Tuesday, December 10, 2013

RMT, PDT, SYY, GSTPRB, SWZ, BWG, ARCC/Roth IRA: Added 50 ERC at $13.97and Sold 100 OSM at $23.76/Bought: 50 BPFHP at $22, 100 Realty Income (O) at $36.96/Pared BDGE Selling Highest Cost 56 Shares at $24.71/Pared Intel: Sold 42 at $23.64 and 45 at $25-Highest Cost Shares/Added 50 FAM at $13.74

Big Picture Synopsis

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

I am not comfortable with stocks at the present time.  

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

The market's average annual CPI forecast over the next 10 years remains in the 2% to 2.25% range. Unless that expectation materially declines, I would expect intermediate and long term bonds to rise in yield once the FED starts to taper. The market may drive up yields some in anticipation of tapering which is basically what happened earlier this year. Rates can only go up so far, however, based on that kind of inflation expectation number.

An important unknown is how will inflation and inflation expectations react to tapering and the eventual demise of QE. Many investors believed that QE would be inflationary but the annual, non-seasonally adjusted CPI was reported by the BLS at 1% through October 2013.

If the withdrawal of QE results in a modest decline in inflation expectations, the next phase of rate normalization may not be as painful as the May-September 2013 episode.

Ultimately, risk free interest rates will depend on inflation and inflation expectations. While I am negative about intermediate and longer term bonds at the current time, except for short term trades, I recognize that I am not omnipotent, capable of predicting the future. I also recognize that there are powerful deflationary forces that are keeping a lid on inflation, even with extraordinarily easy central bank monetary policies as reflected in both ZIRP and QE.

I am consequently playing, to some decree, a less likely scenario of prolonged low inflation/deflation by buying some longer term bonds. Recognizing the interest rate risk issue, I am chopping my orders into bits and pieces, spacing them out in time. The typical order is to buy 50 shares of a $25 par value security and then consider averaging down with another 50 share purchase when and if the yield exceeds 8%.

There are only a few fixed coupon, exchange traded baby bonds and equity preferred stocks that currently qualify for a potential average down. The one that is the closest to that 8% bogey is AGIIL, a senior unsecured baby bond which has a 6.5% coupon and a BBB- investment grade rating from S & P. The average down price would be slightly below $20.2. I would put that add in the ROTH IRA. ITEM # 3 Bought: 50 AGIIL at $21.11

The other recent 50 share purchases, which are eligible for 50 share average downs, when and if their current yields exceed 8%, are AFPRC, BDNPRE, ELB, EVERPRA, KWN, NNNPRD, SGZA, SLGPRI, TCBIP, and WBSPRE. This is no big deal irrespective of what happens.

I will want 8.5+% for an average down on both FHNPRA and BPFHP discussed below. The only reason for establishing a 8.5% as a marker for BPFHP is that I am starting off at close to 8% with the purchase discussed below.

I might accept less than 8% on an average down in a paired trade. Just as an example, I might accept slightly less than 8% on AGIIL provided I sold another fixed coupon security that yielded less and was inferior in credit quality. In that kind of paired trade, I would be moving up both in credit quality and yield.

I could fund a number of average downs in 2014 with the redemption proceeds paid by the maturing Citigroup Funding PPNs MOL, MTY, MBC, MOU, MKN and MKZ. I will use those proceeds to buy exchange traded bonds and/or equity preferred stocks.

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Recent Developments:

Last Friday, the BLS reported that the economy added a better than expected 203,000 jobs in November. The unemployment rate fell to 7% from 7.3%. Employment Situation Summary Average hourly earnings for employees on private nonfarm payrolls rose 4 cents to $24.15, with the average work week increasing by .1 of an hour to 34.5 hours. The U-6 number declined to 13.2% in November from 13.8% in October. Table A-15. Alternative measures of labor underutilization This report sparked another rally in stocks with the DJIA gaining almost 200 points. The VIX closed at 13.79, down  -1.29 or  -8.55%.

I was surprised to see the long treasury bond gain in price (and fall in yield) last Friday:

Closing Price 12/6/13: TLT: $102.92 +0.49 (+0.48%)

It does make one at least wonder about the direction of bond prices after the FED starts to taper, which is inevitable. What will inflation do thereafter?

The unemployment rate has been falling due largely to the decline in the labor participation rate, This article published by Zero Hedge shows the relationship between the unemployment and labor participation rates using the Jobs Calculator  available at the Federal Reserve Bank of Atlanta.

The labor participation rate appears to be in a secular decline:


Labor Force Participation Rate in the United States- St. Louis Fed

The rate has fallen to 1978 levels. JOBS/Secular Decline Labor Participation Rate (5/7/12 Post); Causes for Labor Participation Decline (5/18/12 Post)

ADP reported that private employers added 215,000 jobs in November, compared to the consensus forecast of 178,000. ADP revised its October estimate to +184,000 from 130,000. ADP National Employment Report - November 2013 | NER

The November ISM services index was reported at 53.9, down from 55.4 in October. The new orders component was close to unchanged at 56.4, but employment declined to 52.5 from 56.2 in October.

In the second estimate for third quarter GDP, the government increased its estimate of real GDP growth to 3.6% from 2.5% annualized. bea.gov.pdf The price index for personal consumption expenditures increased by 2% and 1.5% excluding food and energy. (Table A at page 18) Most of the increase from the first estimate was due to inventory stockpiling which will probably lead to anemic growth in the 4th quarter. WSJ

Brian Wesbury noted that he would not be surprised now with .5% real GDP growth in the current quarter. He also noted that the headline was not the important news. The "best news was that corporate profits increased at a 7.5% annual rate" in his opinion.

The government reported that new home sales increased at an annual rate of 444,000 in November, up 25.4% from October. census.gov.pdf There were significant downward adjustments for prior months.

The American Association of Railroads reported that November 2013 saw a weekly average of 251,887 intermodal containers which was the "highest weekly average for any November in history.". AAR Reports Increased Intermodal, Carload Traffic for November

I can confirm that I heard at least six trains pass near HQ last Friday, the highest number noted here for a very long time. The OG woke up hearing that incessant horn honking and that noise was the last thing heard before falling asleep.  Item # 5 Bought: 100 CSX at $26.33

The Federal Reserve listed its Z.1 report earlier this week that contains household net worth data for the 2013 third quarter. federalreserve.gov/z.1.pdf In the 2013 third quarter, the Fed estimates that household net worth increased by $1.9T to $77.3T compared to the 2013 second quarter. The value of corporate equities and mutual funds owned by households increased by an estimated $917M with home equity rising $428B.

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John Hancock Premium Dividend Fund (PDT ) 

The John Hancock Premium Dividend Fund increased its monthly dividend rate to $.08 per share from $.0755. The fund also declared a long term capital distribution of $.3368 per share and a short term capital gain distribution of $.0036 per share. The ex dividend date is 12/10/13.

I am taking the distributions in cash.

I own 200 shares. Item # 1 Bought: 200 PDT at $11.73 (10/24/13 Post)

PDT Page at CEFConnect

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Royce Micro-Cap Trust  (RMT) 

Royce Micro-Cap Trust declared a year end distribution of $.97 per share. About 76% of this distribution is currently estimated to be sourced from long term capital gains.

I currently own 694+ shares and will consequently receive a $673+ distribution later this month. While I changed my distribution option to payment in cash earlier this year, I have continued to receive payment in additional shares. I have purchased 25.318 shares with the $316.47 in dividends paid by RMT during the first three quarters of 2013. This last payment will eat into my unrealized profit.

CEFConnect Page for RMT

Under the performance tab at CEFConnect, the YTD increase in net asset value per share was 37.9% through 12/6/13. For five years, the annual average total return based on net asset value was 24.22%. Those numbers do no provide me with a reason to buy this fund now. Instead, I view those numbers as a reason for paring, possibly by selling my highest cost 200 shares during 2014.

Links to some discussions: Item # 6 Added 50 ADX at 9.7 and 50 RMT at 7.82 with Cash Flow July 2010; Item # 6 Added to CEF RMT at $7.64 January 2010; Item # 2 Bought RMT at $7.02 August 2009

RMT AS OF 12/6/13/Unrealized Gain +$2,180.76/Average Cost Per Share=$9.48
(see also: Small Caps and RVX model)

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Swiss Helvetia Fund (SWZ)

Swiss Helvetia Fund announced a year end distribution of $1.016 per share payable on 1/24/14 with an ex dividend date of 12/13/14. Of that amount, $.972 is classified as a long term capital gain distribution. The Fund further announced a tender offer to acquire up to 15% of the outstanding shares at a price equal to 95% of the fund's net asset value per share on the business day immediately following the date of this offer's expiration.

I currently own 507+ shares at an average cost of $13.49 per share and have been reinvesting the dividend.  

SWZ has paid several large capital gain distributions during my ownership period so my total return is much higher than my current unrealized profit in the shares.

CEFConnect Page for SWZ (up 29.01% in price YTD through 12/6/13)

SWZ Page at Morningstar

Last SEC Filed Shareholder Report: THE SWISS HELVETIA FUND, INC. (cost of investments $295.96+M-Value at $466.143+M as of 9/30/13)

Links to some recent discussions: Item # 3 Added 50 SWZ at $10.64 November 2012; Item # 1 Added 50 SWZ at $12.22 April 2013

While I have several reasons for owning this fund, one of them is to gain exposure to assets priced in Swiss Francs (CHFs). This fund took a hit when the Swiss Central Bank (SCB) started to sell CHFs back in 2011 in a successful effort to devalue its currency, CHF/USD Currency Conversion Chart (note the steep decline in the CHF starting in early August 2011).

The USD and the Euro had been relentlessly declining in value against the CHF until August 2011, Bloomberg, when the SCB started to devalue its currency by selling CHFs and by buying Euros and USDs with those newly created Swiss Francs. That is not something that a central bank would do to engender a strong currency. At the moment, the SCB is attempting to keep the CHF range bound against the Euro at near 1.2 to 1. Bloomberg As noted in that article, the policy is subject to change based on economic conditions.

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S & P Upgrades Senior Macy's Bonds to BBB+



I own just 1 May Department Stores bond. Bought 1 Macy's 7.875% Bond Maturing in 2030 @ 99.5 January 2011 That company was acquired by Macy's. When I bought this bond, Macy's senior unsecured bonds were rated in junk territory. This bond is mostly out of sight, out of mind.

Bonds Detail at FINRA

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Legg Mason BW Global Income Opportunities Fund (BWG) 

Legg Mason BW Global Income Opportunities Fund (BWG announced a continuation of its monthly $.12 per share dividend for December 2013, as well as for January and February 2014. The fund also announced a special dividend payable in December of $.30 per share with a 12/18/13 ex dividend date. I am reinvesting the dividend to buy additional shares given the fund's current discount to net asset value per share.

BWG Page at CEFConnect

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Sysco (own):

Sysco agreed to acquire the privately owned US Foods for $3.5 in stock ($3B) and cash ($.5M). US Foods had been bought by two private equity firms that loaded up the company with debt. Sysco will assume or refinance $4.7B of US Foods Net Debt. SEC Filing If this acquisition passes antitrust scrutiny, it will combine the two largest food distribution companies into one large one with over $65B in annual revenues. Sysco anticipates that the merger will create at least $600M in synergies.

Sysco shares rose in response to this news, trading as high as $43.4 on 12/9/13 before closing at $37.62.

Closing Price 12/9/13: SYY: $37.62 +3.31 (+9.65%)

Until about two years ago, Sysco's dividend rate was growing rapidly and was increased during the recent Near Depression. Item # 4 Sysco (11/18/09 Post); Item # 1 SYSCO. As noted in that last post, I view my Sysco shares now as a bond substitute. Unlike the fixed coupon bond however, my yield increases with each dividend increase. Sysco was purchased under my common stock dividend growth strategy: Item # 6 Common Stock Dividend Growth vs. Long Term Investment Grade Bonds

Due to a significant slowdown in earnings growth, Sysco's rate dividend of dividend growth has slowed to a trickle. For example, the rate of growth from 2012 to 2013 was 3.7%. Between 2003-2004, the dividend was increased by 18.18% (annual rate of $.44 in 2003 vs. .52 in 2004; $.60 in 2005; $.68 in 2006; and $.76 in 2007). The annual dividend was .$.36 in 2002 and had more than doubled by 2007.

Sysco - Stock Information - Dividend History

The current quarterly dividend is $.28 per share, which equates to about a 5.76% dividend yield at a total cost of $19.46 per share. Stocks, Bonds & Politics: Bought SYY at $19.46 (3/9/2009 Post)

Hopefully this new acquisition will jump start Sysco's earnings and allow for meaningful dividend increases. I am not going to sell this one.

Barrons' columnist opined that the rally in Sysco shares was overdone.

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Gastar Exploration Ltd. 10.75% Cum. Pfd. Series B 

On Wednesday 12/11/13, this recently issued preferred stock will go ex dividend for $.39566. The IPO was in November, so that payment will incorporate more than the usual monthly dividend period. The regular monthly dividend of $.22395833 will start in January 2014.

I discussed a nibble in my last post:

Item # 5 Bought 50 GSTPRB at $25.3

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ARES Capital (own common and senior exchange traded bond)

ARES announced after the close yesterday that it would be selling common shares. The company priced the offering at an undisclosed price. ARES sold 14.3M shares with an over allotment option for an additional 2.145M shares. Ares Capital Corporation Prices Public OfferingProspectus I would now classify Ares as a serial issuer of common stock.

While share issuances are positive for the managers whose compensation is increased by an increase in assets, it remains to be seen whether such issuances inure to the benefit of the shareholders.

At least initially, the ARCC stock price has been knocked down over 3% in early trading today in response to this latest offering. The shares were not sold below net asset value per share which is a common practice for many BDCs. As of 9/30/13, the net asset value per share was $16.35. So there was no immediate dilution resulting from selling new shares at below net asset value per share.

ARES sold 19.1M shares back in April at $17.43 (page S-42, Prospectus) In 2012, the company sold 25.875M share at $16.55 and another 16.422M shares at $15.41 in January 2012 (page F-74, 10-k)

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1. Added 50 of the Bond CEF ERC at $13.97-Roth IRA (see Disclaimer): Unlike other bond CEFs, I did not liquidate my ERC position earlier this year when I had an unrealized gain of over $500. I now have an unrealized loss. I did pare the position: Item # 1 Sold 100 of 550 ERC at $15.49 July 2011 (Snapshot of realized gain=$244.8); Sold 100 ERC at $16.27 October 2010.

Snapshot of Trade:

2013 Roth IRA Added 50 ERC at $13.97
Security Description: The Wells Fargo Advantage Multi-Sector Income Fund (ERC) is a leveraged closed end bond fund.

Form N-Q (Holding as of 7/31/13)(net unrealized depreciation than at $7.650+M)

FORM N-CSRS (Last SEC Filed Shareholder Report period ending 4/30/13)

ERC Page at CEFConnect (data shows no recent ROC support for the dividend; portfolio leverage shown at 23.87% as of 11/26/13)

The current monthly dividend is $.10 per share. At a total cost of $13.97, the dividend yield is about 8.59%.  

Data on Day of Trade (Wednesday 11/27/13)
Closing Net Asset Value Per Share: $16.21
Market Price: $14
Discount: -13.63
Average 1 Year Discount: -8.51%
Average 3 Year Discount: -7.46%
Average 5 Year Discount: -8.29%

The discount has expanded some since my purchase. On 12/9/13, the discount was at -14.4%.

This fund has significant exposure to junk bunds. As of 9/30/13, the weightings were 22.8% in BB; 26.3% in B; and 10.9% in CCC. 

The fund is well diversified with 691 holdings as of 9/30/13 with an average duration of 5.09 years at that time: CEFConnect-Portfolio Characteristics Tab

Investor Alert - Duration—What an Interest Rate Hike Could Do to Your Bond Portfolio - FINRA

The ten year annualized total return through 11/26/13 was 7.11% based on net asset value and 7.31% based on price.

Prior Trades: My last purchase was made in July:  Item # 5 Added 50 ERC at $14.09 Links to prior trades are provided in that post. 

Rationale: At a total cost of $13.97, the dividend yield is about 8.59%. The current discount is considerably above the average 1, 3 and 5 year discounts. When and if individual investors become more comfortable with bonds after their shellacking earlier this year, the discount may return to more normal levels providing an opportunity for a capital gain.

Risks: This CEF has all of the risks inherent in leveraged bond CEFs that invest globally. Given the diversity in the portfolio, interest rate and CEF risks are probably more important than credit risks, though the fund does have significant exposure to junk rated bonds that have a higher default risk historically than investment grade bonds.

The relatively short duration of 5.09 years mitigates interest rate risk some.  

Future Buys/Sells: I am done with open market purchases. I have changed in my distribution option to reinvestment and will continue to reinvest the dividend until the discount is consistently under 10%.

2. Bought 50 BPFHP at $22  (see Disclaimer):

Snapshot of Trade:

2013 Bought 50 BPFHP at $22
Security Description: The Boston Private Financial Holdings Inc. Non-Cumulative Perpetual Preferred Series D (BPFHP) is an equity preferred stock issued by Boston Private Financial Holdings (BPFH). The common shares are under consideration for a possible purchase in the regional bank basket strategy.

This security pays qualified (p. S-34) and non-cumulative (p. S-21) dividends at the fixed coupon rate of 6.95% on a $25 par value. Prospectus The issuer has the option to redeem on or after 6/15/18.

The prospectus contains a typical Dividend Stopper clause which can be found at page S-21.


Boston Private Financial Holdings is the holding company for the Boston Private Bank and Trust Company that has 24 branches in the Boston area (12) the San Francisco bay area (6) and southern California (6) Boston Private Bank & Trust Company BPFH also has several wealth advisory and investment management affiliates.

Common Share Dividend History: Boston Private Financial Holdings

I have been reluctant to buy the common shares due to bank's poor performance during the recent Near Depression, as reflected in the dismal numbers from 2008: Page 22-2012 Q4 10K BPFH

Recent Earnings Release: For the 2013 third quarter, the bank reported net income attributable to common shareholders, excluding an extraordinary gain, of $17.511M or $.22 per share, up from $.19 in the 2012 third quarter.

PR of the Company dated October 17, 2013

The current consensus estimate is for an E.P.S. of $.76 in 2013 and $.8 in 2014. BPFH Analyst Estimates

The capital ratios were good as of 9/30/13:

The financial ratios were also good:

As shown in the foregoing snapshot, ROA and ROTE for the third quarter was reported at 1.18% and 15.54% respectively. The coverage ratio was at 152%.

For Q/E 9/30/13, net interest income totaled $42+M. Fees and other income added 30.M+ or about 43% of total revenues. Investment management and trust fees totaled $17M, up 7%, while wealth advisory fees increased by 13% to 10.7M. (page 63- 2013 Q3 10-Q BPFH)

Prior Trades: None (new issue)

Rationale: (1) Tax Advantage Income Generation: This security will pay qualified dividends. The yield became slightly attractive as the price declined over 10% from the $25 IPO price last April. BPFHP Stock Chart

At a total cost of $22, the dividend yield is about 7.9% (.0695% x. $25 par value=$1.7375 annually per share divided by $22=7.8977%)

In the unlikely event that interest rates return to April 2013 levels, with the market anticipating a long period of stability thereafter, there is at least a possibility of share price appreciation back to par value.

I am more concerned about the downside, caused by the more likely than not scenario of rising rates due to interest rate normalization. After weighing the advantages and disadvantages, I elected to initiate a small 50 share position and would then buy another 50 shares when and if the yield exceeds 8.5% after taking into account the brokerage commission. That would put the average down price a few cents below $20.25 taking into account a brokerage commission.

Risks: Interest rate and volatility risks are the most important risks. Credit risk becomes enhanced when and if the issuer of the equity preferred stock feels the need to eliminate its common share dividend.

The company summarizes risks starting at page S-12 of the Prospectus.

Future Buys and Sells: I may add another 50 shares when the yield goes over 8.5% as noted above. I have increased that marker simply because I am starting out near 8% with my first nibble.

3. Sold 100 OSM at $23.76-Roth IRA (see Disclaimer):

Snapshot of Trade:
Sold 100 OSM at 
Snapshot of Recent Transaction History in Roth IRA:



Snapshot of Profit:


2013 OSM 100 Shares +$49.95
Item # 4 Bought 100 OSM at $23.12-Roth IRA (8/24/13 Post)

Total Realized Gains OSM: $1,300.15 ($49.95 plus another $1,250.2 shown in snapshots at the preceding linked post)

I still own 100 shares of the functionally equivalent ISM:  Bought 100 ISM at $22.8 (9/7/13 Post)

Security Description: The SLM Corp. CPI-Linked Medium Term Notes Series A 2017 (OSM) is a senior unsecured note issued by SLM, commonly known as Sallie Mae, that pays monthly interest payments based on a 2% spread to a CPI calculation on a $25 par value. The note matures on 3/15/17.

Prospectus

Rationale: As noted in the preceding snapshot, the monthly interest payments are trending down, and I would expect that to continue for several months. The calculation used to compute CPI has a three month lag. The last CPI report showed inflation increasing just 1% for the year ending in October 2013. Consumer Price Index Summary

I intend to replace OSM with a higher yielding bond in the Roth IRA. I have a GTC AON limit order to sell ISM.

On a dip, I would consider buying OSM back in a taxable account.

I am also concerned about SLM's plan to split into two companies, and how that split might impact the security and credit worthiness of its senior unsecured debt. MarketWatchReuters

4. Pared BDGE-Sold Highest Cost 56 Shares at $24.751 (REGIONAL BANK BASKET STRATEGY)(see Disclaimer): I decided to sell the highest cost shares remaining after my last pare, rather than to use FIFO accounting. I took a series of snapshots to show what I am doing here.

Bridge Bancorp (BDGE) is the holding company for the Bridgehampton National Bank

Bridgehampton National Bank (BNB) Locations

Snapshot of Trade: 

Sold 56 BDGE at $24.71
Snapshot of Position Before Transaction:

BDGE 165.558 Shares Average Cost Per Share=$19.72
Selection of Shares to be Sold: I selected the highest cost shares to sell:


Snapshot of Position After Transaction:

BDGE 109.558 Shares Average Cost Per Share=$19.05

Profit on Shares Sold:

2013 BDGE 56 Shares +$200.65
I sold my highest cost 50 share lot purchased in the open market, plus my highest cost 6 shares purchased with reinvested dividends.

Item # 5 Added 50 BDGE at $20.76 (August 2013) Yes, I know that the gain is short term, and I kept shares with a greater profit that could have been sold as long term capital gains.

Rationale: I reduced my average cost per share from $19.72 to $19.05 while harvesting a $200.65 gain and selling all shares purchased with the dividends profitably.

I have been selling BDGE shares at over $23: Sold 50 BDGE at $23.5Sold 50 BDGE at $23.01

I am not comfortable with the current share price. The current consensus forecast is for an E.P.S. of $1.36 in 2013 and $1.51 in 2014. BDGE Analyst Estimates Assuming those numbers prove to be accurate, the earnings growth for a small regional bank would be fine at 11%. However, the forward P/E on estimated 2014 earnings is about 16.36 at a $24.71 price, which is high in my opinion for a regional bank. It is not so high for this bank to cause me to jettison the entire position.

As shown in a price chart, this stock can be yanked up and down on relatively thin volume. BDGE Interactive Chart Over the past two years, the stock has been a buy at under $20 with four quick spikes over $23.

I discussed BDGE's third quarter earnings report in Item A in the October Regional Bank Basket Strategy update, along with some observations about BDGE's recent common share offering (priced at $20.75) and its proposed acquisition of FNBNY Bancorp. I mentioned in that post that Sandler O'Neill had upgraded BDGE to buy and raised its price target to $26 from $25.

This pare leaves me holding the following shares purchased in two 50 share lots: Item # 4 Bought Back 50 BDGE at $19.65 (August 2012); Item # 1 BOUGHT 50 BDGE AT $18 (October 2011). I still own 9.558 shares purchased with dividends.

5. Pared Intel By Selling Highest Cost Shares: 42 at $23.64 and 45 at $25 (see Disclaimer): Again the Google software inexplicably turns the snapshot images dark from a nice white background and consequently makes them more difficult to read.

Snapshot of Trades:
2013 Intel Sold 42 at $23.64
 
2013 Sold 45 Intel at $25
Snapshot of Profit:


2013 Sold 87 Intel +$358.85
Position Before Transactions:

Intel Before Sell Order/Average Cost Per Share =$17.91
Identification of Shares to Sell: I selected the highest cost shares that could be sold profitably in the first transaction:



Share Position After Sell:

Intel Position after 42 Shares Sold/236.95 Shares Average Cost Per Share Now $17.46
Share Identification for Second Transaction:

Last Friday, I received a pop in the shares after Citigroup upgraded Intel to outperform and hit my target for the second lot:


Remaining Shares:


191.95 Intel Shares/Average Cost Per Share at $16.95 
Prior Trades: As shown in the snapshot of my position prior to selling 42 shares, I started to buy Intel shares in October 2008.

I did trade the shares some prior to October 2008 and have a record of transactions dating back only to 2005. I could find only two prior sells, and both were short term flips:

2006 Intel $101.13 (two 50 share flips)
2008 Intel 40 Shares +$74.83
Intel has been an unrewarding investment for long term holders since 2000. At most, it has been rewarding for channel traders. I would have been better off investing in countless other stocks in October 2008.

Rationale: The reasons for Intel's lackluster, totally uninspiring performance since 2000 are not difficult to discover.

First, the shares became absurdly valued in 1999-2000 after spiking from about $4 in December 1994 to $75 in August 2000. INTC Interactive Chart That movement was a dangerous parabola which will invariably implode. INTC Interactive Chart By September 2002, the stock had cratered to less than $14, which at least had some rational connection to a reasonable valuation. That kind of irrational pricing, which was prevalent in 1999-2000 for blue chips, will first result in a price collapse and then a long period of range bound trading.

Item # 3 Large Cap Valuation Strategy-A New Long Term Strategy (May 2010 Post)

Item # 1 Stocks, Bonds & Politics: Large Cap Valuations (July 2010 Post)

Second, the foregoing does not explain why the stock has not been able to burst decisively outside a channel movement largely between $20 to $25 since 2002. Intel spends a great deal of its cash flow on research and plant in a never ending cycle. I likened it somewhat to running very hard to stay in place.

Consequently, Intel is not like a drug company that spends money to discover a drug like Lipitor  and then sells the drug for an astronomical spread over the cost of manufacture for a couple of decades or so.

While I do not have the data in front of me, the 1980s and 1990s was marked by rapidly growing PC sales which then started to slow down and has now started to decline. The latest projection from IDC forecasts a 10.1% decline in PC shipments this year.

Third, and this brings me to the current problem, the company has recently been negligent in adapting to changes in how consumers use computing devices.

I am not one who views the PC as dead or dying, soon to be replaced by tablets and smartphones. The IDC report noted above predicts that shipments will stabilize above 300 million units per year "with no significant recovery".

Yet, it has been apparent to everyone, other than Intel's highly compensated senior management, that PCs (laptops and desktops) were no longer a growth market. Sure, there will be years where shipments increase Y-O-Y, but the amount will relatively small and will likely occur after a period of steady declines, indicating more of a refresh cycle than a movement away from smaller computing devices.

Based on recent developments, I have concluded that there is significant downside risk in Intel shares during 2014. This is not to say that those concerns will actually be realized, but that I see a significant chance for a price decline.

I would not be surprised to see the shares decline below $20 and view it as more probable than not that the shares will decline below the average cost of the 42 shares sold which was $20.45.

If the price declines below my current average cost of $16.95 per share, I will consider using the proceeds to buy additional shares depending on my opinions about Intel profitably gaining substantial market share in both tablets and smartphones. Without question Intel's management was left in the dust, dumbfounded and flat footed in those two future critical markets.

The most disconcerting recent development occurred during Intel's recent analyst day when the company predicted flat revenue in 2014. Seeking Alpha

I will just take a chance with the remaining shares and hope that Intel is successful with its new products.

I am not reinvesting the dividend at the moment.



5. Added 50 of the bond CEF FAM at $13.74 (see Disclaimer): The $13.74 is the lowest price ever paid for this security. Closed end bond funds have been a drag on my portfolio in 2013.

Snapshot of Trade:



Security Description: The First Trust/Aberdeen Global Opportunity Income Fund (FAM ) is a leveraged closed end bond fund.

Sponsor's Webpage: First Trust/Aberdeen Global Opportunity Income Fund (FAM)

The fund is currently paying a monthly dividend of $.13 per share. FAM Distribution History At that rate, the yield is about $ at a total cost of $13.74.

FAM Page at CEFConnect

Morningstar Page on FAM (rated 4 stars as of date of purchase)

Morningstar raised the rating to 4 stars from 3 after my last purchase. That change is most likely due to valuation considerations.

Data Day of Trade 12/3/13:
Closing Net Asset Value Per Share: $15.21
Closing Market Price: $13.75
Discount: -9.8%
Average 1 Year Discount: -4.27%
Average 3 Year Discount: -3.42%
Average 5 Year Discount: -5.52%

The discount has expanded some since this purchase. On 12/9/13, the discount was reported at -10.78%.

I reduced my average cost per share from $16.61 to $15.73 in this account:


Semi-Annual Report (period ending 6/30/13)

Credit Quality as of 10/31/13:



Prior Trades: My most recent transaction was to buy 50 shares in the ROTH IRA: Item # 5 Paired Trade Roth IRA Bought 50 FAM at $14.2-Sold 50 SNLN at $19.89 (10/7/13 Post)

Rationale and Risks: I recently discussed the rationale and risks. The primary reason for owning these shares is to generate income. The current discount is significantly higher than the average 1, 3 and 5 year discounts. The most important risks are interest rate, currency, volatility and typical CEF risks associated with leveraged closed end bond funds. I view credit risks as less important given the diversity and credit quality of the fund's holdings.

6. Bought 100 Realty Income at $36.96 (see Disclaimer): Realty Income is one of the better equity REITs that has recently fallen within what I would view as a reasonable valuation range. I thought that this stock was clearly overvalued earlier this year when the price hit $55.

Snapshot of Trade:

Bought 100 O at $36.96
Closing Price Day of Trade: O: $36.87 -0.73 (-1.94%)

Security Description: Realty Income Corp (O) owns 3,800+ properties under long term leases. Most of those leases are triple net leases which requires the tenant to pay property taxes, insurance and maintenance expenses. Rent growth will generally be modest for those type of leases, probably around 1.5% over a long term lease. Occupancy rates have historically been in the high 90s.


As of 9/30/13, the company owned 3,866 properties and 99.5% of those are single tenant properties. Of the 3,846 single tenant properties, "3,774 were leased with a weighted average remaining lease term . . . of approximately 10.9 years". (page 27, 10-Q)  The company estimates that approximately 40% of its total rental revenues comes from investment grade companies or their subsidiaries.

The company refers to itself as "The Monthly Dividend Company®", a registered trademark. The company asserts that it has paid 519 dividends and has increased the dividend 73 times. The annualized dividend has increased from $.9 per share in 1994 to $2.182 per share this year. Track Record The company did not cut the dividend during the recent Near Depression.

I prefer monthly dividends and it is unusual for an American equity REIT to pay monthly dividends. All Canadian REITs that I own now or have owned pay monthly dividends.

Website: Realty Income

The January 2013 acquisition of American Realty Capital Trust (ARCT) allowed the company to significantly increase the dividend rate in 2013. SEC Filed Press Release

Dividend Annualized/Percentage Increase from Prior Year
2003 $1.2
2004 $1.32      10%
2005 $1.395     5.68%
2006 $1.518      8.817%
2007 $1.641      8.1%
2008 $1.701      3.656%
2009 $1.716       .882%
2010 $1.731       .874%
2011 $1.746       .867%
2012 $1.821     4.3%
2013 $2.182   19.82%

Realty Income Common Stock

For the Near Depression period, and its aftermath, I can only say that the dividend raises in 2009-2011 are better than cuts and a large number of American REITs slashed their dividends during that period.

Nonetheless, I would not get to enthused about this dividend history. Just compare the rate of growth to a Coca Cola. (see my comment to this December 2012 Seeking Alpha, where I computed KO's dividend growth rate)

Prior Trades: I overlooked this REIT for a long time. Since I started to  read articles published at SeekingAlpha, it would have been difficult to continue overlooking this company since so many authors write about it.

One author views Realty Income as his favorite REIT and he has published two recent articles discussing this REIT (Brad Thomas: Realty Income Corp (O) Scared Money Never Wins - Seeking Alpha and Realty Income May Be Old School, But The Dividends Are Really Cool - Seeking Alpha.

I am more inclined to agree with another author who looked at historical P/FFO ratios and argued that there was still room to the downside based on normal historic valuations assigned to this stock. Seeking Alpha He is probably correct in opining that this stock would be cheap at $31, but I doubt that the price will come close to that number without a significant recession.

Recent Earnings Report: For the 2013 third quarter, the company reported that AFFO per share increased to $.60 per share, up from $.52 in the 2012 third quarter. Portfolio occupancy stood at 98.1%. Same store rents increased 1.3%. For 2013, the company estimated normalized FFO to be between $2.38 to $2.42. The estimated range provided by the company for 2014 is currently $2.53 to $2.58.

SEC Filed News Release

Assuming FFO of $2.55 in 2014, and a total purchase cost per share of $36.96, that puts the forward P/FFO at 14.49.

During the third quarter, the company sold 9.775M shares at $40.63. In March 2013, the company sold 17.250M shares of common stock at $45.6. The company issued 45.573+M shares to the shareholders of ARCT last January. On the closing day of the ARCT acquisition, the Realty Income common shares closed at $44.04.

As of 9/30/13, Realty Income had $3.2B in senior unsecured notes outstanding, up from $2.550B as of 12/31/12. (page 15: 10-Q) There was at that time 50 mortgages on 229 properties, up from 13 mortgages on 11 properties as of 12/31/2012. The total amount of mortgage debt stood at $779.7M as of 9/30/13, with all but $197.6M of that amount maturing prior to 2018 (page 14).

Total debt was $4.55B as of 9/30/13. The fixed charge coverage ratio was 2.9. (page 38) Moody's rates the senior unsecured debt at Baa1. S & P rates it at BBB+. Both rating firms have "stable" outlooks on the debt (page 39)

Rationale: (1) Over the long term, I would anticipate that the total return from this investment will be in my satisfactory range which would be somewhere between 8% to 10%. The current dividend yield is close to 6%, so I will not need much annual appreciation in the shares to hit that target range. When evaluating the success long term I doubt that it will make much difference whether my entry point is at a 15 P/FFO or a 13 P/FFO. It would make a considerable difference with an entry point at a 23 P/FFO.

At a $55 price and assuming a $2.4 FFO in 2013, the P/FFO would be about 22.92.  The stock traded briefly over $55 in May and is now well below its 50 and 200 SMAs.  O Interactive Chart

The chart does not give one much comfort that a bottom is in place. It is what I would call a "falling knife" chart.

Risks: Anyone who purchased this stock at $55 back in May has hopefully learned a valuable lesson. Even the stocks of good companies can be overpriced, sometimes for long periods, and valuation issues always need to be considered when making any investment decision. An improvident buy can easily result in losses and unsatisfactory long term returns. How long will it take for Realty Income to return to $55? Or worse, how long will it take for Cisco or Intel to hit $70 again or GE to arrive back at its 2000 price of $57?

I do not know how Realty Income's stock is going to perform over the next ten years. I would not assume that the past is predictive of future returns. This REIT is much larger now than it was 10 years ago and may find it more difficult to grow using its existing business model. It has already started to branch out into non-retail properties.

In the last quarter, the company completed $503M in acquisitions of 219 new properties or properties under development. SEC Filed Press Release For the nine months ending 9/30/13, Realty Income has invested approximately $1.37B in 407 new properties or properties under development.

I do know that a P/FFO of around 15 is at least a reasonable price for the stock, given this REIT's track record, the proven competence of its management, the overall quality of its tenants, and its credit profile. However, the momentum is certainly to the downside at present and further downside action is certainly possible.

The company discusses risks starting at page 21 of its 2012 Annual Report.

Future Buys/Sells: I will consider buying 50 shares in the Roth IRA between $34 to $35. If the stock spurted to $42-43 within a few months, I would consider selling the position.

When evaluating buys and sells, I will first try to establish a fair value range for the security. A movement above that range will not automatically trigger a sell. Instead, I will be more likely to sell as the stock moves further away from the upper end of the fair value range. My current reasonable range would be a TTM P/FFO between 13 to 16. The range will change based on future results. If FFO declines, that would obviously cause a significant lowering of the range. The converse would be true with a greater than expected increase in FFO. 

3 comments:

  1. Other baby bonds getting close to your 8% bogey are TDE and TDJ. Both issued by TDS and IG rated. For whatever reason, both have sold off nearly 10% in the last few days. While rates have been weak and this is long dated paper, I'm not seeing any news items that would warrant such a big move. Perhaps it's a liquidation from an institutional player as volume has been unusually high.

    ReplyDelete
  2. SCOTT: I am familiar with those TDS bonds. At one time, I owned TDA which had a 7.6% coupon and was partially called in late 2010 and then fully called:

    Partial Call News Release
    http://ir.teldta.com/phoenix.zhtml?c=67422&p=irol-newsArticle&ID=1500469&highlight=

    The proceeds from TDE were used to redeem TDA. The symbol TDA was later given to another TDS bond maturing in 2061 which had a 5.875% coupon. The company has been lowering its coupons and extending its maturity dates at the same time. This has been a routine response among corporations to the Federal Reserve's extended Jihad Against the Saving Class.

    I have also owned at least one U.S. Cellular bond which has also been called.

    Generally, I have stayed away from bonds maturing much after 2040 but I am willing to buy some in small quantities particularly in the Roth IRA.

    All securities that are purchased by investors in part for their yield are declining in value, probably due to concerns about tapering and the potential rise in rates next year. This would include exchange traded bonds, preferred stocks, bond CEFs, REITs, and MLPs. The rate rise that started in early May has certainly made investors jittery about what will happen as QE starts to wind down.

    ReplyDelete
  3. I would add that trading in exchange traded bonds and preferred stocks is dominated by individual investors who can frequently make irrational decisions. A more charitable description would be to say that professional investors are making different decisions.

    To show that difference, I would recommend going to the FINRA site that permits an advanced bond search:



    http://finra-markets.morningstar.com/BondCenter/Screener.jsp?type=advanced

    The purpose of this exercise is to compare the pricing in the bond market and the stock market for similarly rated bonds.

    AGIIL is rated BBB- by S & P and matures in 2042. The current yield is close to 8% and the YTM is higher given the discount.

    If I looked for bonds rated BBB- by S & P maturing between 2040 and 2044, I would find several and they generally have YTM's between 5% to 5.5%. Those bonds are priced by institutional investors whereas AGIIL is priced primarily by individuals, many of whom are selling after paying near or over par value earlier this year. Buy high-sell lower. You will generally find some bonds traded in the bond market whose price is significantly out of whack with its investment grade, which generally would indicate that investors are assigning a different grade to it.

    For bonds maturing between 2055 to 2062, rated BBB- by S & P, there are only 4. One is issue by Reinsurance Group and I own one of its exchange traded bonds.

    6.75%/Maturing 12/15/2065
    http://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C316184&symbol=RGA.GC

    That one is trading near par value.

    Another is a 6.8% coupon from American Express, maturing in 2066, trading at around 106:

    http://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C350608&symbol=AXP.LA

    ReplyDelete