Monday, December 23, 2013

KFN/P, JZJ/Fired Robert Arnott-Sold Entire Position in PAUDX/Bought: 50 NVS at $76.72, 100 OHI at $29.85, 50 CNQ at $31.88 and 20 of the Commission Free ETF IEMG at $48.4/Sold 57 FFBC at $17.03-Highest Cost Shares/

My next post will be published next Monday and will be the monthly update for the regional bank and lottery ticket basket strategies. I will probably not even start writing the next weekly post until after 1/1/14.

I also revised the discussion about KFN/P contained in the last post over the weekend after doing more research about KKR's senior unsecured debt ratings. I had previously only glanced at the pertinent FINRA page which gave me incorrect information.

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

I guess the world did not end with the FED starting its taper. After the announcement last Wednesday, the S & P 500 rose 29.65 points or 1.66%, hitting a new all time high, while the long bond barely budged in yield. The ETF for the long treasury had an inconsequential decline: TLT: $102.77 -0.52 (-0.50%). If I did not know what had happened and only knew about the closing price of TLT and other bond ETFs, I would have said that nothing really happened to influence bonds last Wednesday. After a bond rally last Friday, rates were basically unchanged for the week.

What difference does it make whether an investor characterizes a bull move as cyclical or secular?

Some of the most powerful bull moves have occurred in long term secular bear markets. Once stock prices crater by 50%+, it is natural to have a counter-reaction where part of the cataclysmic decline is recouped in a cyclical bull market lasting a few years. Two examples were the snapback rallies in 1933-1937 after the devastating declines between 1929-1932 and the two year rally after the cataclysmic 1974 decline. In both cases, stocks would resume their typical long term secular bear movement best described as going nowhere with a lot of up and down chop. Stocks, Bonds & Politics: The Roller Coaster Ride of the Long Term Secular Bear Market

Sure, if the investor could have liquidated their stock positions in early October 1929, bought them back in 1932, and sold them all again in late 1936, then that investor would be swimming in profits. The investor who bought in 1929-and held-would have another decade or so before they recouped the opening salvo of that long term secular bear market.

In the initial stages of any large bull move, it does not matter whether an investor describes it as a cyclical bull market within the context of a long term secular bear market or the start of a long term secular bull market.

Either way, the move has to be played by the investor.

The best buying opportunities occur after a cataclysmic event during the long term secular bear market, which I define as a fairly quick 45+% plunge in the S & P 500. The most recent example was the decline after Lehman's failure in September 2008 to March 9, 2009. I will start buying consumer staples after one of those, as shown by my blogs starting in March 2009.

A cyclical move might last 2 to 4 years. If that move is occurring in the context of a long term secular bear market, the investor needs to lighten up in two or no more than 3 years into one of those cycles. Sell into the rip is the operative phrase, though many investors probably need to hold most better quality dividend growth companies bought after the inevitable cataclysmic event which occur during a long term secular bear market. Those will separate investors into the wheat and the chaff.

On the other hand, if the move is properly labeled as the start of a long term secular bull market, then a different strategy needs to be adopted by the investor. Buy the dips and then nip and tuck as appropriate. There will be stocks that will move way outside a fair value range and those need to be trimmed or eliminated with the proceeds deployed to more rationally valued stocks or into other securities. That is what I mean by nip and tuck. The overall allocation to stocks needs to be within the top part of an investor's range during those long term secular bull markets.

The problem is how does an investor make a judgment about whether the current market is in a cyclical or secular phase.

For a start, the investor needs to focus on the Big Picture issues which sounds like some simpleton piece of advice but most ignore it, preferring instead to focus on a variety of matters that have zero long term impact on the market's direction.

This is not brain surgery. Mostly, it is just common sense uninfluenced by pre-existing beliefs and a willingness to acquire unfiltered information. Someone with average intelligence could probably do a much better analysis than a MIT quant with a 180 IQ hired by the Masters of Disasters. Those folks need to become more acquainted with the real world and how humans actually respond to events and can consequently be far worse than worthless. Stocks, Bonds & Politics: The Need for Nerd TherapyThe Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It: Scott Patterson: 9780307453389: Books

Back in 1982, a long term secular bull market in stocks started with an unusual up day in the market on 8/17/1982: S&P 500 Historical Prices and Volume The S & P rose from 104.09 to 109.4 with volume accelerating from 55+M to 92+M. Sounds quaint now but it was a really big deal at the time. The S & P 500 closed at 119.51 on 8/31/82 and at 140.64 by year end, up 35.11% since 8/16/82. There was hardly a burp until the October 1987 crash.

Back in those ancient times, a number of "professionals" and assorted talking heads argued that this move was just another short term bullish cycle in the long term secular bear market that had started in 1966.

In retrospect, they were without question wrong.

An investment in the S & P 500 on 1/1/1982 would have increased at an average annual rate of 14.88%, adjusted for inflation, through 12/31/1999. That is a long term secular bull move. Annualized Returns of the S&P 500

I had concluded by the summer of 1982 that the long term bear market was coming to an end. Consequently, I opened a brokerage account in July 1982 at Charles Schwab, back when a discount brokerage fee was $45 and a telephone keypad was used to place orders. I started to buy stocks again after about a 4 year hiatus. Since my brain had not yet been rewired after listening to Frank Sinatra, I viewed bonds back then as a name for some kind of old man's disease and consequently did not buy 30 year treasury bonds yielding 15%. I was after all a Young Stock Stud.

It is important just to step back and to identify as best as you can the powerful forces that really move markets. There are obviously long periods when stocks go nowhere and even decline adjusted for inflation. And, since there is balance, there are long periods when stocks are money printing machines.

Ecclesiastes 3 has some good stock market advice. For those who are not likely to have a bible at hand, downloading Pete Seeger's version, "Turn! Turn! Turn!" may be just as good. I prefer the Byrds' version: YouTube

The money printing period can produce a 14%-15% annualized return in the S & P 500 index with dividends reinvested and adjusted for inflation, whereas the long period of water torture produces a negative annualized return calculated on the same basis with periods that test the meddle of the most intrepid among us. So that is a historical fact, a remarkable symmetry over a century or more. Ignore it or deal with it.

Someone told me that I was crazy to buy stock during the summer of 1982. There were many rational reasons for that opinion. The country was after all in a recession. The DJIA was lower in July 1982 than it was in late 1965. Dow Jones Industrial Average (1900 - Present Monthly) The thirty year mortgage rate averaged 16.04% for the year with 2.2 points added for good measure. Primary Mortgage Market Survey Archives - 30 Year Fixed Rate Mortgages - Freddie Mac Inflation was still running hot. Historical Inflation Rates: 1914-2013, Annual and Monthly Tables I had to be crazy or maybe I am just an outlier, defined as someone who somehow manages to avoid group think, at least on occassion. That is relatively easy once you step back, cleanse you mind of all cherished beliefs and predispositions, and look at the situation from the mountain top. Most investors are their own worst enemy.

What was causing the bear market in bonds and stocks since 1966? In a word, problematic inflation was the cause. That was sure easy.

What was happening in the real world to inflation? The FED was well underway in killing that bogeyman. If you remove the problem, what is left?

Stocks were selling at low P/Es and at rich dividend yields. The productivity revolution created by advances in computers was already underway. The long period of extraordinarily high interest rates had actually enriched the Savings Class, most of whom own their homes free and clear. Another positive long term issue involved the lowering of the marginal tax rates after Reagan's election.

American households had not yet leveraged up. One of the fuels for the long term bull market was spending borrowed money in increasing amounts by both consumers and governments primarily in developed countries.  The U.S. was the Poster Child for that movement.

The seeds of destruction are planted well before the sprout sees sunlight.

The most important and absolutely critical factor was the lowering of inflation and inflation expectations that led to a very long term bull market in bonds and a long secular decline in interest rates.

What about now? It is extremely important that inflation remain tame. A repeat of what started to happen in the late 1960s will be death to both stocks and bonds.

So one powerful long term secular force is present. Inflation and inflation expectations are low.

I have identified other powerful long term forces which is not hard to do:

1. Middle class consumers are growing in parabolic fashion throughout emerging markets, primarily in Asia.

2.  U.S. households in the aggregate have develeraged and have increased significantly their disposable income after debt service payments by refinancing their main mortgage obligation at absurdly low long term rates. The most important data series that changed my opinion in 2012 was the FED's DSR and FOR ratios which showed a plunge in the ratio of debt service payments to disposable income.

DSR Ratio
Household Debt Service Payments as a Percent of Disposable Personal Income (TDSP) - FRED - St. Louis Fed

"FOR" Ratio 
Household Financial Obligations as a percent of Disposable Personal Income (FODSP) - FRED - St. Louis Fed

If a household is spending less disposable income to service mortgage debt, then the savings can be used to fund spending without incurring debt, to pay down other higher cost debt (e.g. credit cards), and/or to save, usually some combination of those more desirable alternatives. U.S. GDP growth is largely dependent on consumer spending, which is close to 70% of GDP. Millions have households have in effect been given monthly stimulus checks, similar to those handed out one time by government back in 2009, represented by the financing costs of their main debt obligation.

3. The movement toward energy independence in the U.S. is also important long term. It is particularly important that the U.S. will have a long term supply of relatively low cost natural gas compared to other nations. Large manufacturing firms will start to move more production to the U.S. rather than to outsource production abroad. Land and other costs besides energy are also rising in China and other countries in the outsourcing trend over the past decade, taking away gradually some of the cost advantages previously enjoyed by those countries. (See  Stocks, Bonds & Politics Introduction Heading "Relevance of Energy to More Manufacturing Jobs in the U.S."; BarronsCNBC)

In this connection, the WSJ recently published an interesting story that textile companies are moving from China to the U.S. because of "lower" costs here. It was the textile firms that led the exodus of manufacturing jobs out of the U.S. Isn't that a hoot?


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

As noted previously, this opinion is based on an average increase in CPI of 2% to 2.25% over the next ten years, which is generally the range in the break-even spread of the ten year TIP over the past several weeks.

Recent Developments:

The government revised its estimate of real 3rd quarter GDP growth to 4.1% from 3.6%.  Both consumer spending and business investment were revised higher. Corporate profits were revised up to an annualized increase of 7.7% compared to the second quarter. Nominal GDP grew at a 6.2% annual rate, which is the highest rate since 2006.  News Release: Gross Domestic Product

In his Barrons' column, Jack Hough argues that closed end municipal bond funds may rebound early next year, possibly giving the buyer in mid-December a 10% gain in "three weeks".

Lumber prices appear to me to have resumed their uptrend after suffering a setback earlier this year. Lumber Monthly Commodity Futures Price Chart : CME


Recent Mutual Fund Dividend Reinvestments:

This year is probably the best year since the Near Depression for mutual funds capital gain distributions.

I received earlier this month the following distributions on two Vanguard stock funds:

VEIPX is the Vanguard Equity Income Fund, rated 5 stars by Morningstar.

VGHCX is Vanguard Health fund rated 3 stars by Morningstar. I own only 34+  shares, making my initial investment when I sold out of the Vanguard Inflation Protected Securities fund rated 4 stars by Morningstar. Exchanged VIPSX for VGHCX I still believe TIPs are overpriced, though I will occasionally trade the CEFs WIW and IMF that owns them.

I also received a significant percentage capital gain on my recently purchased Vanguard Capital Opportunity fund. Initiated Position in VHCOX I have not yet received distributions from VWELX or the Vanguard Star fund.

I received last week annual distributions paid by Janus Balanced T (JABAX) and the recently purchased Brown Advisory Small-Cap Fundamental Value (BIAUX). Both are rated 5 stars by Morningstar.

Item # 7 Initiated Position in BIAUX (July 2013)($2,500).

I also received last week a distribution from the FMI Large Cap fund. Initiated Position in FMIHX

I initiated my position in the Janus Balanced Fund back in April 2008 ($3,000) and made two $250 adds during the October 2008 nightmare period. I added another $250 in 2010 and $250 in January 2012. The remaining shares have been purchased with reinvested dividends.

Canadian General Investments (CGI:CA)(own 200)

Canadian General Investments Ltd. (CGI:TOR) is a Canadian closed end fund that is selling at a large discount to its net asset value per share. It is the only Canadian CEF that I currently own.

Since I acquired shares, the market price has hovered near a 30% discount to net asset value per share. The discount narrowed some after the fund declared a year end capital gains distribution of C$.5 per share and an ordinary income dividend of $.08 (Sponsor: Morgan Meighen & Associates) Some individual investors may be buying that tax event. I received last December a $.52 per share dividend sourced from capital gains. The fund normally pays a $.06 per share quarterly dividend.

If the net asset value continues to go up and the discount narrows significantly, I will consider selling or pairing my position.

Item # 3 Bought 100 of the CEF CGI:CA at 15.78 CAD-Toronto Exchange (10/17/2012 Post); Item # 1 Added 100 of the Canadian Stock CEF CGI at C$16.03 (4/2/2013 Post)

Monthly Dividend Flow in CADs (Canadian Dollar (CAD) Strategy)

As previously noted, a large number of Canadian securities pay monthly dividends. With my Canadian Dollar Strategy, primarily based on a desire to diversify some out of USD priced assets, I want to generate dividend income paid in CADs that can be used to buy more income producing securities using my CAD stash creating a compounding effect over time.

This is a snapshot of CAD dividends received on 12/17/13 minus the 15% withholding tax:

Another grouping of monthly payments occurs late in the month:

(Snapshot of Tax Withholdings Not Made Here)
Other monthly dividends are received on other days (e.g. Artis, Riocan, Enerplus). Others pay quarterly.

I own 200 of Enerplus that last paid me a dividend of C$18 on 12/20/13. I have not talked much about that one which just went back into profit territory for me:

Enerplus trades on the NYSE under the ERF symbol. Anyone buying those shares will be paid their dividends in USDs after their conversion from CADs. By buying the shares on the Toronto exchange, I will receive dividend payment in CADs which is what I want. Irrespective of which shares are bought, the U.S. investor will be hit with a 15% withholding tax on dividends paid into a taxable account and owners of either listed security (ERF or ERF:CA) are subject to the same currency exchange rate risk.

I own some ERF shares in the ROTH IRA and have not had to pay Canadian taxes on those distributions

This is a link to a recent Seeking Alpha article on ERF.

I left some comments on the tax and currency issues in another Seeking Alpha. The article is no longer available to non-SA Pro subscribers but the comments are still freely available.

As shown in a two year chart, the stock has been making a comeback recently after hitting $12-$13 earlier this year: ERF.TO Interactive Chart

China Fund (own):

The China Fund confirmed its annual year end distribution of $3.3140 per share ($2.8753 per share in long term capital gains). The distribution went ex dividend on 12/19/13. That dividend represents the third consecutive large year end distribution since I bought shares in 2011. At least this fund has profits to distribute unlike the buy-write funds that support their distributions with a ROC and have large loss carryforwards.

I will receive about $497+ on 12/27/13. I now want the price to decline until my shares are purchased by the broker. Those purchases using reinvested dividends are normally made on the dividend payment date. China's stocks have hit another air pocket recently on credit tightening concerns.

Most investors are under the mistaken impression that they are enrolling in a DRIP plan when instructing their broker to reinvest the dividend. Most of my brokers buy the securities using the dividends in the market. Fidelity does use a third party service to purchase securities through a DRIP plan but that is limited only to a few securities. Continuation of Discussions Re: Broker Price Differences For Reinvested Dividends

Lehman ABS Corp. 7.125% CorTS AT&T Note-Bkd Series 2003-18 Cl A-1 (JZJ) 

I left a number of comments over the weekend to a Seeking Alpha article about the trust certificate JZJ which I have owned since October 2008. The author made two factual mistakes. Since I have owned this security, the coupon has been 6.375%, not 7.125% as asserted by the author. And, AT & T did not partially call this security. It was partially called by the owner of the call warrant.

JZE, which contained the same senior unsecured AT & T bond, was fully called by the owner of the call warrant and I lost 82 shares of JZJ to a partial call. I lost 100 shares of JZE which had been bought at $12.5.

2010 JZE and JZJ Redemptions by Call Warrant Owner/JZE +$1,242, JZJ +$567.33
Bought 100 JZE at $12.5

Apple (own)

I see that Apple finally reached an agreement with China Mobile. Bloomberg


1. Added 50 NVS at $76.72 (see Disclaimer): This stock was purchased in a satellite taxable account.

Snapshot of Trade:

Closing Price Day of Trade Monday 12/16/13: NVS: $76.93 +0.09 (+0.12%)

Security Description: Novartis AG ADS (NVS) is one of the world's largest pharmaceutical companies. The company is based in Switzerland. NVS is an ADS: Novartis American Depository Shares (ADS)

Dividends will be subject to Switzerland's withholding tax (see below in Prior Trades Section)

1 ADS=1 Ordinary Share

The ordinary shares are priced in Swiss Francs. NOVN.VX

USD/CHF Currency Conversion Chart
CHF/USD Currency Conversion Chart

The price for the NYSE listed ADS shares will reflect the value of the ordinary shares priced in Swiss Frances converted into USDs.

Novartis AG (NVS) Profile Page at Reuters

Novartis AG (NVS) Key Developments Page

WebPage: Novartis

Novartis pays an annual dividend in CHF's and this chart shows the growth in the dividend rate since 1997. The chart is supportive of this purchase under my dividend growth strategy as I previously mentioned in an old post and nothing has changed since that time except the rate of growth has slowed recently.

Novartis dividend information

Since I bought the ADS, my dividends will be received in USDs after conversion from CHFs. In that respect, I would want the CHF to gain strength now against the USD.

In early November, Novartis announced a share repurchase program of up to USD $5B.

Prior Trades: Since starting this blog back in October 2008, I flipped a small position in NVS twice:

2009 NVS 50 Shares +$230.94
2010 NVS 100 Shares +$97.41
Item # 2 Bought 100 NVS at $49.08 (6/22/2010 Post); BOUGHT 50 NVS at $36.9 (April 2009)- Item # 4 Sold NVS at $41.86 (6/17/09 Post)

This snapshot, made soon after the recent 50 share purchase, is of an existing position:

NVS Position as of 12/16/13

I went back and found that Fidelity did withhold 15% to pay Switzerland's dividend tax.

So, in this example, I was not able to avoid the withholding tax by reinvesting the dividend.  I would consequently not buy NVS in a retirement account.

Recent Earnings Report: For the 2013 third quarter, the company reported net income of $2.264B on $14.338B in revenues. Free cash flow for the quarter was $3.543B. On a constant currency core basis, E.P.S. was reported at USD$1.26.  Financial Report Q3 2013 Currency had a negative 6 percentage impact in the quarter. Underlying net sales increased 10% in the quarter. Pharmaceutical net sales increased to USD 7.9B led by "strong volume growth (10+ percentage points)" in "growth products, including Gilenya, Afinitor, Tasigna, Galvus, Xolair, the Q family, and Jakavi, who provided USD 3.1B in revenues, up 28% in constant currencies.

The generic division reported a 10% increase in sales to USD $2.3B.

Alcon's sales increased to $2.5B.

Consumer products were up 12% in constant currencies to USD $1B. NVS did run into some manufacturing problems with Maalox in the non-liquid tablets. I am aware of that problem since I still have to buy the CVS brand for my mother.

Rationale: Even after the price rise, I am comfortable with the valuation and the dividend yield is still over 3%. For a large company, the shares have done well in 2013, moving from $63.3 on 12/31/12 to over $78 now. NVS Interactive Chart

The current E.P.S. estimate is for 5.14 in 2013 and 5.43 in 2014. NVS Analyst Estimates At a total cost of $76.72 per share, the forward P/E is about 14.13.

Overall, Novartis is my favorite dividend paying Big Pharma company. Unlike Pfizer, Novartis has been very successful in both developing new products in house and then bringing them to market over the past several years.

Pfizer's drug development is best described, in my opinion, as acquiring another company that invented a new drug in order to compensate for its in house failures after spending billions on research and development. Nonetheless, I recently bought a 100 shares: Bought 100 PFE at $28.7

The oncology pipeline portfolio has "an industry leading 24 ongoing pivotal trials exploring 16 new products and indications". SEC Filed Release The company receive 3 FDA Breakthrough Therapy designations in 2013. One of those compounds, RLX030 is for acute heart failure and was shown to improve symptoms and mortality. If approved, Novartis claims that this compound will be the "significant treatment advance for AHF patients in 20 years" (earnings release for third quarter)

One of those mew cancer drugs, a compound known as CTL019 and CART-19, cleared malignant cells in 19 of 22 children patients suffering from acute lymphoblastic leukemia, the most common form of cancer for children, though five of the 19 later relapsed. In chronic lymphocytic leukemia, a large market for the drug,  the therapy resulted in a 47% remission rate. Bloomberg

Another compound, LBH589, significantly extended the time period without disease progression for multiple myeloma in a Phase III trial.

While many investors applaud the divestment of consumer products divisions, I would prefer buying a company like JNJ who bought PFE's consumer product division than PFE who sold it. Novartis has a large consumer product division, Novartis OTC (Over-the-Counter), and a bustling generic drug business. Sandoz Generic Pharmaceuticals Division of Novartis

Risks: Any foreign security has currency risk. I do not mind a long term exposure to an asset priced in Swiss Francs.

The most serious risk comes from the expiration of patent protection.

I also view regulatory and litigation risks as important in this sector.

2. Bought 100 OHI at $29.85 (see Disclaimer): This security was purchased in another satellite taxable account.

Snapshot of Trade:

Closing Price on Day of Trade: OHI: $29.79 -0.40 (-1.32%)

Security Description: OHI is a REIT that owns or holds mortgages on 477 skilled nursing homes, assisted living facilities and other specialty hospitals with approximately 55,066 beds located in 33 states and operated by 48 third party companies. Most of those facilities (450) are nursing homes. During the last quarter, this REIT derived 94% of its revenues from skilled nursing facilities.

A long term chart, going back to 1992, reveals a stock in a solid uptrend from 1992 to January 1998, moving from $9+ to $30. OHI Interactive Chart The bottom fell out with a waterfall decline to $1.75 (April 2001). As I recall, there was a significant cut in Medicare payments to skilled nursing homes in 1999 that led to the bankruptcy of some large operators including Genesis HealthCare.

The stock then started another ascent rising to a high of $33+ last October. The shares behaved well during the Near Depression. The stock was near $16 in November 2007 and bottomed close to $14 in March 2009. Most investors would be pleased with such a small decline in a position with a net positive total return given the dividend.

Company Website: Omega Healthcare Investors, Inc. - Corporate Profile

Recent Earnings Report: For the 2013 third quarter, Omega reported FFO available to common shareholders of $70.3M or $.59 per share. Adjusted FFO was reported at $.63 per share. As noted in that release, OHI sold 2.875M shares at $30 in early October. The company is also selling shares pursuant to its equity shelf programs:

The company estimated that its 2013 adjusted FFO will be between $2.48 and $2.51 per diluted share.

Adjusted FAD (Funds Available for Distribution) is expected to be between $2.23 to $2.26 per diluted share.

OHI recently increased its quarterly dividend to $.48 per share or $1.92 per year. OHI increased its quarterly dividend by one cent per share in January, April, July and October of 2013. The annual common share dividend payout for 2013 was of $1.86 would represent about 82.55% of 2013 FAD assuming a number in the mid-point of the estimated range.

SEC Form 10-Q for Q/E 9/30/13

Rationale: (1) Income: For now at least, I am impressed that this REIT has been increasing its dividend and did not cut it during the recent Near Depression. The quarterly dividend was maintained at $.3 per share from the 2008 second quarter until it was raised to $.32 in the 2010 first quarter. Omega Healthcare Investors, Inc. - Dividends

(2) Total Return Potential: Provided an investor does not overpay for a REIT, and maintains a diversified portfolio, there is a reasonable chance to produce annualized total returns in the 8% to 10% range. With OHI, I am starting with a current dividend yield close to 6.4% which will hopefully increase over time.

(3) Portfolio Diversification: REITS also provide a measure of diversification and balance to a portfolio. Generally, REITs as an asset class will have low to moderate positive or negative correlations with other asset classes. AssetcorrelationDynamic Correlations-Vanguard.pdf

Correlations are not constant and change over time. This Forbes article has a chart showing the rolling 3 year correlation between the S & P 500 and the 5 year treasury note between 1952 to 2013.

When designing a portfolio, I do not want all asset classes to go up or down in unison and will consequently attempt to own some assets with negative correlations or low positive or negative correlations with the two major asset classes.

Risks: Needless to say, skilled nursing homes are highly dependent on Medicare and Medicaid for payments. Back in 1999, there was a significant and unexpected cut in Medicare reimbursement rates that led to the bankruptcy of some operators including GenesisHealth Systems, now known as Genesis HealthCare.

This is a list of operator concentration found in OHI's last earnings release. Genesis is at the top of the list, and I have not even heard of most of these companies:

Once an investor makes the plunge into OHI stock, it is important to monitor potential changes in reimbursement rates.

I found this publication from a trade group, published in March 2012, that discusses some recent funding issues:

I highlighted this risk in the comment section of a recently published Seeking Alpha article.

Interest rate risks impact REITs in two fundamental ways. For investors who buy them as bond substitutes, a rise in rates will provide them with alternative investments that meet their needs. And, a lot of debt has to be continually refinanced which can negatively impact net income. It is problematic when rates rise rapidly as they did starting in May.

3. Bought 50 CNQ at $31.88 (see Disclaimer):

Snapshot of Trade:

Over the past year or so, I have been adding Canadian energy companies based on valuation.  Bought 100 HUSKF at $26.42 (7/6/13 Post); Bought 50 SU at $28.67. I have also added to a ETF that owns Canadian Energy stocks: Item # 4 Added 50 ENY at $14.04

Security Description: Canadian Natural Resources (CNQ:NYSE) is one of Canada's largest energy companies with production in Canada, the North Sea and off the African coast. I did not use my available CADs to purchase the ordinary shares listed in Toronto: Canadian Natural Resources (CNQ:TOR)

Canadian Natural Resources - Home

Canadian Natural Resources Profile Page at Reuters

Canadian Natural Resources Key Developments Page at Reuters

CNQ Key Statistics Page at Yahoo Finance

Consensus E.P.S. Estimates: 2.31 for 2013 and 2.79 for 2014

Forward P/E at $31.88 Price: 11.43

CNQ is currently rated 4 stars by Morningstar with a $46 fair value, and 3 stars by S & P.

Prior Trades: None

Recent Earnings Release: For the 2013 third quarter, Canadian Natural Resources reported record production of approximately 703,000 barrels of oil equivalent per day, "driven by record liquids production of approximately 509,000 barrels per day". The Horizon Oil Sands project had production of approximately 112,000 barrels of "high quality synthetic crude oil per day". Production from that project is expected to ramp up to 500,000 barrels per day by the next decade. Cash flow was reported at C$2.45B and C$2.26 per share for the quarter. Net income was at C$1.07.

Rationale: I just viewed the current price as reasonable given the projected forward earnings and current TTM P/E.

There is also some dividend support and a history of dividend raises since the company inaugurated a dividend in 2001. Canadian Natural Resources Limited (CNQ) Dividend Date & History -

The quarterly dividend was increased from C$.125 to C$.2 recently. Canadian Natural Resources Limited Announces 60% Increase in Quarterly Dividend

In my view, it is also important that this company has exposure to long lived energy assets. I am referring primarily to the Horizon Oil Sands Project. The company provided recently an update on this project designed to "deliver on its strategy to transition to a longer life, low decline asset base which continues to deliver significant and growing cash flow". SEC Filed Press Release This project began its first production in 2009 and is in the process of receiving several upgrades as noted in the preceding link and at Canadian Natural Resources - Horizon Oil Sands.

The company anticipates that 2014 production will increase 9% from 2013 levels. Cash flow is anticipated to be $8.7B with $1B in free cash flow, assuming U.S.$96.67bbl and AECO strip pricing of C$3.47/GJ SEC Filing I like to see production growth through the drill bit in an energy company rather than growth through acquisitions.

Risks: Any E & P company is exposed to an abundant number of risks relating to its operations. The price of natural gas and oil fluctuate in wide ranges. Exploration and production costs have been trending up. There is a constant need to replace production. Those types of risks and others are discussed by the company in its 2012 Annual Report starting at page 44. There are a number of environmental issues that could prove problematic in the years to come.

You have to spend money to make money. The company has a $7.7B capital budget for 2014 with an additional $400M of flexible spending allocable to the aforementioned Horizon Oil Sands Project. SEC Filing

Return on capital will be restrained as the company spends a great deal of money developing its oil sands projects. Once those expenditures are mostly completed, possibly around 2017, then free cash flow and ROIC will hopefully improve.

4. Sold 57 FFBC at $17.03 (see Disclaimer): Rather than use FIFO accounting, I selected the highest cost FFBC to sell. The selected shares included a 50 share market buy and my highest cost shares purchased with dividends.

Stock Quote: First Financial Bancorp (Ohio) Stock

Snapshot of Trade:

2013 Sold FFBC 57 Shares at $17.03

Snapshot of Position Before Trade:

FFBC 194+ Shares Average Cost Per Share $15.25

Snapshot of Position After Trade:

FFBC 137+ Shares Average Cost Per Share=$14.84
I now own the following shares (plus the remaining reinvested dividends): ADDED 50 FFBC at $14.87 (December 2011)(to keep those shares, I could not use FIFO); Item # 2 Added 30 FFBC at $14.24 (December 2012); Added 50 FFBC at $14.65 (June 2013).

I took a snapshot on the day after my trade to show the current position:

Remaining Shares 12/20/13 Snapshot Mid-Day

The numbers in the second to last column, far right, are the average cost per share numbers for each purchase. That would include any brokerage commission.

Snapshot of Profit:

2013 FFBC 57 Shares +$37.68
I sold the 50 share lot purchased in August 2012:  Item # 3 Added 50 FFBC at $15.95

Needless to say, FFBC has been a less than optimal pick, though my total return to date has been acceptable given the dividend and the purchase of some shares on dips below $15.

I previously sold a 50 share lot: Item # 3 Sold 50 FFBC at $17.51 (September 2012)  In December 2012, I bought 30 of the 50 shares sold at $14.24.

Rationale: FFBC had been paying out 100% of its net income as a dividend. As previously noted, this policy was set to expire after the 2013 4th quarter payment. While that policy was in effect my dividend yield was over 7%.

The last quarterly dividend that included 100% of net income was $.27 per share and was paid on 10/1/13. Stock Splits & Cash Dividends | First Financial Bank Of that amount, the regular dividend was $.12 and the variable dividend was $.15 representing the remaining net income per share. When stopping the payout of the variable dividend, FFBC did increase its regular dividend from $.12 to $.15 and that distribution went ex dividend on 11/29/2013 with a 1/2/2014 payment date.

I have been pairing or eliminating regional bank stocks based on valuation. The current consensus E.P.S. estimate is for $1.05 in 2013 and $1.12 in 2014. FFBC Analyst Estimates If those numbers are hit, earnings growth would be 6.66%. The forward P/E based on the 2014 estimate and a $17.03 market price would be 15.2. While I do not view that as expensive, it is slightly higher than the top of my fair value range.

Earnings reports have been lackluster. SEC Filed Earnings Release 2013 Third Quarter

Over the past year or so, this stock has had a tendency to decline after trading over $16. There was an abrupt decline after the stock hit $17.46 in September 2012, with the shares sliding to $13.9 last December before rallying again.  FFBC Interactive Chart

My current average cost is now $14.84 per share. I changed my dividend option to payment in cash after selling the foregoing odd lot, but still may receive the upcoming dividend payment in shares.

Last Friday, First Financial Bancorp announced an agreement to acquire Insight Bank which has one service location in Worthington, Ohio which is near Columbus.

5. Fired Robert Arnott-Sold Entire Position in  PAUDX (See Disclaimer): While I had a loss on the shares, I managed a slightly positive total return with the dividends. The reinvested dividends were sold at a loss, diminishing my total return compared to receiving those distributions in cash.

Given that my initial investment was made in 2011, that is an extraordinarily poor return that would be difficult for a novice investor, ingesting a variety of mood altering drugs, to duplicate. A blind and inebriated male monkey, suffering from severe arthritis in his hand, would likely do far better throwing darts. If you think that sounds like a slam, then my meaning has been made clear.

Snapshot of Loss:

2013 Sold 366+ Shares PAUDX at $10.17/ -220.47 on the Shares
I recouped $229.3 in the reinvested dividends bringing my total return to $8.83. Without any doubt, that performance is worse than pathetic under the circumstances.

MSN shows the YTD total return at a pathetic -5.98% through 12/19/13. That is a negative five star performance. Morningstar has downgraded the fund to 3 stars. PAUDX That page at Morningstar also has performance figures for this fund. Fortunately, I did not have much invested in this loser.

Maybe Arnott should not have been shorting stocks in 2013. The top holding at 22+% is the PIMCO StocksPLUS AR Short Strategy Institutional Class fund which is making a run toward zero shorting stocks. I am simply not willing to pay someone who has managed money this year at a loss.

For some reason the financial press including Morningstar has elevated Robert Arnott to guru status. He is responsible for the portfolio allocation in the Pimco All Asset All Authority mutual fund.

I was patient with him up for over two years. I am not impressed with his money management whatsoever. I would not hire him again to manage a dime of my money.

Bought PAUDX/Unusual Allocation Funds (July 2011 Post)

Admittedly, the fund would do better when and if the stock market tanks. I could say the same about the Hussman funds whose manager is held in even more disdain. (see my discussion of Hussman Strategic Return under the heading GDP and Profit Margins, introduction section in Stocks, Bonds & Politics: GDP-Profit Margins)

I would note that I am not a professional investor. Just an individual investor working at a computer in the SUV Capital of the World, with no MIT pets, "brilliant" quants or freshly minted MBAs helping me.

With over 20% of my investable assets in cash earning .01% in money market funds, and owning an eclectic variety of securities like PAUDX, including many sectors suffering declines this year (exchange traded preferred stocks and bonds, bond CEFs, etc), as well as owning some loser funds like PAUDX, and making a few less than optimal stock selections, I will end up being up over 20% on my total investable assets. I did okay in the Near Depression period too. Main Taxable and Regular IRA Accounts Performance Numbers Calculated by Broker (December 2011 Post)

How on earth did a "professional" money manager lose money in 2013?

It is always important to avoid losing too much during the down periods, so I will accept less in big up years for stocks. I am not willing to accept a 5%+ loss from a "professional" money manager being paid big bucks when stocks are having one of their best years and bonds are down just a little.

6. Bought 20 IEMG at $48.4-Commission Free ETF Offered by Fidelity (See Disclaimer): 

Snapshot of Trade:

Security Description: The  This security is available at Fidelity commission free. That makes it more economical to buy in small lots since I do not have to be concerned with how commission costs impact returns.

As of 12/19/13, this ETF had almost $3B in assets and owned 1751 stocks. The expense ratio is low at just .18%.

Sponsor's Webpage: iShares Core MSCI Emerging Markets ETF (IEMG)

This is a snapshot of the top 10 country weightings:

Samsung is the largest holding at 3.47% as of 12/20/13:  iShares Core MSCI Emerging Markets ETF (IEMG): Holdings - iShares

Rationale: When starting to nibble again at emerging stock market funds, I noted the valuation issue. Items 4 and 6 Stocks, Bonds & Politics:  Bought:  50 PIE at $18, 100 MSF at $15.18 (12/3/13 Post).

I cited an article published by MarketWatch on 11/18/13 that highlighted both the relative valuation and the underperformance of those markets compared to our own.

The MSCI Emerging Markets Index which captures the performance of 824 stocks across 21 emerging markets had a  -3.5% loss year to date through 11/30/13 and an annualized loss of 1.82% for the 3 years ending 11/30/13. The forward P/E had shrunk to 10.36 with a P/BV of 1.5. .pdf

Risks: The stock risk is clearly manifested in what happened to emerging market stocks in 2008 as shown in the long term chart in the previous link.

Emergency markets have substantially underperformed U.S. stocks over the past three years. Market participants are currently worried about economic slowdowns in major emerging markets and the impact on emerging market currencies caused by a rise in U.S. interest rates. Those concerns ebb and flow. When I bought IEMG last Friday, the Shanghai Composite had fallen for nine straight days as an example. Historical Prices | SSE Composite Index (12/9 through 12/20/13)

One analyst at Deutsche Bank believes that China will crash next year. If that proves prescient, then emerging market ETFs will be much cheaper in price than now. I would add that this analyst apparently made a correct call about Russia's market in 1998 and opined in December 2007 that he sensed the worst was over for the U.S. subprime market. If you predict often enough, one will come true and a fortune can then be made as some kind of guru sent to us mortals from up above.

When buying any foreign stock index, I am subject to a variety of risks including those normally associated with stocks. Some of these countries have what is known as "country risk". When conjuring up that risk, my mind generally sees a picture of Hugo Chavez.

Then there is the currency risk issue. The securities owned by an emerging market fund are priced in local currencies, such as the Indonesian Rupiah or the Malaysian Ringgit which have been declining against the USD.

USD/IDR Currency Conversion Chart (Indonesian Rupiah)
USD/MYR Currency Conversion Chart (Malaysia's Ringgit)
USD/BRL Currency Conversion Chart (Brazil's Real)

For example, in February 2012, 1 U.S.D. bought 1.70 Brazilian Reals. Last Friday, 1 USD bought 2.38+ Reals. That is a powerful headwind for a U.S. owner of a Brazilian stock purchased in February 2012. After I buy an ETF owning Brazilian stocks, I want the USD to buy fewer Reals-not more.

Just as a hypothetical, assume I bought a Brazilian Stock priced at 30 Reals per share in February 2012. I convert my USDs into BRL's and that stock costs me $17.67 per share before commission and currency exchange fees on 2/29/12. I then sell that stock at 30 Reals per share on 12/20/13 and convert those Reals back into USDs. Before brokerage commissions and currency exchange fees, I now have $12.74 per share, a 27.56% loss, even though the shares are still priced at 30 Reals.

I do not avoid the currency risk issue by buying a Brazilian ADR using USDs or a U.S. listed ETF that owns Brazilian stocks. I am subject to the same currency risk. Some mutual funds and CEFs will hedge currency risks but that is not the case with the ETF that I purchased last Friday. Of course, the risk can turn into an advantage with the Brazilian stock market rising in value at the same time as the BRL gains in value against the USD.

I am cognizant of the currency risks and prefer to buy foreign securities after a decline in share price aggravated by a decline in the local currency.

Stocks, Bonds & Politics: Strong U.S. Dollar + Weak Market=Time to Start Looking Overseas

Stocks, Bonds & Politics: International Trading and Currency Risks

Future Buys/Sells: I will average down with small lot buys as long as I can do so without incurring a brokerage commission. I am not likely to average up. I am bottom fishing with this kind of buy. When engaged in that sport, my orders will be sliced and diced into small pieces since no one knows when a sector will hit bottom.

7. Sold 100 of 400 Artis REIT (See Disclaimer):

2013 ROTH IRA Sold 100 ARESF at $13.8142
I mentioned in my last post that I would sell the 100 shares bought in the ROTH IRA whenever I had a profit after discovering soon after purchase that Canada would clip the dividend by 15% for its withholding tax. I have no way to recover that tax when the dividend is paid into the IRA. I am keeping the 300 shares bought on the Toronto exchange for their monthly income generation in my main taxable account. I receive the dividend in those shares in Canadian dollars.

If I could not buy shares in Canada, I would buy ARESF in a taxable account. ARESF are ordinary shares traded on the U.S. pink sheet exchange and can only be bought with USDs.

I made a few bucks on the shares and received one dividend. Roth IRA: Bought 100 ARESF at $13.6 I took a snapshot of that dividend in my last post. (Introduction Section: Artis REIT