescient, currently at 1.9%, then it is hard to see much damage if any coming from rising rates due to inflation. The price damage would then be the anticipated damage from interest rate normalization.
Another potential risk arises from the sequester. Some of the BABs have provisions that allow the issuer to redeem the bonds in the event the federal government cuts its subsidy which has happened due tot he sequester. MSRB MSRB Reminds Investors, Market Professionals to Assess Terms of Build America Bonds and other Direct-Pay Bonds in Light of Federal Sequester I would not say that there is yet an avalanche of redemptions but several issuers are apparently contemplating redemption. More Issuers Contemplate BAB Redemptions The federal government is still paying most of its subsidy; and long term interest rates have already gone up.
This last risk is sufficient, however, to keep my exposure to BAB bond funds low. The average price of the bonds owned by NBB was 134.18 as of 4/30/13, less now, so any redemption at par will likely cause a decline in net asset value. I discuss this risk in a September 2012 post: Introduction Stocks, Bonds & Politics.
Last Friday's Close: NBB: $19.36 -0.06 (-0.31%)
3. Bought 50 CZNC at $19.15 (REGIONAL BANK BASKET STRATEGY)(see Disclaimer):
Snapshot of Trade:
 |
| 2013 Bought 50 CZNC at $19.15 |
Security Description: Citizens & Northern is headquartered in Wellsboro, Pennsylvania and is the holding company for the Citizens and Northern Bank which has 25 branch offices in seven PA counties and one in NY.
The annual rate for the dividend in 2008 was $.96 per share which was reduced to $.72 in 2009 and then to $.39 during 2010. The bank thereafter started to raise the dividend, paying $.58 per share in 2011 and $.84 in 2012. This kind of dividend history is, of course, view unfavorably, but at least the bank has almost returned to the 2008 level. This small bank does not maintain a dividend history database at its website. I acquired those numbers from page 11 of the last filed Annual Report. 10-k
The last quarterly dividend payment was $.25 per share. SEC Filed Press Release At that rate the dividend yield at a total cost of $19.15 is about 5.22%, one reason for buying some shares. The general idea is for dividends to account for approximately 40% of my total return over the life of this basket strategy which started in mid-2009.
When evaluating these small regional banks, it is also important to see how the bank performed during the recent Near Depression period, and most of that data can also be gleamed from page 11 of the aforementioned 2012 Annual Report. The bank experienced a bad 2009 losing $4.4 per share, but did bounce back with an E.P.S. of $1.45 in 2010 and $1.92 to in 2011. The 2009 loss was not due to core operations, but a after tax charge on a non-temporary impairment on available-for-sale securities of $55.859M which on cursory examination was due to owned pool trust preferred securities: 2010 Annual Report at page 14
The bank owns each of its branch facilities except for two that are leased. (page 7) I view that positively.
Prior Trade: Sold 100 CZNC at $16.53 September 2011; Bought 50 CZNC at $11.77; Added 50 CZNC at $10.46
 |
| 2011 100 CZNC Shares +$517.61 |
Last Earnings Report: I may regret buying this one back after realizing a good profit on just 100 shares. The last earnings report had some items going the wrong way. Hopefully, the rise in intermediate and long term rates will have a beneficial impact on net interest margins later this year, as the cost of funds from depositors continues to hug zero.
SEC Filed News Release
DATA Exhibit 1
Data Exhibit 2
1st Quartervs. 2012 First Quarter:
Net Income: $4.706M / $5.587M (wrong way)
E.P.S.=$.38 / $.46 (wrong way)
Net Interest Margin= 4.18% / 4.41% (still good but big decline)
NPL Ratio: 1.42%/ 1.18% (wrong way)
NPA Ratio: .83%/ .7% (still good though rising a bit)
Coverage Ratio: 75.79%/ 89.74% (prefer over 100% for new position)
Return on Average Equity: 10.31% / 13.15%
Return on Average Assets: 1.5% / 1.72% (1.5% is still a good number)
Tangible Book Value Per Share= $13.88/ $13.06
Some of the compression in net interest margin was due to a lower average loan balance and a decline in deposits, both viewed negatively by me.
SEC Form 10-Q Q/E 3/31/13
The efficiency ratio is shown at 48.77% for 2012, which is good. (page 12-10k)
The capital ratio are excellent:
Only one analyst provides earnings estimates. For 2013, that analyst forecasts an E.P.S. of $1.62 and $1.58 for 2014. CZNC Analyst Estimate Hopefully, the bank will beat the 2014 forecast and generate at least single digit E.P.S. growth Y-O-Y.
Rationale: Since regional banks have been performing well lately, even on significant down days for the market, I decided to take my exposure up a tad by adding back a small position in one previously sold at a good percentage profit. CZNC also has an above average dividend yield.
Risks: The main risk is probably E.P.S. stagnation or worse, a continued decline in E.P.S. numbers Y-O-F. That kind of action has already left CZNC in the dust as other regional bank stocks have rallied over the past several days. There are the usual risks associated with banks, including boneheaded loan decisions, contraction in net interest margin due to a variety of factors including but not limited to the QE, a lower deposit base (banks pay depositors almost nothing now, so a lower deposit number is not good for net interest margins), and/or lower loan generation. Recessions are also bad news for banks, as loan losses accelerate.
A more benign environment would be increasing deposits, which costs the bank almost nothing given ZIRP, coupled with increased new loan generation at higher yields. CZNC's loan and deposit number for the last quarter were going in the wrong direction and hopefully will improve in the subsequent quarters.
Last Friday's Close: CZNC: $19.32 -0.03 (-0.16%)
4. Added 50 GDO at $17.58-Roth IRA (see Disclaimer): I have repeatedly bought and sold this bond CEF.
Snapshot of Trade:
 |
| 2013 Roth IRA Bought 50 GDO at $17.58 |
Recent History Roth IRA Snapshot:
I successfully exited my position last February by selling 120 shares at $20.73, noted in the preceding snapshot, and realized a gain of $340.33 (snapshot at item # 4 Sold 120 GDO at $20.73) I then had a less than optimal re-entry with two subsequent purchases: Bought Back GDO at $19.95-Roth IRA (4/1/13 purchase); Bought ROTH IRA 50 GDO at $18.7 (6/7/13 purchase noted above). The downdraft in both market price and net asset value was swift.
Security Description: The Western Asset Global Corp Defined Opportunity Fund is a closed end bond fund that uses a modest amount of leverage, last reported at less than 15%.
The fund uses a small amount of leverage.
Unlike most bond funds, GDO has a term date.
The fund will liquidate on or about 12/2/2024.
This gives the fund one of the characteristics of owning an individual bond, the promise to pay the investor at a time certain. Unlike the individual bond, however, this fund does not promise to pay a specific sum at a future date. The investor is GDO will receive their pro-rata share of the liquidation proceeds, which may be more or less than the current net asset value per share.
GDO page at CEFConnect.
GDO page at the CEFA
GDO page at Morningstar (rated 4 stars with no analyst report)
None of the 2012 dividends paid by GDO were classified as a return of capital: leggmason.com/PDF
Links to the sponsor's web page will not work when provided here in this blog. The relevant page can be found by following the sponsor's link at CEFConnect.
CEFConnect Page on Distribution History: As previously noted, the monthly dividend was recently cut to $.115 per share from .12. This fund appears to be making an effort to avoid return of capital distributions, and I am fine with that approach.
Data as of 6/25/13-Day Before Purchase (Tuesday)
Closing Net Asset Value Per Share: $19.63
Closing Market Price: $17.63
Discount: -10.19%
Data Day of Purchase 6/26/13
Closing Net Asset Value Per Share= $19.76
Closing Market Price= $17.7
Discount= -10.43
GDO closed last Friday at a -8.6% discount to net asset value per share, based on a NAV of $19.89 and a closing market price of $18.18.
The recent discount to net asset value per share represents a significant increase to the 1, 3 and 5 year averages as of 6/25/13:
1 Year=3.96%
3 Year=2.73%
5 Year=4.54%
That information can be found under the "pricing history" tab at CEF Connect.
Without making an adjustment for the 2 monthly dividends, which would lower the following loss calculations slightly on a total return basis, this fund has suffered the following declines since May 1:
5/1/13 to 6/25/13
Market Price Decline: -11.25% ($21.06 to $17.63)
Net Asset Value Per Share Decline: -6.8% ($21.07 to $19.63)
Prior Trades: The following is a list of most of my trades in addition to the ones mentioned above: Bought 100 of the CEF GDO at $18.6 March 2010; Bought 70 of the CEF GDO in Regular IRA at $18.61 March 2010; Bought 200 of the CEF GDO at 18.63 and 18.53 (100 in Roth and 100 Taxable Account respectively) March 2010; Bought 100 GDO at $18.57 April 2010; Bought Back 50 shares of GDO at 17.8 in the Roth IRA previously sold at $19.24 December 2010; Sold 100 GDO at $18.72 January 2012; Sold 200 GDO at $19.18 June 2012; Sold Remaining GDO in Taxable Account at $19.69 July 2012; Bought 100 Shares of GDO at $18.9 November 2012; Sold 100 GDO at $20.79 December 2012; Pared Trade Roth IRA: Sold 120 GDO at $20.73-Bought 100 GSPRD at $21.38
Rational: I am just going to copy a previous discussion on both the rationale and risks. Obviously, recent events highlight the risks, but the rapid decline also makes this bond more attractive for current income too.
This fund does have several advantages.
I was able to buy it at a discount to net asset value. Many CEF bond funds sell at a premium to net asset value. If I held the fund until the liquidation date in 2024, purchasing GDO at a discount may enhance the profit or lessen the loss.
I also juice my dividend yield by buying the fund at a discount compared to a bond mutual fund selling at net asset value.
Yield is currently being juiced by the the spread between short term borrowing costs and the yield on bonds purchased with those borrowed funds.
The dividend yield is about 7.85% at a total cost of $17.58, which is tax free in the Roth IRA. Money will double in about 9.17 years at 7.85%. Estimate Compound Interest
The portfolio is well diversified which lessens credit risk compared to owning a few individual bonds.
The duration is relatively short which will mitigate interest rate risk.
While the fund has significant junk bond exposure, the fund is weighted in BBB rated or higher bonds.
Risks: I believe that readers of this blog are fully familiar with bond risks. The two major risks involve a rise in interest rates and credit risk. Since this fund invests in foreign bonds, currency risk, primarily involving the Euro, is an important risk.
Some of this material may be useful to anyone who is not familiar with the interest rate risk issue:
Rising Interest Rates and Your Bond Portfolio-Charles Schwab
Smart Bond Investing—Bond Funds: Comparing Bonds and Bond Funds - FINRA
Rising Rates and Your Investments: Securities Industry and Financial Markets Association (SIFMA)
Fidelity Learning Center: Risks of fixed income
Fidelity Learning Center: Bond vs. Bond funds
As I have mentioned several times previously, I would anticipate that the dividend rate will gradually decline and that decline will likely accelerate as the fund nears its 2024 liquidation date, as the managers shorten the duration.
Last Friday's Close: GDO: $18.18 +0.15 (+0.83%)
5. Bought 100 WTBA at $11.67 (REGIONAL BANK BASKET STRATEGY)(see Disclaimer):
Snapshot of Trade:
Security Description: West Bancorp (WTBA) is the holding company for the West Bank that provides banking services in Iowa. West Bank currently has 8 branches in the Des Moines metropolitan area, two in Iowa City and one in Coralville. The bank received approval to operated a loan production office in Rochester, Minnesota as a branch effective 7/1/13: WTBA 2013.06.19 Form 8K
West Bancorporation recently repurchased 1,440,592 shares at $10.95 from the insurance company American Equity Life Holding Company. The total consideration of $15.774+M will be financed using borrowed funds.
During the Near Depression, WTBA did cut its dividend from an annual rate of $.64 in 2007 and 2008 to $.09 in 2009 and then to $.05 in 2010. The annual dividend rate was thereafter raised to $.17 in 2011 and then to $.36 in 2012. (page 26, 2012 WTBA-2012.12.31-10-K) The bank suffered a $.97 per share loss in 2009 and bounced back in 2010 with a profit of $.64 in 2010. The E.P.S. numbers rose again in 2011 to $.74 and to $.92 in 2012. The decline started in 2008 with an E.P.S. of $.44 which was down from the $1.05 E.PS. in 2007. (page 16 WTBA-2011.12.31-10K)
Only two analysts provide earnings estimates. Their consensus forecast is for an E.P.S. of $.94 in 2013 and $.94 in 2013. WTBA Analyst Estimates For the shares to gain much traction from the current level. the bank will need to beat that 2014 forecast by at least six cents. Otherwise, the shares are probably close to being dead money for now, except for the dividend.
While WTBA did participate in TARP out of an "abundance of caution", the bank repurchased the government's preferred stock in June 2011 without borrowing money or issuing new stock. WTBA 2011.06.29
Closing Price on Day of Purchase-6/26/13: WTBA: 11.65 -0.27 (-2.27%)
Maximum YF Chart: WTBA Interactive Chart
As with a large number of small regional banks, the stock priced topped out in 2006 rather than 2007, which was in retrospect an early warning of things to come. WTBA's high price was in April 2006 at $19.88. The bottom was hit in the Fall of 2009 at around $4.4 and the stock has been moving steadily up in fits and starts since that bottom, moving in what I would call a 45 degree positive angle.
Prior Trades: None
Recent Earnings Report:
WTBA-SEC Filed Press Release
WTBA-2013.03.31-10Q
1st Quarter 2013 vs. 1st Quarter 2012
Net Income: $3.948M/ $3.977
E.P.S.= $.23 / $.23
Net Interest Margin: 3.36% / 3.5%
Efficiency Ratio: 53.87% / 51.82%
NPL Ratio: .76% / 1.26%
NPA Ratio: 1.17% / 1.65%
Coverage Ratio: 219.77% / 214.02% (p. 35 10-Q)
Charge Offs: .02%/ .06% (page 35 10-Q)
Return on Average Assets: 1.12% / 1.23%
Return on Average Equity: 11.84%/ 12.82%
Tangible Common Equity Ratio: 9.5% / 9.56%
Texas Ratio: 11.03% / 15.28%
NPL and NPA ratios for March 2012 quarter taken from 2012 first quarter 10-Q at page 36 WTBA-2012.03.31-10Q.
The capital ratios are good:
Page 61: WTBA-2013.03.31-10Q
Rationale: This small regional banks stubbed its toe during the Near Depression but is well capitalized with an excellent Texas Ratio. The recent stock repurchase adds some risk since it is being funded with additional borrowings but will significantly reduce the share count. As of 3/31/13, there were 17,403,882 shares outstanding.
The small position in this bank also gives me some geographic diversification in my regional bank basket. WTBA is my first Iowa based bank.
I did note that the Board "accepted the resignation" of its Chairman and CEO in July 2009. SEC Filed Press Release Part of the 2009 loss was due to a $23M goodwill impairment associated with prior acquisitions. 2009 2nd Q Earnings Press Release (bank also took a $15M charge for loan losses in the 2nd Q of 2009).
Last Friday's Close: WTBA: $11.75 -0.22 (-1.84%)
6. Sold 111+ HCBK at $8.74 (REGIONAL BANK BASKET STRATEGY)(see Disclaimer)
Snapshot of Loss:
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| 2013 Sold 111+ HCBK -$422.55 |
I decided to go ahead and harvest my loss in Hudson City Bancorp that is in the process of being acquired by M&T Bank(MTB) in a stock and cash deal. HCBK was one of my mistakes in the regional bank basket. Over 11 shares were acquired through reinvestment of dividends. I have been taking the recent dividends in cash. Please note the identity of the trader who bought 50 of the 100 shares: Bought 50 HCBK at $13.27; RB Adds 50 HCBK at $12.15
This loss reduces my realized gain for this basket to $11,873.37 but also increases my unrealized gain. The unrealized gain is now over $5,300 excluding any gains or losses from shares purchased with dividends which I am not tracking in my YF table.
The regional bank basket was easily my best performing sector play during June.
The two largest unrealized losses are in VLY and FNFG, both hovering in the $700 to $800 range depending on the day. The unrealized loss in FNFG has been going down since that bank sacked the CEO.
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