I finished writing this Post on Thursday morning, so I decided to go ahead and publish it before Saturday morning. A few readers have inquired how I am responding to the current political dysfunction which is answered in this post.
Big Picture Synopsis
Big Picture Synopsis
Stocks:
Stable Vix Pattern
Short Term: Expecting a 10+% Correction
Intermediate and Long Term: Bullish
After realizing that the GOP was serious in shutting down the government, I reacted by slightly reducing my stock allocation. I discuss some of those sells below and the reasons for my caution in this section.
A history of debt limit showdowns was recently prepared by the Congressional Research Service. www.fas.org.pdf
Many of the shutdowns in the 1970s were related to abortion funding. The 1977 dispute, for example, involved Medicaid's funding for abortions. The House wanted to ban paying for abortions except in cases where the life of the mother was at stake, while the Senate wanted to expand coverage to rapes and incest. The funding dispute shut down only the Labor and HEW departments for 12 days since their funding was tied up in that dispute. WP Liberal Democrats would not have been in favor of any restrictions, so it was necessary to cobble together an agreement among republicans and southern Democrats (mostly republicans now) on the limited number of exceptions.
Part of the government had to shutdown this week after Obama refused to pay, in his words, a "ransom" for a 45 day continuing resolution (CR) to fund the government. Bloomberg; WSJ.com; CNN
Obamacare "is the most insidious law known to man" according to the True Believer Todd Rokita (R-IND- 4th congressional district)
Yes, Obamacare is worse than slavery and the Jim Crow laws, the Spanish Inquisition, Hitler's Nuremberg Laws, and even prima nocta, as Jon Stewart jokingly noted.
A staff writer for Forbes, John Tamny asserted that it is good economics and politics for the GOP to keep the government shut through the November 2014 elections unless the Democrats make significant concessions. If the GOP followed that path, which is conceivable, I suspect that Mr. Tamny would be in for a big surprise in November 2014.
Parks were closed and more than 800,000 government workers were furloughed costing about $1B per week in lost pay.
The IRS ceased processing tax returns. Fox Nation I have not yet received my refund for an overpayment in the 2012 tax year. The website "Where's My Refund? is one of the websites where individuals are venting their frustration about the delay. Sequestration and other problems have impacted the processing of refunds this year.
Shutdown To Cause Furloughs at Private Companies: Bankrate.com; Reuters (start of the ripple effect as private companies have to lay off workers when the government cuts off funding)
Shutdown Pinches Low Income Aid Programs: WSJ.com
Shutdown and Food Inspections: POLITICO.com
Other issues: WP
Not to worry, the politicians will still get their paychecks. CNN.com
And the IRS will find the staff necessary to process tax payments, while keeping the money indefinitely that it owes taxpayers, just about what one would expect from an emerging third world country.
The Daily News had a cover page that elicited a chuckle. John Boehner is sitting in a chair, like Kevin Spacey in the the promo for Netflix's House of Cards, with the headline "House of Turds".
Mark Zandi estimates that a shutdown of three to four weeks will clip as much as 1.4% from 4th quarter GDP. Bloomberg
The recovery is not exactly on firm footing now, and this kind of event could have serious longer term repercussions lasting longer than one quarter.
It would be a false analogy to use the impact from the GOP inspired shutdowns during Clinton's first term, United States federal government shutdown of 1995–96, when the economy was on firmer footing than now:
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| Real GDP Growth 1992-1996 |
Historical GDP Data St. Louis Fed
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| Unemployment Rate Graph |
The unemployment rate average for 1995 was 5.6%.
An objective and informed person (the gold standard for investors), looking at the jobs, GDP and other material economic data from 1995, could not reasonably conclude that there is nothing to worry about now from a prolonged shutdown, simply because the economy recovered from the brief shutdowns during that earlier period.
There is simply no legitimate comparison between then and now regarding the potential impact from an extensive government shutdown.
Facts will never have any influence on the opinions of an ideologue. And, even if they possess some accurate information, always an issue for them, their ideology will warp the conclusion to be drawn from that information.
Investors have to squash their biases, particularly their political ones, when acquiring and assessing reliable data.
I would not assume that the current standoff will end soon with a clean CR before inflicting serious damage on the economy. And, even if there was a clean CR, the only current hope to resolve the shutdown, the bigger issue is the debt limit increase. Report on Macroeconomic Effect of Debt Ceiling Brinkmanship (U.S. Treasury-Link to Report)
The strong aroma of anarchism given off by virtually all GOP House members is an ingrained personality trait involving a deep aversion to government and is inextricably linked to their hard line ideology. My representative is just one of many whose opinions are supported by her reality creations unperturbed by accurate information.
The foregoing observations are relevant to my asset allocations.
I have to take my opinion into account when making my asset allocations rather than someone who disagrees with the foregoing observations.
Investors can not afford to ignore material evidence when forming an opinion. Any opinion formed has to be rationally related to the material facts and has to be subject to change based on the assessment of new information without any interference from the investor's ego.
While the GOP claimed to have captured the South from the Democrats through its Southern Strategy, an abomination, the reality is that the powerful reactionary forces in the South, and their natural allies in the prairie and western states, captured the GOP.
The Souther Strategy, while hugely successful in the South, has alienated voters elsewhere in the country, NYT.
Just count the number of GOP politicians in Congress, using 1964 and now, in New England for example.
For thoughtful republicans who have not yet joined the reactionary crusade and the continuing retrogression to 19th century dogma, the inroads being made by Democrats in Virginia and a few other southern states has to be a matter of concern.
It is just not a viable long term strategy to turn off in varying ways non-whites, women and young people and hope that gerrymandering will protect the WASP middle age white males indefinitely.
Hispanics supported Obama by a margin of 71%, pewhispanic.org/2013/06/03. When combined with the black vote, the total reached 80%. cnn.com (Asians at 73% for Obama)(Women 55% for Obama, rutgers.edu/pdf)(61% of the youth voted for Obama, politico.com). White, middle-aged men, frequently with anger issues, are not growing in numbers compared to those other groups.
Both parties have effectively silenced moderate voices through gerrymandering and the primary system that promotes the election of non-moderates. Consequently, the political system is becoming increasingly polarized and dysfunctional.
The trend is decidedly toward more dysfunction. This is important for an investor to evaluate even though it is strictly political.
Only the moderates and True Conservatives could avoid the inevitable fiscal train wreck in a fair and sensible manner. The only way for them to even have a meaningful voice would be with the formation of a third political party.
Even then, that third party would have to win 60 Senate seats, secure a majority in the House, and elect a President.
My current timeline for the occurrence of that financial Armageddon is between 2030 to 2040, more likely earlier than 2030 than later than 2040.
Back to the current problem, to avoid a prolonged shutdown of the government, which could send the U.S. into a recession, Boehner will have to permit a vote on a clean CR that would permit a handful of GOP House members to vote with the Democrats to fund the government at existing levels, which would include the sequestration for the current fiscal year. 14 House Republicans Back Clean CR; Boehner: Clean CR Is 'Not Going To Happen'; Government shutdown: GOP moderates huddle as conservatives set agenda - CNN.com; Democrats Poised to Accept 'Clean' CR at Sequester Levels; Why John Boehner Won't Hold a Vote to Reopen the Government - Businessweek.
As noted in the second link above, Boehner does not yet appear willing to let the majority rule in the House.
In addition, I would not assume that there will be an increase in the debt limit, a potentially really serious fiasco that is only a few days away. Antideficiency Act Background
I read a number of comments from republican politicians that they will condition their approval on a debt limit increase on the Democrats' agreement to both gut Obamacare and agree to other draconian spending cuts aimed at the poor and middle class.
At least David Stockman, Reagan's OMB Director, is honest about this approach, recognizing that the GOP is responsible and needs to take the debt ceiling increase hostage, arguing that it is for the greater long term good. Daily Ticker His position did spur me to thinking about investment options in the event the GOP seizes the debt limit increase as a hostage and the U.S. somehow manages to continue servicing its debt. I am not certain that the U.S. could avoid a default by successfully prioritizing spending as claimed by Stockman.
Erskine Bowles has a different take than Stockman which sounded more rational to me.
Given the current uncertainty, I continued to take a few chips off the table. One reader said that I was hyperventilating and engaged in a "hysterical tirade" about the shutdown (anonymous statement in comment section of Stocks, Bonds & Politics at 10/1/13 at 7:28 P.M).
I view my slight cash raise as prudent under the circumstances. I will have another discussion of his comments, mostly personal attacks directed at me, at the end of this blog. His limited substantive points are addressed with facts throughout this post.
The market seems to be working on the assumption that all is well. Last Tuesday, the stock market posted gains on the first day of the government shutdown. Several articles suggested that investors were predicting a limited shutdown which seems like the only rational explanation for the rise last Tuesday. Maybe everything will work out in a few days. All is well that ends well as the saying goes.
I have concerns that the market may be underestimating the GOP's resolve as well as the fervor of their constituents as well as the Democrats willingness to resist extortion as the GOP pursues its reactionary agenda hoping to force the majority to accept their demands.
A Democrat can not find common ground when the other side is demanding program eliminations or spending cuts that Democrats could never accept. (e.g. defunding or gutting Obamacare; cutting $40B in food stamp aid; etc) A number of GOP senators told the House GOP members as much.
Even a clean CR would have significant budget cuts for fiscal 2014 due to the ongoing sequestration, the brain dead way to cut spending that was the end result when the GOP last held the debt limit increase hostage. CBO | Sequestration Update Report: August 2013 (the current CBO estimate is $90.527 billion in discretionary spending cuts in F/Y 2014).
When politics and investing intersect, as now, I try to read a lot of articles containing statements made by partisans from both political tribes as well as comments to those articles. I read the comments solely to get a better feel about what GOP voters are telling their representatives.
Ignorance is a form of bliss and canny politicians know how to manipulate the gullible and uninformed with slick and short madison avenue messages.
I thought this video was humorous, and demonstrates an underlying problem as well. Obamacare vs. The Affordable Care Act - YouTube Jimmy Kimmel asked adults whether they supported Obamacare or the Affordable Care Act. They are one and the same of course. The GOP publicity machine has been remarkably successful, as demonstrated by this video and countless other interviews with the average voter which I have viewed over the past several months.
At the end of this post, I will give anyone interested my reasons for opposing Obamacare, the nickname for the Affordable Care Act.
Bonds:
Short to Long Term: Slightly Bearish Based on Interest Rate Normalization: The Difficult Path to Interest Rate Normalization
Bonds seem to be benefitting from the latest Washington dysfunction.
Bonds seem to be benefitting from the latest Washington dysfunction.
The bond forecast is based solely on interest rate normalization and assumes that the anticipated average inflation rate remains in the 2% to 2.25% range over the next ten years, as reflected in the break-even yield for the 10 Year TIP. J.P. Morgan | Tips on TIPS
The break-even yield is a simple calculation. Just subtract the 10 year TIP yield from the yield of the 10 year non-inflation protected treasury.
Daily Treasury Yield Curve Rates (non-inflation protected)
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Recent Economic Reports:
CoreLogic reported that homes prices increased 12.4% Y-O-Y, the 18th consecutive month of gains, and rose .9% in August from July. However, the national average remains 17.1% below the July 2006 peak.
The ISM September manufacturing PMI was reported at 56.2, up from 55.7 in August. The consensus estimate was 55. The latest reading was at the highest level since April 2011. MarketWatch The market bounced up after this report was released at 10 A.M., E.S.T. on 10/1.
ADP estimated that 166,000 private payroll jobs were added in September. The forecast was for 180,000. In addition, ADP revised the August number from 176,000 to 159,000. ADP National Employment Report - September 2013
The ISM September manufacturing PMI was reported at 56.2, up from 55.7 in August. The consensus estimate was 55. The latest reading was at the highest level since April 2011. MarketWatch The market bounced up after this report was released at 10 A.M., E.S.T. on 10/1.
ADP estimated that 166,000 private payroll jobs were added in September. The forecast was for 180,000. In addition, ADP revised the August number from 176,000 to 159,000. ADP National Employment Report - September 2013
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Royal Dutch Dividend: I own RDS/a in two separate accounts. I took snapshots of the two reinvestments to highlight the non-existence of a withholding tax when using the dividend to buy more shares.
There was an article published recently that explored the tax angles associated with the Dutch RDS/a and the U.K. RDS/B shares. Seeking Alpha The shares are equivalent but the U.K. shares are priced higher due to the lack of a U.K. withholding tax whereas the Netherlands will generally withhold 15%. Based on what I read and seen in my own accounts, I do not believe that this article accurately describes the Netherlands's tax approach when the dividend is used to buy more shares. Several commenters pointed this error out.
Royal Dutch claimed that enrollment in the "Scrip Dividend Programme" will offer a tax advantage in several countries since dividends used to buy additional shares are not subject to a withholding tax in "some countries". Royal Dutch Shell plc - Form 6-K
Royal Dutch Dividend: I own RDS/a in two separate accounts. I took snapshots of the two reinvestments to highlight the non-existence of a withholding tax when using the dividend to buy more shares.
There was an article published recently that explored the tax angles associated with the Dutch RDS/a and the U.K. RDS/B shares. Seeking Alpha The shares are equivalent but the U.K. shares are priced higher due to the lack of a U.K. withholding tax whereas the Netherlands will generally withhold 15%. Based on what I read and seen in my own accounts, I do not believe that this article accurately describes the Netherlands's tax approach when the dividend is used to buy more shares. Several commenters pointed this error out.
Royal Dutch claimed that enrollment in the "Scrip Dividend Programme" will offer a tax advantage in several countries since dividends used to buy additional shares are not subject to a withholding tax in "some countries". Royal Dutch Shell plc - Form 6-K
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Edgen Group:
Edgen agreed to be acquired by the Sumitomo Corporation for $12 in cash.
I sold my Lottery Ticket and will discuss that trade when I next update the LT strategy.
I took a snapshot of my 40 share position just before selling it:
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Consumer Stable Stocks:
Consumer staple stocks hit an air pocket last week caused in my opinion by an announcement from Unilever which I own. I recently added a 100 share lot. Bought 100 Unilever at $38.10+ After my purchase, the shares rose to as high as $40.97 before declining materially after that announcement. UN Historical Prices
Unilever stated "that it has seen weakening in the market growth of many emerging countries in quarter three and now expects underlying sales growth of 3% to 3.5%". 6-k
Edgen Group:
Edgen agreed to be acquired by the Sumitomo Corporation for $12 in cash.
I sold my Lottery Ticket and will discuss that trade when I next update the LT strategy.
I took a snapshot of my 40 share position just before selling it:
Consumer Stable Stocks:
Consumer staple stocks hit an air pocket last week caused in my opinion by an announcement from Unilever which I own. I recently added a 100 share lot. Bought 100 Unilever at $38.10+ After my purchase, the shares rose to as high as $40.97 before declining materially after that announcement. UN Historical Prices
Unilever stated "that it has seen weakening in the market growth of many emerging countries in quarter three and now expects underlying sales growth of 3% to 3.5%". 6-k
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1. Sold 100 of the ETF HGI at $17.74 (see Disclaimer): The Guggenheim International Multi-Asset Income ETF is a fund that attempts to track the Zacks International Multi-Asset Index after fees and expenses.
Sponsor's webpage: Guggenheim Investments (155 securities, P/E of 12.9x)
Snapshot of Trade:
Snapshot of Profit:
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| 2013 100 Shares +$41.28 |
Item # 5 Bought 100 of the ETF HGI at $17.18
This ETF recently went ex dividend for its quarterly payment which is a variable rate:
I will receive that $16.6. Altogether, this 100 share lot generated $134.11 in dividends bringing the total return to $175.39.
Prior Trades: I still own 50 shares in the ROTH IRA bought earlier this year:
Item # 3 Bought 50 HGI at $17.53 Roth IRA (March 2013 Post):
I had a prior trade:
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| 2010 Roth IRA 100 HGI +$627.98 |
Rationale: I was not satisfied with this ETF's total return. My total return over the past 20 months was just 10.17%. In short, this fund was just fired for lackluster performance.
I also noted that 39% of the dividends paid in 2012 were classified as non-qualified. This reduces the dividend tax advantage for high marginal rate taxpayers. I owned this 100 share lot in a taxable account.
The fund is also slightly expensive for an ETF. The net expense ratio is shown at .7% with an expense waiver through 12/31/15. The gross expense ratio would otherwise be 1.06%.
Nonetheless, I may buy 50 shares in an IRA in order to gain some international stock exposure. I recently sold 50 shares of GAL, a lower yielding international ETF. The HGI ETF has a relatively decent yield, and the qualified dividend issue is irrelevant in that account. I would wait for at least a 10% correction before buying that lot given the disadvantages of this fund.
Over the past four quarters, the fund has declared $.718 per share in dividends. Distribution History The distributions are variable. Assuming a continued annual payment of $.718 (actual will vary), the dividend yield at a total cost of $17.74 per share would be about 4.19%.
2. Sold 50 CET at $23.58 (see Disclaimer): I was looking for some securities to sell on 9/27 in anticipation of a government shutdown. I will redeploy back into stocks after gauging the market's reaction over the next several days.
Snapshot of Trade:
Snapshot of Profit:
Item # 5 Bought 50 CET at $19.04 (November 2012)
Rationale: I had a decent profit in this ETF. I also had a small and immaterial position. Consequently, I elected to sell my 50 share lot as a means to slightly reduce my stock allocation during the current period of political dysfunction.
Future Buys and Sells: I will monitor this one for a re-entry point at a much lower price when and if I become more comfortable about stocks than I am now.
3. Bought 50 NNNPRE at $19.71-Roth IRA (see Disclaimer):
Snapshot of Trade:
Closing Price on Day of Trade: NNN-PE: 19.88 -0.01 (-0.05%)
Security Description: is an equity preferred stock that pays cumulative dividends at the fixed coupon rate of 5.7% on a $25 par value.
The issuer is the REIT National Retail Properties (NNN) that has 1,838 properties in 47 states. Our Portfolio | NNN REIT The company invests "primarily in high quality retail properties generally to long-term, net leases."
The security may not be redeemed prior to 5/30/18. After that date, National Retail Properties has the option to redeem. It would do so only when it could refinance at a lower rate. While that may be conceivable, based on a Japanese style long term deflation cycle, I view as likely that this issue will be perpetual, like many of the low yielding preferred stocks issued decades ago by electric utilities.
Prospectus Supplement
This security was sold to the public in early June, just in time for the rise in interest rates to cause a steep loss in value for buying at the $25 par value. NNN.PE Stock Chart Good for National Retail Properties, locking up a low 5.7% coupon in a perpetual security, and bad for anyone unfortunate enough to pay par value at the IPO.
At a total cost of $19.71, the yield becomes 7.23%. While that is certainly better than 5.7% at $25, I am still exposed to interest rate risk and further declines in price. I am just less exposed than buyers at the IPO or soon thereafter.
Unlike most REIT preferred stocks, a deferred dividend does not accrue interest on any deferred amount. (page S-15) That is a highly unusual provision for a REIT preferred stock. It would be normal for an equity preferred stock issued by a bank.
There is a stopper clause at page S-15 that would prohibit the payment of cash dividend to common shareholders and a deferral of the preferred dividend.
A REIT has to pay out 90+% of net income to maintain its tax status.
National Retail Properties Profile Page at Reuters
National Retail Properties Key Developments page at Reuters
NNN Analyst Estimates (FFO of $1.89 in 2013; $2.02 in 2014)
NNN Key Statistics Page at YF
Website: NNN REIT | National Retail Properties
Prior Trades: None
Recent Earnings Report: For the second quarter, NNN reported FFO available to common shareholders at $54.265M or $.45 per share up from $.41 in the 2012 second quarter. AFFO was reported at $.47 per share.
The top tenants and lease expiration data is shown at page 11 of the earnings release: 8-K - 2013.06.30
2013.06.30 Form 10-Q
Rationale: (1) Income Generation in the Roth with Possible Capital Appreciation: As noted above, the yield is about 7.23%. If interest rates continue to decline from their recent highs, there is a possibility of some capital appreciation. Based on my assignments of future probabilities and possibilities, the time frame to capture any such appreciation would probably be measured in weeks or months before September 2014.
(2) According to Quantumonline, this security is rated Baa3 by Moody's, which is an investment grade and BB+ by S & P, a high junk rating.
Risks: Interest risk is currently more important than credit risk. The rapid decline in price from the $25 IPO price to $19.71 illustrates that risk.
Future Buys: I would consider adding another 50 shares when and if the yield exceeds 8% and there is no material change in the credit quality. To realize a 8% yield, the price would need to fall to $17.8 per share without taking into consideration commission costs.
I am likely to sell this security when and if I can achieve an annualized return of 8%+. That modest objective could be achieved with a $1.58 rise in the price and no dividends or about a $.16 rise in price after receiving 4 quarterly dividends after adjusting those numbers by approximately $18 to cover roundtrip commission costs for a 50 share lot.
4. Added 50 of the Bond CEF BWG at $16.68 (see Disclaimer):
Snapshot of Trade:
Security Description: The Legg Mason BW Global Income Opportunities Fund (BWG) is a closed end fund that invests in bonds globally.
Closing Net Asset Value Per Share 9/27/13: $19.32
Closing Market Price: $16.71
Discount to NAV: -13.51%
Discount at $16.68= 13.66%
BWG Page at CEFConnect
Sponsor's website: Legg Mason Individual Investor - Closed-End Funds Details (have to navigate by clicking Closed End Fund tab)
As of June 30, 2013, the "effective duration" was 8.57 years.
The fund is currently paying a $.12 per share monthly dividend. Legg Mason BW Global Income Opportunities Fund Inc. (BWG) Announces Distributions for the Months of September, October and November 2013 As noted in that press release, the fund is estimating, subject to revision, that 45.77% of the cumulative distributions during the current F/Y are sourced from income with the remainder from capital gains. That simply tells me that the return of capital issue will likely be present soon.
Credit Quality as of 6/30/13:
Prior Trades: I was premature with my prior purchases. This last add was an average down from a 50 share buy at $20.55 (April 2013). Last April was not a good time to buy a leveraged bond CEF.
Rationale: I am simply averaging down with this last purchase and with reinvestment of my dividends. The fund is generating decent income on a monthly basis with its current $.12 per share monthly dividend. Assuming a continuation of that rate, which is no way assured, the yield would be about 8.63% at a total cost of $16.68. I would consider that yield real only if the fund earns it. Supporting the dividend with the return of my capital is not earning the dividend.
Risks: (1) Currency Risk: As with any foreign bond fund, an important risk involves currency conversions. The following table shows the currency exposures as of 6/30/13 before and after hedging.
(2) Interest Rate and Credit Risk/CEF Risks: The interest rate and CEFs risks are highlighted by the plunge in market price between early May, when the price hit $21.61, and earlier this month when the price tumbled below $16. BWG Interactive Chart
Three risks are causing that decline. Interest rates were moving up, causing a loss in the bonds value, emerging market currencies were declining significantly in value against the USD and the discount to net asset value was expanding which accelerates the decline. Some or all of those factors can reverse, turn on a dime, and work in favor a buyer which has been the case since the Fed decided to continue QE full bore.
Under the "pricing information" tab at CEFConnect, there is a chart that shows the discount information which graphically displays the expansion in the discount starting in May.
The net asset value has been declining during the same period. On 5/1/2013, the net asset value per share was $22.97 and at $19.32 on 9/27/13. During that time period, the fund has paid five $.12 monthly dividends. Adding $.60 back to the $19.32 net asset value, I arrive at $19.92 or a 13.28% decline in net asset value after making the dividend adjustment. The widening of the discount, a risk associated with CEFs in general, just adds to the pain. Now, after my most recent purchase, a narrowing of the discount would add to the gain when coupled with a rising net asset value.
This kind of purchase has four major risks: credit, interest rate, currency and the normal ones associated with all CEFs.
Future Buys and Sells: I may buy another 50 provided the discount is over 13% and the price is under $15.5. I am an involuntary long term holder in the shares previously bought. I am reinvesting the dividends as a means to average down.
5. Sold 100 PBA at $33.1886 (see Disclaimer): This is another sell motivated primarily by the decision to slightly reduce my stock allocation and then redeploy later.
Snapshot of Trade:
Snapshot of Profit:
Item # 3 Bought 100 PBA at $29.21 (February 2013)
Rationale: The primary reason is profit taking. I may use some of CAD stash to buy this security on the Toronto exchange so that the dividend will be paid to me CADs. I would prefer to wait for a pullback below C$30. Pembina Pipeline Corp. Stock Price (PPL:TOR)
6. Sold 200 BIF AT $7.65 (SEE DISCLAIMER): Given the uncertainty created by the higher than normal dysfunction in Washington, I sold this position. The reasons for selecting this security, as opposed to some others, would be the relatively small size, the non-core status of the position, profit taking, and some of the disadvantages discussed below.
Snapshot of Trade:
Snapshot of Profit:
Item # 2 Bought 200 of the Stock CEF 200 BIF at $6.67 (January 2013)
When I discussed buying this fund, I pointed out some positives and negatives. One of the negatives is the high expense ratio which would keep me from taking a serious position. CEFConnect shows the baseline expense at 3.28% for 2012 (1.4% of that number in management fees).
Another negative is the lack of meaningful dividends under current management. (See BIF Dividend Data at Morningstar).
The fund is heavily weighted in Berkshire Hathaway which has been a positive. (33.2% as of 5/31/13: SEC Filed Shareholder Report at page 7).
The fund will generally sell at a persistently high discount to net asset value under current management. If that discount would start to narrow to say 15% from the persistent range of 20% to 23%, then I would view it as a positive. The discount, however, remains persistently high in a fairly high range and consequently I can not characterize it as either positive or negative.
Sponsor's website: Boulder Growth & Income Fund - Fund Objective
7. Sold 700 CLF:CA at C$19.4 (see Disclaimer):
Snapshot of Trade:
Like all investors, the OG has personality quirks that precipitates a transaction. In prior posts, I have discussed Fidelity's inability to find the quote for this ETF. Long ago, I sent them an email with the symbol and a link to the Toronto Stock exchange where quote information was readily available,Stock Market Quotes, as well as links to U.S. financial sites. (e.g. CLF Fund Quote - iShares 1-5 Year Laddered Government Bond Index Fund) How hard could it be? This ETF does have a lot of volume too and has over one billion in assets, CLF Overview - iShares ETFs.
Still, Fidelity had trouble finding the quote, and frequently showed this position as having no value.
Fidelity would lose the value of this security, something generally close to $14,000, for extended periods, and consequently would significantly misstate my account values.
For the entire month of September until 9/30, Fidelity had managed to find the quote after the close each day, and I knew that could not last.
Then, when preparing my monthly statement, the quote was lost again on 9/30, and my account value was shown as almost $14,000 lower than the accurate figure. That is when my personality quirk becomes relevant. I was not pleased with the sheer level of incompetency being displayed by the broker.
The frustration and aggravation caused me to sell the security that otherwise had a place in my portfolio. There was no reason to sell it other than to relieve once and for all that aggravation.
Now, I am back to the problem of having too many CADs earning nothing. I added another Canadian REIT last Wednesday which I will discuss in the next post.
8. Cash Flow 9/30/13-10/1/13-Main Taxable Account: My primary investment strategy is to generate a continuous flow of dividend and interest payments and to use that cash flow to purchase more income generating securities. The income generated by each security is unimportant and immaterial in isolation. The contribution made by each security becomes important and material only when combined with the cash flow produced by all income generating securities. The foregoing snapshots show the cash flow received 9/30 and 10/1 in the main taxable account. The other taxable and IRA accounts would be doing the same except on a smaller scale. I have not contributed funds to my taxable accounts since 1984.
Politics and ETC.:
1. Why I Would Have Voted Against Obamacare:
With the republicans shutting down the government due to their opposition to Obamacare, I decided to discuss why I would have voted against that law.
Although I am opposed to the law, I am even more vehemently opposed to the transparent blackmail and extortion now being perpetuated by the GOP and their irresponsible linkages to a clean continuing resolution.
Both sides are engaging in lying and misleading statements regarding Obamacare.
Politicians from both political tribes lie for two simple reasons.
First, lying works because a majority of Americans are uninformed and can consequently be easily manipulated with false information. It takes effort to become informed and to overcome pre-existing biases and group think. It is far easier to remain ignorant and to form opinions from the talking points of approved group think members.
Politics is all about acquiring and maintaining power and lying is simply one means used to achieve that goal. The republicans see Obamacare as a means to energize their base and to swing independents to their side for the next election.
Second, there is no penalty for lying.
Stocks, Bonds & Politics: The Road to Political Power: Lying Works (SEPTEMBER 2011 POST)
True conservatives would view telling the truth and avoiding intentionally misleading statements as a conservative value. Many who call themselves conservatives today rarely display any affinity for those real conservative values.
While I would have voted against Obamacare, I am not a doctrinaire ideologue that formed my opinions based on GOP propaganda designed to sway the uninformed as well as those easily swayed by false information dispensed by sources deemed trustworthy by them (e.g. Russ Limbaugh, the faux blondes at Fox, Sean Hannity and GOP politicians)
Most Americans who oppose this health insurance law will cite one or more of the 16 falsehoods compiled by PolitiFact, mostly promulgated by GOP politicians like Senator Marco Rubio or their apparatchiks (e.g. Rush Limbaugh).
One of my favorites comes from Betsy McCaughey who claims that "Obamacare will question your sex life". PolitiFact
Chain emails are another method used to spread misinformation.
FactCheck.Org has started to examine the alleged factual statements made by Senator Cruz in his 21 hour talk-a-thon on the Senate's floor. FactChecking ‘Pernicious’ Obamacare Claims When two Democrats joined the republicans in voting to defund Obamacare, Cruz called that vote a "strong bipartisan majority." PolitiFact That caused the OG to chuckle. It would not be possible for anyone to shame that "conservative" senator into telling the truth. PolitiFact | Ted Cruz's file
A recent MSN article highlights some of Obama's statements as a "bit slippery on the cost of coverage, in particular". (see also PolitiFact | 10 things Obamacare supporters say that aren’t entirely true)
The public exchanges is an idea that originated from republicans. Those exchanges provide an easy way for consumers to shop for policies and to compare prices. Yet, the republicans are opposed to those exchanges now because they are part of Obamacare.
The Tennessee republicans passed a law to intimidate persons called navigators, who provide guidance about the alternatives to those who need it. To become a navigator in Tennessee, you must be fingerprinted, and you can not offer advice without being subject to a $1,000 fine per violation. State issues rules for Obamacare 'navigators;' Does anyone want to apply for that job?
Many Republicans have no qualms in punishing unacceptable speech in furtherance of their beliefs. True Conservatives, rather than the pseudo pretend ones that now dominate the GOP, place a lot of value in First Amendment rights that the Framers believed naturally belonged to individuals. The First Amendment is phrased as a restraint on the government rather than a grant of rights. Amendment 1 - The U.S. Constitution Online I have seen several similar examples dealing with religion. (e.g. Muslim | timesfreepress)
There are mostly factual articles, such as this one published by MarketWatch, that provide some fodder for those opposing this law. I would note, however, that the author's bias is revealed by her refusal to mention the higher paying jobs that will be created in the healthcare industry due to Obamacare. A high school graduate could enroll in a local technical college and secure a decree in nursing for about $6,000 and would have no problem finding a job. ttcnashville.edu.pdf While it is still too early to tell, I suspect that the CBO may end up being close with its prediction about job losses and gains.
Omitting known material information inconsistent with a argument is just another form of misrepresentation.
The main reasons for my opposition include the following:
(1) Nothing has been done to alleviate Medicare's unfunded liabilities even though the Democrats have launched yet another expensive program.
The GAO estimates that the funding gap for Medicare will approximate $76.4 trillion over the next 75 years. The Medicare Security Trust Fund will run dry as of 2016. WSJ.com No one is questioning that the U.S. has a really serious funding problem with those long standing safety net programs.
The additional taxes associated with Obamacare are needed to close the funding gap for Medicare rather than used as a partial funding source for Obamacare.
This Forbes article contains a summary of the increased taxes associated with Obamacare.
Over my lifetime, Democrats have displayed a belief that the wealthy are a bottomless pit for them to mine. The Democrats have yet to recognize that the rich can only be tapped so many times before the well starts to run dry and/or the result is counter-productive for revenue generation.
A good faith factual argument could be made now that we are already at the tipping point.
{It is odd that the republicans are trying to repeal the Obamacare taxes on certain medical devices. Even if those taxes are eliminated, and some Democrats support the GOP on that issue, Obamacare would still exist but the budget deficit would increase by the amount of foregone taxes. I thought the GOP was concerned about the budget deficit.}
(2) There is a really serious cost control problem in the America healthcare system. Before launching any new programs, partly funded from government resources, cost containment in Medicare spending needs to be addressed in a bipartisan way. And, that effort must be successful and include a hard nose, take no prisoners clamp down on massive fraud which could easily be costing the government over $50B per year. GAO reports $48B in Medicare fraud in 2010; U.S. GAO
(3) Young Americans will be faced with a terrible burden in the coming decades.
They will be a funding source for the Medicare and SS benefits for my generation.
Yet, the healthy young persons will also be used, starting in 2014, to subsidize insurance premiums for those uninsured persons who are not able to secure affordable insurance due mostly to pre-existing health conditions.
Some low income youngsters would qualify for subsidies, which cost money of course, and their costs could be lower than without Obamacare depending on the amount of a subsidy. YF Daily Ticker
More information on that and other subjects can be found at Healthcare.Gov.
The Kaiser foundation has a subsidy calculator: Subsidy Calculator | The Henry J. Kaiser Family Foundation I played with that calculator for a few minutes. A single person earning 30,000 in my zip code, who is a non-smoker with no children, would not receive any assistance, while the same person earning $20,000 could buy a "bronze" plan for $557 per year after taking into account $746 in subsidies. The amount of the subsidy is based on income not assets. Income -- Not Assets -- Will Determine Subsidies In Online Insurance Marketplaces - Kaiser Health News
The bronze healthcare plan covers only 60% of the health care costs. Bronze, Silver, Gold, and Platinum Plans If that calculator is right, even with the subsidy, that hypothetical young person living in my city with a $20,000 taxable income would be paying $557 per year for a crap policy, hardly a good deal or fair deal for them.
I am monitoring whether premiums in 2014 will increase for healthy non-insured persons compared to 2012-2013. As noted in a recent FactCheck.Org article, both sides are providing misleading and/or unsubstantiated information on premium costs which make accurate fact discovery for unbiased persons far more difficult. Spinning Premium Rates
There is insufficient data at the moment, and conflicting views.
Compare rwjf.org with Forbes for example.
The Forbes article linked above relies on a study by the Manhattan Institute for Policy Research. I do not view that "think tank" as reliable or trustworthy. It is funded by foundations associated with the Koch brothers, Scaifes, John M. Olin and similar persons and organizations. Their money spigot would be turned off without drawing the appropriate conclusions desired by their benefactors.
Ultimately, I may have to wait for peer reviewed studies by respected academicians, or a detailed analysis by the Kaiser Foundation or some other reliable source, before drawing any conclusion. My current belief is that the data will ultimately show that young healthy persons will pay more, while those with significant pre-existing conditions will pay substantially less. The question will be how much after taking into account the differences in coverages.
As one would expect, Forbes magazine will display an obvious and extreme bias against Obamacare. Those who are strongly against Obamacare will generally not include the subsidies when comparing pre and post Obamacare insurance premiums, and will most likely be comparing apples with oranges too without making that disclosure
The health exchange plans are likely to cover more than existing plans. All plans have to provide coverage for conditions like mental health and vision/dental care for children (Marketplace Insurance Types: Bronze, Silver, Gold, and Platinum Plans), which would normally not be covered by existing plans purchased by individuals.
There is a great deal of deliberate misinformation in cyberspace right now. I am just interested in accurate factual information.
(4) The "Shared Responsibility" Issue: I elected to go without health insurance for a long time. From the time I graduated from college in 1973 until about 1999, I was not covered under any health insurance plan. I saved and invested the money that would otherwise have been spent in premiums. That has worked out for me. My $5,000 deductible health insurance has not been necessary so far, even though it is costing almost $400 a month now. In three years, I will be on Medicare.
The fine for not having insurance will be the greater of $95 for an adult ($47.5 for each child; or $285 for a family of four) or 1% of household taxable income in 2014. PBS News; usnews.com If I was 25-35 now, I would certainly have looked into the various plan costs focusing on the high deductible ones and would have probably bought one to avoid the 1% fine. The fine rises to $325 or 2% of taxable income in 2015. In 2016, the fine rises to $695 per adult and $347 per child ($2,085) or 2.5% of taxable income, whichever is greater.
I would not have appreciated the government requiring me to balance the cost of the fine with the cost of insurance coverage. I would have probably opted to buy the insurance and avoid the fine. With either choice, I would have spent money that I ended up saving and investing between 1976 to 1999 by choosing to go without health insurance.
What about "shared responsibility"? That is what the Democrats call the individual mandate.
As I noted in last week's blog, I do not have a problem with a program like food stamps, particularly since it is a cost effective way to generate economic activity. ("The Role of Automatic Stabilizers in the U.S. Business Cycle: columbia.edu/pdf; "Best Stimulus Package May Be Food Stamps" - Bloomberg; SNAP Is Effective and Efficient)
I was paying a lot of taxes when I was working and that was a more than sufficient personal contribution to "shared responsibility", particularly when governments were taking about 50% of my income prior to the Reagan tax reductions. I was living in Silver Spring Maryland at the time, paying a 50% cap rate on earned income to the FEDs and higher on other income, plus another 7.5% to Montgomery Country and the State of Maryland as a kicker.
Might as well hit me on the side of the head with a baseball bat and take all of my money.
I thought that was too much of a "shared responsibility" contribution for me. Just my opinion.
High earners in states with income taxes (e.g. NY, CA, NJ, ILL) will be paying close to 50% of their income in taxes in 2014, possibly more in some case, when everything is added up which I was always hesitant to do when I was 30 since it depressed me too much (federal and state income taxes, the Obamacare taxes, property and sales taxes, etc.)
I doubt that liberal Democrats, as opposed to the moderate ones, have realized yet that taxes can reach a level that discourages work and consequently produces less revenue.
I calculated in 1982 that I could work about half as much in Tennessee and take home about the same amount of money after taxes. Why work 60 to 80 hours a week when the government takes more than half of what you earn? My property taxes today are close to $2,000 and there is no state income tax on earned income.
(4) While the following is a statement of an opinion rather than a statement of fact, I believe that Obamacare will end up costing the government far more than currently anticipated and will ultimately make it far more difficult to finance the unfunded liabilities in Medicare and SS. Sure, the Obamacare related taxes will ease that cost. However, by taxing the rich more to help pay for Obamacare, that funding source is diminished for other pre-existing social programs including Medicare.
CBO | CBO’s Estimate of the Net Budgetary Impact of the Affordable Care Act’s Health Insurance Coverage Provisions Has Not Changed Much Over Time
The upcoming financial train wreck will be inextricably linked to those two programs (Medicare and SS, along with Medicaid)
Before embarking on a new long term future liability, the nation needs to address first the two big unfunded entitlements. The baby boom generation is already starting to draw on both Medicare and SS in case the politicians have forgotten about them and apparently they have. I would not characterize the GOP's voucher plan for Medicare, which would bankrupt virtually all middle class seniors (while giving the top 1% more tax breaks) as a solution or a serious attempt to address the problem.
(5) Related to the issue of shared responsibility, a large number of healthy and younger persons will simply elect to go without coverage. Those who are sick will sign up. The insurance pools in a number of states, will be inadequate and consequently insurance rates will skyrocket causing many a death spiral in coverage as healthy people opt out due to the premium spikes and more sick people continue to opt into the plans.
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Earlier in this post, I mentioned that a reader had accused me of hyperventilating about the shutdown. I did not hyperventilate during the Near Depression, and I am not hyperventilating now. I am simply describing why I blame the republicans for the current shutdown, and how my views of the modern day GOP are impacting now my asset allocation decisions.
My response so far is a minuscule reduction in my stock allocation as a precautionary measure. I am uncertain of the end game and how much damage will be caused to economy. The largest trade discussed above, the disposition of CLF, had nothing to do with the shutdown or anything other than the rationale described in that section.
Normally, I do not publish comments that are 100% ad hominem personal attacks by a reader directed at me. Some readers feel the need to fill their first and only comment with those kinds of attacks.
This particular comment was slightly less than 100% ad hominem so I went ahead and published it. The reader objected to my "hysterical tirade" about the shutdown; accused me of being "sanctimonious and partisan", inconsistent in my beliefs, and of having a "heart attack" about the shutdown.
Comment by Anonymous in Stocks, Bonds & Politics at 10/1/2013 at 7:28 P.M.
I am use to those kind of comments from Republicans and a lot worse. He was not responding to the Politics and Etc. section of that preceding linked post, which focused on food stamps, but to that section at the end of my last post, Stocks, Bonds & Politics.
I took a snapshot of my comment which provoked his comments so that everyone can compare what I said with his characterization. I captured as much as I could with this snapshot:
He did express an opinion that the shutdown was not important and expressed what I would view as a biased opinion that the Democrats shut the government down seven times during the Reagan Administration. Since those last two statements made by this individual were not personal attacks directed at me, I decided to publish the comment.
An objective person, which I try very hard to be, would look at the brief shutdowns during the Reagan administration, lasting generally one or two days, and reach a different conclusion than that commenter. Past Government Shutdowns: 17 And Counting Those shutdowns during Reagan's eight year, lasting about 14 days in total, are described in foregoing article from USC. Those shutdowns were not caused by one side taking an intractable position that the other could never accept and were relatively minor disagreements that were quickly resolved by rational politicians from both sides. The True Believers are upset that Obama will not negotiate with them what is fair in their view to the American people-the End of Obamacare. A person is either capable or incapable of seeing that distinction.
The modern day GOP was not then in existence and certainly not in full bloom as now. Both sides were capable of talking and reaching a reasonable compromise during Reagan's years. As I have said in the past, I have a lot of respect for Abraham Lincoln, Teddy Roosevelt and Dwight Eisenhower, all republican presidents. Please Bring Back the Eisenhower Republicans I was okay with Reagan and Daddy Bush. I voted for the current Tennessee Republican senators, Corker and Alexander, and the republican governor Haslam. I am now re-considering whether to vote for them again.
The current situation is entirely different and can not be compared to those previous examples. The more relevant comparison is the shutdown during Clinton's first term which was precipitated by the beginnings of the modern day GOP. As noted above in the introduction section, the economy was on far better footing during the brief shutdowns during Clinton's first term.
In his next comment, I was called either "naive or misinformed" if I believed either side was sincere. One common type of argument is to assign a position to another, which was never expressed, and then ridicule it in some way (commonly referred to as the straw man argument form) I did not claim in any of my statements in those two posts, or comments thereto, that politicians were sincere. (I am assuming that this commenter is a white male that routinely votes republican based on the wording in his comments which is why I used the word "his" comment above)
It is my opinion, however, that majority of GOP House members are sincere in their hatred of both Obama and Obamacare. And, it is clear that I am of the opinion that they are not True Conservatives, a dying breed in the modern day GOP.
"Shutdown: A fight with no room for compromise"-REUTERS
Senator Coburn (R-Okla): Defunding ObamaCare strategy 'not intellectually honest' - The Hill's Video
Republicans Are No Longer the Party of Business - Businessweek
Hank Paulson: Some elements 'hijacked the debate' (i.e. the Tea Party)
Buffett on DC's "Extreme Idiocy"
In July, Lindsey Graham (R-SC) referred to the linkage as a "bridge too far" but then backtracked when accused of being a "centrist" (some kind of terrible disease) by a bevy of primary opponents. I would classify Graham as a right leaning centrist only in the modern day Republican party.
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This post is long enough.
I will discuss trades made after last Tuesday in the next post.
2. Sold 50 CET at $23.58 (see Disclaimer): I was looking for some securities to sell on 9/27 in anticipation of a government shutdown. I will redeploy back into stocks after gauging the market's reaction over the next several days.
Snapshot of Trade:
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| 2013 Sold 50 CET at $23.58 |
Snapshot of Profit:
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| 2013 CET 50 Shares +$211.08 |
Rationale: I had a decent profit in this ETF. I also had a small and immaterial position. Consequently, I elected to sell my 50 share lot as a means to slightly reduce my stock allocation during the current period of political dysfunction.
Future Buys and Sells: I will monitor this one for a re-entry point at a much lower price when and if I become more comfortable about stocks than I am now.
3. Bought 50 NNNPRE at $19.71-Roth IRA (see Disclaimer):
Snapshot of Trade:
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| 2013 Roth IRA Bought 50 NNNPRE at $19.71 |
Security Description: is an equity preferred stock that pays cumulative dividends at the fixed coupon rate of 5.7% on a $25 par value.
The issuer is the REIT National Retail Properties (NNN) that has 1,838 properties in 47 states. Our Portfolio | NNN REIT The company invests "primarily in high quality retail properties generally to long-term, net leases."
The security may not be redeemed prior to 5/30/18. After that date, National Retail Properties has the option to redeem. It would do so only when it could refinance at a lower rate. While that may be conceivable, based on a Japanese style long term deflation cycle, I view as likely that this issue will be perpetual, like many of the low yielding preferred stocks issued decades ago by electric utilities.
Prospectus Supplement
This security was sold to the public in early June, just in time for the rise in interest rates to cause a steep loss in value for buying at the $25 par value. NNN.PE Stock Chart Good for National Retail Properties, locking up a low 5.7% coupon in a perpetual security, and bad for anyone unfortunate enough to pay par value at the IPO.
At a total cost of $19.71, the yield becomes 7.23%. While that is certainly better than 5.7% at $25, I am still exposed to interest rate risk and further declines in price. I am just less exposed than buyers at the IPO or soon thereafter.
Unlike most REIT preferred stocks, a deferred dividend does not accrue interest on any deferred amount. (page S-15) That is a highly unusual provision for a REIT preferred stock. It would be normal for an equity preferred stock issued by a bank.
There is a stopper clause at page S-15 that would prohibit the payment of cash dividend to common shareholders and a deferral of the preferred dividend.
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| Stopper Clause |
National Retail Properties Profile Page at Reuters
National Retail Properties Key Developments page at Reuters
NNN Analyst Estimates (FFO of $1.89 in 2013; $2.02 in 2014)
NNN Key Statistics Page at YF
Website: NNN REIT | National Retail Properties
Prior Trades: None
Recent Earnings Report: For the second quarter, NNN reported FFO available to common shareholders at $54.265M or $.45 per share up from $.41 in the 2012 second quarter. AFFO was reported at $.47 per share.
The top tenants and lease expiration data is shown at page 11 of the earnings release: 8-K - 2013.06.30
2013.06.30 Form 10-Q
Rationale: (1) Income Generation in the Roth with Possible Capital Appreciation: As noted above, the yield is about 7.23%. If interest rates continue to decline from their recent highs, there is a possibility of some capital appreciation. Based on my assignments of future probabilities and possibilities, the time frame to capture any such appreciation would probably be measured in weeks or months before September 2014.
(2) According to Quantumonline, this security is rated Baa3 by Moody's, which is an investment grade and BB+ by S & P, a high junk rating.
Risks: Interest risk is currently more important than credit risk. The rapid decline in price from the $25 IPO price to $19.71 illustrates that risk.
Future Buys: I would consider adding another 50 shares when and if the yield exceeds 8% and there is no material change in the credit quality. To realize a 8% yield, the price would need to fall to $17.8 per share without taking into consideration commission costs.
I am likely to sell this security when and if I can achieve an annualized return of 8%+. That modest objective could be achieved with a $1.58 rise in the price and no dividends or about a $.16 rise in price after receiving 4 quarterly dividends after adjusting those numbers by approximately $18 to cover roundtrip commission costs for a 50 share lot.
4. Added 50 of the Bond CEF BWG at $16.68 (see Disclaimer):
Snapshot of Trade:
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| 2013 Added 50 BWG at $16.68 |
Security Description: The Legg Mason BW Global Income Opportunities Fund (BWG) is a closed end fund that invests in bonds globally.
Closing Net Asset Value Per Share 9/27/13: $19.32
Closing Market Price: $16.71
Discount to NAV: -13.51%
Discount at $16.68= 13.66%
BWG Page at CEFConnect
Sponsor's website: Legg Mason Individual Investor - Closed-End Funds Details (have to navigate by clicking Closed End Fund tab)
As of June 30, 2013, the "effective duration" was 8.57 years.
The fund is currently paying a $.12 per share monthly dividend. Legg Mason BW Global Income Opportunities Fund Inc. (BWG) Announces Distributions for the Months of September, October and November 2013 As noted in that press release, the fund is estimating, subject to revision, that 45.77% of the cumulative distributions during the current F/Y are sourced from income with the remainder from capital gains. That simply tells me that the return of capital issue will likely be present soon.
Credit Quality as of 6/30/13:
Prior Trades: I was premature with my prior purchases. This last add was an average down from a 50 share buy at $20.55 (April 2013). Last April was not a good time to buy a leveraged bond CEF.
Rationale: I am simply averaging down with this last purchase and with reinvestment of my dividends. The fund is generating decent income on a monthly basis with its current $.12 per share monthly dividend. Assuming a continuation of that rate, which is no way assured, the yield would be about 8.63% at a total cost of $16.68. I would consider that yield real only if the fund earns it. Supporting the dividend with the return of my capital is not earning the dividend.
Risks: (1) Currency Risk: As with any foreign bond fund, an important risk involves currency conversions. The following table shows the currency exposures as of 6/30/13 before and after hedging.
(2) Interest Rate and Credit Risk/CEF Risks: The interest rate and CEFs risks are highlighted by the plunge in market price between early May, when the price hit $21.61, and earlier this month when the price tumbled below $16. BWG Interactive Chart
Three risks are causing that decline. Interest rates were moving up, causing a loss in the bonds value, emerging market currencies were declining significantly in value against the USD and the discount to net asset value was expanding which accelerates the decline. Some or all of those factors can reverse, turn on a dime, and work in favor a buyer which has been the case since the Fed decided to continue QE full bore.
Under the "pricing information" tab at CEFConnect, there is a chart that shows the discount information which graphically displays the expansion in the discount starting in May.
The net asset value has been declining during the same period. On 5/1/2013, the net asset value per share was $22.97 and at $19.32 on 9/27/13. During that time period, the fund has paid five $.12 monthly dividends. Adding $.60 back to the $19.32 net asset value, I arrive at $19.92 or a 13.28% decline in net asset value after making the dividend adjustment. The widening of the discount, a risk associated with CEFs in general, just adds to the pain. Now, after my most recent purchase, a narrowing of the discount would add to the gain when coupled with a rising net asset value.
This kind of purchase has four major risks: credit, interest rate, currency and the normal ones associated with all CEFs.
Future Buys and Sells: I may buy another 50 provided the discount is over 13% and the price is under $15.5. I am an involuntary long term holder in the shares previously bought. I am reinvesting the dividends as a means to average down.
5. Sold 100 PBA at $33.1886 (see Disclaimer): This is another sell motivated primarily by the decision to slightly reduce my stock allocation and then redeploy later.
Snapshot of Trade:
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| 2013 Sold 100 PBA at $33.1886 |
Snapshot of Profit:
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| 2013 PBA 100+ Shares +$383.72 |
Rationale: The primary reason is profit taking. I may use some of CAD stash to buy this security on the Toronto exchange so that the dividend will be paid to me CADs. I would prefer to wait for a pullback below C$30. Pembina Pipeline Corp. Stock Price (PPL:TOR)
6. Sold 200 BIF AT $7.65 (SEE DISCLAIMER): Given the uncertainty created by the higher than normal dysfunction in Washington, I sold this position. The reasons for selecting this security, as opposed to some others, would be the relatively small size, the non-core status of the position, profit taking, and some of the disadvantages discussed below.
Snapshot of Trade:
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| 2013 Sold 200 BIF at $7.65 |
Snapshot of Profit:
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| 2013 BIF 200 Shares +$180.07 |
Item # 2 Bought 200 of the Stock CEF 200 BIF at $6.67 (January 2013)
When I discussed buying this fund, I pointed out some positives and negatives. One of the negatives is the high expense ratio which would keep me from taking a serious position. CEFConnect shows the baseline expense at 3.28% for 2012 (1.4% of that number in management fees).
Another negative is the lack of meaningful dividends under current management. (See BIF Dividend Data at Morningstar).
The fund is heavily weighted in Berkshire Hathaway which has been a positive. (33.2% as of 5/31/13: SEC Filed Shareholder Report at page 7).
The fund will generally sell at a persistently high discount to net asset value under current management. If that discount would start to narrow to say 15% from the persistent range of 20% to 23%, then I would view it as a positive. The discount, however, remains persistently high in a fairly high range and consequently I can not characterize it as either positive or negative.
Sponsor's website: Boulder Growth & Income Fund - Fund Objective
7. Sold 700 CLF:CA at C$19.4 (see Disclaimer):
Snapshot of Trade:
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| Sold 700 CLF: CA at C$19.4 |
Still, Fidelity had trouble finding the quote, and frequently showed this position as having no value.
Fidelity would lose the value of this security, something generally close to $14,000, for extended periods, and consequently would significantly misstate my account values.
For the entire month of September until 9/30, Fidelity had managed to find the quote after the close each day, and I knew that could not last.
Then, when preparing my monthly statement, the quote was lost again on 9/30, and my account value was shown as almost $14,000 lower than the accurate figure. That is when my personality quirk becomes relevant. I was not pleased with the sheer level of incompetency being displayed by the broker.
The frustration and aggravation caused me to sell the security that otherwise had a place in my portfolio. There was no reason to sell it other than to relieve once and for all that aggravation.
Now, I am back to the problem of having too many CADs earning nothing. I added another Canadian REIT last Wednesday which I will discuss in the next post.
8. Cash Flow 9/30/13-10/1/13-Main Taxable Account: My primary investment strategy is to generate a continuous flow of dividend and interest payments and to use that cash flow to purchase more income generating securities. The income generated by each security is unimportant and immaterial in isolation. The contribution made by each security becomes important and material only when combined with the cash flow produced by all income generating securities. The foregoing snapshots show the cash flow received 9/30 and 10/1 in the main taxable account. The other taxable and IRA accounts would be doing the same except on a smaller scale. I have not contributed funds to my taxable accounts since 1984.
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| Cash Flow 1 |
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| CASH FLOW 2 |
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| Cash Flow 3 |
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| CASH FLOW 4 |
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| CASH FLOW 5 |
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| CASH FLOW 6 |
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| CASH FLOW 7 |
1. Why I Would Have Voted Against Obamacare:
With the republicans shutting down the government due to their opposition to Obamacare, I decided to discuss why I would have voted against that law.
Although I am opposed to the law, I am even more vehemently opposed to the transparent blackmail and extortion now being perpetuated by the GOP and their irresponsible linkages to a clean continuing resolution.
Both sides are engaging in lying and misleading statements regarding Obamacare.
Politicians from both political tribes lie for two simple reasons.
First, lying works because a majority of Americans are uninformed and can consequently be easily manipulated with false information. It takes effort to become informed and to overcome pre-existing biases and group think. It is far easier to remain ignorant and to form opinions from the talking points of approved group think members.
Politics is all about acquiring and maintaining power and lying is simply one means used to achieve that goal. The republicans see Obamacare as a means to energize their base and to swing independents to their side for the next election.
Second, there is no penalty for lying.
Stocks, Bonds & Politics: The Road to Political Power: Lying Works (SEPTEMBER 2011 POST)
True conservatives would view telling the truth and avoiding intentionally misleading statements as a conservative value. Many who call themselves conservatives today rarely display any affinity for those real conservative values.
While I would have voted against Obamacare, I am not a doctrinaire ideologue that formed my opinions based on GOP propaganda designed to sway the uninformed as well as those easily swayed by false information dispensed by sources deemed trustworthy by them (e.g. Russ Limbaugh, the faux blondes at Fox, Sean Hannity and GOP politicians)
Most Americans who oppose this health insurance law will cite one or more of the 16 falsehoods compiled by PolitiFact, mostly promulgated by GOP politicians like Senator Marco Rubio or their apparatchiks (e.g. Rush Limbaugh).
One of my favorites comes from Betsy McCaughey who claims that "Obamacare will question your sex life". PolitiFact
Chain emails are another method used to spread misinformation.
FactCheck.Org has started to examine the alleged factual statements made by Senator Cruz in his 21 hour talk-a-thon on the Senate's floor. FactChecking ‘Pernicious’ Obamacare Claims When two Democrats joined the republicans in voting to defund Obamacare, Cruz called that vote a "strong bipartisan majority." PolitiFact That caused the OG to chuckle. It would not be possible for anyone to shame that "conservative" senator into telling the truth. PolitiFact | Ted Cruz's file
A recent MSN article highlights some of Obama's statements as a "bit slippery on the cost of coverage, in particular". (see also PolitiFact | 10 things Obamacare supporters say that aren’t entirely true)
The public exchanges is an idea that originated from republicans. Those exchanges provide an easy way for consumers to shop for policies and to compare prices. Yet, the republicans are opposed to those exchanges now because they are part of Obamacare.
The Tennessee republicans passed a law to intimidate persons called navigators, who provide guidance about the alternatives to those who need it. To become a navigator in Tennessee, you must be fingerprinted, and you can not offer advice without being subject to a $1,000 fine per violation. State issues rules for Obamacare 'navigators;' Does anyone want to apply for that job?
Many Republicans have no qualms in punishing unacceptable speech in furtherance of their beliefs. True Conservatives, rather than the pseudo pretend ones that now dominate the GOP, place a lot of value in First Amendment rights that the Framers believed naturally belonged to individuals. The First Amendment is phrased as a restraint on the government rather than a grant of rights. Amendment 1 - The U.S. Constitution Online I have seen several similar examples dealing with religion. (e.g. Muslim | timesfreepress)
There are mostly factual articles, such as this one published by MarketWatch, that provide some fodder for those opposing this law. I would note, however, that the author's bias is revealed by her refusal to mention the higher paying jobs that will be created in the healthcare industry due to Obamacare. A high school graduate could enroll in a local technical college and secure a decree in nursing for about $6,000 and would have no problem finding a job. ttcnashville.edu.pdf While it is still too early to tell, I suspect that the CBO may end up being close with its prediction about job losses and gains.
Omitting known material information inconsistent with a argument is just another form of misrepresentation.
The main reasons for my opposition include the following:
(1) Nothing has been done to alleviate Medicare's unfunded liabilities even though the Democrats have launched yet another expensive program.
The GAO estimates that the funding gap for Medicare will approximate $76.4 trillion over the next 75 years. The Medicare Security Trust Fund will run dry as of 2016. WSJ.com No one is questioning that the U.S. has a really serious funding problem with those long standing safety net programs.
The additional taxes associated with Obamacare are needed to close the funding gap for Medicare rather than used as a partial funding source for Obamacare.
This Forbes article contains a summary of the increased taxes associated with Obamacare.
Over my lifetime, Democrats have displayed a belief that the wealthy are a bottomless pit for them to mine. The Democrats have yet to recognize that the rich can only be tapped so many times before the well starts to run dry and/or the result is counter-productive for revenue generation.
A good faith factual argument could be made now that we are already at the tipping point.
{It is odd that the republicans are trying to repeal the Obamacare taxes on certain medical devices. Even if those taxes are eliminated, and some Democrats support the GOP on that issue, Obamacare would still exist but the budget deficit would increase by the amount of foregone taxes. I thought the GOP was concerned about the budget deficit.}
(2) There is a really serious cost control problem in the America healthcare system. Before launching any new programs, partly funded from government resources, cost containment in Medicare spending needs to be addressed in a bipartisan way. And, that effort must be successful and include a hard nose, take no prisoners clamp down on massive fraud which could easily be costing the government over $50B per year. GAO reports $48B in Medicare fraud in 2010; U.S. GAO
(3) Young Americans will be faced with a terrible burden in the coming decades.
They will be a funding source for the Medicare and SS benefits for my generation.
Yet, the healthy young persons will also be used, starting in 2014, to subsidize insurance premiums for those uninsured persons who are not able to secure affordable insurance due mostly to pre-existing health conditions.
Some low income youngsters would qualify for subsidies, which cost money of course, and their costs could be lower than without Obamacare depending on the amount of a subsidy. YF Daily Ticker
More information on that and other subjects can be found at Healthcare.Gov.
The Kaiser foundation has a subsidy calculator: Subsidy Calculator | The Henry J. Kaiser Family Foundation I played with that calculator for a few minutes. A single person earning 30,000 in my zip code, who is a non-smoker with no children, would not receive any assistance, while the same person earning $20,000 could buy a "bronze" plan for $557 per year after taking into account $746 in subsidies. The amount of the subsidy is based on income not assets. Income -- Not Assets -- Will Determine Subsidies In Online Insurance Marketplaces - Kaiser Health News
The bronze healthcare plan covers only 60% of the health care costs. Bronze, Silver, Gold, and Platinum Plans If that calculator is right, even with the subsidy, that hypothetical young person living in my city with a $20,000 taxable income would be paying $557 per year for a crap policy, hardly a good deal or fair deal for them.
I am monitoring whether premiums in 2014 will increase for healthy non-insured persons compared to 2012-2013. As noted in a recent FactCheck.Org article, both sides are providing misleading and/or unsubstantiated information on premium costs which make accurate fact discovery for unbiased persons far more difficult. Spinning Premium Rates
There is insufficient data at the moment, and conflicting views.
Compare rwjf.org with Forbes for example.
The Forbes article linked above relies on a study by the Manhattan Institute for Policy Research. I do not view that "think tank" as reliable or trustworthy. It is funded by foundations associated with the Koch brothers, Scaifes, John M. Olin and similar persons and organizations. Their money spigot would be turned off without drawing the appropriate conclusions desired by their benefactors.
Ultimately, I may have to wait for peer reviewed studies by respected academicians, or a detailed analysis by the Kaiser Foundation or some other reliable source, before drawing any conclusion. My current belief is that the data will ultimately show that young healthy persons will pay more, while those with significant pre-existing conditions will pay substantially less. The question will be how much after taking into account the differences in coverages.
As one would expect, Forbes magazine will display an obvious and extreme bias against Obamacare. Those who are strongly against Obamacare will generally not include the subsidies when comparing pre and post Obamacare insurance premiums, and will most likely be comparing apples with oranges too without making that disclosure
The health exchange plans are likely to cover more than existing plans. All plans have to provide coverage for conditions like mental health and vision/dental care for children (Marketplace Insurance Types: Bronze, Silver, Gold, and Platinum Plans), which would normally not be covered by existing plans purchased by individuals.
There is a great deal of deliberate misinformation in cyberspace right now. I am just interested in accurate factual information.
(4) The "Shared Responsibility" Issue: I elected to go without health insurance for a long time. From the time I graduated from college in 1973 until about 1999, I was not covered under any health insurance plan. I saved and invested the money that would otherwise have been spent in premiums. That has worked out for me. My $5,000 deductible health insurance has not been necessary so far, even though it is costing almost $400 a month now. In three years, I will be on Medicare.
The fine for not having insurance will be the greater of $95 for an adult ($47.5 for each child; or $285 for a family of four) or 1% of household taxable income in 2014. PBS News; usnews.com If I was 25-35 now, I would certainly have looked into the various plan costs focusing on the high deductible ones and would have probably bought one to avoid the 1% fine. The fine rises to $325 or 2% of taxable income in 2015. In 2016, the fine rises to $695 per adult and $347 per child ($2,085) or 2.5% of taxable income, whichever is greater.
I would not have appreciated the government requiring me to balance the cost of the fine with the cost of insurance coverage. I would have probably opted to buy the insurance and avoid the fine. With either choice, I would have spent money that I ended up saving and investing between 1976 to 1999 by choosing to go without health insurance.
What about "shared responsibility"? That is what the Democrats call the individual mandate.
As I noted in last week's blog, I do not have a problem with a program like food stamps, particularly since it is a cost effective way to generate economic activity. ("The Role of Automatic Stabilizers in the U.S. Business Cycle: columbia.edu/pdf; "Best Stimulus Package May Be Food Stamps" - Bloomberg; SNAP Is Effective and Efficient)
I was paying a lot of taxes when I was working and that was a more than sufficient personal contribution to "shared responsibility", particularly when governments were taking about 50% of my income prior to the Reagan tax reductions. I was living in Silver Spring Maryland at the time, paying a 50% cap rate on earned income to the FEDs and higher on other income, plus another 7.5% to Montgomery Country and the State of Maryland as a kicker.
Might as well hit me on the side of the head with a baseball bat and take all of my money.
I thought that was too much of a "shared responsibility" contribution for me. Just my opinion.
High earners in states with income taxes (e.g. NY, CA, NJ, ILL) will be paying close to 50% of their income in taxes in 2014, possibly more in some case, when everything is added up which I was always hesitant to do when I was 30 since it depressed me too much (federal and state income taxes, the Obamacare taxes, property and sales taxes, etc.)
I doubt that liberal Democrats, as opposed to the moderate ones, have realized yet that taxes can reach a level that discourages work and consequently produces less revenue.
I calculated in 1982 that I could work about half as much in Tennessee and take home about the same amount of money after taxes. Why work 60 to 80 hours a week when the government takes more than half of what you earn? My property taxes today are close to $2,000 and there is no state income tax on earned income.
(4) While the following is a statement of an opinion rather than a statement of fact, I believe that Obamacare will end up costing the government far more than currently anticipated and will ultimately make it far more difficult to finance the unfunded liabilities in Medicare and SS. Sure, the Obamacare related taxes will ease that cost. However, by taxing the rich more to help pay for Obamacare, that funding source is diminished for other pre-existing social programs including Medicare.
CBO | CBO’s Estimate of the Net Budgetary Impact of the Affordable Care Act’s Health Insurance Coverage Provisions Has Not Changed Much Over Time
The upcoming financial train wreck will be inextricably linked to those two programs (Medicare and SS, along with Medicaid)
Before embarking on a new long term future liability, the nation needs to address first the two big unfunded entitlements. The baby boom generation is already starting to draw on both Medicare and SS in case the politicians have forgotten about them and apparently they have. I would not characterize the GOP's voucher plan for Medicare, which would bankrupt virtually all middle class seniors (while giving the top 1% more tax breaks) as a solution or a serious attempt to address the problem.
(5) Related to the issue of shared responsibility, a large number of healthy and younger persons will simply elect to go without coverage. Those who are sick will sign up. The insurance pools in a number of states, will be inadequate and consequently insurance rates will skyrocket causing many a death spiral in coverage as healthy people opt out due to the premium spikes and more sick people continue to opt into the plans.
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Earlier in this post, I mentioned that a reader had accused me of hyperventilating about the shutdown. I did not hyperventilate during the Near Depression, and I am not hyperventilating now. I am simply describing why I blame the republicans for the current shutdown, and how my views of the modern day GOP are impacting now my asset allocation decisions.
My response so far is a minuscule reduction in my stock allocation as a precautionary measure. I am uncertain of the end game and how much damage will be caused to economy. The largest trade discussed above, the disposition of CLF, had nothing to do with the shutdown or anything other than the rationale described in that section.
Normally, I do not publish comments that are 100% ad hominem personal attacks by a reader directed at me. Some readers feel the need to fill their first and only comment with those kinds of attacks.
This particular comment was slightly less than 100% ad hominem so I went ahead and published it. The reader objected to my "hysterical tirade" about the shutdown; accused me of being "sanctimonious and partisan", inconsistent in my beliefs, and of having a "heart attack" about the shutdown.
Comment by Anonymous in Stocks, Bonds & Politics at 10/1/2013 at 7:28 P.M.
I am use to those kind of comments from Republicans and a lot worse. He was not responding to the Politics and Etc. section of that preceding linked post, which focused on food stamps, but to that section at the end of my last post, Stocks, Bonds & Politics.
I took a snapshot of my comment which provoked his comments so that everyone can compare what I said with his characterization. I captured as much as I could with this snapshot:
He did express an opinion that the shutdown was not important and expressed what I would view as a biased opinion that the Democrats shut the government down seven times during the Reagan Administration. Since those last two statements made by this individual were not personal attacks directed at me, I decided to publish the comment.
An objective person, which I try very hard to be, would look at the brief shutdowns during the Reagan administration, lasting generally one or two days, and reach a different conclusion than that commenter. Past Government Shutdowns: 17 And Counting Those shutdowns during Reagan's eight year, lasting about 14 days in total, are described in foregoing article from USC. Those shutdowns were not caused by one side taking an intractable position that the other could never accept and were relatively minor disagreements that were quickly resolved by rational politicians from both sides. The True Believers are upset that Obama will not negotiate with them what is fair in their view to the American people-the End of Obamacare. A person is either capable or incapable of seeing that distinction.
The modern day GOP was not then in existence and certainly not in full bloom as now. Both sides were capable of talking and reaching a reasonable compromise during Reagan's years. As I have said in the past, I have a lot of respect for Abraham Lincoln, Teddy Roosevelt and Dwight Eisenhower, all republican presidents. Please Bring Back the Eisenhower Republicans I was okay with Reagan and Daddy Bush. I voted for the current Tennessee Republican senators, Corker and Alexander, and the republican governor Haslam. I am now re-considering whether to vote for them again.
The current situation is entirely different and can not be compared to those previous examples. The more relevant comparison is the shutdown during Clinton's first term which was precipitated by the beginnings of the modern day GOP. As noted above in the introduction section, the economy was on far better footing during the brief shutdowns during Clinton's first term.
In his next comment, I was called either "naive or misinformed" if I believed either side was sincere. One common type of argument is to assign a position to another, which was never expressed, and then ridicule it in some way (commonly referred to as the straw man argument form) I did not claim in any of my statements in those two posts, or comments thereto, that politicians were sincere. (I am assuming that this commenter is a white male that routinely votes republican based on the wording in his comments which is why I used the word "his" comment above)
It is my opinion, however, that majority of GOP House members are sincere in their hatred of both Obama and Obamacare. And, it is clear that I am of the opinion that they are not True Conservatives, a dying breed in the modern day GOP.
"Shutdown: A fight with no room for compromise"-REUTERS
Senator Coburn (R-Okla): Defunding ObamaCare strategy 'not intellectually honest' - The Hill's Video
Republicans Are No Longer the Party of Business - Businessweek
Hank Paulson: Some elements 'hijacked the debate' (i.e. the Tea Party)
Buffett on DC's "Extreme Idiocy"
In July, Lindsey Graham (R-SC) referred to the linkage as a "bridge too far" but then backtracked when accused of being a "centrist" (some kind of terrible disease) by a bevy of primary opponents. I would classify Graham as a right leaning centrist only in the modern day Republican party.
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This post is long enough.
I will discuss trades made after last Tuesday in the next post.
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