Tuesday, December 3, 2013

MOL, CHN, MAPTX/Roth IRA: Bought 100 ARESF at $13.6, 50 EXL at $11.75/First Data Redeems 11.25% Note Maturing in 2016/Bought: 50 ELB at $24.44, 100 FSC at $9.47, 100 LXP at $10.33, 50 PIE at $18, 100 MSF at $15.18, 50 GSTPRB at $25.3

The Google Search Box, formerly located to the right, is defective and continues to return no results when a properly functioning search engine would return multiple hits. Consequently, I have removed it and will add it back when and if it is ever fixed by Google. The search box in the upper left hand corner still functions. 

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

Hopefully, a correction in the stock market started last Monday. A continuation of an upward spiral is not viewed by me as healthy long term and could lead to a really nasty denouement. The rise in stocks since August 2011 strikes me as a potentially dangerous parabola without a meaningful correction very soon.

My gut tells me that stocks will only suffer a brief decline before hitting new highs before year end.

It is probably not a coincidence that the move down occurred after Robert Schiller made some bearish statements in a recent interview over the weekend (see below)

In next week's post, I will discuss some individual stock pares. I did something unusual. Normally, I will use FIFO accounting (first in, first out). In two recent stock sales, I identified the highest cost to sell regardless of when those shares were bought, with the remaining shares being the lowest cost shares. 


Short Term: Neutral
Intermediate and Long Term: Slightly Bearish Based on Interest Rate Normalization

The bond forecasts assume an average average inflation rate of 2% to 2.25% over the next ten years.

The ten year treasury is moving mostly within a 2.6% to 2.8% yield range, with occasional brief spurts above and below that range. Daily Treasury Yield Curve Rates


Recent Developments:

The Case Shiller home price indexes for the 10 and 20 metropolitan areas increased .7% in September, month-over-month, and 13.3% year-over-year. Press Release

Core Logic reported that October home prices rose 12.5% from a year ago. However, the pace of increases have slowed down significantly. Compared to September 2013, prices increased just .2% in October.

The Calculated Risk blog summarizes a projection made by Merrill Lynch that the U.S. economy will exit rehab in 2014 and start growing at a healthy clip. 

Chicago PMI was reported at a robust 63.

The American Association of Railroads reported a 17.4% in U.S. rail traffic for the week ending 11/23/13, compared to the same week last year. Car load shipments for motor vehicles and parts increased by 42.2%. AAR Reports 

In an interview over the weekend, Robert Shiller stated that the "boom in the U.S. stock market makes me most worried", as the the "economy is still weak and vulnerable". He also noted that his 10 year cyclically adjusted P/E (CAPE) could be pointing to a bubble but only time will tell. MarketWatch The Shiller P/E is certainly flashing caution, as noted in this recent WSJ article. I discussed some of the shortcomings of the CAPE in a recent post. Stocks, Bonds & Politics: Shiller CAPE Ratio (P/E 10) (8/10/13 Post-introduction)

Doug Short monitors the current P/E readings at "Is the Stock Market Cheap?"

The November Markit PMI for U.S. manufacturing was reported at 54.7 in November, up from 51.8 in October. The new orders component accelerated to 56.2 from 52.7. Output increased to 57.4 from 50.6. markit The November Markit PMI for the eurozone manufacturing was reported at 51.6. markit

The November ISM manufacturing index was reported at 57.3, higher than the 55.5 consensus. The new orders component rose to 63.6 from 60.6.

The better than expected ISM number spooked the bond market on Monday:

Closing Price on 12/2/13: TLT: $103.33 -1.12 (-1.07%)

In a Goldman Sachs research report, summarized in this Bloomberg article, GS predicts that Chinese stocks traded in Hong Kong will advance 18% in 2014.

My most direct play on China is the CEF CHN:  China Fund Page at CEFConnect I am near break-even on the shares at the moment, even after the fund paid out a $3.2517 distribution in 2012 and $2.9964 in 2011. The China Fund Press Releases Unfortunately, I bought my first lot shortly before the 2011 distribution. I am reinvesting the dividend:

The fund has not yet announced its year end 2013 distribution. If it is over $1 per share, I may add another small lot after the ex dividend date.

The fund paid out $12.12 per share in a distribution in 2007 and $5.82 in 2008. The China Fund, Inc. - Dividend history

I have more exposure through some other funds like the Matthews Pacific Tiger (MAPTX) fund which I have owned for a long time. Overview - Matthews Pacific Tiger FundMorningstar Page for MAPTX

MAPTX Average Cost Per Share=$15.16
I took some profits ($652.3) in 2007 and late 2006. (see snapshots at Item # 4 Bought 100 APF at $13.58

Importantly, Brazil's economy contracted .05% in the third quarter. WSJ.com

I thought this Seeking Alpha article about the AllianceBernstein Income Fund was interesting. I would not buy this security based on the possibility that this bond CEF will open end. I have traded it on several occasions and currently own just 150 shares. Item # 2 Bought 150 ACG-$6.975-Regular IRA (October 2013)

Closing Price ACG 12/31/13: ACG: $7.12 +0.19 (+2.74%)

Citigroup Funding PPN MOL:

The Citigroup Funding Inc. 2.00% Minimum Coupon for Gold Stock Price (MOL), a PPN, finished its next to last annual coupon period on 11/20/13 and paid its minimum 2% coupon on 11/27/13.

I expected a 2% coupon, since the Starting Value for the price of gold was $1,730.50 during that annual coupon period, the closing London P.M. fix on 11/22/12.

There is one remaining annual coupon period before this senior unsecured note matures on 11/26/2014. Par value is $10.

Starting Value Gold London P.M 11/20/13: $1,257
Kitco Inc. - Past Historical London Fix
Maximum Violation Level:  ($1,257 x. 1.19=1,495.83)
End Date: 11/19/14


MOL has become in effect a one year unsecured senior note issued by Citigroup Funding and guaranteed by Citigroup as provided in the prospectus.

Assuming Citigroup survives to pay par value on 11/26/14, my worst outcome would be for another 2% annual interest payment next November.

I have at least a chance a coupon payment between 2% and 19% based on the performance of gold.

If the price of gold closes above the Maximum Level at anytime between now and the End Date, using the London P.M. fix, then I will receive the minimum 2% coupon.

If gold closes below 1,282.14 (1.02 x. Starting Value), I will receive the 2% annual coupon. In that example, the price of gold rose less than 2% during the coupon period.

I will receive the percentage difference between the Starting Value of gold and its Closing Value on 11/19/14 as a coupon payment for any close above 1,282.14 (up to $1,495.83), provided there is no Maximum Level Violation during the current annual coupon period.

Bought 200 MOL at $9.95-Sold 100 MOL @ 10.3Added 100 MOL at $9.78

Closing Prices Gold and Silver ETFs 12/3/13:
SLV: $18.42 -0.04 (-0.22%)(close at $46.88 on 4/24/13, Chart
GLD: $117.98 +0.40 (+0.34%) (close at $183.24 on 8/29/11, Chart)

Closing London P.M. Fix on 12/3/13 for Gold: $1,217.25 per ounce
Closing London Fix on 12/3/13 for Silver: $19.17

Gold and silver are in bear markets of unknown durations. The last long term secular bear markets for precious metals lasted from about 1980 to 2000. There can be strong cyclical bull markets within the context of long term bear markets.

I sold all of my junk silver coins, starting in September 2011, when the silver price was over $40 per ounce. I sold the remaining ones in January 2012. I intend to use the proceeds to buy some American Silver Eagles when and if the price falls between $10 to $15 per ounce. I have not decided on a particular re-entry point yet. I also sold some gold coins when the price was over $1900 per ounce. In both cases, those were my first sells of gold and silver bullion coins. My potential re-entry price for the purchase of American Gold Eagles, using the proceeds from those gold coin sales, is between $800 to $1,000. I really do not care whether or not those downside targets are hit. I invest in gold and silver for a very limited purpose, the Financial Armageddon scenario involving a collapse of the fiat government currencies, and I am not currently worried about such an event in the near or intermediate term. And, I still own gold and silver bullion coins. I am not in the market for Bitcoins which remind me of tulip bulbs. Bitcoin, Gold and Tulips - Barrons.com; Seeking Alpha.

Snapshots of earlier coin sales:

Stocks, Bonds & Politics: The Road to Political Power: Lying Works/Recent Gold and Silver Sales

Stocks, Bonds & Politics: Snapshots of Coin Sales In January 2012

I last bought Silver Eagles from a dealer at $7 per coin back in 1995, see snapshot at  Sold Some Junk Silver Coins Yesterday (9/13/11 Post)

I previously called in this blog the gold price spike starting in 2009 and ending in September 2011 a "dangerous parabola." A dangerous parabola will collapse upon itself.


FIRST DATA Bond Redemption:

I lost another bond to a redemption last week. First Data called its 11.25% senior subordinated note maturing in 2016.

First Data Bond Redemption
The options for reinvestment are not very appetizing or appealing at the moment. I decided to accept far less interest from an interest grade First Mortgage bond discussed briefly in Item # 8 below.


1. Bought 100 LXP at $10.33  (see Disclaimer): I have started to purchase equity REITs with cash flow. This sector has fallen out of favor with investors as prices have corrected from unsustainable levels achieved back in May 2013.

In many cases, the pendulum may have swung too far in the other direction given my current outlook for interest rates and inflation. 

Snapshot of Trade:

2013 Bought 100 LXP at $10.33
I bought another 50 shares in the ROTH using cash flow.

Security Description: The Lexington Realty Trust (LXP) is a self-administered equity REIT that "owns a diversified portfolio of equity and debt interests in single-tenant commercial properties and land". All of the land leases and a majority of its properties are subject to net leases, where the "tenant bears all or substantially all of the operating costs".

As shown in this one year chart, LXP Interactive Chart, this stock is trading below its 50 and 200 day SMA and has yet to show any signs of bottoming after hitting $13.64 on 5/20. 

Lexington Realty Trust Profile Page at Reuters

Lexington Realty Trust Key Developments Page at Reuters

Company Website: Lexington Realty Trust - Main Page

Lexington Realty Trust - Dividend History

LXP was one of the U.S. REITs that slashed their dividends during the last recession. The quarterly rate was $.375 per share in 2007. The company also paid a special dividend of $2.1 per share that year. The dividend was then reduced in stages until a new quarterly rate of $.10 per share was established in 2010.

The dividend was recently raised from $.15 to $.165. At that new rate, the dividend yield is about 6.39%.

At the time of my trade, Fidelity's detailed quote showed the correct yield but still had the dividend rate at $.15.

The shares tanked during the recent Near Depression. LXP Interactive Chart A long term chart at YF shows a steadily rising stock price, starting at $5.46 in October 1993 and peaking at around $24.31 in June 2005. The price then slid some into 2007 but was still trading at over $20 when the bottom fell out, sinking to $2+ by March 2009. The shares hit a price in 1996 higher than the current price.

In June 2013, LXP sold $250M in a 4.25% senior unsecured nature maturing in 2023. 8-k

Prior Trades: None

Related Trades: I have flipped small positions in this REIT's equity preferred stock, LXPPRD, which was called last April, and it had a 7.55% coupon. The largest gain came from this 50 share lot:

2010 ROTH IRA 50 Shares LXPPRD $807.03
Buy 50 LXPPRD at $7 in Roth IRA March 2009-Sold LXPPRD at $23.46 August 2010

Recent Earnings Report: For the 2013 third quarter, Lexington Realty Trust reported adjusted FFO per share of $.25, unchanged from the 2012 third quarter, on revenues of $97.9M. The company reaffirmed its 2013 FFO guidance of $1.01 to $1.04 per diluted share.

LXP 9/30/1310-Q (debt discussed starting at page 15)

Earnings Call Transcript - Seeking Alpha

One major transaction was mentioned in the third quarter's earnings press release.

LXP acquired .6 acres of land in NYC for $306M. There are three hotels sitting on that land (DoubleTree by Hilton; the Sheraton Tribeca NY; and Element New York Times Square West). The improvements on these three parcels are owned by the tenants under non-cancellable 99 year land leases. The annual initial rent under the leases is approximately $14.9M or 4.9% of the aggregate purchase price. The rent will increase at a minimum 2% per year and up to 3% based on CPI. Lexington Realty Trust Acquires $302 Million Manhattan Land Portfolio Subject to Long-Term Leases

Subsequent to that announcement, LXP sold 10M shares at $11.17 with an over allotment option of another 1.5M shares. Lexington Realty Trust Announces Pricing of Public Offering of Common Shares The net proceeds were use to pay down amounts outstanding under LXP's unsecured revolving credit facility, a portion of which was used to buy the aforementioned NYC land parcels. 

Rationale: (1) Primarily Income with Some Capital Appreciation Potential: The recent price drop improved the dividend yield and the prospects for some capital appreciation.

(2) Reasonably Priced at Current Estimates: Based on the current consensus FFO estimate of $1.11 in 2014, the shares are priced well below the average P/FFO for REITs. The Lazard report published in October had the average P/FFO at 17.7, "Lazard_US RealEstate Indicators Report".pdf

Risks: (1) Interest Rate Risks: Many investors view REITs as bond substitutes and consequently will be conditioned to sell when interest rates start to rise.

Part of the decline in equity REIT share prices is related to the interest rate rise starting in early May. That rise has made investment grade bond yields more competitive with the dividend yields of REITs. Those dividend yields had fallen considerably with the robust rally in REITs since March 2009.

Just as an example, the Vanguard REIT ETF, VNQ, closed at $65.12 last Monday, down -$0.38 or -0.58%. That ETF closed at over $78 in May. Vanguard REIT ETF Chart

2. Ongoing Valuation Reset: It is my opinion that most of the decline is due to a valuation reset. The equity REIT sector had just gone up too much in price, and the sector was being priced in early May at relatively high premiums to both historical FFO and the value of owned real estate. I previously referenced a report from  Lazard that contained valuation metrics for REITs as of 5/31/13. The average price to FFO has historically been around 15, with buying opportunities generally occurring when the P/FFO was in the 10-12 range. On 5/31/13, the P/FFO was at 18.7. The Lazard report for October 2013 is available at Lazard_US RealEstate Indicators Report 10/2013.pdf.

Of course, some REITs deserve to sell at a higher P/FFO than others based on a number of factors, including past performance, competency of management, diversity of holdings and tenants, the overall desirability of the owned property including its location and the competitive landscape, and issues relating to debt.  It is one thing to own Class A office buildings in downtown Boston, San Francisco or New York and another to own office buildings in the suburbs of Nashville where land and construction costs are cheap and barriers to entry are practically non-existent.

The other valuation metric is the historic premium/discount to net asset value which is a more mushy number than P/FFO. REITs in the aggregate were selling then at an estimated 5.8% premium to their collective net asset value.

As I noted earlier, REITs were overvalued by the market using either valuation metric. A great deal of that excess has been taken out in price action since May, with many securities hitting new 52 week lows including the better ones like Realty Income (O) which hit a new 52 week low intraday at $37.55 today. O: $37.60 -0.26 (-0.69%)

(3) Company Discussion of Risks: The company discusses risks relating to its business starting at page 11 of its 2012 Annual Report filed with the SEC: LXP 2012.12.31 10K

Future Buys/Sells: I am hoping for a 10% annualized total return before selling this security. I would consider buying 50 more shares at below $9 provided the decline is not due to significant negative news.

Closing Price 12/3/13: LXP: $10.21 -0.08 (-0.78%)

2. Bought 50 EXL at $11.75-Roth IRA (see Disclaimer): This is another equity REIT purchase with cash flow.

Snapshot of Trade:

Security Description: The Excel Trust  (EXL) is a self-administered REIT that owns "value oriented community and power centers, grocery anchored neighborhood centers and freestanding retail properties." Page 13 FORM 10-Q

Excel became a public company in April 2010: Prospectus More shares were sold to the public in June 2011 at $10.94 per share, Form 8-K, receiving net proceeds of approximately $150M.

Closing Price Day of Purchase 11/25/13: EXL: $11.70 -0.15 (-1.27%)

Page 2 -- TheStreet

Excel Trust Inc (EXL) Profile Page at Reuters

Key Developments Page at Reuters (note the sell of of $100M in unsecured notes to Prudential with a weighted average maturity of 7.8 years and a weighted average interest rate of 4.6%)

Map of Properties: Excel Trust

Excel Trust : Dividends & Splits

The current quarterly dividend is $.17 per share, up from $.1625 in 2012.

Prior or Related Trades: None

Excel does have an equity preferred outstanding: Final Prospectus Supplement; Excel Trust Inc. 8.125% Cum. Redeem. Pfd. Series B Stock (EXL.PB) There is also outstanding a convertible preferred stock with a 7% coupon.

Recent Earnings Report: For the Q/E 9/30/13, Excel reported AFFO of $11.7M or $.24 per share and increased its common share quarterly dividend to $.175 from $.17. SEC Filed Press Release


Rationale and Risks (see previous discussion regarding LXP): Hopefully this REIT will continue its recent string of annual dividend increases. At the current quarterly rate of $.17 and a total cost of $11.75 per share, the dividend yield is about 5.79%. In the ROTH IRA, that would be a tax exempt yield.

The company discusses the risk factors relating to its business starting at page 10 of its 2012 Annual Report: Form 10-K

Equity REITs are probably suffering now from tax loss selling and herd momentum to the downside. Fears about how REITs will react to a FED tapering add fuel to the fire. Anyone venturing into this sector with buy orders now is attempting to catch a falling knife.

Future Buys and Sells: I will be monitoring the earnings. If the price falls below $10.75, and there is no significant adverse development I would consider averaging down with another 50 share purchase.

Closing Price 12/31/13: EXL: $11.78 +0.22 (+1.90%) 

3. Bought 100 ARESF at $13.6-ROTH IRA (see disclaimer): This one was bought in my smaller ROTH IRA which was opened earlier this year at Fidelity when I did a Roth conversion.

I wanted to see whether Fidelity would deduct the 15% from the dividend for the Canadian withholding tax, even though the dividend was paid into an IRA.

After I made this purchase, I came across some information that Canada will no longer exempt dividends paid by REITs from the withholding tax. dtcc.com/pdf If this proves to be true, I will jettison this security bought in a IRA whenever I have a profit. The dividend yield is still good even after a 15% withholding tax.

The problem is that I can not recover, either as a credit or a deduction, a foreign tax paid on a dividend received by an IRA.

If the tax is paid on a distribution made into a taxable account, however, an individual can take up to a $300 credit against their U.S. taxes for foreign taxes paid on dividend distributions ($600 for married couples filing jointly). If those limits are exceeded, the taxpayer can potentially recover more as a credit but IRS Form 1116 has to be filed out which may limit the amount of the credit. 

Snapshot of Trade:

Security Description: Artis Real Estate Investment Trust (ARESF) is a diversified Canadian REIT that owns office, retail and industrial properties in Canada and the U.S.

The U.S. properties are concentrated primarily in the Minneapolis and Phoenix to a lesser extent. As of 9/30/13, about 22.1% of this REIT's property weighting by net operating income is in the U.S.

Company Website: Artis REIT 

Portfolio Map: Artis REIT

As of 9/30/13, this REIT's portfolio was comprised of 232 commercial properties totaling about 24.8M leasable square feet.

Quote OTC Markets: ARESF Artis Real Estate Investment Trust

In the OTC Market, commonly known as the pink sheet exchange, the symbol for a foreign security that ends in "F" denotes the "ordinary" shares, the very same shares that I bought earlier using CADs  on the Toronto exchange.

Artis REIT 2012 Annual Report.pdf

Prior Trades: I purchased some shares on the Toronto exchange back in September: Item # 1 Bought 300 of Artis REIT at C$14.36 As noted in that post, I flipped some shares in 2011 for a $281.27 gain.

The current monthly cash dividend is C$.09 per share. Artis Real Estate Investment Trust Announces Monthly Cash Distribution

Recent Earnings Report: For the 2013 third quarter, Artis reported FFO of C$49.359M or C$.38, up from C$.33 in the 2012 third quarter.

Occupancy was at 96.4% on a committed basis as of 9/30/13 (see page 13)

Rationale: The reason for buying REIT common shares is primarily to produce a flow of income with capital appreciation being a secondary objective. The dividend yield at a total cost of $13.6 would be about 7.55%. 

Risks: (1) Currency Conversion Risk: While I bought these shares using USDs on a U.S. stock exchange, I am subject to the same currency risk as a U.S. investor who converts their USDs into CADs to buy the same shares in Toronto. The share price of ARESF will reflect the market price of Artis shares in Toronto converted back into USDs. If the price in Toronto remain constant, while the CAD declined 5% in value against the USD, then the U.S. listed ARESF would decline by 5%. To confirm this fact, an investor can take the price in Toronto and convert the CADs into USDs.  The price in USDs will be lower than the price in CADs since 1 USD will currently buy over C$1.05: USDCAD

Toronto Stock Quote: AX.UN

Currency Converter

Once an investor buys a foreign security, gains and losses, as the case may be, will reflect changes in currency conversion rates. It would be positive for me to now see the CAD rise against the USD coupled with an increase in the ordinary share price in Toronto. If the CAD declines in value and the ordinary shares fall, then I am hit with the Double Whammy-Not Good!

The currency exchange will also impact the value of the dividend when converted from CADs to USDs. The owner of ARESF will receive their dividend in USDs after the 15% withholding tax. If the value of the CAD falls from current levels then the dividend would generate fewer USDs compared to now. Conversely, the owner of ARESF would receive more with a rise in the value of the CAD as the Canadian dollar would then buy more USDs.

(2) Interest Rate and Volatility Risk:  REITs have become a disfavored sector among many investors as interest rates started to increase starting in May. It did not help that this sector had reached premium P/FFO valuations by early May. The Toronto listed shares briefly traded over C$17 in late April and quickly swooned to C$13.45 on 9/9/13. AX-UN.TO Interactive Chart There has been a modest recovery since that low that coincided with the FED's decision to continue buying $85B in securities every month. Interest rates thereafter fell some and have since steadied at slightly below their late summer peaks.

The maximum chart, which shows the price decline in late 2008 and early 2008, highlight what I call volatility risk. AX-UN.TO Interactive Chart  The shares careened from C$18 in September 2007 to C$4.85 in December 2008. Artis did briefly cut its monthly dividend for five months back in 2008 before restoring it: Distribution History » Artis REIT - Artis REIT

The price has continued to decline after my purchase.

(3) Dividend Payout Ratio to AFFO is high, suggesting that meaningful dividend increases are not likely over the short term. The AFFO payout ratio did decline in the last quarter to 81.8% from 90% in the 2012 third quarter (page 9 earnings release) For the nine months ending in 9/30/13, the AFFO payout ratio was 84.4%, down from 95.3% in the first nine months of 2012.

The company discusses certain risks starting at page 37 of its last earnings report referenced above.  

Future Buys and Sells: As soon as I confirm that a 15% tax will be withheld, which will be non-recoverable in an IRA, and I can sell the 100 ARESF at a profit after round trip commissions, I will do so. I am holding the Toronto listed shares to generate income in CADs.

Closing Price 12/3/13: ARESF: $13.27 -0.18 (-1.32%)

4. Bought Back 50 of the Stock ETF PIE at $18 (See Disclaimer):

Snapshot of Trade:

2013 Bought 50 PIE at $18
Security Description: The PowerShares DWA Emerging Markets Technical Leaders Fund (PIE) is what I would label a quant momentum ETF that uses a momentum based technical strategy when selecting stocks.

The fund will invest in approximately 100 stocks from emerging markets that "possess powerful relative strength". The expense ratio is high at .9%. Dividend support is lacking to any meaningful degree. The sponsor shows a 12 month yield at .9%. In 2013 to date, the fund has paid a total of $.13326 per share in dividends. As of 9/30/13, the weighted average P/E was 23.51 with an ROE of 16.08%.

Sponsor's Website: DWA Emerging Markets Technical Leaders Portfolio

I am not familiar with most of the fund's holdings: Holdings

Closing Price Day of Purchase 11/25/13: PIE: $17.92 -0.21 (-1.19%)

Prior Trades: Item # 4 Sold: 50 PIE at $18.75 (10/11/13 Post)-Item # 3 Bought Back PIE at $17.63 (July 2013); Sold 50 PIE @ $20.06 April 2013-Bought 50 PIE at $17.08; Item # 2 Sold 150 PIE at $16.76 September 2010-Bought 50 PIE at $10.01 October 2008 Bought 50 PIE at $14.04 in 2/2010 There was a 50 share purchase back in May 2008, with the total cost per share at $23.45. The next fifty share purchase, noted above, was at $10.01 a few months later.

Total Realized Gains=$298.78

Rationale: Emerging market stocks have been a tough space to make money over the past three years or so. While there are many risks, the overall underperformance makes them somewhat interesting as a contrarian play. Total return will be dependent on share price appreciation. With this kind of purchase, I am looking for a 10% total return and will harvest that gain when and if I receive it.

Risks: Emerging market stocks are more volatile historically than U.S. stocks. That volatility can increase, with a decided downside bias, when the U.S.D. increases in value against emerging market currencies. The emerging market currencies declined precipitously in value against the USD when U.S. interest rates started to spike in May 2013.

I am not familiar with most of the companies owned by this fund. The very concept of choosing stocks based on "technical" leadership suggests a momentum strategy that will frequently capture what is hot-for the moment. Those kind of stocks can frequently reach unjustifiable valuation levels. I am not comfortable with this style of investing.

The emerging market currency risk is important for the reasons discussed in Item # 6 below.

The fund sponsor discusses risks starting at page 10 of the prospectus: invescopowershares.com/pdf

Closing Price 12/3/13: PIE: $18.12 -0.13 (-0.71%)

5. Bought 50 GSTPRB at $25.3 (see Disclaimer):

Snapshot of Trade:

2013 Bought 50 GSTPRB at $25.3

Security Description: The Gastar Exploration Ltd. 10.75% Cum. Pfd. Series B Stock (GST.PB) is an equity preferred stock recently issued by a small E & P company called Gastar Exploration (GST).

This is a link to the "free writing prospectus" for this security: Prospectus That prospectus updates and supersedes another one but only to the extent of any inconsistency. Preliminary Prospectus

The issuer has the option to call this security at par plus accrued dividends on or after 11/15/2018. Dividends will be paid monthly.

The preliminary prospectus does contain a dividend stopper clause at page S-51.

However, Gastar is not paying a common stock dividend, so there is no current legal impediment that would prevent a legal deferral of the preferred stock dividend. This is not to say that GST will defer a preferred stock dividend, but only that it could legally do so now. And, it could legally continue that deferral for as long as it did not use cash to pay common dividends or to purchase common shares.

As a practical matter, GST would hurt its standing among institutional investors by deferring the preferred stock dividend when it had the capacity to pay. And, any deferral would hinder any future capital raise through the sale of equity preferred shares.

Prior Trades: None. This is a new issue.

Related Trades: I did recently flip the common shares as a Lottery Ticket: Bought 100 GST at $2.68 (7/29/13 Post)- Sold 100 GST at $4.1 (11/25/13 Post)(snapshot of gain=$126.09) When discussing the disposition of GST, one concern was the steep yield that the company had to pay in order to sell GSTPRB. In today's low interest rate environment, a 10.75% coupon speaks volumes about credit risk.

Recent Earnings Report: Gastar has done so much buying and selling of properties recently that any prior earnings report is not meaningful given the change in energy producing assets.

The current consensus estimate is for an E.P.S. of $.24 in 2013 and $.48 in 2014.

The company did report adjusted net income of 3 cents per share for the 2013 third quarter. Gastar Exploration Ltd. Reports Third Quarter 2013 Results


A recent spurt in the stock price resulted after this press release, with the common shares rising almost 19% the day after the release: Gastar Exploration Provides Update on Mid-Con 6H Well in Hunton Limestone Oil Play (Closing Price 11/22/13: GST: $5.59 +0.89 (+18.94%)

Rationale: If I can sell this one in a year or two at break-even, and simply harvest the dividends without suffering a share loss, I will be content. The dividend yield at a total cost of $25.3 is about 10.62%. Needless to say, there is no such thing as a free lunch for that kind of dividend yield in today's abnormally low interest rate environment.

The first monthly dividend payment will be on 12/31/13.

Risks: The company discusses risks factors in the Preliminary Prospectus starting at page S-37.

Credit risk is very high, as manifested by the high dividend.

There is always an enhanced danger of a preferred dividend deferral when a company is not paying, and has no history of paying a common share dividend.

Future Buys/Sells: I am not likely to buy more until such time, if ever, that I become comfortable with the credit risk. I am not comfortable now. I am already at my risk limit with a 50 share purchase.

Closing Price 12/31/13: GST-PB: $25.45 +0.17 (+0.67%)

6. Bought Back 100 MSF at $15.18 (see Disclaimer):

Snapshot of Trade:
2013 Bought 100 MSF at $15.18

Security Description: The Morgan Stanley Emerging Markets Fund (MSF) is an unleveraged closed end stock fund.

CEFConnect Page for MSF

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

As of 12/31/12, the fund had a capital loss carryforward of approximately $10.622M (page 28). The fund had a net realized gain of $9.775M for the six months ending 6/30/13 (balance sheet at page 16). I doubt that there will be a long term capital gain distribution at year end due to the loss carryforward.

Data as of Date of Purchase 11/26/13:
Closing Net Asset Value Per Share: $17.04
Closing Market Price: $15.2
Discount: -10.79%
Average 1 Year Discount: 9.65%
Average 3 Year Discount: 9.44%
Average 5 Year Discount: 8.59%

The top holding as of 930/13 was Samsung at 4.25%.

Over the past ten years, ending on 11/27/13, the fund has an average annual total return of 11.83% based on net asset value and 12.99% based on price.

Prior Trades: I sold my entire position last October: Sold 201+ MSF at $15.62 (10/14/13 Post). So I bought back almost 1/2 of those shares. As noted in that post, I flipped two 100 share lots in 2010 realizing $403.14 in profits.

Rationale: The main reason for buying this security is capital appreciation.

As noted in this article published by MarketWatch (11/18/13), the MSCI Emerging Markets Index has underperformed the rest of the world by 25% to 35% this year. That indexes trailing P/E was just 11.2 in mid-November. And, the growth prospects in those markets are superior over all time frames compared to the developed markets.

MSCI Emerging Market's Index Fact Sheet October 2013.pdf

One negative point, highlighted in this article published at YCharts, is the exposure to commodity related stocks which have been notably weak. The author of that article noted that a new ETF WisdomTree Emerging Markets Consumer Growth Fund (EMCG) eliminates that issue.

Risks: This CEF will have the normal risks associated with a closed end fund that invests in emerging market stocks. One of those risks, which was displayed starting in May, involves currency risk and the flight to assets priced in U.S.D.s and out of emerging market assets when U.S. interest rates start to rise meaningfully.

Future Buys/Sells: I am still trying to catch the emerging market stocks during an upswing phase which has been difficult for the past three years or so. I will use a wide variety of securities to test the water so to speak, including MSF and PIE discussed above.

Closing Price 12/3/13: MSF: $15.16 -0.10 (-0.66%)

7. Bought 100 of the BDC FSC at $9.47 (see Disclaimer):

Snapshot of Trade:

Security Description: The Fifth Street Finance Corp. (FSC) is a BDC (Business Development Corporation).

The stock took a dive after FSC announced a cut in its monthly dividend from $.0958 to $.0833 per share or about a 13% reduction. FSC Interactive Chart

Fifth Street - For Investors : Dividends

Prior Trade: Prior to this purchase, I bought 100 shares in the ROTH IRA and mentioned that I would consider buying another 100 shares when and if the share price fell below book value. Item # 4 Bought Roth IRA 100 FSC at $10.1 I may average down by buying another 50 shares at $9.2 or lower. I did change my dividend option to reinvestment after the significant decline in price below book value per share.

Recent Earnings: For its 4th fiscal quarter ending 9/30/13, Fifth Street Finance reported net investment income of $28.7M or $.24 per share, down from $.27 per share for the Q/E 9/30/12. On the positive side, there were no investments on non-accrual status as of 9/30/13. The weighted average yield on debt investments was 11.1% with 67.4% of FSC's total debt investments at floating rates and 77.5% were in senior secured loans.

Net asset value per share was reported at $9.85 per share, down from $9.9 as of 6/30/13.

Earnings Call Transcript - Seeking Alpha

One Seeking Alpha published an article after the earnings report and opined that FSC was a buy after the decline in price.

The consensus estimate for the F/Y ending in September 2014 is currently $1.08 and $.97 in the 2015 F/Y. FSC Analyst Estimates When I last bought the stock, the estimate for the 2014 F/Y was at $1.11.

Rationale: (1) Income: The primary reason for owning a BDC is income generation. At a total cost of $9.47 per share, this security has a dividend yield of about 10.55%.

(2) Some Capital Appreciation Potential-Modest at its Optimum: The decline in price below net asset value per share improves the odds-somewhat-of share price appreciation contributing to an investor's total return. When starting out at a 10.55% dividend, any capital appreciation would be viewed here at HQ as a bonus.

Risks: (1) History of Dividend Cuts: I noted in my last post discussing FSC that this BDC has a history of dividend cuts.

(2) Serial Share Issuer: So far in 2013, FSC has sold 14.435M shares last April at $10.85 and another 17.643M shares last September at $10.31. Fifth Street Finance Corp. Raises $181.9 Million in Gross Proceeds in Connection With Public Offering of Common Stock At least those sales were above net asset value per share.

(3) Typical BDC Risks: Those risks are summarized by the firm starting at page 22 of the recently SEC filed 2013 F/Y Annual Report. FSC 10-K Ended 09.30.2013 That summary of risks ends at page 40. I seriously doubt that most individual investors appreciate those risks. There is no free lunch for a 10%+ dividend yield.

I discuss typical BDC risks in a number of prior posts (e.g Item # 3 Bought 100 PSEC @ $10.2-Roth IRA)

Future Buy/Sells: If the stock price meanders back up to over $10.4 after collecting a year or so of dividends, I will consider selling the shares. As noted above, I may average down in the ROTH IRA at $9.2 or lower.

Closing Price 12/3/13: FSC: $9.29 -0.10 (-1.06%)

8. Bought 50 of ELB at $24.44 (see Disclaimer): I used the proceeds from the First Data bond redemption to buy this higher qualify, lower yielding bond.

Snapshot of Trade:

2013 Bought 50 ELB at $24.44
The Entergy Louisiana LLC 1ST Mortgage Bond Series 2041 (ELA) is an Exchange Traded first mortgage bond issued by Entergy Louisiana, a wholly owned subsidiary of Entergy Corp.(ETR).

Interest payments are made quarterly at the fixed coupon rate of 6% on a $25 par value. The note matures on 6/15/2040, so there is a ton of interest rate risk.

The issuer may call the bond on or after 3/14/2015. An early optional call is conceivable, but I would not view it as probable given the low coupon.

Prospectus for ELB

According to Quantumonline, this security is rated A3 by Moody's and A- by S & P.  Interest rate risk and the risk of lost opportunity are the major risks in my opinion.

{The First Data bond was rated deep into junk: Caa2 by Moody's and CCC+ by S & P: Bonds Detail}

I recently discussed ELB when buying a 50 share lot in the ROTH IRA. Item # 4 Roth IRA: Bought 50 ELB at $25.06

As noted in that earlier post, the price of this security declined when interest rates started to move up. ELB closed at $26.55 on 5/1/13 and traded over $28 per share during October 2012. ELB Interactive Chart

The most recent earnings report for Entergy Louisiana can be found in Entergy's 10-Q filing for the Q/E 9/30/13, starting at page 126. 10-Q Net income was reported at $100.597M on $782+M in revenues. After preferred dividends, the net income available to common shareholders was reported at $98.859M (page 136)

As previously noted, there is a plan to spin off this subsidiaries transmission lines which is discussed in Entergy's last 10-K filing. (10-k starting at page 12)

The yield at a total cost of $24.44 per share is about 6.14%. It would make more sense to buy this type of security in the Roth IRA, where that yield becomes more appealing. However, I am running out of funds in the IRA accounts and I already own several low yielding first mortgage bonds in the ROTH.

The last ex interest date was 9/11/13.

Closing Price 12/3/13: ELB: $24.81 +0.35 (+1.43%)


This post is long enough. Some trades made in the week ending 11/29/13 will be discussed in the next weekly post. 


  1. Hi,
    Thx for writing this blog.
    I have a question regarding ELB.
    Being an A3 security is a positive. However,
    I agree that given its low coupon, it is unlikely to be called. So assuming no call, this means that either the plan is to hold it until 2040, or sell it at some point. If the latter, when would that be?

    Given that it is unlikely that interests will stay as low as today, isn't it true that ELB is unlikely to appreciate in value, and when a rise of interests come, ELB will depreciate considerably. A raise of 1% may make ELB drop to around $21.

    Am I not understanding something? Maybe the bet is that interests will remain unchanged for some time and that you will be able to sell ELB around $24 on time, having collected the quarterly divididens? MY problem is: who knows when is
    "on time" to sell.

    Appreciate your inputs and thx!

  2. When designing the bond part of my portfolio, I will play a variety of possible and probable scenarios. One possible scenario is that interest rates will stay abnormally low for an extended period of time.

    That reasoning is explained in my prior post dealing with ELB where I bought 50 shares in the ROTH IRA:


    I will copy some of that discussion:

    Rationale: The yield is tax free in the Roth IRA and becomes modestly attractive only due to that tax advantage. A 6% yield will double an investment in about 11.9 years. Estimate Compound Interest

    This is in part a contrarian play to my own outlook for interest rates. I have to recognize that my future forecasts may be proved wrong. I view it as a low probability scenario that interest rates will remain about the same as now over the next few years, or decline some. I view the higher probability event to be a rise in long term rates caused by interest rate normalization due to the phasing out of QE and its eventual termination next year. Interest rates may accelerate up even faster than currently expected due to an upward revision in inflation expectations.

    In effect, the purchase of ELB is a play on being wrong about the future course of rates. This security closed at $26.55 on May 1, 2013, when the 10 year treasury was yielding 1.66%, just before the rapid increase in long term rates commenced in earnest. ELB Historical Prices Last September and October, ELB was trading mostly over $28 per share. ELB Interactive Chart If rates do decline some, this security may find some buyers, affording me a opportunity to exit the position after collecting one or more interest payments at a profit. The last ex interest date was on 6/12/13.

    Generally, the optimal result for this kind of security would be to collect two interest payments and to sell the security at over $27."


    I recently made a decent percentage profit on EMQ by simply waiting for a spurt upward. I sold that one at $26.49 and used the proceeds to buy EFM at $24.9.


    For all of these securities where the issuer has the option to call, usually five years after the IPO date, the risk is asymmetric.Tails the issuer wins and heads the issuer wins.

    If interest rates rise faster than I can react, or if I have the deer in the highlights response to any meaningful rise, I will likely be stuck with all of the securities bought recently.

    If interest rates fall to levels where the issuer finds it advantageous to redeem and to refinance, then I lose in that scenario when forced to reinvest the proceeds in a falling rate scenario at lower coupons. The only way to avoid that predicament is to go with bonds with make whole provisions where some part of the foregoing risks is retained by the issuer. Those are priced at very high levels, well over par and have plenty of risk to the downside given their steep premiums.

    I have also increased the odds of a longer than expected period of abnormally low long term rates.

    I have about $9,000 in Citigroup Funding PPNs maturing in 2014, starting in March, and I will need to invest the proceeds in the best available bond alternative when those funds are received unless I want to forego the income and allow my cash allocation to build up which earns .01% in a MM fund.

    I am chopping my exchange traded bond and preferred stock orders into very small pieces as one way to control interest rate risk, setting generally a 8%+ yield target for an average down. So far ELB, I may another 50 in the taxable account when the current yield exceeds 8%

  3. These Entergy bonds are fun to range trade, especially against functionally similar bonds. I recently shorted some EFM vs EMQ at over a 1pt differential (these should trade at about the same price as far as I can tell, and historically have).

    The original poster might be more comfortable in something like EDT which has a 7.875% coupon and is less negatively convex. Unfortunately, if you buy it at 25.7 that's only about a 2.2% YTC in 6 months, but I guess that's not horrible for short dated paper and there's always a chance they leave these outstanding for awhile.

  4. Scott: I only have cash accounts. Consequently, being old fashioned and conservative, I do not buy on margin or short.

    I am looking at the issue recognizing that I am not an omnipotent being. I can not predict the future with certainty but can only identify possible scenarios and assign to each a range of probability. I will then weight my allocations based generally on those assignments. Those ranges have to be continually updated with new information. I have recently increased the odds of the low inflation/deflation scenario.

    Many investors thought that QE would lead to inflation. I was in that camp when the FED first announced significant asset buying back in March 2009.

    The last annual CPI for the year ending in October 2013 had the rate at 1%.

    What happens to inflation when the FED starts to taper and eventually ends QE? There are powerful deflationary forces in play now.

    In one scenario, inflation may fall and even turn negative. In that scenario, a long term investment grade bond will rise in value. One like ELB will not rise far given the call option however. The initial reaction might be to take the value down when the FED starts to taper, which is what I would expect, but that slide could reverse when and if the inflation numbers start to come in lower.

    Ultimately, besides credit issues, the long term driver for long bond prices is inflation and inflation expectations. The current break-even for the 30 year TIP is 2.27%, the predicted average annual CPI rate over the next thirty years. That may come down, yet it already would generate close to a 4% real rate of return per year assuming that prediction proves prescient.

    As I noted, one way to deal with the interest rate risk and uncertainty issues is to slice and dice the orders into small increments and set a possible marker for buying another 50 shares. My current market is 8%+ for an average down. I have the cash flow from income generating assets that can be used to finance those additional buys without having to dip into my cash allocation which is being held in reserve.