Saturday, July 27, 2013

Initiated Position in BIAUX/Sold: 140 KEY at $11.8025 & 50 ANCX at $14.9-Regional Bank Basket/Sold 100 MTOR at $7.65/Added 50 NPI at $12.45/Roth IRA: Bought 50 ELB at $25.06 and Sold 50 TDIV at $22.26/PEO, ADX, BHB

Big Picture Analysis


Stable Vix Pattern (Bullish)
Short Term: Market Needs a 10+% Correction
Intermediate and Long Term: Bullish


Short Term to Long Term: Slightly Bearish (Based on Interest Rate Normalization)

Stocks, Bonds & Politics: The Difficult Path to Interest Rate Normalization

Bonds had a bad day last Wednesday on the heels of several positive economic reports. The 10 year treasury rose in yield to 2.61% on Wednesday 7/24/13 from 2.53% on 7/23.  The 20 and 30 year yields rose .07%.

Daily Treasury Yield Curve Rates

While that does not sound like much, it caused this kind of decline in TLT: $107.52 -1.38 (-1.27%).

Rates declined somewhat last Friday.

The director of credit research at Pioneer succinctly discusses why he recommends shorting treasuries in this article published by MarketWatch. He also places odds on the bear case (25%), the base case (50%), the stagnant case (20%) and the bull case (5%). That kind of exercise is helpful, even if the investor does not agree with his conclusions, since we are all dealing with possible scenarios when making decisions now.

The break-even for the 10 year TIP closed last Friday at 2.15, the market's estimate of the average inflation rate over the next ten years. If prescient, that rate would be ideal for stocks and will place a lid on a rise in rates caused by interest rate normalization.


The cover story in Barrons last week was titled "Europe's Economy Will Rebound", which is not saying much. Of course, the European economy "will" rebound but the important questions are when and by how much.

I noted in a post another Barrons article titled "Europe on Sale", wherein the author argued that European equities could "rally as much as 20%" in 2013. The phrase "as much" has the same meaning as "up to" which is no meaning at all. I mentioned in that article having a position in the ETF BLDRS Europe Select ADR Index Fund (ADRU), a low cost fund (.3% expense ratio) that owns 100 European market based ADRs. Holdings It is lightly traded so I would use another ETF to increase my European equity exposure now, and would consider buying the low cost Vanguard FTSE Europe ETF (VGK) which has a .12% expense ratio and about 504 stocks.

The performance of European stocks has left a great deal to be be desired over the past five years, with  the Vanguard ETF VGK having a five year annualized return of -.92% through 6/30/13. That would have been a good reason for avoiding a European index fund; and an even a better reason is the index's 3.53% annualized performance since March 2005, at least owning that index over those two time periods. Those performance numbers are not a reason to avoid Europe now, but instead probably justify a contrarian "bet" going forward. The question is "when" to place that bet.

There are still a lot of unfavorable economic numbers coming out of Europe. I review periodically the statistical releases published by Eurostat.  For example, the last release on unemployment shows a jobless rate of 12.2%. in the EA 17: ‎ The second estimate for the first quarter Euro area GDP was down .2% compared to the prior quarter. ‎ PDF

The U.K. reported last Thursday that its GDP grew .6% in the second quarter from the first quarter, the fastest pace of growth since 2011. The U.K. service PMI index hit a 27 month high in June.

I also look at the Markit purchasing manager indexes that are the same kind of data points as the ISM numbers in the U.S., and those numbers have been showing consistent trends of contraction for both manufacturing and services, but the recent number showed some improvement. Markit Economics - Press releases)

Earlier this week, Markit released its "flash" composite Eurozone PMI indexes for July (services and manufacturing). The composite output index rose to 50.4, an 18 month high. The Manufacturing PMI rose to 50.1 from 48.8 in June, a 24 month high, while the manufacturing PMI output index rose to 52.3, a 25 month high. markiteconomics  The flash composite for Germany rose to 52.8 from 50.4 in June, markiteconomics.

A large part of the optimism is based on the EC's prediction that the recession will end later this year and growth will accelerate to +1.4% next year. Hopefully, that prediction will prove prescient, the world really needs Europe to quit being a drag, but there is probably more hope than substance in that forecast.

Europe has way too many structural problems that retard productivity, particularly in countries like France and the Mediterranean countries. An example is France's 35 hour work week and the difficulty of firing unproductive workers.

Just as another example, a recent WSJ article highlighted how difficult it was to collect on an unpaid debt, a problem that is particularly critical to small business owners who make up the vast majority of employers, as in the U.S.

The European system is geared toward protecting those who renege on their financial obligations and consequently encourage irresponsibility and defaults.

If an owner defaults on a car loan, for example, the U.S. lender can seize the automobile without going to court, but their counterparts in Europe have to first go to court where the proceedings can last for years. The U.S. lender can also go to the small claims court and most likely receive a disposition of their claim within a few weeks but the small business owner in Europe may face several years in a crowded and inefficient court system that will end up costing the business more to navigate than the value of the claim. After reading that article, the only sensible solution for most small businesses would be to accept only cash payment or a credit card. Extending credit to a customer to assist them with the purchase would be difficult to justify.


Recent Economic Reports:

NAR reported that existing home sales fell a seasonally adjusted 1.2% in June, with the annualized rate at 5.08M  The rate was 15.2% higher than in June 2012, marking the 24th consecutive month of Y-O-Y increases. The median price home rose 13.5% from June 2012. Inventory levels were at a 5.2 month supply. The median time that a home was on the market was 37 days, down 47% from June 2012.

There were some reports last week that China will not tolerate GDP growth less than 7%. One remark was attributed to Chinese Premier Li Keqiang, the top economic policy maker in China.

FHFA reported that its national home price index rose .7% in May from the previous month. .pdf The index is still 11.2% below its April 2007 level and is roughly where it was in January 2005. That kind of data just highlights what happens when a parabola in price hits a brick wall and comes back to earth.

Zillow reported that home sales in the Spring were the hottest since 2004.

The Markit "flash" manufacturing PMI for the U.S. rose to 53.2 in July from 51..9 in June. markit Markit's PMI index has been higher than the ISM version for 22 out of 24 months. MarketWatch The new orders component rose to 55.1 from 53.4.  Export orders rose to 52.3 from 46.3.

The Commerce Department reported that new home sales rose a higher than expected annual rate of 497,000 in June, the highest level since May 2008. This was up sequentially 8.3% above May 2013 and up 38.1% over the June 2012 number.

The Commerce Department reported that durable goods orders rose to $244.5B or 4.2% in June, stronger than the 2.3 consensus expectation. Excluding transportation, however, orders were flat. Orders for "core" capital goods increased by .7%.  The number for May was revised up to +5.2% from a 3.7% increase.

Bar Harbor Bankshares (BHB)(own):

Bar Harbor Bankshares increased its quarterly dividend by .5 or 1.6% compared with the prior quarter. The dividend is up by 6.9% Y-O-Y. While that is modest, it is at least going in the right direction.

This stock has had a robust move this month: BHB Interactive Chart

Bought 50 BHB at $30

Closing Price Last Friday: BHB: $39.23 -0.67 (-1.68%)

Adams Express Second Quarter Report:

ADX is my largest stock CEF position. CEF Portfolio as of 7/22/13

The approach of this fund suits my temperament as an investor. The tilt is toward value and growth at a reasonable price. The fund is not going to shoot the lights out in robust stock market moves.

I will review each quarterly report and the 2013 second quarter report was just released by the fund. Shareholder reports can be found at the fund's website; adx_q2_2013.pdf, or at the SEC.

Link to ADX Filings at the SEC.

The financial websites will have an incorrect distribution yield for this fund. ADX has a 6% minimum managed distribution policy. The recent quarterly income dividend was only $.05 per share. The fund will make one large capital gains distribution at year end that will provide the bulk of that managed distribution. As noted in that 2nd quarter report, the fund had realized gains for the first six months of $26,817,557 or $.29 per share.  The fund had an unrealized appreciation as of 6/30/13 of $238+M and no loss carryforwards. The annual distributions since 2002 can be found at page 15.

The largest single position is in another stock CEF, Petroleum & Resources (PEO), that I also own. ADX and PEO share office space and employees. The funds are not externally managed by an investment company.

I took a snapshot of the top ten holdings as of 6/30/13:

The expense ratio was .65% for 2012.

ADX Purchases Discussed from 1/1/2009: Item # 4 Bought 100 ADX at $10.14 (November 2012); Item # 1 Added 50 of the Stock CEF ADX at $9.79 (December 2011); Item # 2 Added 50 ADX at $10.95 (June 2011); Item # 1 Bough 200 ADX @ $9.99 (October 2010); Item # 6 Added 50 ADX at $9.7 (July 2010); Item # 5 Added To CEF ADX at $9.98 (November 2009); Item # 2 Bought  ADX at $8.34 (May 2009)

I have quit reinvesting the dividend.

CEFConnect Page for ADX

Closing Price Last Friday: ADX: 12.45 +0.03 (+0.24%)

Discount as of 7/26/13: -14.08

Link to PEO's second quarter report: peo_q2_2013.pdf As noted in that report, PEO also has a minimum 6% managed distribution policy and will likewise source that distribution mostly from capital gains paid at year end. Through 6/30/13, that fund had realized gains of about 50 cents per share.

CEFConnect Page for PEO


I recently bought back my usual 100 share position in Husky, buying the ordinary shares available on the pink sheet exchange in the U.S. Item # 2 Bought 100 HUSKF at $26.42 (7/6/13 Post). The shares have done well so far this month, closing last Friday at $29.42 +0.16.

Husky reported second quarter net income of C$605 million or 59 cents per share from C$431 million or 43 cents per share in the 2012 second quarter. Adjusted earnings were C$.62 per share, beating the consensus estimate of C$.57. Total upstream production rose to 310,000 barrels of oil equivalent per day from 282,000. Cash flow increased 26%. The Liwan Gas Project in the South China Sea remains on schedule for first production late this year or early in 2014. Nine wells at that site are ready for production now. SEC Filed Press ReleaseReuters

Earnings Call Transcript - Seeking Alpha


1. Sold 140 KEY at $11.8025 (REGIONAL BANK BASKET STRATEGY) (See Disclaimer):

Snapshot of Trade:

Snapshot of Profit:

2013 KEY 140 Shares +$429.32 ($347.4 ST; $81.92 LT)
KeyCorp's stock was initially purchased in the Lottery Ticket Basket Strategy and later elevated in October 2012 to the Regional Bank Basket Strategy.

There were several prior roundtrip trade as a LT: Bought 50 KEY at $5.88-Lottery Ticket (September 2009)-Sold50  KEY at $8.12 (July 2010)($98.52 Profit) and the following two 50 shares trades:

2009 KEY +$86.98 (two 50 Share Trades)
During the Near Depression, I bought one of Key's trust preferred securities in the single digits: Bought KEYPRA at $7 (October 2008). That security was called in September 2011 at its $25 par value plus accrued interest. 

Total Realized Gain on KEY Common Shares= $614.82

BMO upgraded KEY to outperform with a $13 price target, arguing that KEY's assets were more rate sensitive than generally believed by investors.

Rationale: I sold this one for three reasons. (1) I was not impressed with Key's earnings report for the 2013 second quarter; (2) this stock has a dividend yield less than 2% at $11.8, the lowest in my regional bank basket; (3) the profit was excellent based on my cost (35.33%; mostly short term however)

SEC Filed Earnings Press Release
During the 2nd quarter, KEY "incurred $37 million, or $.03" per share for its "efficiency initiative".
2013 2nd Quarter/ 2012 2nd Quarter
Net Income: $193M / $217M
E.P.S.= $.21 / $.23
Net Interest Margin: 3.07% / 2.99%
Cash Efficiency Ratio:  69.06% / 69.13%
NPL Ratio: 1.23%/ 1.32%
Coverage Ration: 134.36% / 135.16%
Charge Offs: .34% / .63%
Total Capital to Risk Weighted Assets: 14.75% / 15.83%
Tangible Equity to Assets: 9.96% / 10.44%
Return on Average Assets: .95% / 1.1%
Return on Average Equity: 7.72% / 8.9%
Return on Average Tangible Equity: 8.82%/ 10.46%
Branches: 1,052/ 1,062

Earnings Call Transcript - Seeking Alpha

Friday's Close: KEY: $12.40 +0.04 (+0.32%) 

2. Sold 100 MTOR at $7.65 (see Disclaimer): Meritor provides drivetrains, brakes and braking systems, axles, and undercarriages for commercial vehicle

Snapshot of Trade:

Snapshot of Profit:

2013 MTOR +$32.83

Added 50 MTOR at $6.55; Bought 50 MTOR at $7.62

The earnings estimates for this company are not reliable. In the post discussing a purchase, I noted that the E.P.S. was $1.63 for the F/Y ending in September 2013. The estimate is now $.32. MTOR Analyst Estimates It is really hard to figure out an appropriate price when the earnings are that unpredictable. MTOR is a cyclical company and the stock can be a winner during an up cycle. The current forecast is for an E.P.S. of $.72 for the 2014 F/Y. If MTOR exceeds that estimate by a significant amount, and the market does not see a downturn on the horizon, the stock could clear $10.

The stock has enjoyed a powerful rally since late April 2013, rising from $4.5 on 4/26 to $7.96 on 7/18/13: MTOR Interactive Chart

The last earnings report was another factor motivating the sell. Revenues declined 22%, FCF was a negative $26M and the company had a GAAP loss from continuing operations of $4M compared to $20M in net income for the year ago quarter.

SEC Filed Earnings Press Release for Q/E 3/31/13: MTOR-2013.Q2-8K

Key Developments Page at Reuters

Rationale: This was an unsuccessful trade, even though I managed to break into profit territory. I did better on the ArvinMeritor bonds. I will invest the proceeds into an income generating security.

Last Friday's Close: MTOR: $7.46 -0.27 (-3.49%)

3. Added 50 NPI at $12.45 (see Disclaimer):

Snapshot of Trade:

Security Description: The Nuveen Premium Income Municipal Fund (NPI) is a leverage closed end bond fund that owns tax free municipal bonds. As shown under the "portfolio characteristics" tab at CEFConnect, this fund is weighted in "A" rated or better municipal bonds.  The average duration is shown at 6.21 years at that page.

Last SEC Filed Shareholder Report: npi

CEFConnect Page

Sponsor's Page: NPI - Nuveen Premium Income Municipal Fund, Inc.

Data on Day of Purchase (Monday 7/22/13)
Closing Net Asset Value: $13.93
Closing Market Price: $12.38
Discount: -11.13%

Average Discounts as of 7/22/13:
1 Year: -3.05%
3 Years: -2.5%
5 Years: -3.86%

Prior Trades: I am averaging down from two prior purchases: ITEM # 5 Bought 58 Shares of NPI at $13.4 and 42 shares at $13.17 (June 2013)

Rationale: As previously noted, I am devoting up to $1,000 per week toward the purchases of leveraged bond CEFs which are being hammered in price.

The rationale for this approach is explained in detail in Item # 4 Added 70 BTZ at $12.63.

NPI is currently paying a tax free dividend of $.072 per share. Nuveen Closed-End Funds Declare Monthly Distributions At a total cost of $12.45, the tax free dividend yield is about 6.94% assuming a continuation of that monthly dividend which is in no way assured of course.

I am currently reinvesting the dividend.

Risks: First, the recent carnage in the bond CEF space highlights one of their disadvantages. During times of turmoil, volatility, stress and/or downdrafts in asset values, the market price of CEFs can go down much faster than their net asset values. Second, the existence of leverage, even at a very low cost, will accelerate that decline simply due to the assets purchased with borrowed money adding to the decline that would otherwise exist for that fund without any leverage.

All bond funds face interest rate risks and risks associated with interest rate normalization which is currently a significant risk for them.

Friday's Close: NPI: $12.42 +0.08 (+0.65%)

4. Bought 50 ELB at $25.06-Roth IRA (See Disclaimer):

Snapshot of Trade:

2013 Bought 50 ELB at $25.06-Roth IRA

Security Description: The Entergy Louisiana LLC First Mortgage Bonds 6.00% Series 2040 (ELB) is an exchange traded First Mortgage Bond issued by Entergy Louisiana, a subsidiary of  Entergy Corp.(ETR). (ETR 10-Q for Q/E 3/31/13)

Prospectus for ELB

Interest payments are made quarterly.

The issuer may call this bond on or after 3/15/15 at its par value plus accrued interest.

If not redeemed early, the bond matures on 3/15/2040.

According to Quantumonline, this bond is rated A3 by Moody's and A- by S & P.

The lien does not attach to cash, certain equipment, automobiles and receivables:

Description of Security Interest at pages 5-6 Prospectus

Rationale: The yield is tax free in the Roth IRA and becomes modestly attractive only due to that tax advantage. A 6% yield will double an investment in about 11.9 years. Estimate Compound Interest

This is in part a contrarian play to my own outlook for interest rates. I have to recognize that my future forecasts may be proved wrong. I view it as a low probability scenario that interest rates will remain about the same as now over the next few years, or decline some. I view the higher probability event to be a rise in long term rates caused by interest rate normalization due to the phasing out of QE and its eventual termination next year. Interest rates may accelerate up even faster than currently expected due to an upward revision in inflation expectations.

In effect, the purchase of ELB is a play on being wrong about the future course of rates. This security closed at $26.55 on May 1, 2013, when the 10 year treasury was yielding 1.66%, just before the rapid increase in long term rates commenced in earnest. ELB Historical Prices Last September and October, ELB was trading mostly over $28 per share. ELB Interactive Chart If rates do decline some, this security may find some buyers, affording me a opportunity to exit the position after collecting one or more interest payments at a profit. The last ex interest date was on 6/12/13.

Generally, the optimal result for this kind of security would be to collect two interest payments and to sell the security at over $27.

So, I have modest upside goals. If need be, I would not mind be stuck with this one, as a result of a rise in rates, given its quality and tax free income generation when owned in the ROTH IRA.

Preservation of capital and income generation are the two primary management criteria for my retirement accounts. In the unlikely event that I ever need those funds, the money better be there, rather than in money heaven.

Risks: Interest rate is the most important risk. The bond owner has the risk associated with a rise in rates, while the issuer has the right to call the bond at par value in the event interest rates fall and refinancing is worthwhile. It is a heads the issuer wins, tails the bond owner loses, kind of situation.

Friday's Closing Price: ELB: $25.01 +0.01 (+0.04%)

5. Sold 50 TDIV at $22.26 Roth IRA (see Disclaimer): The First Trust ETF VI NASDAQ Technology Dividend Index Fund is an ETF that focuses on dividend paying technology stocks.

Snapshot of Trade:

2013 Roth IRA Sold 50 TDIV at $22.26
Snapshot of History:

Snapshot of Profit:

2013 Roth IRA 50 TDIV +$101.98
Item # 1 Bought 50 TDIV at $19.94-ROTH IRA (October 2012)

Sponsor's webpage: First Trust NASDAQ Technology Dividend Index Fund (TDIV)


Other Trades: I still own 100 shares bought in a taxable account. Item # 3 Added 50 TDIV at $19.2 (October 2012); Item # 1 Bought 50 TDIV at $19.95 (August 2012)

Rationale: The income generation is low. I basically substituted the higher yielding ELB for TDIV. The overall percentage total return was about 12.42% for the TDIV trade, realized in 9+ months.

As a practitioner of an enhanced version of turtle investing in my retirement accounts, I am not likely to hit any home runs, but I find with a continuous series of singles, walks, hit by pitches and an occasional double.

Through July 22, 2013, I have a total realized gain in the ROTH of $3,848.72 or 13.4% based on the cost basis of those securities sold:

Roth IRA Realized Gains 1/1/13 to 7/22/13/Cost-Proceeds-Short Term Gain-Long Term Gain-Total Gain

Friday's Closing Price: TDIV: $22.39 +0.01 (+0.07%)

6. Sold 50 ANCX at $14.9 (REGIONAL BANK BASKET STRATEGY) (see Disclaimer): I thought that I owned 100 shares of ANCX but could only find 50 shares. Access National is a small regional bank based in Reston, Virginia.

Snapshot of Trade:

Snapshot of Profit:

2013 ANCX 50 Shares +$123.59
Recent Earnings ReportAccess National reported a second quarter E.P.S. of $.34 cents per share or $.31 on a pro forma basis which assumes no contribution from the Denver mortgage loan operation. The E.P.S. was $.38 in the 2012 second quarter or $.27 on the pro forma basis.The consensus estimate was for $.27. I do not know whether that estimate is the GAAP or pro forma number but suspect that it is a pro forma number that excludes the Denver operation.

Rationale: Prior to the earnings release, the consensus E.P.S. estimate was for $1.14 in 2013 and $1.02 in 2014. ANCX Analyst Estimates While that consensus may be too pessimistic, it does highlight an issue relating to valuation at the $15 share price.

The process that led to the closure of the Denver mortgage loan office is of some concern. As noted in a  8-K filing, the decision was made by management and then communicated to the Board, as if the Board had nothing to say on the matter (see first sentence).

The closure of that office had a sufficiently important impact on earnings that someone at the bank felt the need to prepare pro forma statements showing the earnings as if the Denver office did not exist and then compare those results to the much higher reported results.

I left a comment to a Seeking Alpha discussing that issue along with the recent earnings report.

Friday's Closing Price: ANCX: $15.20 -0.46 (-2.94%)

7. Initiated Position in BIAUX at $21.29 (see Disclaimer): The Brown Advisory Small-Cap Fundamental Value Fund (BIAUX) is a mutual fund.

This fund is available at Fidelity on a NTF basis and with a minimum initial investment of $2,500.  Brown Advisory Small-Cap Fundamental Value Fund Investor Shares | Fidelity Investments

Snapshot of Trade:

I would not pay a transaction fee to buy this fund which would be required at several brokerage firms which is required at all but two of the firms offering it. Fund Purchase Information - MSN Money

Sponsor's webpage: Brown Advisory Mutual Funds

Last SEC Filed Shareholder Report (list of holdings as of 12/31/12 starts at page 16)

Snapshot of Top Ten Holdings as of 6/30/13 Taken From Sponsor's Web Site:

BIAUX Brown Advisory Sm-Cp Fundamental Value Inv Fund (Morningstar Page: rated 5 stars)

I decided to add a small cap value fund after I came across this data from Fidelity which compared the result of value and growth indexes between 1980-2010. Fidelity Learning Center Value indexes beat growth indexes and the small cap value index smashed all of the others in performance. That may be a good reason to go light on this category going forward. Over the 31 year period reflected in Fidelity's table, a $10,000 investment in the small cap value index would have grown to $601,860, while large cap growth rose to $187,071.

This purchase is part of a paired trade. I will discuss what I sold in the post. This one is already long enough.  

Friday's Closing Price: BIAUX: $21.37 -0.13 (-0.60%)