Wednesday, November 27, 2013

Roth IRA: Bought 50 KFNP at $24 and Sold 100 SDA at $14.13/Added 100 Cominar REIT at C$18.15, 50 SAN at $8.62/Sold 202+ TICC at $10.5 (102+ Roth IRA & 100 in a Taxable Account)/Added 50 of the Bond CEF NBB at $17.76

Big Picture Synopsis

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

I would certainly agree with Jeremy Grantham's comment in his quarterly commentary that the Efficient Market Hypothesis (EFM) is the "most laughable of all" assumption based economic theories. (GMO_Quarterly Letter 3Q 2013.pdf which is reprinted in

As Grantham noted, if the EMH hypothesis had any validity, four of the largest asset bubbles in the history of mankind would not have occurred just in the past 25 years. Those bubbles are the Japanese stock and real estate bubbles that culminated in 1989 and 1991 respectively, with the Nikkei peaking at over 39,000 and the land underneath the emperor's palace being valued equal to all of the land in California. Then there was the 1999-2000 bubble in stock prices and the bubble in housing and other assets prices that peaked in 2007.

The mere fact that most portfolio managers can not beat a market index is not proof of EMH. Instead, their failures only prove that those managers are prone to making a veritable cascade of errors that have a compounding effect and really should not be managing anyone's money including their own. 

Grantham believes that the path of least resistance, given the abnormal monetary policies of central bankers, will be for stocks to go up in the U.S. "perhaps by 20% to 30% in the next year or, more likely, two years", with the rest of the world, particularly emerging markets going up more to catch up with the U.S. Then, in his opinion, there will be another really nasty mean reversion. 

Grantham is worth reading.  

He had some interesting comments about Larry Summers and Brooksley Born that are similar to the ones made in one of my old posts. Stocks, Bonds & Politics: Wild West Capitalism & Brooksley Born (2/25/2009 Post) 

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

As Grantham noted, how rationale was it for investors to price 30 year treasury bonds in 1982 at 15% or as much as 16% when the FED was almost done in squashing inflation?  Rational Investors were forecasting inflation at nearly 13% in 1982, thirty years into the future, even though events were then changing to make that forecast totally irrational and unjustifiable. The herd of Rational Investors will invariably project the immediate past into the indefinite future.

When managing the bond side of my portfolio, I will not postulate that investors are correctly predicting the future. Instead, I will just assimilate the evidence and formulate alternate scenarios, placing my "bets" based on the probabilities assigned to each scenario. In 2012, I would have assigned a negligible chance to a deflation/persistently low inflation scenario in the U.S. I am now up to 15% to 25%, so I have increased slightly my long term bond allocation. 

Recent Developments:

CPI decreased .01% in October on a seasonally adjusted basis. Consumer Price Index Summary Core CPI rose .1%.

The persistently low CPI numbers suggest powerful deflationary forces at work that are bucking the Fed's extraordinarily accommodative monetary policies. Those deflationary forces for the U.S. include excess capacity in both plant and labor. Real wage growth for the vast majority of workers has been anemic or non-existent particularly for non-skilled workers. (Doug Short Graph: Real Hourly Wages WSJ; Washington Post: "Between 2000 and 2012, American wages grew…not at all"-graph in article shows real wage growth by percentiles)

Other deflationary forces include productivity gains (e.g. automation), abundant and relatively low cost natural gas supplies, anemic demand for products and services and low cost items imported from abroad (e.g. clothing). The demand side of the equation is being impacted by relatively high unemployment, economic uncertainty, generally poor consumer confidence, excessive debt among millions of households, and slightly positive or negative real wage growth. 

The Cleveland Fed's median CPI rose .1% in October or at a 1.4% annualized rate. Current Median CPI :: Federal Reserve Bank of Cleveland

There was nothing surprising in the Fed minutes released last Wednesday. FRB: FOMC Minutes, October 29-30, 2013 The FED will start to taper when it is more comfortable that the economy is on more solid footing. The market initially reacted as if something new had been disclosed on the FED's intentions. Same old mush in my opinion.

Bonds reacted negatively to certain language in the Fed's minutes:

TLT: 102.78 -1.78 (-1.70%) : iShares 20+ Year Treasury Bond ETF
ZROZ: $83.18 -2.73 (-3.17%) : PIMCO 25+ Yr STRIPS (long duration)
TIP: $111.36 -0.69 (-0.62%) : iShares TIPS Bond ETF

Bond prices have risen since last Wednesday, with TLT closing at $104.6 yesterday.

Existing home sales fell 3.2% on a seasonally adjusted basis in October.

Norcraft Bond Call:

The 10.5% Norcraft second lien bond has been called at 102.625 effective on 12/16/13:

That redemption price is set forth in the prospectus at page 71, Definitive Prospectus;

Prudential CPI Floater (PFK-OWN 100 Shares):

I sold 100 shares of this $25 par value senior bond earlier this year. Item # 3 Sold 100 PFK at $28.25-Bought 100 PFK at $18.466 (snapshot of gain=$962.38). I mentioned then that I would hold my other 100 shares, held in the ROTH IRA, for another year before making a decision.  I have a similar profit in those shares (see snapshot)

This bond pays monthly interest at a 2.4% spread to a CPI calculation and matures on 4/10/2018 at $25. Pricing Supplement No. 122 dated March 31, 2006 I explain how that calculation is made in Item # 3 PFK.

There were two primary issues that need to be addressed in order to decide whether to take my profit now or to wait. The first is that CPI is currently running below 2% and likely to stay that way for several months at a minimum and possibly for several years. For the 12 months ending in October, CPI increased 1% before seasonal adjustments. Consumer Price Index Summary The second is that the premium to par value will shrink as we move closer to the April 2018 maturity date.

The shares are now trading near $26.75. PFK Stock Quote If I wait until maturity, I will lose that premium, worth approximately $168.

What would I give up by selling now in terms of PFK's interest payments until maturity? I can not predict with any certainty the likely average coupon for PFK until maturity. I can only estimate now a reasonable range. On the low side, I would postulate a 1.5% average CPI rate and 2.5% on the high side. Adding the 2.4% spread to those numbers, I come up with a 3.9% to 4.9% coupon on a $25 par value or a monthly interest payment between $.08125 to $.1021 per share or $8.125 to $10.21 for my 100 shares. I am going to multiply those last numbers by 52 months to arrive at $422.5 yo $530.92. So I would be giving up $254.50 to $362.92 by taking the $168 profit over the $25 par now

Let's say I invested the proceeds of $2,668 in the senior bond from Argo Group International Holdings Ltd. 6.5% Sr. Notes Due 2042 at $21, just as an illustration of my point, buying 127 shares which would generate over the same 52 week period about $894 in interest income. (.065 x. $25=$1.625 annually per share dividend by 12 months=$.1354166666 per share x. 52 weeks) I would take on more interest rate risk with a note maturing in 2042 but I am now up to a $168 additional profit on the PFK shares and another $531 more income than my high estimate for PFK)

Another consideration is how PFK is priced in relation to a fixed coupon bond from Prudential maturing at about the same time. I found this Pru bond maturing in August 2018 with a 2.3% coupon trading at over its par value. Bonds Detail The YTM on that one is handing around 2%. In my opinion, the exchange traded PFK is being priced too low if that bond is priced right by the market. If I assume a 3.9% annual coupon for PFK (just a 1.5% average annual CPI for the next 52 months), the YTM at $26.75 is about 2.32%. And, I may have upside up to a 3.31% YTM with my high assumption.

Consequently, I have decided to wait for a slightly better price.

Closing Price 11/26/13: PFK: $26.52 -0.48 (-1.76%)

Western Asset Investment Grade Defined Opportunity Trust (IGI-own 100 shares) 

IGI declared its regular $.10 monthly dividend for December and a $.3096 per share long term capital gain distribution. Western Asset Investment Grade Defined Opportunity Trust Inc. (“IGI”) Announces Distributions for the Months of December 2013, January and February 2014

IGI is an unleveraged closed end bond fund that is weighted in investment grade bonds. It is a term bond fund scheduled to liquidate in 2024 which is also the case with GDO. I am a frequent trader of both both bond CEFs. My last trade was to sell IGI and to buy GDO.  Item # 3 Bought Roth IRA: 100 IGI at $19.43 (9/7/13 Post)-Paired Trade Sold 100 IGI at $20.22 in Roth IRA and Bought 100 GDO at $17.79-Regular IRA (10/24/13 Post)

I currently own 100 shares of IGI. Added 100 IGI at $19.28 (10/14/13 Post) I may elect to sell those IGI shares when and if the share price hits or crosses $20.5.


Closing Price 11/26/13: IGI: $19.46 -0.06 (-0.31%)
Adams Express (ADX-own 884+):

I elected to keep all of my shares and consequently will receive in late December a $.69 per share dividend on 884+ shares. The ex dividend date was 11/21/13 Adams Express Fund Declares Year-End Distribution The shares closed on 11/20/13 at a -14.13% discount to the $15.22 net asset value per share. CEFConnect

On the ex dividend date, the shares closed at $12.48, down -0.59 (-4.52%) from the previous day's closing price. Adjusted for the dividend, however, the shares actually gained 10 cents.

On the day prior to the ex dividend date, the shares closed at $13.07, representing a -14.13% discount to the then current net asset value per share of $15.22.


Closing Price 11/26/13: ADX: $12.27 +0.05 (+0.41%)

Alcoa (own 343+): 

AA is one of my contrarian plays that requires an abundant amount of patience, a commodity normally in short supply here at HQ.

GS upgraded Alcoa to buy from neutral and boosted its price target to $11. While acknowledging that the price of aluminum has been sagging, GS argues that the market is undervaluing AA's higher margined products, particularly its engineered products, and I would tend to agree with that assessment.

Cramer makes the same point in this Video: Cramer: Alcoa

Engineered products includes super alloy castings; forgings and fasteners; aluminum wheels; integrated aluminum structural systems; and architectural extrusions used in the aerospace, automotive, transportation, and industrial products markets. Pages 18-19, Form 10-K; page 9 of ESEC Filed Press Release-Earnings for Q/E 9/30/13. For this segment, after tax operating income (ATOI) was up 22% to $192M with the highest quarter ever of adjusted EBITDA margin of 22.5%.

Eventually, there will hopefully be a surge in aluminum prices coinciding with a surge in revenues from those higher margined products.

AA has certainly be stuck at historically low price levels for some time now. AA Interactive Chart The stock has made little progress after the Near Depression caused a significant price drop and an ejection from the DJIA.

AA Key Statistics

Analysts are not expecting much of a recovery in profits either. The current consensus forecast is for $.31 in 2013 and $.53 in 2014. While that is decent earnings growth, the forward P/E based on that estimate would be about 18.11 at a $9.6 price, which is very high for a cyclical company. AA will need to do far better than that consensus in 2014.

I am reinvesting the meagre dividend to buy more shares and just received 1.13 new shares that way:

Alcoa slashed its quarterly dividend from $.17 per share to $.03 in 2009 and has continued to pay that $.03 per share ever since that slash. Alcoa: Invest: Financial Information: Dividend History I am not anticipating a dividend increase in 2014.

So far, I have been patient with this position.

Closing Price 11/26/13: AA: $9.65 +0.06 (+0.63%)


1. Bought 50 KFN PR at $24-Roth IRA (see Disclaimer): The symbol for this equity preferred stock was KFN PR at Vanguard. 

Snapshot of Trade (as noted earlier, the Blogger software is turning these snapshots dark from a clear white background):

2013 Roth IRA Bought 50 KFN PR at $24

Security Description: The KKR Financial Holdings LLC Preferred 7.375% Series A Stock (KFN.P) is an equity preferred stock issued by the publicly traded partnership KKR Financial Holdings LLC (KFN). The common stock has a higher dividend yield than this preferred stock. 

At a total cost per share of $24, the current yield is about 7.68%.

KKR has the right to redeem at the $25 par value per share plus accrued dividends on or after 1/15/2018. Distributions are cumulative. There is a Dividend Stopper Clause at page S-19 of the prospectus. KKR can not pay a cash distribution to its common shareholders and defer the preferred share distribution.

According to Quantumonline, this security is not rated by Moody's and has a BB rating from S & P.

The last cash distribution was for $.460938 per share payable on 101/5/13.  

A recent article discussing KKR Financial Holdings was published by Seeking Alpha.

Company Website: KKR Financial Holdings LLC 

KKR Financial Holding Profile Page at Reuters

KKR Financial Holdings Key Developments Page at Reuters

KFN Key Statistics at Yahoo Finance

Prior Trades: None

Related Trade: I have bought and sold the common shares in an IRA. Item # 2 Sold 150 KFN at $9.78 (9/10/12 Post)(snapshot of profit=$103/total return=$134.5)-Item # 4 Bought 100 KFN at $9-Regular IRAAdded 50 KFN at $8.81-Regular IRA (3/15/12 Post) 

Recent Earnings Report: For the 2013 third quarter, KKR reported net income of $33M or $.16 per share, compared to $.39 per share in the previous quarter. Book value per share was reported at $10.42. SEC Filed Earnings Press Release for Q/E 9/30/13 For the nine months ending 9/30/13, KKR reported net income of $224.354. After subtracting preferred share distributions of $20.52M during that nine month period, total income available to the common shareholders was $203.834M or $1.01 per share. The company paid out $.68 per share in dividends to the common shareholders. 

The market reacted negatively to this report, sending the shares down from a $10.87 close on 10/23 to $10.11. KFN Historical Prices The common shares have continued to drift down falling to a $9.42 close on 11/12 (ex dividend of $.22 per share on 11/4/13). 

YF does not have an interactive chart for the preferred stock, so I have to use the one at Marketwatch which takes longer to load. KFN.P Stock Chart The preferred shares closed at $24.5 on 10/23 and at $24.47 on 10/24, so there was no immediate reaction to the earnings report. The preferred shares continue to rise to a $24.84 closing price (10/30) before declining. 

The preferred shares traded to a closing high of $26.84 (5/8/13) and hit their low at $23.74 (8/19) before my purchase. I attribute that 11.55% decline to the rise in rates which started in early May. 

Rationale: (1) Entirely About Generating Tax Free Income in the Roth IRA: The management of the retirement accounts focuses on generating a constant stream of dividends and interest distributions. Cash flow is then used to purchase more of the same, creating a compounding effect over time. 

A 7.5% average weighted tax free yield for all Roth IRA investments will double the account's value in about 9.58 years, Estimate Compound Interest, and would be generating a 5+% real rate of return based on the inflation forecasts currently embodied in the pricing of the 10, 20 and 30 year TIPs. This assumes that I can managed the income generating securities at break-even. If I can generate at least another 2.5% in realized gains per year, which would bring the annual total return percentage to 10%, then the doubling occurs in 7.2 years. 

The difficulty is selecting securities that can generate the 10% annualized total return, mostly from distributions, without causing a significant loss in principal value. If I lose most of a $1,000 investment yielding 7.5%, other investments will have to perform substantially better than just an annualized 2.5% gain for me to reach the holy grail of 10% annualized for the account total.

Assume doubling in 7.2 years which is easier said than done:

Approximate Values:
Assume $50,000 Balance Now 
$100,000 7.2 Years
$200,000 14.4 Years
$400,000 21.6 Years
$800,000 28.8 Years
$1,600,000 36 Years

I have ceased funding my IRAs.

Risks: (1) Lots of Senior Debt: When looking at an equity preferred stock, which is senior only to common stock in the capital structure, it is important to at least look at the amount of debt carried by the firm. As of 9/30/13, KKR had $5.79+B in debt outstanding (page 27, 10-Q). Most of that debt is of the senior secured variety. While I have not performed an analysis, I doubt that the equity preferred stock would have any value in a BK.  I would view the credit risk as material. 

(2) K-1: The owner of these preferred shares will receive a K-1. The distributions will be classified as qualified dividends. I would consequently avoid buying these shares in a taxable account in order to avoid the tax preparation hassle. As noted at page S-13 of the prospectus KKR will have "unrelated business taxable income" (UBTI) which is relevant to my ownership in an IRA. 

Tax is owed on UBTI that exceeds $1,000 in a retirement account. National Association of Publicly Traded Partnerships This preferred stock will be the only security generating UBTI and I will keep my position at just 50 shares. As noted in that article, it is the "IRA's share of the partnership income and not the cash distributions it receives that is subject to UBIT". (emphasis added). Consequently, it is not really possible to calculate UBIT, with any precision, in advance of receiving the K-1.

(3) Interest Rate Risk: As shown by the price action between 5/8 to mid-August, a perpetual equity preferred stock will go down in price when interest rates start to go up.

(4) KKR's Long Recitals of Risks: The company summarizes risks relating to this preferred stock starting at page S-8 of the prospectus.  

The company summarizes risks relating to its operations starting at page 22 of its 2012 Annual Report and ending on page 58. Those are single spaced pages by the way. 

Future Buys/Sells: Due to the UBIT issue, I am not likely to buy more. I will be looking to harvest a 10% annualized total return when and if the distributions plus capital appreciation provide me with that opportunity. Depending on the price of the common shares, I may sell the preferred shares sooner in order to buy back the higher yielding common shares which have the same UBIT issue as noted in the previously linked posts.

Closing price 11/26/13: KFN-P: $23.80 +0.10 (+0.42%) 

2. Sold 100 SDA at $14.13 Roth IRA (see Disclaimer): I mentioned that this PPN might be sold when I last updated my Exchange Traded Bond and Preferred Stock Table as of 11/14/13. The reasons for selling it are discussed in my comment to that post.

Quote: Bank of America Corp. Market Index Target Term Secs for Dow Jones Industrial Average (SDA)

Prospectus: Final Term Sheet No. 286

Snapshot of Trade:
2013 Roth IRA Sold 100 SDA at $14.13

Snapshot of Profit:

2013 Roth IRA SDA 100 Shares +$418.02
Item # 7 Bought 100 SDA at $9.8 (4/14/2010 Post)

I was satisfied with the 42.31% return since my purchase.

For a PPN, this one is easy to understand, as I explained when the Old Goat made the purchase:

The OG is becoming nervous about the stock market. While he may be wrong, he is under the impression that money does not grow on trees and the current level of enthusiasm seems to just about match the pessimism prevailing in March 2009.

3. Added 100 Cominar REIT at C$18.15 (see Disclaimer): This is an average down. I am reluctant to average down when buying securities on the Toronto exchange, using Fidelity, since my commission cost is C$19. I consequently took my full position in Canadian Apartments (200 shares) and Artis (300 shares) in one order.

Snapshot of Trade:

Security Description: Cominar Real Estate Investment Trust Units  (CUF.UN:TOR) is a Canadian REIT that owns 493 office, retail, and industrial/mixed use properties in Canada containing 36,788,000 leasable square feet. It is the largest commercial property owner and manager in Quebec. Cominar Properties - Overview

Like other Canadian REITs, this one pays monthly distributions. The current monthly distribution is C$.12 per share. Investor Relations - Distribution History This REIT did not cut its dividend during the Near Depression period, but did maintain the annual rate at C$1.44 for 2009-2012.

I recently discussed this REIT and only have a few additional comments.

Welcome – Cominar Real Estate Investment Trust

Cominar Properties - List of Properties


The price has been in a free fall since rates started to move up in early May:  CUF-UN.TO Interactive Chart As shown in that chart, the shares closed at C$23.94 on 5/1. The 24.19% decline to C$18.15 is to say the least a significant drop in price. I have not seen anything in the results that would explain that decline.

I have bought some of the Canadian REITs for family members using USDs on the U.S. pink sheet exchange. Cominar ordinary shares are listed in the U.S. Grey Market which I try to avoid. I bought shares listed on the Toronto exchange using my Canadian Dollar stash.

Prior Trades: Item # 4 Bought: 100 Cominar REIT at C$18.75

I made a $196.7 profit on a prior round trip (snapshot in preceding linked post): Pared Trade: Sold 100 CUF_UN:CA @ 22.66 CAD & Bought 100 CDZ:CA at 21.26 CAD-Bought 100 CUF-UN.TO @ 21.68 CAD

Recent Earnings Report: For the Q3 2013.pdf, Cominar reported a 14.9% increase in operating revenues; a 14.4% in net operating income; and a 8.1% per unit increase in recurring adjusted funds from operations. As of 9/30/13, the debt ratio was at 50.9% with an interest coverage ratio of 2.81:1. Overall occupancy was at 93.3%.

Properties as of 9/30/13
Page 10

Rationale and Risks: I discussed these items in Item # 4 Bought 100 Cominar REIT at C$18.75 (10/7/13 Post)

With a lower price, my yield does rise a tad. The yield at a total cost of C$18.15 is about 7.93%, compared to 7.68% at a total cost of C$18.75.

As an asset class, REITs have been falling in price and may have further to go. While I believed that most of them were clearly overvalued in May 2013, and consequently did not own any, several have become relatively attractive after declining in price. The 24%+ decline in Cominar shares, which has raised the dividend yield to almost 8%, has reduced the valuation risk. However, once shares decline that much, further declines may happen, as momentum to the downside has a tendency to over compensate.

The stock is ex dividend for its monthly distribution on 11/27.

Closing Price 11/26/13: CUF-UN.TO: 18.16 0.00

5. Added 50 SAN at $8.62 (see Disclaimer):

Snapshot of Trade:

2013 Added 50 SAN at $8.62
Security Description: Banco Santander S.A. ADS (SAN) operates more than 14,000 branches in Europe (including the U.K.), Latin America and the U.S. As of 9/30/13, the bank had 14,561 branches and 102 million customers.

Company website: Investor Relations

Banco Santander SA (SAN) Profile Page at Reuters

Banco Santander SA (SAN) Key Developments Page at Reuters

SAN Analyst Estimates (E.P.S. $.56 in 2013 and $.67 in 2014)

At a total cost of $8.62 per share, the forward P.E. is about 12.86.

SAN Interactive Chart

2012 Annual Report.PDF


Morgan Stanley initiated coverage of SAN at equal weight on 11/13/13.

Prior Trades: My last two buys were made in 2012 and 2013. Item # 3 Added 40 SAN at $6.8 (4/16/13 Post) I did not discuss the other one, made on 7/17/12:

2012 Added 50 SAN at $5.55
I have reinvested the generous dividend to buy more shares, starting in July 2012, which have mostly been at prices below this last purchase. The last reinvestment was at a higher price.

I am slightly in the hole due to these purchases, however: Bought 50 STD at $13.35 (April 2010) and Bought 50 STD at $12.35 (April 2010).

Related Trades: I have bought and sold Santander Finance's equity preferred floater several times and currently own 180 shares: Item # 6 Bought Roth IRA: 50 SANPRB at $19.35 (7/20/13 Post)Bought: STDPRB at $13 (August 2011);  Added 50 STDPRB at $15.44 (November 2011). The symbol was changed from STDPRB to SANPRB.

I have booked $795.25 in realized gains in that security (snapshots in  Item # 6 and in Gateway Post for Equity Preferred Floating Rate Securities)

Recent Earnings Report: The company reported €1.055B in earnings for the third quarter. Deposits rose 5% to €663B. The President claimed that the bank was now in a position to build profits after years of provisioning for bad loans. NPLs stood at 5.43%. The coverage ratio was 63.9%. Book value was $7.58 per share. Deutsche Bank downgraded the stock to sell after the report.

As of 9/30/13, the Basel II capital ratio was 11.56%, up 1.23% in a year.

FORM 6-K (SEC Filed News Release)

Q3 2013 Results - Earnings Call Transcript - Seeking Alpha

The earnings report is discussed in this  Seeking Alpha article.

Rationale: (1) Income and Capital Appreciation Potential: I view Santander as a work in progress. Possibly, I may move into profit territory sometime in 2014.

At page 12 of the earnings call transcript, the CEO stated that "we don't expect to do any changes" on the dividend which has been €.60 annually. That works out to be a really good dividend yield on the SAN shares.

Based on what I read, almost 90% of the total dividend is taken in additional shares.

(2) Technicals: One of my many shortcomings as an investor is a lack of any training in technical analysis. I did buy a book on the subject, took it out of the Amazon carton, and placed it on my bookshelf about three years ago. I have not yet opened it. Maybe that lack of knowledge is a positive rather than a negative.

I do look at charts and the SAN stock chart sort of looks like a break-out. The price is trending above its 50 and 200 day SMA. SAN Interactive Chart 

Risks: The company summarizes risks in its financial filings (e.g. Form 20-F starting at page 13). The bank's operations in Spain have suffered massive losses, but hopefully that is now largely in the past. Notwithstanding the statement made about the dividend being sustained for another year, SAN will probably have to slash it unless earnings improve significantly. This article published by Seeking Alpha before the last earnings report argues that the current payout can not last.

Future Buys/Sells: Depending on subsequent events, I may continue buying SAN shares in small lots. I would want to see substantial progress on the earnings front in 2014, along with significant decreases in the NPL ratio, before committing more funds.

Closing Price 11/26/13: SAN: $8.75 +0.03 (+0.34%)

6. Added 50 NBB at $17.76-Main Taxable Account (see Disclaimer): I thought my recent run of bad luck with this security could change by entering a limit order at $17.76.

Snapshot of Trade:

2013 Added 50 NBB at $17.76
I now own 100 shares of NBB in the main taxable account. The average cost per share is $18.31, down from $18.71. I just changed my distribution option to reinvestment and will maintain that option for as long as the discount to net asset value remains above 5%.

Security Description: The Nuveen Build America Bond Fund owns Build America Bonds which are taxable municipal bonds. The fund will terminate on or about 6/30/2020, distributing the fund's asset to its shareholders at that time.

Data on Date of Trade (Thursday 11/21/13)
Net Asset Value Per Share: $20.13
Market Price: $17.76
Discount: -11.77%
Average 1 Year Discount: -7.65%
Average 3 Year Discount: -5.43%


The share price closed at $18.61 on 10/31/13, NBB Historical Prices Adjusted for one monthly dividend, the price declined thereafter by 3.94% to hit $17.76. The adjusted net asset value per share declined by .6%.

The monthly dividend is currently $.116. CEFConnect does not show any ROC support. Distributions Tab

At that rate, the dividend yield would be about 7.84% at a total cost of $17.76 per share.

By clicking the "portfolio characteristics" tab at CEFConnect, the investor can see that this fund is weighted in A or better bonds. I acquired this table from the sponsor's website under the tab "holdings & detail".

The sponsor shows the effective duration at 10.65 years, and the leveraged adjusted effective duration at 12.41 years, both as of 10/31/13. NBB That page also shows the credit quality break-down as of 10/31/13. At that time, the fund owned 101 different bonds.

SEC Form N-Q: Period Ending 6/30/13 Holdings

Last SEC Filed Shareholder Report:  NBB as of 3/31/13

Prior Trades: Prior to this trade, I owned 50 shares in the main taxable account.

Item # 2 Added 50 NBB at $18.55 (6/29/13) Other trades are linked in that post.

The closing net asset value per share was $20.66 on 6/24/13 (the date of purchase) with the discount then at -9.49%. The discount has expanded by 2.28% as of 11/21/13, and the net asset value has declined by 2.56% unadjusted for the subsequent monthly dividends. Adjusting for 5 dividend payments ($.58) by adding that amount back to the 11/21 NAV, there has been a five cent increase in net asset value per share which is just another way of looking at it (add back $.58 to 11/21/13 NAV of $20.13).

Rational: I am generating some cash flow with this purchase and playing the less likely, though possible scenario where long term interest rates remain abnormally low for a far longer period than currently contemplated by investors.

The current dividend yield of 7.84% at a total cost of $17.76 is 5.5+% over the average annual CPI forecast embodied in the pricing of the 10 year TIP.

Some of the recent discount expansion may be related to year end tax loss selling. This year has been a horrible one for bond CEFs. The up action in 2013 has been in the stock market. Anyone who has bought and held bond CEFs in 2013 is most likely several percentage points in the hole while the S &P 500 pushes toward new highs and a 30% total return for the year.

As noted in this recent article published by Vanguard, individual investors are chasing returns, pouring money in stocks over the past few months and jettisoning bonds.

Risks: This bond CEF has a number of material risks explained in prior posts. Added 50 NBB at $18.55 (and post linked therein including the ones involving the functionally equivalent CEF NBD) Interest rate risk is huge given the long duration. The high degree of leverage significantly adds to the risks. Risks inherent in owning CEFs have been made clear since May 2013, as the market price has slid more than the decline in net asset value. Credit risk is present, but mitigated by the sheer number of holdings and the credit quality.

The liquidation date in June 2020 may turn out to be an advantage or a disadvantage. If rates are about the same or lower than now, then the discount will narrow as that term date approaches and a buyer now would likely receive a profit on their shares. Conversely, if rates are rising at a fast clip, and are much higher than now, the liquidation date could be a disadvantage for a long term holder.

There is no way to predict the future but I do know that the discount is over 11% now so that at least provides a cushion in the rising rate scenario. Personally, I would view it as a win to receive 7.84% per annum in monthly dividend payments and then to break-even on the shares in 6 1/2 years. I am not likely to hold onto the shares for that long however.

Closing Price 11/26/13: NBB: $18.16 +0.21 (+1.17%)

7 Sold 202+ TICC at $10.5 (102+ Roth IRA and 100 Taxable Account)(See Disclaimer): TICC Capital  (TICC) is a BDC.

Snapshots of Trades:

Roth IRA:

Taxable Account:

The shares were sold at a minimal profit. Added 100 TICC at $10.30 (1/30/13 Post)

ROTH IRA History:

As shown in this history snapshot, I received $228 in dividends and had a total purchase cost of $988. At a total cost per share of $9.88, the dividend yield was about 11.74% annualized at the $.29 per share quarterly rate. TICC Capital Dividend History

By selling the shares for a profit, I realized my goal with any BDC purchased in the ROTH IRA which is a 10+% annualized total return.

Snapshot of Remaining TICC Position Held in a Taxable Account:

Remaining TICC Position Average Cost Per Share $9.94
Item # 1 Added 50 TICC at $9.85 (6/15/13 Post)

Snapshot of ROTH IRA Profit on 102+ Shares:

2013 ROTH IRA TICC 102 Shares +$57.5

Item # 1 Bought 100 of the BDC TICC at $9.8-ROTH IRA (2/9/12 Post)

Total Return 102+ Shares in Roth IRA (Dividends + Share Profit): $255.5 or 25.13%. 

Rationale: For the ROTH IRA, I am content to receive a BDC's dividend for a year or so and then sell the shares for whatever profit is available.

In retrospect, I view the 100 share purchase in the taxable account to be a mistake. Those shares were bought to close to a 5% premium to the then net asset value per share, which violates one of LB's ten billion or so trading rules. LB just said "that it is imperative to maintain both discipline and strict adherence to all RULES!".

Future Buys/Sells: I will look to buy back up to 100 shares when and if the shares trade below net asset value per share.

As of 9/30/13, the net asset value per share was reported by the company at $9.9, unchanged from the $9.9 reported at 12/30/12. 10-Q

A 5% premium on $9.9 would be $.495 or a market price of $10.395.

Closing Price 11/26/13: TICC: $10.63 +0.01 (+0.09%)

This post is long enough. The remaining trades will be discussed in the next post. 


  1. Thanks for the link to the GMO letter. It's a pleasure to read Grantham, who not only writes well, but also has something worthwhile to say...a rare thing these days.

    I know LB has his fingers on the pulses of ten thousand things and may be pressed for time, but what are your thoughts on virtual currencies such as Bitcoin?

    "...there's no fundamental reason why Bitcoin should have any value at all. The only reason people are willing to pay money for the currency is because other people are willing to as well. (Try not to think about it too hard.)"

  2. CATHIE: What is the fair value of any currency? The Bitcoin at least has a limited quantity unlike the USD which seems to have an infinite quantity. As long as enough people view anything as a currency, from seashells to gold, then the item has value as a currency but there is no intrinsic value.

    More people are willing to accept the Bitcoin in payment for goods and services:

    I know what I can buy with a $20 bill, but what will that Bitcoin buy now or in a few days, weeks, months or years?

    Gold has a much longer track record as a currency. I would prefer owning one ounce of gold (the pretty American Eagle coin) rather than one virtual Bitcoin stashed in some computer data bank. The prices are close to converging.