Big Picture Synopsis
Stocks:
Stable Vix Pattern (bullish)
Short Term: Hoping for a 10%+ Correction
Intermediate and Long Term: Bullish
Bonds:
Short Term: Neutral to Slightly Bearish Based on Interest Rate Normalization
Intermediate to Long Term: Slightly Bearish Based on Interest Rate Normalization
The bond forecast is predicated on an average CPI rate between 2% to 2.25% over the next ten years.
My most likely bond scenario, which is bearish based on interest rate normalization, was explained in much greater detail by James Paulsen, the Chief Investment Strategist at Wells Capital Management, the investment subsidiary of Wells Fargo. Barrons.com
Paulsen is predicting another bad year for bonds, as economic growth and money velocity accelerate, QE ends, the unemployment rate declines to near 6% and factory utilization crosses 80%.
The decline in money velocity probably explains why QE did not produce inflation. As the FED created money to buy treasuries and mortgage backed securities, the new money was not used in the real economy. Mostly the funds landed in bank reserves and then remained idle. The result was a decline in money velocity as more money was created by the FED. Money velocity has yet to show that it is about to accelerate:
Velocity of M2 Money Stock (M2V)- St. Louis Fed
I would certainly view it as material to see a meaningful and non-temporary upturn in money velocity, particularly given all of that excess money supply sloshing around.
Paulsen notes that $1 in the money supply will produce $1 in GDP when "spent once a year but this same dollar can produce $4 of GDP if turned over (spent) four times during the year".
He further notes that the persistent decline in money velocity since QE's onset has muted its impact, and I accept that opinion.
If all of Paulsen's factual predictions come true in 2014, I would expect to see the ten year treasury at or slightly above 4% by year end.
Capacity utilization is currently at 79%: Capacity Utilization: Total Industry - St. Louis Fed
While a problematic rise in interest rates during 2014 is my most likely scenario, I have upgraded the likelihood of a deflation/low inflation scenario which could make bonds a buy even at current interest rate levels. There are several deflationary forces at play (e.g. surpluses in labor and plant; abundant natural gas at low prices), and it remains to be seen how the economy will react once the FED ends QE.
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Recent Developments:
The Case Shiller home price indexes, for both the 10 and 20 major U.S. cities, rose 13.6% Y-O-Y in October.
Eurozone manufacturing PMI rose to a 31 month high in December, rising to 52.7 from 51.6 in November. markit
Markit's U.S. manufacturing PMI was reported at 55, an eleven month high.
The ISM December manufacturing PMI for the U.S. was reported at 57. The new orders component rose to 64.2 from 63.6.
I would agree with Soros that China is the greatest threat to the world's economy in 2014. MarketWatch A negative article about China's prospects can be found in this opinion column written by a portfolio manager and published by Bloomberg. My exposure to China is de minimis. My primary direct exposure is through the CEF CHN.
The December ISM services index declined to 53. The business activity index was reported at 55.2, down from 55.5 in November. The new orders component declined 7 points to 49.4, the first reading below 50 since July 2009. The employment index increased to 55.8 from 52.5.
Chart of ISM Non-manufacturing: Business Activity Index - St. Louis Fed
Chart of ISM Non-manufacturing: New Orders Index - St. Louis Fed
Chart of ISM Non-manufacturing: Employment Index - St. Louis Fed
Markit's U.S. manufacturing PMI was reported at 55, an eleven month high.
The ISM December manufacturing PMI for the U.S. was reported at 57. The new orders component rose to 64.2 from 63.6.
I would agree with Soros that China is the greatest threat to the world's economy in 2014. MarketWatch A negative article about China's prospects can be found in this opinion column written by a portfolio manager and published by Bloomberg. My exposure to China is de minimis. My primary direct exposure is through the CEF CHN.
The December ISM services index declined to 53. The business activity index was reported at 55.2, down from 55.5 in November. The new orders component declined 7 points to 49.4, the first reading below 50 since July 2009. The employment index increased to 55.8 from 52.5.
Chart of ISM Non-manufacturing: Business Activity Index - St. Louis Fed
Chart of ISM Non-manufacturing: New Orders Index - St. Louis Fed
Chart of ISM Non-manufacturing: Employment Index - St. Louis Fed
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1. Bought 50 FPOPRA at $24.25 (see Disclaimer): Although REIT's do not pay qualified dividends, and I generally will stick them in a retirement account for that reason, I have started to buy some REIT cumulative preferred stocks with cash flow generated in the main taxable account. I am buying them in small amounts after balancing their many risks against their limited potential benefits at current prices.
As previously noted, all of my Citigroup PPNs mature in 2014 at their $10 par values. I will be adding exchange traded bonds and equity preferred stocks to replace those income investments even before they start to mature.
The first Citigroup PPN to mature will be MOU, which could have a good pay day for its last annual coupon period, provided the Russell 2000 does not close one day above 1,255.12 causing a Maximum Level Violation during this last annual period and a reversion to the minimum 3% coupon. The starting value on 2/22/13 was 916.5 and the Russell 2000 closed last Friday at 1,156.09. The Closing Date for the current coupon period is 3/3/14. Pricing Supplement If the Russell 2000 closed at 1156 on 3/3/14, and there was no Maximum Level Violation, the last coupon would be 26.13% (1156 minus 916.5=239.5 divided by 916.5=26.13%) MOU hit pay dirt with a 27.93% coupon in 2011. MBC & MOU; Bought 100 MOU at $10.12 (April 2010)
As previously noted, all of my Citigroup PPNs mature in 2014 at their $10 par values. I will be adding exchange traded bonds and equity preferred stocks to replace those income investments even before they start to mature.
The first Citigroup PPN to mature will be MOU, which could have a good pay day for its last annual coupon period, provided the Russell 2000 does not close one day above 1,255.12 causing a Maximum Level Violation during this last annual period and a reversion to the minimum 3% coupon. The starting value on 2/22/13 was 916.5 and the Russell 2000 closed last Friday at 1,156.09. The Closing Date for the current coupon period is 3/3/14. Pricing Supplement If the Russell 2000 closed at 1156 on 3/3/14, and there was no Maximum Level Violation, the last coupon would be 26.13% (1156 minus 916.5=239.5 divided by 916.5=26.13%) MOU hit pay dirt with a 27.93% coupon in 2011. MBC & MOU; Bought 100 MOU at $10.12 (April 2010)
Snapshot of Trade:
 |
| 2013 Bought 50 FPOPRA at $24.25 |
Security and Company Description: The First Potomac Realty Trust Cumulative Preferred Series A (FPO.PA) is an equity preferred stock issued by the REIT First Potomac Realty Trust (FPO). This preferred stock pays cumulative and non-qualified dividends at the fixed coupon rate of 7.75% on a $25 par value. Distributions are paid quarterly. FPO has the option to redeem this security on or after 1/18/2016.
Prospectus
There is a typical dividend stopper clause contained in the prospectus at page S-18.
There is also a change of control provision (pages S-19 to S-23)
First Potomac Realty Trust Profile Page at Reuters
Key Developments Page at Reuters
2014 Consensus FFO Per Share Mean Estimate: $.97
Company Website: First Potomac Realty Trust
Property Portfolio - First Potomac Realty
In May 2013, just about perfect timing, First Potomac Realty sold 7.475M shares at $14.7 per share.
As part of its restructuring program, First Potomac Realty sold 24 industrial properties in the greater D.C. area for $259M.
The common share quarterly dividend was cut to $.15 per share from $.2 in the 2013 first quarter due to FPO's restructuring described above. Investor Relations Dividend History
Prospectus
There is a typical dividend stopper clause contained in the prospectus at page S-18.
There is also a change of control provision (pages S-19 to S-23)
First Potomac Realty Trust Profile Page at Reuters
Key Developments Page at Reuters
2014 Consensus FFO Per Share Mean Estimate: $.97
Company Website: First Potomac Realty Trust
Property Portfolio - First Potomac Realty
In May 2013, just about perfect timing, First Potomac Realty sold 7.475M shares at $14.7 per share.
As part of its restructuring program, First Potomac Realty sold 24 industrial properties in the greater D.C. area for $259M.
The common share quarterly dividend was cut to $.15 per share from $.2 in the 2013 first quarter due to FPO's restructuring described above. Investor Relations Dividend History
Prior Trade: I could only find one prior trade. In 2011, I sold 50 shares of FPOPRA at $25.7 for a small profit:
Last Earnings Report: For the 2013 third quarter, First Potomac Realty Trust reported core FFO of $13.5M or $.22 per share. As of 9/30/13, the portfolio consisted of 145 buildings totaling approximately 9M square feet. The portfolio was 87.4% leased, up from 84% as of 6/30/13. Same property net operating income increased by 3.7% compared to the 2012 third quarter.
Rationale: The dividend yield at a total cost of $24.25 per share is about 7.9%. Payment for this investment is sourced from cash invested in a money market fund yielding .01%.
The pathetic income generation from "safe" investments is a motivating factor in buying a risk asset that at least provides an income return over the inflation rate. An assessment of the downside risk, however, keeps the exposure low.
Needless to say, an investor does not come out ahead by buying a security yielding 7.9% per annum and then have the security decline in value by 10%.
I would not be buying this preferred stock with the risk free yield at 4%.
Two potential advantages of a REIT equity preferred stock, compared to those issued by regular "C" corporations, are the cumulative nature of the dividend and the requirement that a REIT must pay at least 90% of its net income in common share dividends to maintain its tax status.
Most non-REIT equity preferred shares pay non-cumulative dividends, particularly those issued by financial institutions.
The requirement to pay a cash dividend out of net income is relevant to the stopper clause. Theoretically, a regular "C" corporation could eliminate the non-cumulative preferred dividend even when it has some net income, provided it first eliminated the common share dividend.
An equity preferred stock issued by a leveraged bank holding company would likely become worthless when the FDIC seizes its operating bank subsidiary. That may not be the case with a preferred stock issued by a publicly traded equity REIT that owns real estate, where the real estate may be worth significantly more than the total amount of debt assuming no forced liquidation at an inopportune time (e.g. a severe recession).
The pathetic income generation from "safe" investments is a motivating factor in buying a risk asset that at least provides an income return over the inflation rate. An assessment of the downside risk, however, keeps the exposure low.
Needless to say, an investor does not come out ahead by buying a security yielding 7.9% per annum and then have the security decline in value by 10%.
I would not be buying this preferred stock with the risk free yield at 4%.
Two potential advantages of a REIT equity preferred stock, compared to those issued by regular "C" corporations, are the cumulative nature of the dividend and the requirement that a REIT must pay at least 90% of its net income in common share dividends to maintain its tax status.
Most non-REIT equity preferred shares pay non-cumulative dividends, particularly those issued by financial institutions.
The requirement to pay a cash dividend out of net income is relevant to the stopper clause. Theoretically, a regular "C" corporation could eliminate the non-cumulative preferred dividend even when it has some net income, provided it first eliminated the common share dividend.
An equity preferred stock issued by a leveraged bank holding company would likely become worthless when the FDIC seizes its operating bank subsidiary. That may not be the case with a preferred stock issued by a publicly traded equity REIT that owns real estate, where the real estate may be worth significantly more than the total amount of debt assuming no forced liquidation at an inopportune time (e.g. a severe recession).
Risks: For REIT preferred stocks, I view interest rate and volatility risks to be material.
The interest rate risk is asymmetric between the issuer and the owner of the preferred stock.
If interest rates rise, the issuer will allow the owner to keep the preferred stock which is declining in value. The investor has the option to sell at a loss, or to keep the security declining in value and consequently lose the opportunity to reinvest the proceeds in a higher yielding security.
These securities can become perpetual for an individual's lifetime when rates rise and then remain at a level sufficiently high enough that it is not advantageous for the issuer to exercise their optional call right.
If interest rates decline and the issuer can refinance at lower rates, then the issuer has the option after the call date to redeem the security and to pay only par value plus accrued dividends, providing the investor with cash that can only then be reinvested in a lower yielding security.
The company discusses risk factors starting at page S-9 of the Prospectus. Risk factors incident to its operations are discussed starting at page 11 of its 2012 Annual Report, Form 10-K.
When bought near par value, share price appreciation is minimal, while downside price risk is retained by the investor rather than the issuer, due to two factors.
First, in a declining rate environment, where the issuer is likely to redeem the security when it is legally able to do so (generally five years after the IPO), the price will be unable to rise much above par value even under optimal credit conditions for the issuer.
Second, the downside risk to the investor is not capped due to interest rates rising. In a rising rate scenario, the issuer has locked a low rate to its advantage, possibly into perpetuity, while the owner of the fixed coupon preferred stock has only bad choices left.
Stocks, Bonds & Politics: REIT CUMULATIVE PREFERRED LINKS IN ONE POST/Advantages & disadvantages
Future Buys/Sells: I am not likely to buy more. I may buy the common at some point in 2014 based on valuation. I am likely to sell the equity preferred when and if I have a 10% annualized return. That modest objective will require capturing about a 3.5% increase in the share price ($.85) per share after collecting 4 quarterly dividends or some other combination of the two total return sources. The potential target price after collecting 4 dividends would be $25.1+.
The interest rate risk is asymmetric between the issuer and the owner of the preferred stock.
If interest rates rise, the issuer will allow the owner to keep the preferred stock which is declining in value. The investor has the option to sell at a loss, or to keep the security declining in value and consequently lose the opportunity to reinvest the proceeds in a higher yielding security.
These securities can become perpetual for an individual's lifetime when rates rise and then remain at a level sufficiently high enough that it is not advantageous for the issuer to exercise their optional call right.
If interest rates decline and the issuer can refinance at lower rates, then the issuer has the option after the call date to redeem the security and to pay only par value plus accrued dividends, providing the investor with cash that can only then be reinvested in a lower yielding security.
The company discusses risk factors starting at page S-9 of the Prospectus. Risk factors incident to its operations are discussed starting at page 11 of its 2012 Annual Report, Form 10-K.
When bought near par value, share price appreciation is minimal, while downside price risk is retained by the investor rather than the issuer, due to two factors.
First, in a declining rate environment, where the issuer is likely to redeem the security when it is legally able to do so (generally five years after the IPO), the price will be unable to rise much above par value even under optimal credit conditions for the issuer.
Second, the downside risk to the investor is not capped due to interest rates rising. In a rising rate scenario, the issuer has locked a low rate to its advantage, possibly into perpetuity, while the owner of the fixed coupon preferred stock has only bad choices left.
Stocks, Bonds & Politics: REIT CUMULATIVE PREFERRED LINKS IN ONE POST/Advantages & disadvantages
Future Buys/Sells: I am not likely to buy more. I may buy the common at some point in 2014 based on valuation. I am likely to sell the equity preferred when and if I have a 10% annualized return. That modest objective will require capturing about a 3.5% increase in the share price ($.85) per share after collecting 4 quarterly dividends or some other combination of the two total return sources. The potential target price after collecting 4 dividends would be $25.1+.
Four Dividends on 50 Shares: $96.87
Profit: $42.5
Total: $139.37
Less Commission=$121.37
Total Return Before Tax and After Commissions: 10%
This is admittedly small ball.
2. Bought 50 OFCPRL at $24.04 (see Disclaimer): After researching this security, I decided to place a buy limit order after the ex dividend date, but the OG had a senior moment and remembered incorrectly that date. Consequently, the order was placed and filled the day before the ex dividend date, so I in effect created a tax event without creating any value.
Snapshot of Trade:
The last ex dividend date was 12/27/13.
Security and Company Description: The Corporate Office Properties Trust Preferred Series L (OFC.PL) is an equity preferred stock issued by the REIT Corporate Office Properties (OFC) .
Corporate Office Properties will "generally acquire, develop, mange and lease office and data center properties concentrated in large office parks located near knowledge-base government demand drivers and/or in targeted markets ... in the Greater Washington, DC/Baltimore region." As of 9/30/13, the REIT's investments included 210 office properties totaling 19.2M square feet, 11 properties under various stages of development and 1,721 acres of land held for future development. 10-Q at page 15
As described in this article from Zacks, OFC recently exited the Colorado Springs market, disposing of 20 properties for $177M. Excluding a non-cash accounting gain resulting from this transaction, OFC estimates its 2013 adjusted FFO per share to be between $1.96 to $1.98. COPT Completes Exit from Colorado Springs and Resolves $146.5 Million Secured Loan
This security pays cumulative and non-qualified dividends at the fixed coupon rate of 7.375% on a $25 par value. Distributions are paid quarterly. The issuer has the option to redeem on or after 6/27/2017.
Prospectus
The prospectus contains a dividend stopper clause at pages S-13 to S-14 and a change of control provision that is described starting at page S-17 under "Special Optional Redemption".
Corporate Office Properties Trust Profile Page at Reuters
Key Developments Page at Reuters
2014 FFO Per Share Consensus Mean Estimate $1.9
2012 Annual Report 10-K
In September, the company sold $250M in 5.25% senior unsecured bonds maturing in 2024.
Security and Company Description: The Corporate Office Properties Trust Preferred Series L (OFC.PL) is an equity preferred stock issued by the REIT Corporate Office Properties (OFC) .
Corporate Office Properties will "generally acquire, develop, mange and lease office and data center properties concentrated in large office parks located near knowledge-base government demand drivers and/or in targeted markets ... in the Greater Washington, DC/Baltimore region." As of 9/30/13, the REIT's investments included 210 office properties totaling 19.2M square feet, 11 properties under various stages of development and 1,721 acres of land held for future development. 10-Q at page 15
As described in this article from Zacks, OFC recently exited the Colorado Springs market, disposing of 20 properties for $177M. Excluding a non-cash accounting gain resulting from this transaction, OFC estimates its 2013 adjusted FFO per share to be between $1.96 to $1.98. COPT Completes Exit from Colorado Springs and Resolves $146.5 Million Secured Loan
This security pays cumulative and non-qualified dividends at the fixed coupon rate of 7.375% on a $25 par value. Distributions are paid quarterly. The issuer has the option to redeem on or after 6/27/2017.
Prospectus
The prospectus contains a dividend stopper clause at pages S-13 to S-14 and a change of control provision that is described starting at page S-17 under "Special Optional Redemption".
Corporate Office Properties Trust Profile Page at Reuters
Key Developments Page at Reuters
2014 FFO Per Share Consensus Mean Estimate $1.9
2012 Annual Report 10-K
In September, the company sold $250M in 5.25% senior unsecured bonds maturing in 2024.
Prior and Related Trades: None
Last Earnings Report: For the 2013 third quarter, OFC reported an adjusted FFO of $.49 per share. The weighted average remaining lease term for the portfolio was 4.3 years and the average rental rate (including tenant reimbursements) was $28.26 per square foot. The portfolio was 89.7% leased as of 9/30/13 and 88.5% occupied. The fixed charge coverage ratio was 2.9x. Debt to adjusted book value was at 46.6%. COPT Reports Third Quarter 2013 Results
The payout ratios for the quarter were 57.5% based on FFO and 70.7% based on AFFO. Among other adjustments, AFFO subtracted $10.528M in recurring capital expenditures from the $43.992M in reported FFO.
The payout ratios for the quarter were 57.5% based on FFO and 70.7% based on AFFO. Among other adjustments, AFFO subtracted $10.528M in recurring capital expenditures from the $43.992M in reported FFO.
Rationale and Risks: The rationale and risks are similar to FPOPRA discussed in # 1 above. Both REITs own primarily office buildings in the Washington D.C. metropolitan area, ranging from Baltimore to Northern Virginia. Both REITs have undergone a recent restructuring to more narrowly focus their operations.
The company discusses risks incident to its business starting at page 7 of its 2012 Annual Report. The company discusses risks associated with its preferred stock starting at page
Future Buys/Sells: I am not likely to buy more. I am playing small ball with these REIT preferred purchases. The general idea is to harvest a 10% annualized return whenever the result is achieved.
3. Added $500 to VWELX at $37.89 (see disclaimer): The Vanguard Wellington Fund (VWELX) is a balanced mutual fund.
I initiated a position in 2013: Item # 2 Initiated Position in Vanguard Wellington Fund (VWELX)
The Vanguard Wellington Fund (VWELX) is rated five stars by Morningstar and has a "gold" shield designation. Morningstar Analyst Rating for Funds
I initiated a position in 2013: Item # 2 Initiated Position in Vanguard Wellington Fund (VWELX)
The Vanguard Wellington Fund (VWELX) is rated five stars by Morningstar and has a "gold" shield designation. Morningstar Analyst Rating for Funds
Snapshot of Position Before Add:
Historical Returns Calculated by Vanguard:
Allocation:
As of 11/30/13, the fund was weighted 63.22% in stocks and 32.22% in bonds, with the remainder (4.46%) in short term reserves.
Bond Allocation:
The fund then owned 677 bonds with an average duration of 5.8 years. The bonds are mostly investment grade. The May 2013 semi-annual report shows at page 13 a 21.4% weighting in U.S. government securities; 12.9% in AA; 41.1% in A and 15.2% in Baa, with the remainder not rated.
Stock Allocation:
As of 11/30/13, the fund owned 102 stocks with the top ten holdings as follows:
Since 2000, the only down year was in 2008 with a loss of 25.59% (page 14, May 2013 semi-annual report)
4. Added 50 of the Stock CEF STK at $14.38 (see Disclaimer):
Snapshot of Trade:
Security Description: The Columbia Seligman Premium Technology Growth Fund (STK) is a stock CEF that focuses on technology stocks.
STK is one of my underperforming stock CEFs.
Data Day Prior to Purchase (12/30/13)
Closing Net Asset Value Per Share: $16.07
Closing Market Price: $14.38
Discount: -10.52%
Average 1 Year Discount: -5.1%
Average 3 Year Discount: -3.85%
Data Day of Purchase (12/31/13)
Closing Net Asset Value Per Share= $16.08
Closing Market Price= $14.39
Discount= -11.06%
STK Page at CEFConnect (expense ratio 1.15%)
Last Filed SEC Form N-Q (holdings as of 9/30/13)
Semi-Annual Report: Columbia Seligman Premium Technology Growth Fund (period ending 6/30/13)
The fund is currently paying a $.4625 per share quarterly dividend, mostly supported by a ROC. Morningstar The fund does have unrealized capital gains, amounting to 30.98+M as of 6/30/13. I would assume that the number is higher now given what the market has done during the 2013 second half. That may be a bold assumption for this fund.
After buying shares back in September 2012, I have received 5 quarterly dividends at $.4625 per share or $2.3125 per share. The last ex dividend date was 11/14/13.
Sponsor's Website: Fund Details
Synopsys (SNPS) was the largest holding on 11/30/13, with a 8.93% weighting, followed by Lam Research (LRCX) at 6.87% and Teradyne (TER) at 6.7%.
Prior Trades: I have nibbled at this CEF with several small buys. Item # 1 Bought 60 STK at $16.3 September 2012; Item # 3 Bought 100 STK at $16.12-ROTH IRA September 2012.
This last purchase is an average down in the main taxable account. I am reinvesting the dividend currently only for the 100 shares held in the Roth IRA.
With the dividends, I am barely into positive territory. In addition to the fund's poor performance relative to the S & P 500, my total return has been negatively impacted by an expansion of the discount since that time.
Rationale: Paul Wick manages this fund. Wick is allegedly an astute technology investor who has managed the Columbia Seligman Communications & Information Fund A (SLMCX), which has a 5.75% load, since 1990. So maybe he has learned something over 20+ years as a tech investor, or maybe he is just another one of those "experts" who are paid a great deal as their strive mightily toward mediocrity.
One thing is for certain. His value as a portfolio manager is not yet evident to me based on his performance managing STK since my purchase. I would assign to the managers of this fund a negative value.
The OG is handicapped in the technology area, admittedly lacking any credentials to assess the thingamajigs made by the various companies. Consequently, my tech investing is limited to nibbling at the large cap technology stocks when their P/Es are in the single or low double digits. My largest current individual tech position, which I recently pared, is Intel, where my average cost per share is now at $16.95 per share. Item # 5 Pared Intel: Sold 42 at $23.64 and 45 at $25-Highest Cost Shares
In short, I am looking for a manager who is capable of beating a dumb index fund, and it has been a difficult and disconcerting journey so far.
The holdings of STK are similar to that mutual fund. Holdings Top 25 Companies I will give Wick another year to show some competence as a money manager before he is fired.
Over a three year period ending 12/31/13, the fund has an annualized total return of 2.95% based on net asset value. It is hard to believe that anyone is actually being paid to produce that number.
The one year return is better at 18.12% based on net asset value but only 12.36% based on the market price, which highlights a risk of a CEF. Those numbers indicate an expansion of the discount over the past year. The Select Sector SPDR-Technology Fund (XLK) for technology stocks closed at $28.25 on 12/31/12 and at $35.74 on 12/31/13. XLK Historical Prices Unadjusted for the dividends, XLK share price rose 26.51%, substantially beating STK managed by "experts", and the advantage in favor of the dumb index ETF would be slightly higher with the dividends added into the total return.
When STK was offered to the public back in November 2009, STK Historical Prices, the purchasers were charged a 4.5% load, see page 23 of the Prospectus. At least I avoided that charge by buying in the open market. The IPO offering price was $20 per share, but the fund was left with $19.06 per share in assets after the sales charge and other IPO expenses.
I do view technology stocks in general to be slightly undervalued, based on their current market multiples, a likely pick up in business IT spending and an overall improving worldwide economy. And, as I previously noted when buying the ETF TDIV, First Trust NASDAQ Technology Dividend Index Fund, many technology companies are starting to pay out meaningful dividends: Item # 1 Bought 50 TDIV at $19.95 (August 2012); Item #1 Bought 50 TDIV at $19.94-ROTH IRA (October 2012 Post)(sold); Item # 3 Added 50 TDIV at $19.2 (October 2012) I currently own 100 shares of TDIV.
Holdings First Trust NASDAQ Technology Dividend Index Fund (TDIV)
One way for Wick to outperform an index ETF would be for one or two of STK's top holdings to be acquired at significant price premiums. While that is not going to happen for some of STK's top 10 holdings (e.g. Google and Apple), there are a few other holdings in that list which could conceivably be acquired within the next year or two.
Risks: Unable to make much money over the past three years may be a sign that the managers and the analysts that support them simply need to find another profession more suited to their abilities. Or, it may just mean that a dry spell has been hit. A number of tech stocks, like Apple which is one of the top 10 holdings, had a rough 2012 and treaded water in 2013 with a lot of up and down chop. AAPL Interactive Chart We shall see.
Any CEF has the risks normally associated with this type of fund. Returns can be negatively impacted by an expansion of the discount to net asset value after purchase. A sector fund has risks that are not found in a more diversified fund.
In one Seeking Alpha article, the author argued that the fund was not supporting the dividend with a return of capital since the net asset value had increased by more than the dividend payout over the past year. The argument is that only accountants and the IRS view STK's dividend as a return of capital since STK paid out 11.92% in a 12 month period when the fund's "total" return on net asset value increased 13.72% (apparently adjusted for reinvested dividends). That is not the case for the past three years, where the total return based on net asset value has been substantially lower than the payout, which highlights the problem with that argument. Funds that are not able to earn the dividend through income and capital gains will frequently be unable to produce total returns exceeding the payout. I would be more than just a tad hesitant to accept that justification for ROC.
5. Added 50 of the Exchange Traded Senior Bond KWN at $23.79-ROTH IRA (see Disclaimer): I mentioned in the introduction section that this security was eligible for an average down below $24 per share.
Snapshot of Trade:
This security is lightly traded and usually has a wide bid-ask spread. I placed a day limit order at $23.8, the then existing bid price, and the ask price was then at $24. The order was filled at $23.79.
On the day of my purchase (1/2/14), volume was unusually heavy at 16,820. The average volume is just 3,589. Individual investors are setting the price.
Closing Price 1/2/13: $23.98 $-.42 (1.72%)
Security and Company Description: The Kennedy-Wilson Holdings 7.75% Senior Notes due 2042 (KWN) is a senior unsecured bond issued by Kennedy-Wilson Holdings Inc. (KW), an international real estate and services company.
KWN is a senior baby bond with a $25 par value. The bond matures on 12/1/2042, so there is a substantial amount of interest rate risk assumed by the owner of this security. KWN assumes minimal interest rate risk since it has the option to call this bond at par value plus accrued interest on or after 1/1/2017. An optional redemption can occur prior to that time under a modified make whole provision described at page S-32 of the prospectus.
Interest is paid quarterly at the fixed coupon rate of 7.75% per year on a $25 par value.
Prospectus Supplement
Kennedy-Wilson Holdings Inc (KW) Profile Page at Reuters
Kennedy-Wilson Holdings Key Developments Page at Reuters
Company Website: Home - Kennedy Wilson
In September 2013, KW sold 6.9 million common shares at $18.5, Prospectus Supplement. In March 2013, the company sold 9M common shares at $15.8 raising $133.8 in gross proceeds. Prospectus As an owner of a senior bond, I view those transactions positively. Another positive is that the common shares enjoyed a robust move in 2013, starting the year at $13.98 (KW Historical Prices) and closing at $22.15. KW Interactive Chart
Prior Trade: Item # 4 Bought Roth IRA: 50 KWN at $24.85
While KWN is an exchange traded baby bond, Kennedy Wilson has another senior unsecured bond trading in the bond market. Bonds Detail That bond matures in 2019 and has a 8.75% coupon. It is infrequently traded and is currently priced at near a 10% premium to its par value. FINRA shows that this bond is rated at B2 by Moody's and BB- by S & P. KWN is in pari passu with that 2019 bond.
The 2019 bond was originally issued in the principal amount of $250M (April 2011). In a private placement, another 100M was sold in December 2012, and then exchanged for notes with the same terms that had been registered with the SEC. Final Prospectus
Last Earnings Report: For the 2013 third quarter, KW reported a 142% increase in adjusted EBITDA to $42.2M and adjusted net income per share of $.2, up from $.05 in the 2012 third quarter. 9.30.13 Supplemental & Release
KW-09.30.13-10-Q
The two senior notes are described at page 17 of the last filed 10-Q. KWN has an outstanding principal amount of $50M. There are also $340+M in mortgage debt outstanding (page 18), and a $40M junior bond maturing in 2037 (page 19)
Rationale: 1. Tax Free Income Generation in the Roth IRA: Based on my financial circumstances, it is all about generating tax free income in the ROTH IRA. At a total cost of $23.79, the current yield is about 8.14%. When I buy this security in a ROTH IRA, it in effect becomes a tax free bond. Before inflation, money will double in about 8.86 years at 8.14%. Estimate Compound Interest Using the Morningstar Bond Calculator, the YTM would be about 8.25%, assuming a redemption on the maturity date and a total cost of $23.79 per share.
The YTM would be slightly higher than the current yield due to the profit realized on the maturity date.
Assuming KW did not redeem KWN until 12/1/2042, I would anticipate that the annualized return of this bond will either exceed the return of the S & P 500, with dividends reinvested, or be close to the S & P total annualized return. There would be far less drama as long as KW remained solvent and no less credit worthy than now.
On the day of my purchase, the 30 year treasury closed with a 3.92% yield. The junk rated KWN would have about a 4.22% current yield advantage to the 30 year treasury based on a total cost of $23.79 per share.
Risks: The main risk in my opinion is interest rate risk and the related risk of lost opportunity. If long term rates rise, the price of this bond will go down, assuming no positive change in the credit rating that would offset the decline associated with the rise in rates. With a rise in rates and a decline in price, I lose the opportunity of investing the funds tied up in KWN in a higher yielding instrument with the same risk profile, including KWN at a lower price, unless I sell the security for a loss.
The company discusses risks starting at page S-16 of the prospectus. Further discussion of the risks can be found starting at page of the 2012 Annual Report.
Credit risk is material. KW has a significant amount of debt, including the $350 in senior unsecured debt maturing in 2019.
Future Buys and Sells: I am not likely to buy more of this junk rated bond. It would be typical for me to sell the higher cost 50 shares bought first and to keep the lower cost shares. I am in no hurry to sell the first lot and would probably want a price higher than $25.5.
6. Added to PRPFX at $43.06 (see Disclaimer):
Snapshot of Trade:
This purchase was made on 12/31/13. When the stock market opened after New Year's day, the S & P declined 16.38 points or -.89%. Gold and silver rose for a change as did bonds. PRPFX closed up $.14 per share. That is what is meant by negative correlation, at least for that one day.
Security Description: The Permanent Portfolio Fund (PRPFX) is a mutual fund that maintains a relatively static asset allocation to the following asset classes: common stocks, corporate bonds and U.S. treasuries, gold and silver bullion, and Swiss government bonds. I view the portfolio as being designed for disaster. As noted previously, the fund performed well in 2008, losing 8.36% The fund performed poorly in 2013 primarily due to its allocation to gold and silver bullion, REITS and U.S. treasuries.
According to Moringstar's data on performance and returns, the 5, 10 and 15 year total annualized returns were 8.68%, 8.01%, and 8.29% respectively through 1/2/2014. Assuming that continues, I am fine with those results. I am willing to give up some return during a boom period provided I suffer far lower losses during the bad years due to portfolio allocation characteristics.
Last SEC Filed Shareholder Report: SEC Form N-CSR (period ending 7/31/13, holdings start at page 6.
This fund maintains a relatively static allocation to various asset classes. As of 7/31/13, gold and silver bullion were weighted at 21.35% and 4.87% respectively; Swiss Franc assets at 9.39%; Natural Resource common stocks at 8.29%; Real Estate common stocks at 7.71%; "Aggressive Growth" common stocks at 16.5%; Corporate bonds at 9.99%; and U.S. treasuries at 20.41%.
The most recently filed SEC Form N-Q, listing the holdings as of 10/31/13, shows gold and silver bullion at 20.88% and 5.17% respectively; Swiss Franc assets at 9.51%; Natural resource, real estate and "aggressive growth" common stocks at 9.03%, 7.35%, 16.51% respectively; corporate bonds at 9.79% and U.S. treasuries at 18.42%.
This kind of portfolio design can ultimately trace its origins to the Talmud. Seeking Alpha
"Let everyman divide his money into three parts, and invest a third in land, a third in business, and a third let him keep in reserve". "The Ancients Knew Something About Investing" - Pinnacle Advisory Group
The PRPFX interpretation is more directly related to Harry Browne's portfolio strategy: The Permanent Portfolio: Harry Browne's Long-Term Investment Strategy: Craig Rowland, J. M. Lawson: 9781118288252: Amazon.com: Books
PRPFX is currently rated 4 stars by Morningstar.
MSN Money Page for PRPFX
Prior Trades: PRPTX is a long standing position which was not trimmed prior to the Near Depression. I have added only $250 to the position infrequently since starting this blog in October 2008. Some prior discussions of this unusual mutual fund can be found in these posts: Item # 6 Added to PRPFX (March 2013); Item # 1 Added to PAUDX (July 2012 Post); Item # 2 Unusual Allocation Funds (July 2011).
Snapshot of Recent Dividend Distribution:
Snapshot of Current Position After Add and Dividend Reinvestment:
I will infrequently buy $250. This last add occurred after the ex dividend date for an unusually large distribution. This fund pays only annual dividends and normally the amount is relatively small, usually consisting of a relatively small distribution of ordinary income and a small long term capital gain. This last annual distribution included a large long term capital gain distribution of $4.35 per share compared to the $.36 per share paid in 2012, $.3 per share in 2011, only $.03 in 2010 and nothing in 2009.
The total 2013 distribution was $4.6 per share which I used to buy more shares.
Rationale and Risks: I am not a gold bug. It is very difficult for me to become enthusiastic about gold and silver. I do view the American Gold and Silver Eagles as beautiful coins. As to its appearance, gold has a timeless quality to it, a fact that is always driven home to me when I look at a U.S. minted gold coin from the 1880s that I bought in 1964 using money earned from mowing lawns at $2 per lot, with hand clipping and sweeping thrown into that majestic price.
Both gold and silver were in a secular bear market between 1980 to 2000. After gold topped out at around $850 per ounce in January 1980, the price has slid to around $260 per ounce by late in 2000. Gold would have to be about $2,404 per ounce in 2013 to equal the buying power of $850 in 1980. Inflation Calculator: Bureau of Labor Statistics
As previously noted, I sold junk silver coins when silver crossed $40 per ounce in September 2011 which I had taken out of circulation in the 1960s, starting when the U.S. government decided to take silver out of the dime, quarter and half dollar altogether and to replace it with base metals. Stocks, Bonds & Politics: The Road to Political Power: Lying Works/Recent Gold and Silver Sales (September 2011); Stocks, Bonds & Politics: Snapshots of Coin Sales In January 2012
Those 1964 and earlier dimes, quarters and half dollars were 90% silver. I could have sold those coins at about the same price in the late 1970s during the last stages of another bull move in precious metals. It was helpful to remember that history in September 2011, including my failure to sell those coins in the late 1970s.
Gold and silver may be in another long term secular bear market now. It is hard to tell one way or the other. Both metals are undoubtedly in a bear market cycle of unknown duration. PRPFX benefited by its exposure to gold and silver during the recent bull move which started in 2000 and ended in 2011. Given its significant exposure to both gold and silver, that allocation may be a major drag going forward. I sold some of my gold and silver bullion starting in September 2011, and I consequently do not mind the exposure through PRPTX.
Since gold and silver do not produce revenues and earnings, they have no intrinsic value and no ascertainable fair market price. What is Gold's "Fair Value"? (April 2013 Post) It is human nature to place value on those precious metals, and the value has risen from about $35 per ounce after Nixon ended the convertibility of gold into 1 USD at that rate: Nixon Shock - Wikipedia There have been throughout history a large number of persons, throughout the world, who lack faith in government currencies as a store of value.
Another potential pitfall is the large exposure to U.S. treasuries. Bonds started a long term bull market in 1982 and arguably ended that secular move in May 2013. The last long term bear market in bonds was horrendous, culminating in a coup d'grace during the 1970s and early 1980s with the 30 year treasury going over a 15% yield.
To address those concerns, I may pare my position in PRPTX during 2014 when and if I acquire more information on the appropriate long term secular characterization for precious metals and bonds. Those categories caused a loss in PRPTX during 2013 even with some exposure to stocks.
The recent large capital gain distribution takes some of the pressure off. In effect, I view such a distribution as similar to a pare when taken in cash. Assuming no material loss in the shares purchased with the distribution, then I would have the same view for the reinvestment option of a large capital gain distribution.
Politics and Etc.
1. Vikings and the Repetitions of History: I watched the History Channel's first original scripted series: Vikings - Episodes, Video & Schedule - History.com. The 9 episodes aired last year were available free using Amazon's Prime Video service. I was reminded about how the past lives in the present.
The Vikings had developed a religion that basically justified murder, kidnapping, rape, slavery, theft and assorted other criminal acts, providing both a moral justification for crimes against humanity spanning five centuries or so and further facilitated their success on the battlefield. The general thrust of the religion was to kill as many people as possible until one died well in battle and went to Valhalla. The comparison to the modern day Jihad is striking.
I have always been interested in history and have found historical information relevant to the formation of opinions relating to investments. It helped, for example, to just know that history has a way of repeating itself, over and over again, since most humans really never learn anything from the past or even from current events, preferring instead to draw erroneous conclusions from contemporary history.
The most recent and lucrative lesson was drawn in March 2009 when the FED commenced QE. One of the most powerful stock market rallies in history started in 1933 after the FED went to ZIRP and QE.
"The First Quantitative Easing: The 1930s"-St Louis Fed
2. Taxation in France-State Strangulation of the Economy: Late last month, the socialist President of France, who once stated that he didn't like the rich, received approval from that nation's constitutional court to tax salaries above 1 million Euros at 75%. Along with the other myriad other taxes, the intent is apparently to drive the "job creators" and high earners to other countries. It is even possible to owe more than 100% of one's income in government taxes. Reuters Is that an incentive to work hard?
I reviewed a Wikipedia article about Taxation in France and concluded that Venezuela would be a better choice for business. It might be possible to actually fire someone in Venezuela for pretending to work.
On Monday, union workers involuntarily detained two executives at Goodyear's factory in northern France and threatened to hold them hostage until Goodyear accedes to their demands. Goodyear wants to close the plant after it was unable to raise productivity after five years of negotiation with the union. Bloomberg
An article in the latest article of Newsweek explores the programs being financed with France's confiscatory tax regime. "The Fall of France"
France's economy has and will continue to suffer as investment declines and the job creators flee toward more hospitable countries. Fewer well off people will remain to support the entitlement benefits enjoyed by virtually everyone, including those who pretend to work for 35 hours a week. The government debt burden as a percentage of GDP will become worse-not better-due to France's onerous and confiscatory tax policies.
People can vote with their feet, as many cities and states are learning in the U.S.
3. Vietnam War: Even as a teenager, the Vietnam War made absolutely no sense to me. I worked during the summer of 1968 to elect Eugene McCarthy as President who was running on an anti-Vietnam platform. The U.S. suffered 58,000+ killed in action and another 153,000+ wounded in action, many of whom were maimed for life. The U.S. sprayed about 10% of South Vietnam with Agent Orange that killed civilians and possibly caused 150,000 children to be born with birth defects. Civilian deaths numbered easily into the hundreds of thousands. The financial cost to the U.S. was huge and was financed with borrowings.
And, what was the national security objective that justified those costs?
I read earlier this week a Seeking Alpha article discussing Vietnam's stock market. Yes, Vietnam is now moving toward capitalism. Economy of Vietnam; Vietnam's First Billionaire And The Triumph Of Capitalism - Forbes
What difference did Vietnam make one way or the other to the nation's security interests and who could have rationally concluded that a land war in a southeast Asia jungle against a determined foe could ever be worth the cost? The decision to become involved in Vietnam was and will always be unjustifiable.
Did enough people learn that lesson in the U.S.? As I noted in a prior post, there are still a large number of citizens who believe, even now, that the U.S. needed to continue fighting until victory was secured for the corrupt South Vietnamese government. Item # 4 Vietnam A simple question to ask those individuals, which would be readily apparent, is for what purpose? Those same citizens would have been in the forefront seeking to justify the invasion of Iraq. The lessons of history will be lost on a clear majority of citizens, and certainly most politicians, which is how the U.S. makes costly going to war mistakes and will likely continue doing so.
4. Vanderbilt Football: There is always hope or so the sages tell us. As exhibit #1 in support of that cliche, I offer the results achieved by James Franklin who became Vanderbilt's football coach three years ago. Vanderbilt had been the perennial doormat in SEC football for most of my life.
I started attending games when I was in grade school, and it was painful to watch most of the time. The team was frequently a source of comedy for most of the past five decades. A normal season was 2-9 for the 11 game seasons and 3-9 for the 12 game seasons. Between 1983 and Franklin's first year as head coach, Vanderbilt did not even have a winning season.
For the last two years, Vanderbilt went 9-4 beating Florida, Georgia and Tennessee in 2013 and winning 5 SEC games in 2012 including those against Tennessee, Missouri, Auburn and Mississippi.
In Franklin's first three seasons as head coach, the team has gone to three bowl games and has won two of them including the recent victory against Houston and last year's trouncing of North Carolina State in Nashville's Music City Bowl. The game against Houston brought back flashbacks to the past, as the trauma of past defeats reappeared when Vandy blew a 24-0 halftime lead in the third quarter.
Snapshot of Trade:
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| 2013 Added 50 STK at $14.38 |
Security Description: The Columbia Seligman Premium Technology Growth Fund (STK) is a stock CEF that focuses on technology stocks.
STK is one of my underperforming stock CEFs.
Data Day Prior to Purchase (12/30/13)
Closing Net Asset Value Per Share: $16.07
Closing Market Price: $14.38
Discount: -10.52%
Average 1 Year Discount: -5.1%
Average 3 Year Discount: -3.85%
Data Day of Purchase (12/31/13)
Closing Net Asset Value Per Share= $16.08
Closing Market Price= $14.39
Discount= -11.06%
STK Page at CEFConnect (expense ratio 1.15%)
Last Filed SEC Form N-Q (holdings as of 9/30/13)
Semi-Annual Report: Columbia Seligman Premium Technology Growth Fund (period ending 6/30/13)
The fund is currently paying a $.4625 per share quarterly dividend, mostly supported by a ROC. Morningstar The fund does have unrealized capital gains, amounting to 30.98+M as of 6/30/13. I would assume that the number is higher now given what the market has done during the 2013 second half. That may be a bold assumption for this fund.
After buying shares back in September 2012, I have received 5 quarterly dividends at $.4625 per share or $2.3125 per share. The last ex dividend date was 11/14/13.
Sponsor's Website: Fund Details
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| Top Ten Holdings as of 11/30/13 |
Prior Trades: I have nibbled at this CEF with several small buys. Item # 1 Bought 60 STK at $16.3 September 2012; Item # 3 Bought 100 STK at $16.12-ROTH IRA September 2012.
This last purchase is an average down in the main taxable account. I am reinvesting the dividend currently only for the 100 shares held in the Roth IRA.
With the dividends, I am barely into positive territory. In addition to the fund's poor performance relative to the S & P 500, my total return has been negatively impacted by an expansion of the discount since that time.
Rationale: Paul Wick manages this fund. Wick is allegedly an astute technology investor who has managed the Columbia Seligman Communications & Information Fund A (SLMCX), which has a 5.75% load, since 1990. So maybe he has learned something over 20+ years as a tech investor, or maybe he is just another one of those "experts" who are paid a great deal as their strive mightily toward mediocrity.
One thing is for certain. His value as a portfolio manager is not yet evident to me based on his performance managing STK since my purchase. I would assign to the managers of this fund a negative value.
The OG is handicapped in the technology area, admittedly lacking any credentials to assess the thingamajigs made by the various companies. Consequently, my tech investing is limited to nibbling at the large cap technology stocks when their P/Es are in the single or low double digits. My largest current individual tech position, which I recently pared, is Intel, where my average cost per share is now at $16.95 per share. Item # 5 Pared Intel: Sold 42 at $23.64 and 45 at $25-Highest Cost Shares
In short, I am looking for a manager who is capable of beating a dumb index fund, and it has been a difficult and disconcerting journey so far.
The holdings of STK are similar to that mutual fund. Holdings Top 25 Companies I will give Wick another year to show some competence as a money manager before he is fired.
Over a three year period ending 12/31/13, the fund has an annualized total return of 2.95% based on net asset value. It is hard to believe that anyone is actually being paid to produce that number.
The one year return is better at 18.12% based on net asset value but only 12.36% based on the market price, which highlights a risk of a CEF. Those numbers indicate an expansion of the discount over the past year. The Select Sector SPDR-Technology Fund (XLK) for technology stocks closed at $28.25 on 12/31/12 and at $35.74 on 12/31/13. XLK Historical Prices Unadjusted for the dividends, XLK share price rose 26.51%, substantially beating STK managed by "experts", and the advantage in favor of the dumb index ETF would be slightly higher with the dividends added into the total return.
When STK was offered to the public back in November 2009, STK Historical Prices, the purchasers were charged a 4.5% load, see page 23 of the Prospectus. At least I avoided that charge by buying in the open market. The IPO offering price was $20 per share, but the fund was left with $19.06 per share in assets after the sales charge and other IPO expenses.
I do view technology stocks in general to be slightly undervalued, based on their current market multiples, a likely pick up in business IT spending and an overall improving worldwide economy. And, as I previously noted when buying the ETF TDIV, First Trust NASDAQ Technology Dividend Index Fund, many technology companies are starting to pay out meaningful dividends: Item # 1 Bought 50 TDIV at $19.95 (August 2012); Item #1 Bought 50 TDIV at $19.94-ROTH IRA (October 2012 Post)(sold); Item # 3 Added 50 TDIV at $19.2 (October 2012) I currently own 100 shares of TDIV.
Holdings First Trust NASDAQ Technology Dividend Index Fund (TDIV)
One way for Wick to outperform an index ETF would be for one or two of STK's top holdings to be acquired at significant price premiums. While that is not going to happen for some of STK's top 10 holdings (e.g. Google and Apple), there are a few other holdings in that list which could conceivably be acquired within the next year or two.
Risks: Unable to make much money over the past three years may be a sign that the managers and the analysts that support them simply need to find another profession more suited to their abilities. Or, it may just mean that a dry spell has been hit. A number of tech stocks, like Apple which is one of the top 10 holdings, had a rough 2012 and treaded water in 2013 with a lot of up and down chop. AAPL Interactive Chart We shall see.
Any CEF has the risks normally associated with this type of fund. Returns can be negatively impacted by an expansion of the discount to net asset value after purchase. A sector fund has risks that are not found in a more diversified fund.
In one Seeking Alpha article, the author argued that the fund was not supporting the dividend with a return of capital since the net asset value had increased by more than the dividend payout over the past year. The argument is that only accountants and the IRS view STK's dividend as a return of capital since STK paid out 11.92% in a 12 month period when the fund's "total" return on net asset value increased 13.72% (apparently adjusted for reinvested dividends). That is not the case for the past three years, where the total return based on net asset value has been substantially lower than the payout, which highlights the problem with that argument. Funds that are not able to earn the dividend through income and capital gains will frequently be unable to produce total returns exceeding the payout. I would be more than just a tad hesitant to accept that justification for ROC.
5. Added 50 of the Exchange Traded Senior Bond KWN at $23.79-ROTH IRA (see Disclaimer): I mentioned in the introduction section that this security was eligible for an average down below $24 per share.
Snapshot of Trade:
This security is lightly traded and usually has a wide bid-ask spread. I placed a day limit order at $23.8, the then existing bid price, and the ask price was then at $24. The order was filled at $23.79.
On the day of my purchase (1/2/14), volume was unusually heavy at 16,820. The average volume is just 3,589. Individual investors are setting the price.
Closing Price 1/2/13: $23.98 $-.42 (1.72%)
Security and Company Description: The Kennedy-Wilson Holdings 7.75% Senior Notes due 2042 (KWN) is a senior unsecured bond issued by Kennedy-Wilson Holdings Inc. (KW), an international real estate and services company.
KWN is a senior baby bond with a $25 par value. The bond matures on 12/1/2042, so there is a substantial amount of interest rate risk assumed by the owner of this security. KWN assumes minimal interest rate risk since it has the option to call this bond at par value plus accrued interest on or after 1/1/2017. An optional redemption can occur prior to that time under a modified make whole provision described at page S-32 of the prospectus.
Interest is paid quarterly at the fixed coupon rate of 7.75% per year on a $25 par value.
Prospectus Supplement
Kennedy-Wilson Holdings Inc (KW) Profile Page at Reuters
Kennedy-Wilson Holdings Key Developments Page at Reuters
Company Website: Home - Kennedy Wilson
In September 2013, KW sold 6.9 million common shares at $18.5, Prospectus Supplement. In March 2013, the company sold 9M common shares at $15.8 raising $133.8 in gross proceeds. Prospectus As an owner of a senior bond, I view those transactions positively. Another positive is that the common shares enjoyed a robust move in 2013, starting the year at $13.98 (KW Historical Prices) and closing at $22.15. KW Interactive Chart
Prior Trade: Item # 4 Bought Roth IRA: 50 KWN at $24.85
While KWN is an exchange traded baby bond, Kennedy Wilson has another senior unsecured bond trading in the bond market. Bonds Detail That bond matures in 2019 and has a 8.75% coupon. It is infrequently traded and is currently priced at near a 10% premium to its par value. FINRA shows that this bond is rated at B2 by Moody's and BB- by S & P. KWN is in pari passu with that 2019 bond.
The 2019 bond was originally issued in the principal amount of $250M (April 2011). In a private placement, another 100M was sold in December 2012, and then exchanged for notes with the same terms that had been registered with the SEC. Final Prospectus
Last Earnings Report: For the 2013 third quarter, KW reported a 142% increase in adjusted EBITDA to $42.2M and adjusted net income per share of $.2, up from $.05 in the 2012 third quarter. 9.30.13 Supplemental & Release
KW-09.30.13-10-Q
The two senior notes are described at page 17 of the last filed 10-Q. KWN has an outstanding principal amount of $50M. There are also $340+M in mortgage debt outstanding (page 18), and a $40M junior bond maturing in 2037 (page 19)
Rationale: 1. Tax Free Income Generation in the Roth IRA: Based on my financial circumstances, it is all about generating tax free income in the ROTH IRA. At a total cost of $23.79, the current yield is about 8.14%. When I buy this security in a ROTH IRA, it in effect becomes a tax free bond. Before inflation, money will double in about 8.86 years at 8.14%. Estimate Compound Interest Using the Morningstar Bond Calculator, the YTM would be about 8.25%, assuming a redemption on the maturity date and a total cost of $23.79 per share.
The YTM would be slightly higher than the current yield due to the profit realized on the maturity date.
Assuming KW did not redeem KWN until 12/1/2042, I would anticipate that the annualized return of this bond will either exceed the return of the S & P 500, with dividends reinvested, or be close to the S & P total annualized return. There would be far less drama as long as KW remained solvent and no less credit worthy than now.
On the day of my purchase, the 30 year treasury closed with a 3.92% yield. The junk rated KWN would have about a 4.22% current yield advantage to the 30 year treasury based on a total cost of $23.79 per share.
Risks: The main risk in my opinion is interest rate risk and the related risk of lost opportunity. If long term rates rise, the price of this bond will go down, assuming no positive change in the credit rating that would offset the decline associated with the rise in rates. With a rise in rates and a decline in price, I lose the opportunity of investing the funds tied up in KWN in a higher yielding instrument with the same risk profile, including KWN at a lower price, unless I sell the security for a loss.
The company discusses risks starting at page S-16 of the prospectus. Further discussion of the risks can be found starting at page of the 2012 Annual Report.
Credit risk is material. KW has a significant amount of debt, including the $350 in senior unsecured debt maturing in 2019.
Future Buys and Sells: I am not likely to buy more of this junk rated bond. It would be typical for me to sell the higher cost 50 shares bought first and to keep the lower cost shares. I am in no hurry to sell the first lot and would probably want a price higher than $25.5.
6. Added to PRPFX at $43.06 (see Disclaimer):
Snapshot of Trade:
This purchase was made on 12/31/13. When the stock market opened after New Year's day, the S & P declined 16.38 points or -.89%. Gold and silver rose for a change as did bonds. PRPFX closed up $.14 per share. That is what is meant by negative correlation, at least for that one day.
Security Description: The Permanent Portfolio Fund (PRPFX) is a mutual fund that maintains a relatively static asset allocation to the following asset classes: common stocks, corporate bonds and U.S. treasuries, gold and silver bullion, and Swiss government bonds. I view the portfolio as being designed for disaster. As noted previously, the fund performed well in 2008, losing 8.36% The fund performed poorly in 2013 primarily due to its allocation to gold and silver bullion, REITS and U.S. treasuries.
According to Moringstar's data on performance and returns, the 5, 10 and 15 year total annualized returns were 8.68%, 8.01%, and 8.29% respectively through 1/2/2014. Assuming that continues, I am fine with those results. I am willing to give up some return during a boom period provided I suffer far lower losses during the bad years due to portfolio allocation characteristics.
Last SEC Filed Shareholder Report: SEC Form N-CSR (period ending 7/31/13, holdings start at page 6.
This fund maintains a relatively static allocation to various asset classes. As of 7/31/13, gold and silver bullion were weighted at 21.35% and 4.87% respectively; Swiss Franc assets at 9.39%; Natural Resource common stocks at 8.29%; Real Estate common stocks at 7.71%; "Aggressive Growth" common stocks at 16.5%; Corporate bonds at 9.99%; and U.S. treasuries at 20.41%.
The most recently filed SEC Form N-Q, listing the holdings as of 10/31/13, shows gold and silver bullion at 20.88% and 5.17% respectively; Swiss Franc assets at 9.51%; Natural resource, real estate and "aggressive growth" common stocks at 9.03%, 7.35%, 16.51% respectively; corporate bonds at 9.79% and U.S. treasuries at 18.42%.
This kind of portfolio design can ultimately trace its origins to the Talmud. Seeking Alpha
"Let everyman divide his money into three parts, and invest a third in land, a third in business, and a third let him keep in reserve". "The Ancients Knew Something About Investing" - Pinnacle Advisory Group
The PRPFX interpretation is more directly related to Harry Browne's portfolio strategy: The Permanent Portfolio: Harry Browne's Long-Term Investment Strategy: Craig Rowland, J. M. Lawson: 9781118288252: Amazon.com: Books
PRPFX is currently rated 4 stars by Morningstar.
MSN Money Page for PRPFX
Prior Trades: PRPTX is a long standing position which was not trimmed prior to the Near Depression. I have added only $250 to the position infrequently since starting this blog in October 2008. Some prior discussions of this unusual mutual fund can be found in these posts: Item # 6 Added to PRPFX (March 2013); Item # 1 Added to PAUDX (July 2012 Post); Item # 2 Unusual Allocation Funds (July 2011).
Snapshot of Recent Dividend Distribution:
Snapshot of Current Position After Add and Dividend Reinvestment:
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| Average Cost Per Share=$35.09/Unrealized Gain at $1,798.64 |
The total 2013 distribution was $4.6 per share which I used to buy more shares.
Rationale and Risks: I am not a gold bug. It is very difficult for me to become enthusiastic about gold and silver. I do view the American Gold and Silver Eagles as beautiful coins. As to its appearance, gold has a timeless quality to it, a fact that is always driven home to me when I look at a U.S. minted gold coin from the 1880s that I bought in 1964 using money earned from mowing lawns at $2 per lot, with hand clipping and sweeping thrown into that majestic price.
Both gold and silver were in a secular bear market between 1980 to 2000. After gold topped out at around $850 per ounce in January 1980, the price has slid to around $260 per ounce by late in 2000. Gold would have to be about $2,404 per ounce in 2013 to equal the buying power of $850 in 1980. Inflation Calculator: Bureau of Labor Statistics
As previously noted, I sold junk silver coins when silver crossed $40 per ounce in September 2011 which I had taken out of circulation in the 1960s, starting when the U.S. government decided to take silver out of the dime, quarter and half dollar altogether and to replace it with base metals. Stocks, Bonds & Politics: The Road to Political Power: Lying Works/Recent Gold and Silver Sales (September 2011); Stocks, Bonds & Politics: Snapshots of Coin Sales In January 2012
Those 1964 and earlier dimes, quarters and half dollars were 90% silver. I could have sold those coins at about the same price in the late 1970s during the last stages of another bull move in precious metals. It was helpful to remember that history in September 2011, including my failure to sell those coins in the late 1970s.
Gold and silver may be in another long term secular bear market now. It is hard to tell one way or the other. Both metals are undoubtedly in a bear market cycle of unknown duration. PRPFX benefited by its exposure to gold and silver during the recent bull move which started in 2000 and ended in 2011. Given its significant exposure to both gold and silver, that allocation may be a major drag going forward. I sold some of my gold and silver bullion starting in September 2011, and I consequently do not mind the exposure through PRPTX.
Since gold and silver do not produce revenues and earnings, they have no intrinsic value and no ascertainable fair market price. What is Gold's "Fair Value"? (April 2013 Post) It is human nature to place value on those precious metals, and the value has risen from about $35 per ounce after Nixon ended the convertibility of gold into 1 USD at that rate: Nixon Shock - Wikipedia There have been throughout history a large number of persons, throughout the world, who lack faith in government currencies as a store of value.
Another potential pitfall is the large exposure to U.S. treasuries. Bonds started a long term bull market in 1982 and arguably ended that secular move in May 2013. The last long term bear market in bonds was horrendous, culminating in a coup d'grace during the 1970s and early 1980s with the 30 year treasury going over a 15% yield.
To address those concerns, I may pare my position in PRPTX during 2014 when and if I acquire more information on the appropriate long term secular characterization for precious metals and bonds. Those categories caused a loss in PRPTX during 2013 even with some exposure to stocks.
The recent large capital gain distribution takes some of the pressure off. In effect, I view such a distribution as similar to a pare when taken in cash. Assuming no material loss in the shares purchased with the distribution, then I would have the same view for the reinvestment option of a large capital gain distribution.
Politics and Etc.
1. Vikings and the Repetitions of History: I watched the History Channel's first original scripted series: Vikings - Episodes, Video & Schedule - History.com. The 9 episodes aired last year were available free using Amazon's Prime Video service. I was reminded about how the past lives in the present.
The Vikings had developed a religion that basically justified murder, kidnapping, rape, slavery, theft and assorted other criminal acts, providing both a moral justification for crimes against humanity spanning five centuries or so and further facilitated their success on the battlefield. The general thrust of the religion was to kill as many people as possible until one died well in battle and went to Valhalla. The comparison to the modern day Jihad is striking.
I have always been interested in history and have found historical information relevant to the formation of opinions relating to investments. It helped, for example, to just know that history has a way of repeating itself, over and over again, since most humans really never learn anything from the past or even from current events, preferring instead to draw erroneous conclusions from contemporary history.
The most recent and lucrative lesson was drawn in March 2009 when the FED commenced QE. One of the most powerful stock market rallies in history started in 1933 after the FED went to ZIRP and QE.
"The First Quantitative Easing: The 1930s"-St Louis Fed
2. Taxation in France-State Strangulation of the Economy: Late last month, the socialist President of France, who once stated that he didn't like the rich, received approval from that nation's constitutional court to tax salaries above 1 million Euros at 75%. Along with the other myriad other taxes, the intent is apparently to drive the "job creators" and high earners to other countries. It is even possible to owe more than 100% of one's income in government taxes. Reuters Is that an incentive to work hard?
I reviewed a Wikipedia article about Taxation in France and concluded that Venezuela would be a better choice for business. It might be possible to actually fire someone in Venezuela for pretending to work.
On Monday, union workers involuntarily detained two executives at Goodyear's factory in northern France and threatened to hold them hostage until Goodyear accedes to their demands. Goodyear wants to close the plant after it was unable to raise productivity after five years of negotiation with the union. Bloomberg
An article in the latest article of Newsweek explores the programs being financed with France's confiscatory tax regime. "The Fall of France"
France's economy has and will continue to suffer as investment declines and the job creators flee toward more hospitable countries. Fewer well off people will remain to support the entitlement benefits enjoyed by virtually everyone, including those who pretend to work for 35 hours a week. The government debt burden as a percentage of GDP will become worse-not better-due to France's onerous and confiscatory tax policies.
People can vote with their feet, as many cities and states are learning in the U.S.
3. Vietnam War: Even as a teenager, the Vietnam War made absolutely no sense to me. I worked during the summer of 1968 to elect Eugene McCarthy as President who was running on an anti-Vietnam platform. The U.S. suffered 58,000+ killed in action and another 153,000+ wounded in action, many of whom were maimed for life. The U.S. sprayed about 10% of South Vietnam with Agent Orange that killed civilians and possibly caused 150,000 children to be born with birth defects. Civilian deaths numbered easily into the hundreds of thousands. The financial cost to the U.S. was huge and was financed with borrowings.
And, what was the national security objective that justified those costs?
I read earlier this week a Seeking Alpha article discussing Vietnam's stock market. Yes, Vietnam is now moving toward capitalism. Economy of Vietnam; Vietnam's First Billionaire And The Triumph Of Capitalism - Forbes
What difference did Vietnam make one way or the other to the nation's security interests and who could have rationally concluded that a land war in a southeast Asia jungle against a determined foe could ever be worth the cost? The decision to become involved in Vietnam was and will always be unjustifiable.
Did enough people learn that lesson in the U.S.? As I noted in a prior post, there are still a large number of citizens who believe, even now, that the U.S. needed to continue fighting until victory was secured for the corrupt South Vietnamese government. Item # 4 Vietnam A simple question to ask those individuals, which would be readily apparent, is for what purpose? Those same citizens would have been in the forefront seeking to justify the invasion of Iraq. The lessons of history will be lost on a clear majority of citizens, and certainly most politicians, which is how the U.S. makes costly going to war mistakes and will likely continue doing so.
4. Vanderbilt Football: There is always hope or so the sages tell us. As exhibit #1 in support of that cliche, I offer the results achieved by James Franklin who became Vanderbilt's football coach three years ago. Vanderbilt had been the perennial doormat in SEC football for most of my life.
I started attending games when I was in grade school, and it was painful to watch most of the time. The team was frequently a source of comedy for most of the past five decades. A normal season was 2-9 for the 11 game seasons and 3-9 for the 12 game seasons. Between 1983 and Franklin's first year as head coach, Vanderbilt did not even have a winning season.
For the last two years, Vanderbilt went 9-4 beating Florida, Georgia and Tennessee in 2013 and winning 5 SEC games in 2012 including those against Tennessee, Missouri, Auburn and Mississippi.
In Franklin's first three seasons as head coach, the team has gone to three bowl games and has won two of them including the recent victory against Houston and last year's trouncing of North Carolina State in Nashville's Music City Bowl. The game against Houston brought back flashbacks to the past, as the trauma of past defeats reappeared when Vandy blew a 24-0 halftime lead in the third quarter.
