Tuesday, November 12, 2013

IRS and Refunds: Fraudsters Receive Refunds Before the IRS Processes Legitimate Requests/Sold: 200 GDV at $21.03, 50 BANCP at $26.12, 50 BANC at $13.5/Bought: 5 AAPL at $524.5, 100 IAE at $13.02, 100 CSX at $26.33, 50 GSPRJ AT $22.78/BOUGHT ROTH IRA 50 AMJ AT $45.64

I finished writing the post today.

Big Picture Synopsis:

Stocks:
Stable Vix Pattern (Bullish)
Vix Asset Allocation Model Explained Simply
Use of the VIX as a Timing Model
Short Term: Expecting a 10%+ Correction (market not cooperating)
Intermediate and Long Term: Bullish

Ray Dalio predicts that the average annual return for stocks will be 4% over the next ten years. He does not believe that most individual investors will be able to produce positive alpha (i.e. returns adjusted for risk). If he proves to be right, then a 4% ten year treasury would look good in comparison.

Humans are not very good at long term future forecasts. Who would have predicted that the annualized return of the S & P 500, with dividends reinvested and adjusted for inflation, would be -3.89% (per year!) between 1/1/1999 to 12/31/2008. Annualized Returns of the S&P 500 A $1 investment in the S & P would have been reduced to $.67.

The stock market continues to defy my expectations. For someone in my age bracket, it is normal to reduce exposure to any asset class that has had a strong up move and to re-allocate to other asset classes.

However, in the current environment, the other major asset class-bonds-offers insufficient benefits for the current risks. While I have added some bonds and bond like investments with the proceeds from my stock allocation reductions, I am mostly keeping those funds in cash, hoping for a much better risk/reward balance for stocks or bond investments within the next year.

Bonds:

Short Term: Neutral
Intermediate and Long Term: Slightly Bearish Based on Interest Rate Normalization
The Difficult Path to Interest Rate Normalization

The intermediate and long term outlook assumes an average inflation rate of 2% to 2.25% over the next ten years. 

The better than expected jobs report last Friday caused bonds to decline in price and rise in yield. Bond like investments also declined in price, notwithstanding a robus stock market rally

Closing Prices Last Friday (11/8/13):
S & P 500: 1,770.61 +23.46 (+1.34%)
VIX: 12.90 -1.01 (-7.26%)(inverse correlation with S & P Index) 
TLT: $103.41 -2.55 (-2.41%) : iShares 20+ Year Treasury Bond ETF
BABS: $53.68 -1.12 (-2.04%) : SPDR Nuveen Barclays Build America Bond ETF
ZROZ: $84.42 -3.32 (-3.78%) : PIMCO 25+ Yr STRIPS
VNQ: $66.62 -0.91 (-1.35%) : Vanguard REIT ETF

Normally, the ten year treasury would yield 2%+ over the anticipated inflation rate. QE and ZIRP have lowered interest rates to abnormally low levels and have prevented bond prices from finding their true market levels. QE is the monetary policy that lowers intermediate and longer term interest rates.

The FED will start to taper and then end QE. The only questions are when will the taper start and how quickly will the FED wind down QE. Even if QE was to last another 2 years, which appears to be the outermost limit, why is the 10 year sitting at 2.75% now with the average annual inflation forecast at almost 2.2%. The break-even spread was 2.18% as of 11/12/13.

Something is amiss.

Either the market is incorrectly pricing now the 10 year non-inflation protected treasury or the 10 year TIP.

If the TIP price is being distorted by QE, and the true inflation forecast is substantially lower than the current break-even spread, then the 2.75% to 3% yield would make sense. The market may be predicting that QE will last much longer than many now believe or that inflation will come down further when the FED starts to taper and then end QE.

If the TIP break-even spread is a market based rate, then the market is not pricing the 10 year non-inflation protected security correctly. The yield would, at a minimum, rapidly adjust upward to its true market price once investors begin to believe QE is moving toward an end. In other words, there could be another jolt soon, similar to what happened between early May to mid-September as the market adjusts quickly to normalized rates.

My current way of dealing with this uncertainty in bond land is to slice my bond orders into small pieces. When and if rates rise, causing a bond yielding 7% to rise to a 8+% current yield, then I will consider taking another nibble. Then if the price rises and the yield falls, I would consider selling the first, highest cost lot and so on.

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Recent Developments:

The Labor Department reported that nonfarm payroll employment rose 205,000 in October, signifiantly stronger than the consensus estimate of 120,000. The private sector added 212,000 jobs. The unemployment number was 7.3%. Average hourly earnings for private employees increased by 2 cents to $24.10 per hour. Over the past year, hourly earnings have risen by 2.2%. The government added 60,000 jobs to its previous estimates for September and August. Employment Situation Summary

The ECB cut its main interest rate from .5% to .25%. Consumer prices in the euro zone rose .7% in October on an annualized basis.  eurostat.ec.PDF

The government reported that real GDP rose at an annual pace of 2.8% during the third quarter. Consumer spending slowed to a 1.6% increase, while GDP was positively impacted by an inventory buildup, the housing sector and exports. The consensus expectation was for 2.3%. Personal Consumption Expenditure (PCE) inflation increased to 1.9% annualized with core PCE inflation remaining subdued at just 1.4%. (Appendix Table A at page 15 bea.go.pdf) Disposable personal income increased 138.1B or 4.5%, up from a 3.4% increase in the second quarter. The personal savings rate increased to 4.7% from 4.5% in the second quarter. News Release: Gross Domestic Product

This chart shows the importance of personal consumption expenditures to GDP growth:

Personal Consumption Expenditures as a Percentage of GDP 
Graph - St. Louis Fed (Data 1/1/1958 to 09/1/2013)

The ability to spend money originating from increases in disposable income after debt service payments, rather than sourcing those expenditures from new debt, is extremely important to sustained economic growth in the U.S.

The most important economic development in the U.S over the past five years involves the refinancing of mortgage debt at abnormally low levels which will increase disposable income for millions of American households.




Household Debt Service Payments as a Percent of Disposable Personal Income

It is really simple and the market gets it. If a household refinances their largest debt obligation for 30 years at 4%, saving several hundred dollars per month in debt service payments, then disposable income increases for that household. That additional income can be the source for increased spending, unlike the Age of Leverage period (1980-2007) when increased PCE was financed largely by increasing debt. As wages increase and the FED eventually ends its Jihad against the Savings class, with interest rates returning to normal levels for risk free savings, households will add to their disposable income, creating a virtuous cycle of consumer spending.

The cycle could be disrupted for a household when and if the household sells their home and moves into a new abode which has to be financed with a higher mortgage interest payment.

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TCP Capital And TICC Capital (own both):

TCP Capital Corp., a BDC, reported third quarter net investment income of $.4 per share. Net asset value per share increased to $16.06 from $14.94 as of 6/30/13. The company declared a regular dividend of $.36 per share and a special dividend of 5 cents per share, both will be payable on December 31, 2013.

TICC, a BDC, reported net investment income of $12.2M for the third quarter or $.23 per share. Core net investment income was reported at $.28 per share. At the end of the third quarter, there were no loans on non-accrual status. Net asset value per share was $9.9 as of 9/31/13, up from $9.75 on 6/30/13.

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1. Sold 200 GDV at $21.03 (see Disclaimer): Given the rise in stocks in 2013, it seems prudent to harvest a few gains. Another consideration is that I will receive a full year of SS benefits next year, which may put me into a higher tax bracket. I would consequently want to take profits in 2013 rather than 2014. Even if the gain is taxed at 15%, I will have another consideration to take into account next year.

I have decided to start taking SS benefits at 62. Since I do not have any earned income, and plan to keep it that way, I do not have to be concerned about the government taking away some SS benefits based on the amount of earned income. CBS NewsAARPHow work affects Social Security retirement payments  I can not avoid, however, the taxation of some SS payments depending on my income per year.  Social Security Benefits and Your Taxes


Snapshot of Trade:

2013 Sold 200 GDV at $21.03

Snapshot of Profit: I took a snapshot of my position shortly before entering the order:

200 GDV Average Cost Per Share $14.02

2013 GDV 200 Shares +$1,393.8
Item # 2 Added 70 GDV at $16.19 (August 2012); Item # 2 Added to CEF GDVat $14.54 (August 2011); Added 200 GDV at $13.33 (August 2010)

My cost basis was reduced by that part of dividend payments supported by a return of capital. 

Security Description: The Gabelli Dividend & Income Trust (GDV) is a closed end stock fund. 

SEC Filed Shareholder Report for period ending 6/30/13


GDV Page at CEFConnect

Data Day Before Sell (11/4/13):
Closing Net Asset Value Per Share: $23.45
Closing Market Price: $21.05
Discount: -10.19%
Average 3 Year Discount: -11.32
Average 5 Year Discount: -13.15%

GDV Page at Morningstar (rated 4 stars)

Rationale: (1) Profit Taking:

I decided to continue paring my stock allocation based on the tremendous rise in stocks since March 2009. The S & P 500 is up over 60% since 10/3/11, when that index closed at 1099.23. I am generally inclined to believe that money does not grow on trees.

I was also surprised by how much my portfolio was up in October 2013. I could easily live for an entire year on that month's appreciation. I do not have that many more years left.

And, as noted below, this CEF has some issues.

(2) ROC and Dividend Cuts: As shown in this table, GDV recently cut its monthly dividend.

GDV 2013 Dividend History (Dividend Cut)
Even after the dividend cut, the monthly distribution is still significantly supported by a return of capital, which I view negatively. That data can be found at CEFConnect under the "distributions" tab.

I prefer a stock CEF that earns its dividend.

(3) Yet Another Spin-Off: Gabelli Dividend & Income Trust authorized, subject to shareholder and regulatory approvals, the creation of another CEF that will be capitalized with approximately $100M of GDV's cash and/or securities. The new fund would then distribute shares pro-rata to GDV's shareholders.

I do not like this kind of spin-off. It creates an unnecessary tax event and has no certain positive impact on GDV shareholders.

The Royce Value Trust (RVT) recently performed the same legerdemain. Royce Value Trust, Inc. Completes Distribution of Shares of Royce Global Value Trust (RGT) as Part of Spin-Off Transaction That news release contains a discussion of the cost basis and tax issues relating to that spin-off. On 11/13, RGT, the spin-out CEF, closed at a 13.59% discount, while RVT was at a -12.28% discount. So the spin-out did not decrease the combined discount to net asset value.

This kind of activity serves no useful purpose in my opinion and just creates issues for the existing shareholders. The spin-out process is apparently a cheaper way for the fund to launch a new CEF. No underwriting fees are paid to brokers for an IPO.

2. Bought 5 AAPL at $524.4 (see Disclaimer):

Snapshot of Trade:

2013 Bought 5 AAPL at $524.5
The stock went ex dividend shortly after my purchase for its quarterly distribution. AAPL Stock Quote The dividend was $3.05 per share. Apple Inc. - Financial History

Prior Trades: Shortly after the introduction of the first IPOD, I bought 100 AAPL shares in a regular IRA at around $12. LB sold those shares at over $16 shortly thereafter. RB noted that the Nerd Machine has zero vision.  LB admitted that the disposition of those shares for $16 ($1,600) generated less proceeds than at $700 ($70,000), but even the Stock Stud can not predict the future. "Typical picayune, tunnel vision nonsense", the RB said in retort.

Selling AAPL at $16+ pales into insignificance compared to passing on BRK/A at $16 back in 1974. Stocks, Bonds & Politics: ERROR CREEP and the INVESTING PROCESS

Last Earnings Report: For its fiscal 4th quarter, which ended on 9/28/13, Apple reported net income of $7.512B on net sales of $37.472B, compared to net income of $8.223B on $35.966B in revenues for the year ago quarter. SEC Filed Press Release

As of 9/28/13, Apple had $40.546B in cash, cash equivalents and short term investments and another $106.215B in long term marketable securities. Long term debt stood at $16.96B.

During the quarter, the company generated $9.9B in cash flow from operations and returned $7.8B to shareholders in the form of dividends and share buybacks.

Annual Report: Form 10-K

The annual report shows the rapid increase in sales and net income starting in the 2009 F/Y (revenues $42.905B and net income $8.235B) to and including F/Y 2013 (revenues $170.91B and net income of $37.037B).

There was a rapid acceleration in both revenues and net income from F/Y 2009 through F/Y 2012. However, starting in F/Y 2013, there was a significant decline in revenue growth and a decline in net income. Part of the slowdown in growth is explained by the increasing large revenue numbers being generated by the company:

F/Y Ending in September (in billions)
2009 $42+
2010 $65+
2011 $108+
2012 $156+
2013 $170+

Rationale: While Apple's revenue and profit growth has slowed down, and profit growth over the near and intermediate term may be at best lackluster or even non-existent, the price reflects those concerns.

The current consensus E.P.S. is $43.26 in F/Y 2014 and $47.26 in F/Y 2015. AAPL Analyst Estimates The T.T.M. P/E is 13.25 and the forward P/E on the current F/Y2015 estimate is 11.09 at the $524 price. The P/E is of course lower when an adjustment is made for the net cash. Ex-Cash, the P/E is about 10% lower.

I have a limited goal. I want to make enough money on the shares within the next three years to buy the latest IPAD. I read several reviews discussing the new IPad Air and was impressed with that device. I would buy it now if I did not already own the IPad2.

There was a video at the WSJ that started showing a pencil laying on a desk. iPad Air Review by Walt Mossberg - WSJ.com Nothing was visible except for the pencil. A person then picks up the IPad hiding behind the pencil.

An article at AllThingsD discusses the component costs of this new device. The estimated cost is between $274 to $361 depending on the model.

I have started to really like my IPad2 and have been using it more frequently. I still view it as an adjunct to my desktop. The difference is that I will not replace my laptops when they fail to function properly. I view the IPad as the replacement for my laptop.

Being of a certain age, I do not catch or absorb the technology waves as quick as most precocious toddlers. I did recognize quickly the importance of the IPod and ITunes once they were first introduced by the company. I had some involvement in the music entertainment business, and I quickly bought an IPod and signed up for Itunes. Then I bought the stock.

Being old, having no background in technology whatsoever, and generally unwilling to pay up for a smartphone or many of the latest gadgets, I lacked the future vision of what was to come after those two innovations, however.

I have had the IPAD for almost a year. I first recognized the benefits of the ICloud about one week ago. I did not have to download the music, books, TV shows or movies purchased at the ITunes store into the IPAD, which is what I had been doing for almost a year. I was constantly deleting the old and adding the new since that device is really challenged for storage space.

I now understand that I can download from the Cloud without having the material stored on the device. That may seem obvious to most, but it was a revelation for me.

Risks: A company can have an abundance of talented and really smart employees and still lack vision. The LB is smart, with a lot of knowledge, and sold Apple shares at $16.

The person at the top has to have the vision thing down pat and needs to be able to distinguish between those who are capable of implementing that vision and those who are hindrances or excess baggage. Every large organization has an abundance of both. The trick is to make sure that the cream rises to the top and the less than stellar employees are given tasks within their competence levels.

Steve Jobs certainly had the vision thing down pat, and he obviously had talented people working with him. It remains to be seen whether his successor can do more than just improve on the devices already being manufactured by the company. Microsoft and HP look like beached whales compared to Apple over the past ten years.

My concerns with Apple involves three general areas: the competence and financial heft of its competitors including Google and Samsung; the future ability to replicate Jobs' uncanny ability to develop the next big thing (a really big issue); and the law of large numbers.

IBM has been combating the law of large numbers by shrinking its share base with aggressive stock buybacks. I would not be in favor of a large, one time stock dividend. Instead, I would prefer a significant and steady rise in the dividend and a slightly more aggressive stock buyback. It will be important going forward for AAPL to shrink its shares in order to generate more acceptable E.P.S. growth.

Future Buys/Sells: The goal is to harvest $500. I may buy another 5 shares below $480.

3. Bought 50 AMJ at $45.64 Roth IRA (see Disclaimer):

Snapshot of Trade: 

2013 ROTH IRA Bought 50 AMJ at $45.64
I decided to buy AMJ after noticing a price dip during the morning. On the day of my purchase (11/4/13), the shares closed at $46.05, up $.08

Security Description: JPMorgan Alerian MLP ETN is an Exchange Traded Note that attempts to track before fees and expenses the Alerian MLP Index which consists of MLPs involved in various aspects of the energy business, including pipelines, production and storage, gathering and processing.  

TOP TEN Index Components
This is a link to quotes for the five largest holdings:

An ETN is a senior unsecured note!

The buyer of an ETN is exposed to the credit risk of the issuer in addition to the risks of the securities in the index! 


The daily indicative value can be found at JPMorgan Alerian MLP Index ETN. On 11/4/13, the indicative value was shown as $45.93. I would recommend reviewing the fact sheet available at the sponsor's website. 

I first tried to place a trade in my Fidelity account and was not allowed to place an order:


I could not live with Fidelity as my only broker. I have received this message on several securities that trade with narrow Bid/Ask spreads and decent volume. If I had placed a order for a "closing trade", my only option with Fidelity, I would have received a $46.05 price rather than the $45.64 price actually paid by using Vanguard earlier in that day.

Average volume for AMJ is over 700,000 shares per day.

Prior Trade: I flipped 50 shares within the past year. Item # 6 Sold 50 AMJ at $47.99-ROTH IRA (5/13/13 Post) (snapshot of profit=$490.94)-Bought Roth IRA:  50 of the ETN AMJ at $37.89 (12/19/12 Post) 

Rationale: 1. Income and Some Appreciation Potential: What is my goal in the retirement accounts? I am certainly content with generating a 10% compounded return by investing in income generating securities. Most of those securities purchased in those accounts will generate more than 50% of that return from dividends or interest, bringing me close to that 10% goal before share price appreciation.

For a security like PSEC, which pays over 10%, I only need to sell the shares for a profit to realized that objective, and I could do so now Paired Trade: Sold 50 PRY @ $25.51 & Bought 100 PSEC @ $10.2-Roth IRA

For AMJ, the current dividend yield 4.67% based on a $45.64 total cost per share and the prior 4 quarter distributions ($2.132 paid in quarterly distributions of $.5131. $.5225. $.5591, and .5378 per share) I will need more share price appreciation to hit my 10% objective compared to higher yielding securities like PSEC.

The last dividend quarterly dividend went ex dividend on 8/26/13: JPMorgan Chase 

Risks: This security has had a good run in price and a normal correction could wipe out the value of two or more years in distributions. While the price may later recover back to the investor's purchase price, the risk of lost opportunity comes into play. Needless to say, I was better off buying this security at $37.89 in December 2012 than at $45.64 earlier this month. I have more potential for capital appreciation at $37.89 and a higher dividend yield, both being obvious points.

Since an ETN is a senior unsecured note, I am exposed to the credit risk of the issuer. I am currently comfortable with the JPM credit risk, but many investors were comfortable with Lehman's credit risk too before 2008. Sh-- Happens!

4. Bought 50 GSPRJ at $22.78 (see Disclaimer):  

Snapshot of Trade:

2013 Bought 50 GSPRJ at $22.78

Security Description: The Goldman Sachs Group Inc. Fixed-to-Floating Preferred Rate Stock (GS.PJ) is a fixed to floating rate equity preferred stock issued by Goldman Sachs.

GSPRJ will pay quarterly non-cumulative dividends at the rate of 5.5% per annum on a $25 par value. The 5.5% fixed coupon rate will be applicable from the issue date to, but excluding 5/10/23. On or after 5/10/23, GS has the option to redeem this security at par value plus any accrued dividends. If the security is not redeemed, the coupon transitions to a floating rate on 5/10/23. The floating rate would be a 3.64% spread to the three month Libor. PROSPECTUS SUPPLEMENT DATED APRIL 18, 2013

This security has a typical stopper clause, summarized at page S-3 of the prospectus, that prevents GS from paying a cash common dividend after eliminating the non-cumulative preferred dividend. In order to legally eliminate the dividends on its non-cumulative preferred stocks, GS must first eliminate the common stock dividend.

I seriously doubt that GS would survive as a going concern after announcing the elimination of its preferred stock dividends in order to preserve capital. If you were a big customer, what would you do after hearing that kind of announcement. The customers would be trampling each other trying to get out. Instead, as shown by the Lehman BK, an investment bank goes from paying dividends and interest to its preferred stock and bond holders up to the BK filing and then no one gets paid. It is all or nothing as a practical matter.

The new equity preferred stocks issued by financial institutions allow for an early redemption for a regulatory capital event.

As with other equity preferred stocks issued by Goldman Sachs, GSPRJ is currently rated junk by both S & P and Moody's. S & P has it at BB+. Moody's rates it at Ba2. 

Recent Earnings Report: For the third quarter, GS reported net earnings of $1.4B or $2.88 per share on $6.7B in revenues.  10-Q

The company is currently paying a quarterly common dividend of $.5 per share which is relevant to the owner of a preferred stock. That dividend would have to be eliminated before GS could eliminate the non-cumulative dividends on its equity preferred securities.

Rationale: (1) Tax Advantaged Income Generation: This security will pay qualified dividends, so I bought it in a taxable account.

The current yield is almost equivalent to the yield provided by fixed coupon GSPRB which does not have the Libor float protection.

The current yield at a total cost of $22.78 for GSPRJ is about 6.04%. GS.PB closed last Friday at $24.15, a narrower spread to its $25 par value, and was yielding 6.42% at that price.

(2) Initiation of the Floating Rate in 2023 May Result in A Redemption:

If the Libor rates are high enough in 2023 or anytime thereafter, GS may elect to redeem this security providing me with a profit. I would not mind under those circumstances, since I could take the proceeds and invest in a higher yielding security. That is the reverse of what has been happening to investors over the past several years. Companies have been redeeming higher coupon bonds and issuing new securities with lower coupons and longer maturities. The float provision could turn this security into a term equity preferred stock.

Investors do not want a redemption when the comparable alternative produces less income. I would prefer a redemption of a lower yielding security when rates are higher which would only occur in a fixed to floating rate type of security. GS would not redeem a 5.5% fixed coupon perpetual preferred stock in order to replace it with a 7.5% coupon preferred stock. It might replace that 5.5% fixed coupon preferred when it has to pay 7.5% due to the Libor float activation. And, if it chooses to refrain from doing so, the investor has some protection due to the LIBOR float in those circumstances compared to the fixed coupon owner.

A fixed to floating rate preferred stock will have a theoretical duration less than a fixed coupon preferred stock (see page 8: cohenandsteers.com When_Interest_Rates_Rise.pdf) I would not personally use the bond concept of duration in connection with perpetual preferred stocks unless it was likely that the issuer would exercise its right to redeem the security. In practice, if short term and long term rates remained abnormally low after the GSPRJ option right comes into existence, the duration would remain perpetual for GSPRJ until such time as short term rates rose to a level where it would make sense for GS to redeem it.

Risks: Equity preferred stocks issued by heavily indebted financial institutions would become worthless in a BK. Their lowly status in the capital structure, superior only to common stock, creates volatility in the share price in times of economic stress. The non-cumulative feature will on occasion provide fuel for that volatility. A rise in interest rates will cause declines as more senior securities become more competitive. 

A company like GS has all kinds of inherent risks. (see discussion of risk factors starting at page 24 in the 2012 Form 10-K.  Risk factors relating to GSPRJ are discussed in the prospectus starting at page S-8.

This security was sold to the public in April 2013 and had suffered a  8.88% decline from its IPO price when I bought shares earlier this month. The price has continued to decline since my purchase. That decline simply highlights both the interest rate and volatility risks.

5. Bought 100 CSX at $26.33 (see Disclaimer):

Snapshot of Trade:

2013 Bought 100 CSX at $26.33
Part of Detailed Quote at Fidelity:


Price at $26.37
By the time I entered the order, the price had fallen 4 cents, and the bid/ask spread was 1 cent, so I just entered a market order for 100 shares.

Security Description: CSX has approximately 21,000 miles of track and access to 70 ports and nationwide transloading and warehousing services.

CSX Profile Page at Reuters

CSX Key Developments page at Reuters

Company Website: Welcome to CSX.com - CSX

2012 Annual Report: CSX-12.28.2012-10K

Map of Lines and Terminals:



Page 14: CSX-12.28.2012-10K

CSX Key Statistics Page at Yahoo Finance (Price at $26.25 per share)
ROA (TTM): 7.18%
ROE (TTM): 20.11%
Forward P/E: 13.32
Estimated 5 Year P.E.G: 1.25

The company reiterated its forecast  that 2013 earnings per share will be "slightly up from last year despite continued headwinds in both the export and domestic coal markets": 11/6/13 Press Release: Intermodal Investment Strategy Continues to Drive Growth for CSX Revenues from coal shipments declined by more than $500 in 2012. 

I am looking for some compensation for CSX trains waking up the Old Geezer at 3:00 A.M. with that loud horn, repeatedly honked, as the train approaches a nearby crossing:

Train Crossing Wikle Road-Bottom Right Hand Corner
I recognize that I have no legally cognizable claim for that incessant horn honking. Even worse, a $300 or so gain on CSX shares would be inadequate compensation anyway. Maybe it would be adequate for this month.

S & P gives the stock a 4 star rating with a $29 price target.

After my purchase, Seeking Alpha published a favorable article about CSX.

Another Seeking Alpha article pointed out that CSX was trading at the lowest Enterprise Value/EBITDA among major railroads.

Prior Trades: I can not remember any.

Recent Earnings Report: CSX reported Q3 net income of $463M or $.46 per share, up from $.44 in the 2012 third quarter. SEC Filed Earnings Report Revenues rose 4% to $2.999B. 

Rationale: (1) Rail Transportation is Energy Efficient: Rail transportation has an inherent cost advantage over trucks. Scientific American

(2) Some Dividend Support: The current quarterly dividend is $.15 per share. Assuming a continuation of that dividend, the yield would be about 2.28% at a $26.33 total cost per share. With the economy improving, some dividend hikes are possible.

(3) The price paid for the shares is reasonable.

(4) Technicals Currently Look Good: Fidelity has a service called Trading Central that provides a technical analysis. That service has a bullish medium term signal and a green light short term provided a $25.8 support price prevails. At the time of my purchase, the stock price was trending above its 50 and 200 day SMA.  CSX Interactive Chart 

(5) CSX's Rail Lines and Terminals Are a Natural Monopoly: A competitor can not cost effectively duplicate CSX's network of rail lines and terminals.

This is what a rail yard and terminal, near downtown Nashville, looks like:

CSX Rail Yard
Those little specs are railcars:

Up Close Picture

Risks and Disadvantages:  

(1) Erratic Earnings: CSX is in a cyclical business. Recent results have been hurt by the Near Depression and the weakness in coal shipments. Net earnings was reported at $1.485B in 2008; $1.128B in 2009; $1.563B in 2010 and $1.859B in 2012.

(2) Slow Earnings Growth: Due to the weakness in coal shipments, earnings growth is likely to be subdued 2013-2014.

All of those factors will restrain multiple expansion.

The company discusses risks starting at page 6 of its 2012 Annual Report: CSX-12.28.2012-10K

Future Buys and Sells: I would consider averaging down with a 50 share purchase at below $24. I will consider selling this lot when and if the price exceeds $29, preferably within 12 months.

6. Sold: 50 BANC at $13.5, 50 BANCP at $26.12 (See Disclaimer): I noted a horrible earnings report from BANC last Friday morning. The CEO resigned; and there was no explanation in the earnings release for the dismal results or the CEO's departure. Banc of California Reports 2013 Third Quarter Financial Results This became a shoot first and ask questions later type scenario, since I had to leave HQ early that morning. I entered market orders to sell my positions in BANC and BANCP before the market opened, and I then had no indication of how the market would react to the news.

For the third quarter, BANC reported a net loss of $.53 per share. The consensus estimate was for $.29. Net interest margin declined to 3.25% from 3.93% in the prior quarter. There was an unexplained drop in the capital ratios.


I found it extremely aggravating that this bank would refuse to disclose adequate information in its press release. SA did not prepare a transcript of the earnings call, so I had to listen to it over the weekend. Bancorp - Investor Relations I still do not fully understand the reasons for the results, so I have to put a negative spin on the CEO resignation. There were one time integration expenses for recent acquisitions, a write-off for goodwill when the bank changed its name to Banc of California, and lower gains on the sale of mortgages. I still have unanswered questions after reading the press release and spending time listening to a recording of the earnings conference call.

BANCP is an equity preferred stock that pays non-cumulative dividends.

I decided to stay with BANCL, a senior bond, for now. I own 150 BANCL shares. Added 100 BANCL at $25.1Bought Roth IRA: 50 BANCL at $25.20

Snapshot of Orders (satellite taxable account):

Sold 50 BANC at $13.5 and 50 BANCP at $26.12

Snapshot of Profits:

2013 BANC 50 shares +$95.98/BANCP 50 Shares $32.47
Bought 50 BANC at $11.3 February 2013
Item # 2 Bought 50 BANCP at $25.19 (9/28/13 Post)

Since the bank was not willing to provide explanations for these results and the CEO's departure in the earnings release, I decided that it was best to just abandon ship on BANC's more junior securities rather than to wait for an explanation.

On Monday, Sterne Agee downgraded BANC to neutral and lowered its price target to $14.75.

7. Bought 100 of the Stock CEF IAE at $13.02-Satellite Taxable Account (see Disclaimer): Near the close on Friday, I decided to buy IAE as an income replacement for BANC and BANCP.

Snapshot of Trade:

2013 A Satellite Taxable Account Bought 100 IAE at $13.02
Prior Trade:

2010 IAE 100 Shares +$205.36
Item # 6 Sold IAE at $17.15 (August 2010)

I obviously did not miss any upside action in the stock price by selling this stock CEF.

Part of the price decline was due to a dividend supported in part by a return of capital. Since I sold the 100 share lot back in August 2010, the fund has returned $1.12 per share in investor's capital through dividend payments.

Other reasons for the decline were the underperformance of several Asian markets particularly in China and the expansion of the discount to net asset value. This CEF was selling at a slight premium to its net asset value. The average premium over the past three years was .28%. On the day prior to my purchase, the fund closed at a 8.01% discount to net asset value.

Shanghai Composite: SSE Composite Index Index Chart

This fund was launched in 2008 and started paying $.498 per share in quarterly dividends. There have been several dividend cuts starting in 2009. The last quarterly dividend was for $.32 per share. The last three dividend payments have not been supported by a ROC. Most of the income was sourced from short term capital gains ($.7 per share), with income providing the remaining $.33 of the total dividend payouts. I acquired that data from CEFConnect under the "distributions" tab. The fund will have difficulty supporting the dividend with capital gains unless its positions experience a significant improvements in price. I noted that there was an unrealized net loss as of 8/31/13.

Security Description: The ING Asia Pacific High Dividend Equity Income Fund (IAE) is an unleveraged stock closed end fund. The fund will use a buy-write strategy. As of 8/31/13, 25.28% of the total net assets had call options written against them.

CEFConnect Page for IAE

Data Date of Purchase (11/08/13):
Closing Net Asset Value Per Share: $14.25
Closing Market Price: $13.04
Discount to Net Asset Value Per Share: -8.49
Average 1 Year Discount/Premium: -2.99%
Average 3 Year       "  : +.28%
Average 5 Year      "   : -.81%

Sponsor's Webpage: ING Asia Pacific High Dividend Equity Income Fund - overview (5 year average annual total return for five years ending 10/31/13, based on net asset value=13.39%)

TOP TEN HOLDINGS AND COUNTRY WEIGHTINGS
SEC Filed Shareholder Report (period ending 8/31/13)

I am not likely to hold this position for more than 18 months. I would hope to flip it whenever I can nail down a 10% total return.

Politics and Etc:

1. A Government That Feeds Fraudsters Far Better than Underprivileged Children: The U.S. government has been an easy mark for fraudsters, an easily observable and undebatable conclusion. The problem only becomes worse as the government dispenses more cash.

Occasionally, one hears a politician talking about reforms that would cut down on fraud, but that is just talk jive for votes. It is understandable that the government does not take more proactive measures since money is not being stolen from politicians and other government employees.

The I.R.S. is just one of many incompetent government institutions. It claims to be making some progress in cutting government losses due to fraud. The inspector general found that the I.R.S. only refunded $4B last year to identity thieves. CBS News That is progress according to the government.

Apparently, the IRS had trouble figuring out that something might be amiss when it sent out 580 tax refunds totaling $870,000 to one address in Orlando.

I would just note that the 580 refund checks were apparently sent out long before the IRS has even processed my legitimate $1,000+ request for a refund. I filed my return over 7 months ago and my return is still being "processed" by the I.R.S. I will never ask for a refund again. It is just too aggravating.

The amount of money lost by the government to fraud exceeds $70B each year. The worst offender is Medicare. Medicare: A $60 Billion Per Year Fraud -CBS NewsGAO reports $48B in Medicare fraud in 2010U.S. GAO - Medicare and Medicaid Fraud, Waste, and Abuse: Effective Implementation of Recent Laws and Agency Actions Could Help Reduce Improper Payments.

From the LB's perspective, one way to deal with this problem is simple. The criminals will need to see that crime is not likely to be rewarding, and the government is no longer an easy mark. This would involve longer prison sentences, requiring the construction of several new federal prisons, and the hiring of at least another 10,000 investigators and prosecutors. More sting operations would be started to catch fraudulent billing. More federal employees would be hired to check out suppliers before Medicare starts paying them.

I would say that the Obama administration has been more diligent than prior administrations in cutting down on Medicare fraud. U.S. GAO - High Risk: Medicare Program;  "FBI tracking down Medicare fraud fugitives from South Florida" - MiamiHerald.com; "Policing of Medicare fraud explodes over two years": USA Today; Medicare Fraud strike force charges 89 individuals for approximately $223 million in false billingMedicare Fraud Strike Force Charges 91 Individuals for Approximately $430 Million in False Billing.

However, it is clear that Congress has not appropriated enough funds to keep up with meaningful enforcement efforts: Medicare fraud outrunning enforcement efforts | Center for Public Integrity Why is there a problem in funding when everyone knows that tens of billions are being stolen every year?  

3 comments:

  1. I bought APPL in 2005 for $51.17 and sold it a few weeks later for $51.70. My only excuse for that lame move is that it was part of my first foray into self-directed portfolio construction and stock market investing in my entire life. (A few years later the markets blew up, providing me with another valuable set of lessons, hopefully of the once-in-a-lifetime variety!)

    Like you, I have been eyeing the new iPads. I have an iPod Touch which I love; basically it is a smaller version of the iPad Mini. The Air is tempting.

    I haven't jumped into the Cloud yet due to privacy and security concerns. For storing music, videos and books, it's probably fine. This entertaining clip highlights some concerns:

    http://cnettv.cnet.com/tech-trends-big-brother-must-love/9742-1_53-50151744.html

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  2. Cathie: I did not seek out Apple's ICloud service. I just touched the music icon on the IPAD for some reason and all of the music previously purchased from the ITunes store was there with little cloud icons next to each song. I had not downloaded the songs into the IPAD.

    When I tapped a cloud icon next to a song, the song started to play almost immediately. Fifty years ago, someone carrying that device around might have burned at the stake. The same would be true for movies and books purchased through ITunes. The ICloud storage option is very handy when dealing with a device that is considerably constrained for storage. My IPOD has far more storage for playing songs, movies, and audiobooks.

    For other items, the customer can store up to 5GB for free and then it becomes a paid service after 5 GB. I have no intention of storing anything that was not purchased originally from ITunes other than possibly digital photographs.

    ReplyDelete