Tuesday, December 17, 2013

CHN/TCPC, GE, Artis REIT, PFE, KFN/Added 50 KFN/Pr at $23-ROTH IRA/Added to MACSX at $18.59/Paired Trade Roth IRA: Sold 50 BDNPRE and Bought 50 AGIIL at $20.2/Sold: 100 JLA at $12.62-Roth IRA and 200 JLA at $12.63-Taxable Account/Bought Back 100 EWS at $13.1/Roth IRA: Bought 50 FSC at $9.08 and 50 CSG at $7.65 and Sold 50 PNNT at 11.92/

In addition to the Google Search box, which has been removed since it no longer works at all, Google is now having a problem with the "followers" section which went missing for about a day. I have confirmed that Google's inability to fix its search box is worldwide and is ongoing. Search Box Not Working - Google Groups One would think that a "search" company could fix a problem with its search, which is no longer functional, but that would be an erroneous conclusion.

Big Picture Synopsis:

Stable Vix Pattern (bullish)
Vix Asset Allocation Model Explained Simply
Use of the VIX as a Timing Model
Short Term: Expecting a 10%+ Correction
Intermediate and Long Term: Bullish

It is hard for many investors to get their head around the following concept. Stocks were far more "safe" in March 2009 than now.

The chief U.S. equity strategist for J P Morgan predicts another 20% rise in the S & P 500 next year. He has a list of 29 stocks in that index which will lead the way in his opinion. MarketWatch

I would agree with his general thesis that the U.S. stock market is in a long term secular bull phase. The long term secular bull move started in March 2009. The prior long term bull market started in August 1982 during a recession when interest rates were still sky high.

If JPM is correct about 2014, the secular bull will be in its sixth year. The longest prior cyclical bull within a long term bear market lasted about 4 years and that was a long time ago (1933-1937: Dow Jones Industrial Average 1900-Present). The existence of long term bull and bear markets can be readily observed in that chart. The long term bear markets have a lot of up and down chop and go nowhere over an extended period of time.

I have occasionally argued with perma bears at SA on this point, a total waste of time since some investors are just predisposed to perpetual darkness, forever seeing the glass as perpetually empty or full of radioactive sewage. Their views can be comical at times.

Just as a sample of my remarks, I left comments to these bearish articles at SA under the moniker "Southgent 1951" using a picture of a dachshund known here at HQ as Honey Girl:

"Sorry Bulls, But This Is Still A Secular Bear Market" 
"Outlook 2013: Americans Are Going Broke"
"Why I Remain Bearish Despite The Cyclical Bull Rally"
"Stagflation: Coming Soon To A Market Near You"

Those authors, and the SA readers who read their articles due to confirmation bias, will forever grasp at whatever is negative, frequently blowing negative events out of proportion, while ignoring everything positive.

Initially, I was in the camp that the move off the March 2009 lows was a cyclical bull move within a long term secular bear market. Since I am compelled to challenge my opinions with data unfiltered by pre-existing opinions, I changed that opinion in 2012. Examples of my thought process-before changing my opinion-can be found in several posts from 2009 to 2011:

Stocks, Bonds & Politics: The Roller Coaster Ride of the Long Term Secular Bear Market (May 2010)
Stocks, Bonds & Politics: More on 1982 or 1974 (2009)
1974 or 1982: Start of Cyclical Bull in a Long Term Secular Bear Market or the Start of Secular Bull Market? (September 2009)
Stocks, Bonds & Politics: The Importance of Identifying the Underlying Causes of Long Term Bull and Bear Markets (June 2011)

There is an important caveat. Even secular bull markets have stomach churning cyclical bear markets, just as long term bear markets can have strong cyclical bull markets. The crash in October 1987, which was followed by a four year period of consolidation, was not the start of a new long term secular bear market. Instead it was merely a cyclical bear market within the context of an ongoing secular bull market which would end up producing an average annual total return in the S & P 500 of more than 14%-Adjusted For Inflation. The cyclical bear was merely a termination event for the first phase of a long term secular bull market which thereafter resumed in 1991. The reappearance of something similar may be on the horizon.

I have a healthy respect for the powers of both the bull and the bear, Yin and Yang.

{Returns for long term secular trends can be calculated at Annualized Returns of the S&P 500. I will generally check the box "adjust for inflation" when making calculations. The prior secular bull market started in August 1982 but that calculator only allows the user to input a "Jan 1" start date. If I insert 1/1/1982 as the start date and 12/31/1999 as the end date, check the adjust for inflation box, the annualized return is 14.88%, adjusted for inflation and with dividends reinvested and 18.66% per year unadjusted for inflation. There is a symmetry in this data. A similar gain was produced between 1/1/1949 to 12/31/1965, while long term bear markets are at annual total returns, using the S & P 500 and adjusting for inflation, at slightly more than -1%.}

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

The bond forecast assumes an average annual CPI of 2% to 2.25% over the next years. That is the current range forecasted by the market as embodied in the break-even spread of the 10 year TIP.

Recent Developments:

The BLS reported that CPI was unchanged in November. The core index rose .2%. Both of those numbers are seasonally adjusted by the BLS. On a non-seasonally adjusted basis, CPI rose 1.2% for the 12 months ending in November. Consumer Price Index Summary The forecast was for no change in CPI and a .1% increase in core CPI. 

Producer prices fell a seasonally adjusted .1% in November.  On an unadjusted basis, producer prices for finished goods rose .7% for the 12 months ending in November. Producer Price Index

Industrial production rose 1.1% in November. Capacity utilization increased .8%. Industrial Production and Capacity Utilization

Industrial Production Index Chart  - St. Louis Fed

Capacity Utilization: Total Industry Chart- St. Louis Fed

The BLS reported that labor productivity increased at a 3% annual rate during the 2013 third quarter. Unit labor costs decreased 1.4% while hourly compensation increased 1.6%. Third Quarter 2013, Revised

Bad Year for REITs, Equity Preferred Stocks, Exchange Traded Bonds, etc.

This has been an undesirable year for equity and mortgage REITs, MLPs, bonds and preferred stocks and particularly bond CEFs. Most of the decline in those assets, other than equity REITs, is attributable to the rise in interest rates starting in 2013. Over the past week, I averaged down on several recently acquired positions by adding 50 share lots at lower prices.

In my opinion, the decline in equity REITs has been caused primarily by a correction to their excess valuations.

The primary reason for the decline in leveraged bond CEFs is the rise in interest rates, and their price declines have been aggravated by their leverage (using borrowed money to buy an asset declining in price) and the normal risks associated with CEFs. The pricing decisions, made by individual investors at the margin, will be the primary determinant in a CEF's discount or premium to net asset value.

Many individual investors have an innate tendency to buy what is hot and to sell whatever is declining in price. Buy high and sell low is the governing mantra.

When the value of a CEF's assets are declining significantly in price, the percentage decline in the market price has a tendency to be noticeably greater than the percentage decline in net asset value. The current year is just the most recent manifestation of that phenomenon, as market prices have generally declined more than twice as much as the decline in net asset value for bond CEFs.  

In a research report from KBW, summarized in Barron's, the analysts opined that the BDC sector was one of the most "attractive yield equity opportunities" in 2014, with a total return potential in the 10%-13% range.

My individual junk bonds have performed well in 2013. I have had several called by the issuers.

TCP Capital (own):

TCP Capital Corp, a BDC, sold 4.5M shares at $16 and granted to the underwriters an option to buy up to another 675,000 shares. The reported net asset value per share was $15.06 as of 9/30/13: Page 2 SEC Form 10-Q As noted at page 31 of that filing, TCP sold 5.175M shares back in May at $15.63.

I own just 50 shares in an IRA:  Item # 1 Bought 50 TCPC at $15.64-Roth IRA (May 2013) Those shares were bought after the price decline caused by the May 2013 stock offering.

The stock went ex dividend on 12/6 for its regular quarterly dividend of $.36 per share and a special dividend of 5 cents. TCP Capital Corp. Announces Third Quarter 2013 Financial Results; Net Investment Income of $0.40 Per Share; Earnings of $0.48 Per Share; Regular $0.36 Per Share Dividend; and a Special $0.05 Per Share Dividend

General Electric (own 531+ common shares):

GE increased its quarterly dividend by 16%. The new quarterly rate will be $.22 per share, up from $.19.

I am not going to get too excited about dividend raises from any company that slashed its dividend. In 2009, the quarterly dividend was reduced from $.31 to $.1. Stock Information: Dividend History at GE.com

GE will be in my dog house forever due to that 67.74% dividend reduction. Please note that the quarterly dividend rate in 2014 will still be 29% below the pre-slash rate of $.31.

Investors can not count on any company that cuts its dividend for steady income. The banks are probably the worst industry group for prevalent dividend cuts, since they manage to blow themselves up in large numbers with alarming regularity.

I can reduce my average cost per share to approximately $15 by selling some higher cost shares at $30 or higher which I will do. The only question is whether I will wait for a higher price, like $31 or maybe as high as $32, before selling those shares.

China Fund (CHN)(own)

The China Fund declared another large year end distribution. The fund will pay an estimated aggregate dividend of $3.3127 per share. The precise amount will be determined on the ex dividend date of 12/19/13. Of that total, the fund estimates that $2.874 per share will be a long term capital gain distribution.

I noted in a recent post that this fund has paid out large distributions, mostly sourced from long term capital gains, since I first bought some shares. Stocks, Bonds & Politics: CHN (introduction)

Although my total return is acceptable, this next large distribution will drive me easily back into negative territory on the shares. I may add anywhere from 30 to 50 shares at some point after the ex dividend date. I am reinvesting the dividend.

On the positive side, at least CHN has gains to distribute. The fund discussed below, JLA, has loss carryforwards and supports its distributions mostly with a ROC.

CHN Page at CEFConnect

Sponsor's website: The China Fund, Inc. - Home

Sponsor's Monthly Insight Report for October filed with the SEC.

The China Fund's SEC Form N-Q for the period ending 7/31/13

Artis REIT (own 400 shares):

I own 300 shares in a taxable account, where I bought shares on the Toronto exchange using CADs. I am paid a monthly dividend in CADs after a 15% withholding tax.

I want to be paid in CADs for diversification purposes. I am increasing my CAD stash at a  decent clip by focusing on income producing securities. Most of my Canadian securities, bought on the Toronto stock exchange, pay monthly dividends. It is normal for Canadian REITs to pay monthly distributions.

I recently bought 100 shares in the ROTH IRA on the U.S. pink sheet exchange using USDs. When I made that purchase in the IRA, I thought that Canada would not collect its tribute. I have enough problems with figuring out U.S. tax issues without importing more problems from abroad.

I discovered before publishing my discussion of that purchase that Canada changed its policy and would collect a tax on distributions made by REITs and royalty trusts even when the security is owned in a retirement account.

I can now confirm that Fidelity withheld a 15% tax on the Artis monthly dividend recently paid into my Roth IRA:

I will sell the 100 shares when and if I have a profit after commission for the reasons discussed in this post: Roth IRA: Bought 100 ARESF at $13.6

Pfizer (own)

Pfizer increased its quarterly dividend by 8+%. The new dividend will be $.26 per share, up from $.24. The next dividend will be the 301st consecutive dividend paid by PFE.

I have not been impressed with Pfizer's ability to discover new blockbuster drugs. As I noted when discussing a recent purchase, most of the drugs that are commonly associated with Pfizer were developed elsewhere. Pfizer simply acquires the drugs developed by other companies through acquisitions. Item # 3 Bought 100 PFE at $28.7 (8/24/13 Post)

At a total cost per share of $28.7, and assuming a continuation of the $.26 per share quarterly rate, the dividend yield improves to about 3.62% from 3.34%. The yield goes over 4% with a $.29 per share quarterly dividend, assuming a total cost per share of $28.7.

Item # 6 Common Stock Dividend Growth vs. Long Term Investment Grade Bonds

KKR Financial Holdings LLC Preferred 7.375% Series A (KFN.P)(own) 

REVISED 12/22/13: Subsequent to this post, I found several references to KKR's senior debt being rated higher than the current investment grade ratings of KFN's senior unsecured debt. I noted below that FINRA was showing a junk rating when I glanced at the relevant page.  In the event this merger is consummated, I would expect ratings upgrades in both KFN's senior unsecured debt and KFN/P. Consequently, the Change of Control Event will not happen. Fitch currently rates the KKR unsecured debt at A. KFN's senior debt is rated at BBB by Fitch and the preferred stock is at BB+. Fitch: KFN's 'BBB' IDR on Positive Watch; KKR Affirmed at 'A' Following Acquisition AnnouncementStreet Insider Article on S & P raising KKR's Debt to "A" with a Stable OutlookS&P | Summary: KKR & Co. L.P. | Americas The acquisition could cause the preferred stock to be raised to investment grade which is suggested in the Fitch press release. Fitch states that it would "expect to upgrade the IDR of KFN to A- upon closing of the transaction". That would imply an upgrade in the KFN preferred stock to BBB- or BBB. If that material is correct about KKR's senior unsecured debt being rated "A", then the current BB+ Fitch rating of KFN's equity preferred stock could be raised to BBB- or BBB upon consummation of the merger. KFN is expected to survive as a wholly owned indirect subsidiary of KKR under the merger agreement, www.sec.gov. I will have to wait and see whether that indirect relationship will have any impact on the ultimate rating when and if KKR consummates the merger.   

After the close yesterday, KKR & Co. L.P (KKR) proposed to acquire KKR Financial Holdings LLC (KFN) in a stock merger. KKR to Acquire KKR Financial Holdings for $2.6 Billion in an All-Equity Transaction

I no longer own KFN but I did recently buy its preferred stock. Item # 1 Roth IRA: Bought 50 KFNP at $24 (11/27/13 Post)

In after market action on 12/16/13, I did note that KFN-P rose $.88 on just 3,200 shares, while KFN was up 28.57% on heavy volume

KFNP Prospectus

There is an interesting Change of Control Event Provision in the prospectus. If that provision is activated, and KFN does not give notice to redeem at a slight premium to par ($25.25) plus accrued dividends within the required time period, then the dividend increases by 5% to 12.375%. That kind of provision is intended to be punitive and would certainly motivate the issuer and its acquirer to redeem the stock. The provision can be found starting at page S-20.

I would note that the "Change of Control Event" is defined as a downgrade of KFN's senior unsecured debt to below investment grade rather than a simple "Change of Control". Both terms are defined in the prospectus and there could be a change of control without a triggering Change of Control Event. There is also a causal relationship. The Change of Control must cause the Change of Control Event.

I would note that KKR's senior unsecured debt is apparently rated junk according to FINRA. According to Quantumonline, KFN has two exchange traded senior bonds, KFI and KFH, that are rated BBB- by S & P. Those bonds were selling at a premium to their par value at yesterday's closing prices.

I spent about five minutes looking at the change of control provision in the prospectus this morning and RB decided that was enough research for a 50 share add at $23 in the Roth IRA.

Activation of this Change of Control Event clause will require a Change of Control followed by a downgrade in KFN's senior debt to below investment grade due to that change. If KFN's senior unsecured debt was rated junk before this offer, then obviously the Change of Control did not cause that debt to be downgraded to junk from investment grade. So part of this analysis is dependent on KFN's senior debt being rated investment grade now. I may not be right about KKR's current debt rating since I just glanced at the FINRA page referenced above.


1. Sold 100 JLA at -Roth IRA at $12.62 and 200 Taxable Account at $12.63 (see Disclaimer): The fund seeks to replicate an index consisting of a 50/50 allocation to the S & P 500 and the Nasdaq 100. 

Snapshots of Trades:  

2013 Sold 200 JLA at $12.6338

Roth IRA History:

The 200 shares in the taxable account were acquired on 2/1/13:

Average total cost per share=$12.47
Snapshot of 2013 JLA Gains in Taxable Account:

2013 JLA Trading Gain=$220.89
This last 200 share transaction netted just $25.47 before ROC basis adjustment for 2013.

The closing market price was $12.39, with a net asset value per share was $13.64, creating a discount of -9.16% at that time. As of 12/6/13, the discount had expanded to 11.18% based on a net asset value per share of $14.22 and a closing price that day of $12.63.

I could not find a reference to that transaction in the blog. The cost basis will probably be adjusted early next year to account for ROC. The current estimate is that $.2428 of each $.284 per share dividend will be classified as a ROC. I found that information at CEFConnect under the "distributions" tab. So far in 2013, I have received $170.5 in dividends paid by those 200 shares and that will be most of my return on a $2,493 investment.

JLA Page at CEFConnect 

Rationale: This fund was fired for poor performance.

For the period 1/1/13 to 12/6/13, the annualized total return of this fund was 13.07% based on price and 14.07% based on net asset value. I acquired that information from CEFConnect, available under the "Performance" tab. The S & P 500 has gained 26.57% during that period. The Nasdaq composite was up 34.54%.

Since the fund is attempting to replicated a 50/50 combination of two indexes which have performed admirably this year, the only explanation for its substantial inferior performance is that the managers are losing a great deal of money with their call option writing strategy. 

JLA's performance is not viewed as satisfactory. Whatever the fund managers are doing with their call option strategy is substantially subtracting from total returns.

The author of a Seeking Alpha argued that JLA will hold up better in a market correction since it is writing some "in the money" options. Using such a defensive posture will cause the fund to lose money on the option writing during powerful bull moves such as the one experienced in 2013.

The ROC issue is just another nail in the coffin. I do not regard a return of my capital as a dividend and neither does the IRS. I have given a number of funds some latitude based on the large market declines suffered in 2008. And, there is a benefit to a ROC when the fund is actually earning the dividend but reports a ROC due to offsetting long term capital gains against a loss carryforward.

Morningstar recently demoted this fund to 2 stars.

Fortunately, I only held this fund for less than a one year and I see no reason to give the fund's managers more time to achieve satisfactory results. 

I read an article written by Steven Sears over the weekend, published by Barrons.com, who recommended that individual investors boycott funds that use a call writing strategy. I am inclined to agree with him and have been selling my positions this year. I previously jettisoned ETW and EOI. 

Future Buys/Sells: I have decided to give up on funds that use a call writing strategy.

2. Bought Back 100 EWS at $13.1 (see Disclaimer)

Snapshot of Trade:

Closing Price on Day of Trade: EWS: $13.14 -0.13 (-0.98%)

Security Description: The iShares MSCI Singapore Index Fund (EWS) is an ETF that owns stocks in a Singapore stock index.

STI Index

EWS Page at Morningstar

Sponsor's Webpage: iShares MSCI Singapore Index Fund (EWS)(expense ratio of .49%; 31 holdings as of 12/9/13; TTM P/E 15.48 and Price to Book 2.22 as of 11/29/13)

iShares MSCI Singapore ETF (EWS): Historical Distributions

The fund will pay dividends semi-annually. In 2012, the fund paid out $.196064 per share in June and $.346267 in December with an ex dividend date of 12/18/12. The total annual rate for 2012 was $.542331 which works out to about a 4.14% dividend yield at a total cost of $13.1 per share.

There is also a CEF that focuses on Singapore stocks: Aberdeen Singapore Fund Inc. Stock Price Today (SGF) That CEF has a much higher expense ratio and has underperformed EWS over a ten year period with an annual average total return of 9.88% based on net asset value per share. CEFConnect EWS has an annual average total return over ten years of 13.3%.

Prior Trades: I will occasionally piddle in this security, taking an inconsequential position based on the usual considerations. I have managed to earn a profit so far.

2013 EWS 100 Shares +$79.22
Item # 2 Bought 100 EWS at $12.96 (September 2012)-Sold  EWS @ $13.91 (April 2013)

2010 EWS 100 Shares +$47.15
Item # 1 BOUGHT 100 ETF EWS AT $10.9 February 2010-Sold EWS at $11.55 June 2010

Rationale: The primary reason involves potential total return potential. Singapore index of stocks pays a decent dividend and is reasonably priced after its recent pullback.

Annual total returns over the past ten years was reported by the sponsor at 13.3%. iShares MSCI Singapore ETF (EWS): Performance

Another positive is that Singapore's government recently raised its 2013 GDP forecast to 3.5% to 4%. Bloomberg

Given the mostly historical strength of the Singapore Dollar (SGP), I am comfortable long term holding assets prices in the SGP.

Risks: There are the normal risks associated with a USD denominated investment in stocks from a single foreign country.

As to currency risk the Singapore Dollar (SGD) has been trading in a fairly narrow range between 1.2 to 1.3 since January 2011, USD/SGD Currency Conversion Chart I would regard exposure to assets denominated in the SGP as more stable and desirable than emerging market currencies.

The USD bought 1.7 SGPs in 2004 and close to 1.2 SGPs now. After buying shares in EWS, which is denominated in USDs, I would want the SGP to gain in value against the USD, and it has been in an uptrend since 2004 except for the last couple of years and the Near Depression period. SGD/USD Currency Conversion Chart

The SGP did reach last week a ten week low compared to the USD. WSJ.com The Singapore government ten year bond closed last week at a 2.52% yield compared to almost 2.9% for the ten year treasury.

There is an ETF for the SGP: CurrencyShares Singapore Dollar Trust  (FXSG)

See also, Remarks by the Managing Director of Singapore's Monetary Authority in July 2013: MAS Annual Report 2012  Press Conference

Future Buys and Sells: I have a very modest objective. With the semiannual dividend which will be paid later this month, I hope to achieve a 10% total return after commissions within one year.

3. Averaged Down-Bought 50 CSG at $7.65 in Roth IRA (see Disclaimer):

Snapshot of Trade:
2013 Roth IRA Added 50 CSG at $7.65
Prior Trade: I just bought CSG shares in the Roth IRA and a taxable account: Item # 2 Bought: 150 CSG at $8.4 (11/19/13 Post)

Rationale and Risks: I have nothing to add to the discussion contained the previously linked post other than to highlight and emphasize the 8.92% price decline since my last purchase and to further note my emphasis in the prior post that the price was declining rapidly when I made that purchase at $8.4.

The current monthly dividend is $.042 per share or $.504 annualized. Chambers Street Declares Monthly Common Share Dividends for January, February and March 2014 At a total cost of $7.65, and assuming a continuation at that rate, the dividend yield would be about 6.59%.

Future Buys and Sells: I am not likely to buy more in an IRA account. I will consider adding another 150 in the taxable account at below $7.5.

4. Averaged Down-Bought 50 FSC at $9.08 in Roth IRA (see Disclaimer):

Snapshot of Trade:

2013 Roth IRA Added 50 FSC at $9.08

Prior Trades: I recently bought 100 shares in a taxable account. Item # 7 Bought 100 FSC at $9.47 I discussed the last earnings report in that post.

This last purchase was an average down in the ROTH IRA where I now own 150 shares. Item # 4 Bought Roth IRA 100 FSC at $10.1

Security Description: Fifth Street Finance Corp. (FSC) is a Business Development Corporation. As such, it most pay out at least 90% of its net income to its shareholders. A natural consequence of that requirement is that the company is not retaining capital to grow and will frequently raise new capital by selling more shares.

This is a link to information about FSC available at Finviz. That site has a useful chart and will aggregate links to financial stories in a more useful way than Yahoo Finance.

Link to Main FINVIZ.com site.

Fifth Street Finance Profile Page at Reuters

Fifth Street Finance Key Developments page at Reuters

This is a link to a recent negative article published by Seeking Alpha. One complaint of that author, which involves the compensation paid to FSC's managers, can be applied to all BDCs. I would generally agree that none of them are worth what they are being paid. All are paid like hedge fund managers, some variation of a base management fee (e.g. 2%) and an incentive fee.

Two other SA articles published after the recent dividend cut and earnings report are more positive: "Fifth Street Finance Corp.: 7 Reasons To Buy The Pullback In This 11% Yielder Before It Rebounds" - Seeking Alpha; and "Fifth Street Finance Corp. (FSC): Fifth Street Finance: Time To Buy Or To Sell?" Part 1 - Seeking Alpha

Rationale and Risks: I recently discussed the rationale and risks in two recent posts. The last purchase price represented a 7.82% discount to the $9.85 per share net asset value per share as of 9/30/13.

Some of the risks are amply demonstrated by the recent FSC history. This BDC cut its monthly dividend from $.0958 to $.0833. Fifth Street - For Investors : Dividends There is a history of dividend cuts. I have labeled this BDC as a serial issuer of its common stock. So far in 2013, FSC has sold 14.453M shares at $10.85 last April and another 17.643M shares in September. Fifth Street Finance Corp. Raises $181.9 Million in Gross Proceeds in Connection With Public Offering of Common Stock

On the positive side, those share sales have been above net asset value per share. Net asset value per share declined to $9.85 per share as of 9/30/13 from $9.9 as of 6/30 as this BDC paid out more in dividends than it earned in net income.

Again, it is important to read the BDC's own summary regarding risks. FSC starts its summary at page 22 of its last annual report and continues that discussion through page 37. FSC 10-K Ended 09.30.2013

Future Buys and Sells: I am not likely to buy more. I may sell the 100 shares bought in the taxable account at $10.1 whenever I have a profit. For the 150 shares currently owned in the ROTH IRA, my goal is to harvest at least one year of dividends and to sell the shares at a profit.

5. Sold 50 of the BDC PNNT at $11.92 (see Disclaimer): PennantPark Investment Corporation (PNNT) is a BDC.

Snapshot of Trade:

2013 Roth IRA Sold 50 PNNT at $11.92

Snapshot of History:

Snapshot of Profit:

2013 Roth IRA PNNT 50 Shares +$71.98
Rationale: I have a healthy respect for the risks inherent in BDCs. When purchased in a retirement account, my goal is simply to harvest their generous dividends for a year or more and then to exit the position profitably.

I will generally attempt to buy when the shares are trading at or below net asset value per share. This was recently done with two recent buys of FSC discussed above.

As to the decision to sell, I will consider a number of factors. I will consider selling when I have collected dividends for at least one year and can dispose of the shares profitably. I will be more inclined to sell when those objectives are realized and the stock is selling at over a 5% premium to its net asset value per share.

PNNT reported a net asset value per share of $10.49 as of 9/30/13: Page 32, Form 10-K.

At a $11.92 market price, the stock was then selling at a 13.63% premium to its net asset value as of 9/30/13. I would note that the net asset value per share was $11.85 as of 9/30/09 and trended down until hitting $10.22 for the 2012 F/Y. (page 32). That historical performance is important in my analysis.

I received one year of dividends ($56) and sold the shares for a $71.98 profit. The total return was $127.98 or a 24.75% on my $517 investment in less than 13 months. So, having achieved my goal with PNNT, and taking into consideration the premium, the 50 share position was sold.

Future Buys and Sells: As with other BDCs, I will consider buying back shares when and if the share price is close to net asset value per share. I will occasionally buy at a small premium but would generally prefer buying only when the share price is below net asset value per share.

Related Securities: I currently own 50 shares of a senior PNNT exchange traded bond, which is not very appealing at its current yield:

Quote: PennantPark Investment Corp. 6.25% Sr. Notes due 2025 Stock Price Today (PNTA)

I also own PennantPark Floating Rate Capital (PFLT) which is a separate corporation under the same management as PNNT. PennantPark (Executive Officers: President Arthur Penn; CFO Aviv Efrat)

As of 9/30/13, PFLT's net asset value per share was $14.1, up from $13.98 as of 9/13/12 and $13.44 as of 9/30/11: Page 42 Form 10-K.

Item # 5 Bought 100 PFLT at $14 (July 2013 Post); Pared Trade Roth IRA: Sold 50 GJR at $20.48-Bought 50 PFLT at $14.24 (July 2013 Post).

PFLT was one of the four BDC's currently rated as outperform by KBW: Barrons.com

6. Paired Trade Roth IRA-Sold 50 BDNPRE at $24.3 and Bought 50 AGIIL at $20.2 (see Disclaimer): 

In this paired trade, I exchanged a higher rated and yielding security (AGIIL), selling at a discount to par value for a lower rated and yielding security (BDNPRE) selling at a narrower discount to par value. Admittedly, I am playing small ball with this kind of paired trade.

S & P Ratings:

Current Yields:
AGIIL at $20.2=8%
BDNPRE at $24.3= 7%

BDNPRE has no maturity date. AGIIL will mature on 9/15/42.

The Optional Call Dates are similar as to time:
AGIIL on or after 9/15/17
BDNPRE on or after 4/11/17

In the event both are called in 2017, the buyer of AGIIL would realize a much larger gain on the shares given its larger discount to par value. Both securities have a $25 par value.

AGIIL is also a senior bond whose payments can not be deferred or eliminated outside of bankruptcy. BDNPRE is an equity preferred stock that pays cumulative dividends which can be legally deferred once the common share cash dividend is eliminated by BDN.

Snapshots of Trades:

2013 ROTH IRA Sold 50 BDNPRE at $24.3
Item # 1 Bought 50 BDNPRE at $23.14 Roth IRA (10/31/13 Post)

2013 ROTH IRA Bought 50 AGIIL at $20.2
Closing Price on Date of Purchase: AGIIL: $20.10 -0.23 (-1.13%)

The AGIIL chart looks awful: AGIIL Interactive Chart

Snapshot of BDNPRE profit:

2013 Roth IRA 50 Shares BDNPRE $43.98
PRIOR TRADE AGIIL: I recently bought 50 shares in a taxable account: Item # 3 Bought 50 AGIIL at $21.11 (10/31/13 Post).

Security Description: Argo Group International Holdings Ltd. 6.5% Senior Notes Due 2042 (AGIIL) is a senior Exchange Traded bond issued by the Argo Group US, the U.S. subsidiary of Argo Group International Holdings Ltd.  (AGII). The note is guaranteed by the parent as provided in the prospectus:

Final Prospectus Supplement

This security will pay interest based on a 6.5% fixed coupon on a $25 par value. Argo has the option to redeem this bond on or after 9/15/17. If not redeemed early, the bond will mature in 2042.

AGII Key Statistics

Argo Group International Holdings Key Developments Page at Reuters

Historical earnings have been erratic as shown at page 46 of the 2012 Annual Report: Form 10-K

Recent Earnings Report: For the 2013 third quarter, Argo International reported net income of $31M or $1.13 per diluted share, up from $.47 per share in the 2012 third quarter. The "combined ratio" for the quarter was 97.5% down from 102.3% in the year earlier quarter. SEC Filed News Release

Earnings Call Transcript - Seeking Alpha

10-Q for the Q/E 9/30/13

Rationale: Most of the rationale for this paired trade is discussed above.

I would just highlight here a point  made in the comment section to a recent post: Stocks, Bonds & Politics (12/10/13).

Exchange traded bonds and preferred stocks are sold mostly to individual investors who will frequently make pricing decisions that are different from institutional investors.

An individual investor can easily determine the bond pricing decisions made by institutional investors. This is not to say that those decisions are correct or prescient compared to the decisions made by individual investors when pricing similarly rated exchange traded bonds.

The first step is to go to FINRA's Advanced Search page for bonds.

In connection with AGIIL, I want to know how institutional investors who dominate trading in the bond market, where par value is $1,000 per bond, price BBB- rated bonds maturing at about the same time as AGIIL.

I checked "corporate" under "DEBT/Asset Class".

I then limited the maturity date search to 1/1/2040 to 12/31/2045. I used a broad range given the long dated maturity. I would use a yearly range for an intermediate term bond.

I then limited the search to S & P BBB- rated bonds by confining the search in both the "From" and "To" options for S & P credit ratings to BBB-. AGIIL was rated only by S & P.

Sample of bonds maturing between 2040-2045 and rated BBB- by S & P:

YTM's as of 12/14/13
Anadarko Petroleum 6.2%  Bonds Detail YTM 5.51%
Conagra Foods 4.65% Bonds Detail YTM 5.23%
PPL Capital Bonds Detail YTM 5.4%
Mylan 5.4% Bonds Detail YTM 5.33%
Boston Scientific 7.375% Bonds Detail YTM 5.13%
Ford Motor Bonds Detail 4.75% YTM 5.381%

I noticed one that was out of line. A 6.95% Avon Products bond maturing in 2043 was being priced near its par value: Bonds Detail.

The current yield of AGIIL is 8% and the YTM is around 8.44% (assuming no early redemption), using the Morningstar Bond Calculator.

This is not to say that AGIIL is being priced incorrectly by individual investors. It does highlight that the pricing is way out of whack with the typical 5% to 5.5% YTM range of BBB- rated bonds maturing in the 2040-2045 time period, bought and sold in the bond market. Maybe individual investors buying AGIIL in small lots have it right? AGIIL Historical Prices and Daily Volume Information

Risks: I previously discussed the risks of AGIIL. I would just note that the accounting for insurance companies is beyond my comprehension.

A recent Seeking Alpha article purports to show alleged financial reporting problems with another reinsurance company headquartered in Bermuda called AmTrust Financial Services that resulted in a huge decline in its stock price last Thursday. I certainly lack qualifications to make a similar type analysis of AGII. I am not saying anything about AGII in that respect other than to highlight that I have to accept their financials at face value.

{I would note that the exchange traded bonds of Maiden Holdings took a hit last Thursday. Maiden apparently does business with AmTrust Financial. Barry Zyskind is a large shareholder and director of Maiden, and is also a large shareholder and CEO of AmTrust. ZYSKIND. I do not own any securities issued by Maiden Holdings}

Future Buys/Sells AGILL or BDNPRE: I am near my limit for AGILL. As noted previously, reinsurance companies create a heightened level of anxiety for the OG. I am contemplating adding 50 in a taxable account as part of another paired trade.

8. Added $250 to MACSX at $18.59 (see Disclaimer): The Matthews Asian Growth & Income Fund (MACSX) is a mutual fund and is part of the Matthews fund group which focuses entirely on Asia. Matthews Asia

Sponsor's Webpage for MACSX: Overview - Matthews Asian Growth and Income Fund

The expense ratio is 1.11% which is low for an international mutual fund.

Over the past ten years through 9/30/13, the average annual total return was 12.2% and 10.83% from inception on 9/12/94.  Performance - Matthews Asian Growth and Income Fund

MACSX Matthews Asian Growth & Inc Investor Fund MACSX Page at Morningstar (silver, 4 stars)

MACSX is available at several brokerage firms on a NTF basis.

Broker availability information can be found at MSN Money under "purchase info" tab: Fund Purchase Information MSN will also list the top 25 holdings for mutual funds:  TOP 25 Holdings The largest holding at 3.59% of net assets was Singapore Technologies Engineering Ltd, which is very thinly traded on the U.S. pink sheet exchange, SGGKY. That company had a 2.32% weighting in EWS, discussed above, as of 12/20/13. iShares MSCI Singapore ETF (EWS): Holdings

MAPTX has recently closed to new investors.

Snapshot of Recently Received Annual Distributions:

I have not been adding to my position in MAPTX due to one of my eccentricities as investor. I generally do not like to buy more of a fund where my average cost per share is way under the current price. My average cost per share is $15.16. I am not even reinvesting the MAPTX dividend as shown in the preceding snapshot.

Instead, I have chosen to buy a few shares every now and again in MACSX, another Asian Matthews fund, where my average cost is closer to the existing price.

I started a position in MACSX back in September 2009, while my existing shares in MAPTX were mostly purchased in 2005-2006. Bought Matthews Asian Growth and Income-Price $16.73 (MACSX)(September 2009 Post)

FOR MAPTX, I harvested some profits in late 2006 and 2007 by running my position down to just 150 shares. (see snapshots at Item #4 Stocks, Bonds & Politics-sold 82.129 MAPTX shares for a realized gain of $652.3).

The two funds are different. One significant difference is that MAPTX has no exposure to Japan whereas MACSX had 8.6% exposure as of 9/30/13.

9. Added 50 KFN/pr at $23 Roth IRA (see Disclaimer): 

(Revised 12/22/13: For the reasons discussed in the revised introduction section, I deleted the Change of Control Discussion and to added a sentence about the potential upgrade of the preferred stock to investment grade upon consummation of the proposed merger with KKR)

This is an equity preferred stock that pays cumulative dividends at a fixed coupon rate of 7.375% on a $25 par value.

Snapshot of Trade:

2013 Roth IRA Added 50 KFN/pr at $23
At a total cost of $23 per share, the yield would be about 8%. If the merger with KKR is consummated, the rating of this security could be raised based on the current higher rating of KKR's senior unsecured debt compared to KFN's debt. Fitch: KFN's 'BBB' IDR on Positive Watch; KKR Affirmed at 'A' Following Acquisition Announcement; Street Insider article: S&P Raises KKR Issuer Rating to 'A'

A raise to BBB- or BBB may be possible. U.S. Bancorp's non-cumulative equity preferred stock is rated at BBB+ by S & P who has a A+ rating on USB's senior unsecured debt. One possible negative, and this is subject to further research, is that the new parent does not appear to expressly guarantee the payment obligation in the merger document which I have only skimmed for a minute or two. KFN would still exist as an indirect wholly owned subsidiary. A different successor liability issue is presented when the acquired company seizes to exist altogether. Ultimately, I will just wait and see how the rating agencies respond when and if the deal is consummated.

I would likely sell the higher cost lost bought a $24 when and if the price approaches $25.

Roth IRA: Bought 50 KFNP at $24 and Sold 100 SDA at $14.13 (11/27/13 Post)


Quote: KKR Financial Holdings LLC Preferred 7.375% Series A Stock (KFN.P)