Tuesday, April 1, 2014

NVS, MKZ, FULL, Realty Income, BDN/Borden Chemical And Penn Virginia Resources Bond Calls/Bought 50 Wharf Holdings at $12.2, 100 CSG at $7.73, 66 KIO at $17.95 (partial fill), 50 FNCL at $26.57,100 Cominar REIT at C$18.14/Sold: 50 NNNPRD at $24.06, 50 RZA at $26.07

This post will end with a discussion of 1 trade made on Tuesday 3/25/14. The other trade made that day and some other trades thereafter will be discussed in the next weekly post.

Big Picture Synopsis

Use of the VIX as a Timing Model
Short Term: The Market Needs a Correction
Intermediate Term: Slightly Bullish
Long Term: Bullish

For most people trying to build a nest egg for retirement, to pay tuition expenses for a child and/or to earn enough money to live in the here and now, the greatest risk is an unwillingness to take risk.

I responded to several comments made at SA where one investor was so worried about stocks that he was moving 75% into cash and 15% in gold. Both asset classes pay almost nothing in income (cash) or nothing (gold). After asking him several questions, it was obvious that he has had a lifetime aversion to risk taking and has found a multitude of reasons to justify that aversion. Even when his current justifications justify caution, he simply found other reasons to avoid risks when they flashed a green light as they did in early 2009.

This kind of approach would work for those born into riches, or whose career has produced such a huge stockpile of cash that even extravagant spending could not deplete the principal to a potentially unpleasant level. For most households, the avoidance of risk taking will cause them to fall way short of their goals.

For a large number of households, there has to be both risk taking and a cut back on current spending. A recent CBS News story highlighted that 1/2 of Americans have not saved any money for retirement. Many will never be able to save simply because they are barely earning enough to survive in the present, while others are just engaged in too much frivolous spending given their financial status.

What will be the expenses in retirement? Hard to say.

Inflation will erode the purchasing value of a dollar. Inflation Calculator: Bureau of Labor Statistics

Medical expenses will be a huge wildcard. Fidelity estimated that a couple retiring last year at 65 would need $220,000 just to pay medical expenses and this is with Medicare as it exists now. Retiree health costs fall - Fidelity.com

Back in 2011, virtually every member of the GOP supported a voucher plan for Medicare that would have raised the cost for those unfortunate souls falling under it to $12,500 as opposed to the estimate cost under traditional Medicare of $5,630 according to estimates made by the non-partisan CBO and summarized in chart form by the Kaiser Foundation. (Table reproduced at Stocks, Bonds & Politics: GOP's Plan To Bankrupt the Middle Class, Page 3 kaiserfamilyfoundation.pdf)

If the 30 year treasury was at 15%, and it did go over that yield in 1981, then some problems for a retiree would be solved on the risk taking front provided that was an abundance of cash around to earn that return, while creating others on the spending front due to what would have to be hyperinflation.  In any event, that is not an option now or for the foreseeable future as an alternative to risk taking.

Short to Long Term: Slightly Bearish Based On Interest Rate Normalization
I noted last week that Exxon sold some senior notes maturing in 2017. The coupon was .04% spread to the 3 month Libor, reset quarterly. I have no debt. I would have debt provided anyone would lend me money at a .04% spread to the 3 month LIBOR rate with a 3/15/17 maturing date. Somehow, even with my mind gradually turning to mush, I could manage to earn a better return on the borrowed money after taxes and assuming an abundance of really stupid mistakes. 

3-Month London Interbank Offered Rate (LIBOR), based on U.S. Dollar - St. Louis Fed

Life insurance companies, such as MetLife, will benefit from rising rates, as explained in this Seeking Alpha article. I discussed buying MET in my last weekly post. Bought 50 MET at $51.76

I also referenced MET's equity preferred floating rate stock in that post: MetLife Floating Rate Non-Cumulative Preferred Series A  (MET.PA) I included snapshots of some METPRA trades. That equity preferred floater pays the greater of 4% or 1% over the 3 month Libor rate. The applicable rate is likely to remain at 4% for several years. The 3 month Libor rate would have to go over 3% to trigger any increase in the minimum coupon. I do not own this security now, but I look at the price most everyday. At some point, I may re-establish a position. Generally, I am looking at the current price and yield, taking into consideration the possible time period before a likely bump in the minimum coupon. As more days, weeks and months pass, I am getting at closer to that day when a rise in the Libor will exceed 3%. I do not see that happening now before 2017.  


Recent Developments:

Rather than discuss recent news, I just made a note on how my main taxable account performed on 3/26/14 when the Nasdaq fell 1.43% and the S & P declined .7%.

Most of stock positions are in that account, but I am not a Nasdaq kind of guy. I also have a cash allocation close to 20% earning zilch, some of that is in CADs, and a number of bonds and bond like securities. I was down .18%. I view that as important.

My exchange traded bond and preferred stock portfolio was up .03%, which is at least some negative correlation with stocks. Most of the securities were up and a few PPNs that are stock related account for most of the declines. Some of the common stocks bucked the downturn: COP up .31%; DLR +.64%; OHI +.42%; ORKLY up 1.06%; PEP +.57%; PFE +1.13%; UL + .27%; and UN + .63%. Some of the bond CEFs rose in price. A few foreign CEFs also rose in price. The CAD and AUD rose some against the USD. One of the leading gainers was PRDSY: $15.10 +0.75 (+5.23%) : PRADA SPA ADR. That pop brought me back to even.

I am always interested in what may be working as a shock absorber.  

Novartis (own)

NVS jumped in price last Monday stopped late stage clinical trials for its novel heart failure drug (LCZ696) based on efficacy and will seek regulatory approval sooner than previously expected by it. The drug was helping patients live longer without being hospitalized than a control group who received standard treatment Bloomberg

Closing Price 3/31/14: NVS: $85.02 +3.43 (+4.20%)

That is a big move for a $200+B market cap.

I last discuss NVS when buying a 50 share lot: Bought: 50 NVS at $76.72 (12/23/13 Post). Subsequent to that purchase, NVS went ex dividend for its annual distribution.

Novartis AG (NVS) Dividend Date & History - NASDAQ.com


Borden Chemical Bond Call:

Given the length of the FED's Jihad Against the Saving Class, now in its 6th year, it is not surprising that the junkiest of my junk bonds are being called even when their coupons are not that high, since the issuer is able to refinance at even lower rates.

I am seeing this kind of email pop into my box regularly:

What do I do with the proceeds?

This bond has a Caa2 rating from Moody's according to FINRA.

Bought 1 Borden Chemical 8.375% Bond Maturing 4/15/2016 at 96.85  (APRIL 2011)

Penn Virginia Resources Partners Bond Call:

I also received last week a notice that this bond will be called at 104.125:

The Big Picture Questions/Bought 1 Penn Virginia Resources 8.25% Senior Bond Maturing 4/15/2018 at 98 (8/25/11)

PPN MKN (own):

MKN ended its final coupon period yesterday and will soon be redeemed by Citigroup at its $10 par value.

Bought 100 MKN at $9.85 (January 2010)

The coupon for this one was the greater of 3% or a percentage gain in the DJ-UBS commodity index provided there was no maximum violation during the annual coupon period. There was none. The Starting Value in that index was 136.36. I noted in a 3/10/14 post that MKN was likely to pay its minimum coupon. Received MOU Redemption Proceeds This Afternoon-28.4% Annual Coupon Confirmed The Ending Value on 3/31/14 was 134.52. This will result in a minimum 3% annual coupon for this last annual period. The Ending Value would have had to be over  140.45 to trigger any increase in the coupon.  

This one was good to me. I received a 18% coupon in 2010 and a 25.56% coupon in 2011. (see snapshots in Stocks, Bonds & Politics: Status of Citigroup Funding PPNs: MOU, MBC, MKN, MKZ)

I can't complain. The worst result, other than a Citigroup BK which is not going to happen this year when all of my Citigroup PPNs mature, is the payment of a 3% coupon which looks really good compared to similarly rated short term investment grade debt. I will make a few bucks on the bond when it is redeemed on 4/7/14.

I still have MKZ, whose 3% coupon can be increased by the same index, and I own 200 of that one. MKZ has an End Date of 7/3/14 and a Starting Value of 126.52 so it may finish with an increase in the minimum coupon given its lower Starting Value and the time remaining until the End Date.

Brandywine Realty (own):

As I mentioned in a recent post, BDN was the only equity REIT owned during the May to September valuation correction for equity REITs. It was just my opinion at the time that BDN was still undervalued despite its increase in price up to May 2013. My last add was a 50 share buy during November 2012. BOUGHT 50 BDN at $11.7

I have bought and sold its cumulative preferred stocks several times, but have not yet sold any common shares. Snapshots of preferred share trading can be found in this post: Item # 1 Bought 50 BDNPRE at $23.14 Roth IRA I have since sold those shares and no longer have a position in the a BDN equity preferred stock.

My main way for tracking news about current holdings is to have their symbols included in a Yahoo Portfolio. Whenever I open the "owned" portfolio, I will see news items relating to those holdings and will read whatever is viewed as important.

A news item for BDN referenced a Barron's column by Jack Hough titled "3 Cheap Beltway REITS With Big Dividends". Barrons One of those mentioned was BDN.

I have not changed my standards about what is big, medium size or small due to the FED's Jihad Against the Savings Class now in its 6th year. I still do not call a 4.5% dividend from a REIT "big", more likely a decent morsel.

Another one mentioned by Hough is First Potomac (FPO). I no longer own the common shares, but I still own the preferred, FPO-PA, that I bought last January: Bought: 50 FPOPRA at $24.25, 50 OFCPRL at $24.04, 50 STK at $14.38 /Added to Vanguard Wellington (VWELX) and the Permanent Portfolio (PRPFX)/Added 50 KWN at $23.79 -Roth IRA

Closing Price Last Monday: BDN: $14.46 +0.20 (+1.40%)

Realty Income (own):

Last Thursday, Realty Income announced that it had sold 12 million shares at $39.96 to fund acquisitions. Realty Income Announces Pricing Of Upsized 12.0 Million Share Common Stock Offering The underwriters were granted an option to purchase up to another 1.8M shares. Needless to say, the share price went down in response to that offering, having closed at $40.78 the previous day, but managed to recover most of its intra-day losses by the close. In other words, the market bought the dip.

I noted in a 3/10/14 post that Realty Income was overvalued in my opinion at $44+. Comments on Realty Income I had just sold the shares owned in family member accounts at $44.25, including a testamentary trust, but had elected to keep my 100 shares for the reasons given in that post.

Bought: 100 Realty Income (O) at $36.96 (December 2013)

I intend to keep those shares, but will not buy more higher than $35.

Closing Price Last Monday: O: $40.87 +0.12 (+0.29%)

Full Circle Capital (FULL):

This BDC took a big hit last Thursday when the SEC stopped all trading in ADVANCED CANNABIS (CANN) shares. sec.gov/.pdf I and others discuss this topic in the comment section to this Seeking Alpha, starting with my comment on 3/27 inquiring whether anyone knew why the SEC had halted all trading in CANN shares.

Closing Price Last Monday: FULL: $7.78 -0.05 (-0.64%)

The Impact of Currency Conversion On ADR Share Prices:

I have discussed throughout this blog the currency risk associated with buying any foreign security. It does not matter whether the investor buys the ADR priced in USDs or the ordinary shares priced in the local foreign currency.

To illustrate this point, which is important to understand, I compared the charts of two stocks where I own the U.S. listed ADR bought on the NYSE. In both cases, 1 ADR share equals 1 ordinary share, so there is nothing to account for the differentials in prices other than currency exchange.

First, I will show what has happened to Canadian Natural Resources (CNQ) priced in USDs, which I own, and the Toronto listed CA:CNQ:

The gold line is the Toronto shares which have gained about 10% more than my CNQ shares. The difference is due the approximate 10% decline in the CAD over this same time period which flows through into the pricing of CNQ.

In the next example, I am comparing my Unilever (UN) shares priced in USDs against the ordinary shares priced in Euros. The Euro has gained about 8% against the USD over the past year:

The UN shares have outperformed the Amsterdam shares due to the rise in the Euro against the USD. The UN line is in gold with the ordinary shares in blue.

As I have noted in the past, the ideal situation is to buy a foreign security that has been unjustly pummeled in its local market when the USD is unusually strong against that local currency.

An example was my purchase of 100 AXA ADRs back in 2010, when the USD was strong against the Euro and the ordinary share price has declined 27.2%. The decline in the U.S. listed ADR was 43.33%. Bought 100 AXAHY at $14.69


1. Bought 50 WARFY at $12.2 (The $500 to $1,000 Flyers Basket Strategy)(see Disclaimer): I limit and control risk in part by making a judgment call on the amount of monetary exposure. The Flyers Basket is viewed as slightly less risky than Lottery Tickets where the monetary limit is $300 plus any prior realized gains.

Once a basket exceeds 20 securities, with one exception being the recently published CAD Basket which then had 17 securities in it, I may publish periodically a post containing snapshots of profits/losses and a table of current holdings.

The Flyer's Basket currently has only 10 securities after I sold several of them for profits including Corning, Morgan Stanley, the ETF FVL, and Xerox. Bought 50 GLW at $11.98/Bought 50 MS at $14.98 (September 2012); Bought 50 FVL at $12.95. The largest unrealized gains are in AEG and TDIV. Bought 50 TDIV at $19.95 I am reinvesting the dividend on AEG. ADDED 70 AEG at $5.28 (October 2012) and Bought 50 AEG at $6.36

I have been adding some foreign ADRs in this basket recently that have suffered serious haircuts in price. In addition to WARFY, the other two are Prada and OKLA.  

Snapshot of Trade: 

2014 Bought 50 WARFY at $12.2
Company Description: Wharf (Holdings) Ltd. (4:HKG) is a Hong Kong based conglomerate operating in four business segments primarily in HK and mainland China: property investments (retail, office, apartments and hotels); property development; logistics including terminal operations; and CME (communications, media and entertainment). The Wharf (Holdings) Limited

The shares trade in the U.S. as ADRs, with 1 ADR equalling two ordinary shares. WARFY Wharf Holdings Ltd When I bought the shares, that page from the pink sheet exchange calculated the dividend yield at 3.1%. 

My limit price was based on converting the closing price of the ordinary shares in Hong Kong, priced in Hong Kong Dollars, into USDs.

Closing Price 3/20/14 for 0004.HK: WHARF HOLDINGS HKD 47.2 Down .53%

Intra-day, Wharf hit a new 52 week low on 3/20, so the technicals look really bad, with the stock looking like the typical falling knife. To climb above its 200 day SMA line, as of 3/20/14, the stock would have to do a moonshot above HKD 62.5. 0004.HK Interactive Chart 

Currency Converter Snapshot:

Each ADR is equal to two ordinary shares, so I needed to multiply USD 6.0813 by 2 or USD 12.1626 for one share of WARFY. I had tried to buy 50 shares earlier when I converted the HK closing price into $12.7, just two days earlier on 3/18, but that order was not filled fortunately. I did not mind going a tad about the closing price in HK to secure a purchase at $12.2 after the shares declined more on 3/19.

Prior Trades: None

Last Earnings Release: The company release results semi-annually. Prior to my purchase, the last report was for the six month period ending 6/30/13. Core profit increased 5% to HKD5,683M. Core investment properties represented 68% of total assets with revenues increasing by 10% and operating profit by 12%. Core properties include a portfolio of 3.6M square feet of "prime retail malls in Hong Kong". Group Result Highlights.pdf

Harbor City is a flagship property and generates 60% of the property group's gross rental income from its 8.4 million square feet of "prime commercial space comprising offices, retail shops, serviced apartments, hotels and club, and approximately 2,000 parking spaces.

Wharf is expanding its property ownership in Mainland China and currently owns a landbank of about 11.9 million square metres in 15 cities.

Rationale: This was primarily a gut judgment call. Wharf was hitting a 52 week low. After doing some research, I simply reached an opinion that the price decline had gone too far. There is also some dividend support for the shares.

The HK listed shares hit HKD78.4 on 5/22/13: 0004.HK Interactive Chart The ADR shares peaked on the same day at $19.92. The decline to my purchase price at $12.2 was consequently 38.76% which seemed too much for the HK conglomerate. The HKD is pegged to the USD reducing currency conversion risk. If I took the conversion value as of 3/21/14, the date of my purchase, and applied it to the 5/22/13 closing HKD price, I come very close to the same $19.92 closing price on 5/22/13. In other words, the decline in the ADR price is reflecting just the decline in the ordinary shares in HK with no positive or negative input from currency conversion.

Risks: Sitting at a desk in Tennessee, without any research reports to review for this kind of company, I am naturally reluctant to take much risk. There is considerable news press for several years now about valuation concerns in the HK and China real estate markets.

Future buys: I view a future buy as unlikely. Given the small size of my purchase, I can easily afford to be patient for the hoped for upside move.

Closing Prices Last Monday:
WARFY: 12.80 -0.19 (-1.50%)
0004.HK 49.6 -.6

2. Added 100 Cominar REIT at C$18.14 (Canadian Dollar (CAD) Strategy)(see Disclaimer): This purchase is part of my ongoing sector rotation into REIT common and preferred stocks that started last September.

I published yesterday a table of the securities currently in this basket which included the 100 share adds to Cominar and CSG discussed in this post: Stocks, Bonds & Politics: Update for Lottery Ticket, Equity REIT and Regional Bank Basket Strategies

Snapshot of Trade:

2014 Added 100 Cominar REIT at C$18.14 

I took this snapshot of the broker's quote shortly before entering the order on 3/19/14:

Distributions will be paid to me monthly in CADs after a 15% withholding tax. The current monthly distribution rate is C$.12 per share.

Assuming a continuation of that rate, with no increase or decrease, the dividend yield at a constant cost per share of C$18.14 would be about 7.94% paid in CADs.

The last ex dividend date was on 3/27/14 for the monthly distribution. Cominar Real Estate Investment Trust | Cominar Real Estate Investment Trust Announces March 2014 Monthly Distribution

Investor Relations - Distribution History

It would not be technically correct to call the distribution from a Canadian REIT a dividend.  When Canadian REITs are held in a retirement account, the distributions are not treated as dividend for Canada's tax treaty with the U.S., where Canada agreed to refrain from imposing its withholding tax on "dividends".

The ordinary shares of Cominar can be bought in the U.S. Grey Market with USDs, but that is a dark and illiquid market that I try to avoid altogether. Bid and ask prices are not shown and trading is generally sparse. CMLEF Cominar Real Estate Investment It can be done however, but an investor needs to convert the ordinary share price in CADs into USDs before entering a limit order. Due to the ongoing weakness in the CAD vs. the USD, the USD price will be significantly lower than the CAD price in Toronto. The same price result, assuming no currency conversion cost (which ranges from near nil to 1% or so depending on the broker), could be achieved by selling some USDs for CADs and then using those CADs to buy the more liquid and transparently traded share in Toronto.

Company Description: Cominar Real Estate Investment Trust Units (CUF.UN:TOR) is a Canadian REIT that owns office, retail, and industrial/mixed use properties in Canada. Welcome-Cominar Real Estate Investment Trust The total number of properties was 513, containing 38.3M square feet "spread out across Quebec, Ontario, the Atlantic provinces and western Canada.

List of Properties: Cominar Properties - List of Properties

Portfolio Summary as of 12/31/13 and Occupancy Rates
March 2014 News Release: "Cominar announces closing of the re-opening of its offering of 4.941% Series 4 senior unsecured debentures due July 27, 2020 in the principal amount of $100 million"

Prior Trades: On a CAD basis, I am near break-even on a total return basis for an existing 200 share lot: Added 100 Cominar REIT at C$18.15 (November 2013); Item # 4 Bought 100 Cominar REIT at C$18.75 (October 2013)

I did make a profit on an earlier trade, which involved selling Cominar and buying a Canadian dividend stock ETF (CDZ.CA) at $21.26. That paired trade worked since CDZ has gone up and Cominar down:

Paired Trade: Sold 100 CUF_UN:CA @ 22.66 CAD & Bought 100 CDZ:CA at $21.26 CAD (April 2011)(realized gain on CUF=USD$196.7)

Gains and losses are computed in USDs by the broker even when the security is bought with CADs and the proceeds received in CADs.

iShares S&P/TSX Canadian Dividend Aristocrats Index Fund  (CDZ:TOR)

Depending on the future value of the USD when and if I sell this position, I will have a different number of U.S. tax reporting purposes that will reflect the CAD conversion value into USDs at the time of purchase and sell. In other words, I could receive more CADs than I used for the purchases upon selling all 300 shares and have a loss reported by the broker on my 1099 due to the depreciation in the CADs value against the USD from the time of purchase. Or, I could have my profit artificially boosted by a rise in the CAD from the date of purchase to the time of liquidation. In either case, I will settle the trade, when buying or selling, in CADs.

Recent Earnings Report: For 2013, Cominar reported that revenues increased by 17.3% to C$662.1 and operating income increased 15.9% to C$368.2M, compared to 2012. "Cominar Continues to Grow" (company press release) A more detailed quarterly report can be found at cominar.com Q413.pdf

Recurring AFFO was reported at $1.54 per share in 2013, up 2.7%. Recurring distributable income was reported at $1.58 per share. Payout ratio was 91.1% of recurring distributable income.

At year end, the company reported a debt ratio, excluding convertible debentures, of 48.2% and an interest coverage ratio of 2.70:1. Total assets reached C$5.9973B.

As noted in the press release, the company acquired 11 office properties in the Greater Montreal and Toronto areas and a retail complex of 5 properties after 12/31/13 to the date of that earnings releae in February.

As with many REITs, I do not expect much in the way of FFO growth per share. However, if I am reading the analyst estimates correctly for this year, the consensus appears to be $1.83 for the mean: (CUF-u.TO) Analysts That would put the P/FFO near 10 based on a C$18.14 price.

Rationale and Risks: One of primary risks is the decline in the CAD against the USD. For an investor who is not a long term owner of CADs, like myself, the decline results in a depreciation of the investment when CADs are converted back into USDs for tax reporting purposes. Share gains can consequently be wiped out, or a loss could be created, by nothing more than the CAD declining in value. The reverse is also true. A gain can be created or increased, or a loss reduced, by the CAD gaining in value against the USD. I noted the other day that I could sell my 300 Artis shares and receive close to C$500 more CADs than I used to buy those shares, but Fidelity would be reporting almost no gain on the 1099 to the decline in CAD from the time of purchase.

As shown in the chart, the ordinary shares really have not bounced much from around C$18 after coming close to $24 last May. CUF-UN.TO Interactive Chart Since the USD buys more CADs than in May, this stock has become even cheaper for a U.S. investor using USDs to buy shares in Toronto.

Near the close yesterday, I used the currency converter at YF to determine the value of C$18.14 in USDs. The conversion resulted in a USD price of $16.41. If I converted that same amount on 3/31/13, the value would be USD$17.85.  Currency Converter

I view this REIT to be undervalued on a FFO basis, particularly in light of its dividend yield near 8% at its current price and the payment of a dividend monthly.

My prior discussions contain more details about potential risks and benefits. I wish that I knew a risk free investment that pays me 8%. Alas, I am not aware of any at the moment. The Merrill Lynch junk bond composite yield is near 5.6%-5.7%. BofA Merrill Lynch US High Yield Master II Effective Yield - St. Louis Fed That speaks volumes about the balance being struck between yield and risk now. I would just look at that chart and use my common sense.

Closing Price Last Monday: CUF-UN.TO: C$18.48 +0.08 (+0.43%)

3. Added 100 CSG at $7.73 (see Disclaimer):

Snapshot of Trade:

2014 Added 100 CSG at $7.73
Company Description: Chambers Street Properties (CSG) is a self-administered and internally managed REIT that focuses on net-leased industrial and office properties. A net lease requires the tenant to pay all or some part of the expenses normally paid by the landlord including real estate taxes, insurance on the structure, maintenance, repairs and/or utilities. The triple net lease requires the tenant to pay rent and all of the costs normally paid by the owner.

As of 12/31/13, CSG owned on a consolidated basis 99 industrial, office and retail properties in 18 U.S. states and in the U.K. encompassing approximately 22.5 million rentable square feet.  Page 1 2013 Annual Report

Overview | Our Portfolio | Chambers Street Properties

Chambers Street Properties Profile Page at Reuters

Chambers Street Properties Key Developments Page at Reuters

September 2013 Investor Presentation

In February 2014, the company guided FY core FFF in a range of $.65-.$69 per share. Taking the midpoint of that range, the P/FFO at a total cost of $7.73 would be about 11.54.

At the time of my purchase, the consensus for 2014 was $.67, CSG Analyst Estimates, the mid-point in this REIT's February guidance range.

Since my last purchase, the company announced the purchase of an 80% ownership of new 966,169 square feet warehouse distribution property in France: Chambers Street Acquires New 966,169 Square Foot Warehouse/Distribution Property in France

In December, the company received an issuer rating of Baa3 from Moody's. Chambers Street Announces Investment Grade Issuer Rating

Of the $.659 per share in distributions paid in 2013, the company classified $.36135 as a ROC. Chambers Street Announces 2013 Tax Treatment of Its Distributions

2013 10-K

Brad Thomas published an article today at  Seeking Alpha on CSG.

Prior Trades: I am not down by much, but I am down. Roth IRA: Bought 50 CSG at $7.65 (December 2012);  Item # 2 Bought 150 CSG at $8.4-Roth IRA (November 2012)

Recent Earnings Report: For the 2013 4th quarter, CSG reported core FFO per share of $.17 with an occupancy rate of 96.5%. Total debt stood at about $1.6B at year end with a weighted average interest rate of 3.9% and an average remaining term to maturity of 5.11 years. 8-K

One risk for all REITs is revealed in the preceding sentence. Interest costs are currently abnormally low and the weighted remaining maturity is just 5.11 years. Generally, you will not see investors or banks lending money to REITs for 30 years. A typical commercial mortgage might have a five year term.

Rationale: As with other REIT purchases, the rational involves a hoped for 8% to 10% annualized return with the dividend providing a majority of the total return.

At a total cost of $7.73 and the current monthly distribution rate of $.042, the dividend yield is about 6.52%.

Risks: The company describes the numerous and significant risks starting at page 5 of its 2013 Annual Report.

Interest rate risk is always a concern and I do not try to dismiss it or underplay its significance. The rise in rates hit REITs in two fundamental ways: cost of borrowed funds and a loss in competitive yield compared to other securities. Many investors would simply not own a REIT yielding 6.25% when a 10 year treasury is at 4.25%. The risk premium spread would just be too narrow for them.

Future Buys and Sells: I must be in an accumulation mode for CSG shares given the number of buys. I do not have any plans to buy more, but that is obviously subject to change given what I have been doing.

Closing Price Last Monday: CSG: $7.78 +0.14 (+1.83%)

4. Partial Filled Order-Bought 66 of the CEF KIO at $17.95 (see Disclaimer):

Snapshot of Trade:

Bought 66 KIO (partial fill) at $17.95

Company Description: KKR Income Opportunities Fund (KIO) is a leveraged bond closed end fund.

Data on Date of Trade 03/19/14:
Closing Net Asset Value Per Share: $19.63
Closing Market Price: $17.96
Discount:  -8.51%
Average 1 Year Discount: -7.83%

CEFConnect (shows expense ratio at .56% with interest expense)

The current monthly dividend is $.125 per share. KKR Income Opportunities Fund Declares Special Distribution of $0.163 Per Share and Monthly Distributions of $0.125 Per Share

Sponsor's website: KKR Funds

At the sponsor's website, I found a factsheet that listed the duration at 4.35 years as of 12/31/13. KIO-Factsheet-140131.pdf

SEC N-Q: HOLDINGS as of 1/31/14 (showing then an unrealized gain of almost $6M)

Prior Trades: None

Rationale: The sole reason for buying this one is the current income generation. Assuming a continuation of the current monthly dividend, which is in no way assured, the dividend yield is about 8.36% at a total cost of $17.95.

Risks: The risks are the usual ones for a leveraged bond CEF:

1. Leverage increases duration and accelerates losses during price downturns.

2. The discount to net asset value can expand after the purchase and experience a percentage decline significantly higher than the percentage decline in net asset value per share during times of stress (e.g. May to September 2013).

3. The bonds owned by this fund are not high quality so there is significant credit risk.  

4. Interest rate risk exists with any bond fund. If the duration of a bond fund is 4.35 years, then that reduces interest risk compared to one with a longer duration. Still, a rule of thumb is that a 1% rise in rates would cause about an average 4.35% decline in price.

Future Buys/Sells: I had intended to just buy 100 shares, collect a year or two of dividends, and then hopefully sell this one for whatever profit was available, no matter how small. This is what I call small ball. Since I blew the initial buy by failing to put a AON restriction on it, I will average down at a lower price with a 50 share lot.

Closing Price Last Monday: KIO: $17.86 -0.04 (-0.22%)

5. Sold 50 of 100 RZA at $26.07 (see Disclaimer):

Snapshot of Trade:

2014 Sold 50 RZA at $26.07
Snapshot of Profit:

2014 RZA 50 Shares +$73.08 
Item # 3 Bought: 50 RZA at $24.29 (10/24/13 Post)

In addition, I received two quarterly interest payments, totaling $38.75, bringing the total return up to $111.83 or  9.15% annualized in about 5 months.

If I had $100,000 in a Vanguard Prime MM fund, paying .01% for an entire year, the income generation would be about $10.

Security Description: The Reinsurance Group of America Inc. 6.20% Fixed-to-Floating Rate Subordinated Debt Due 2042  (RZA) is a junior subordinated bond. Prospectus

This has a fixed coupon of 6.2% paid on a $25 par value until 9/15/22, when the issuer may redeem it. If is not redeemed on or after 9/15/22, the note will mature in 2042 and start paying a floating rate at a 4.37% spread to the 3 month Libor rate.

Other Trades: I still own 50 shares in the ROTH IRA: Bought 50 RZA at $24.47-ROTH IRA I am inclined to keep this security in the ROTH for its tax free income generation in that account.

Rationale: Under the new trading guidelines, I will consider selling a long term bond whenever the yield falls below 6%. At a $26.07, the current yield is about 5.95%.

Future buys and sells: I still own 50 shares and will keep those shares for the time being, since they are generating tax free income in the ROTH IRA.

I would need a price lower than $24 to buy back the 50 shares sold.

Closing Price Last Monday: RZA: $26.49 -0.07 (-0.26%)

6. Sold 50 NNNPRD at $24.06 (see Disclaimer): This is yet another example of small ball.

Snapshot of Trade:

2014 Sold 50 NNNPRD at $24.06
Snapshot of Profit:

2014 NNNPRD 50 Shares +$55.57
I also received one quarterly dividend of $20.7, bringing the total return up to $76.27 or 6.7% annualized in about 4 months. As I said, this is small ball. I want to own this kind of security longer term when I can acquire it at a higher current yield.

Bought:  50 NNNPRD at $22.63 (11/19/13 Post)

Security Description: National Retail Properties Inc 6.625% Cumulative Preferred Series D (NNN.PD) is an equity preferred stock that pays quarterly non-qualified and cumulative dividends at the fixed coupon rate of 6.625% on a $25 par value.


Related Trades: I have bought and sold the functionally equivalent NNNPRE: Item # 4 Sold Roth IRA: 50 NNNPRE at $21.14-Item # 3 Bought: 50 NNPRE at $19.71-Roth IRA (October 2013)

Rationale: Under the current guidelines for trading exchange traded bonds and equity preferred stocks, I will consider selling a preferred stock position when the current yield declines below 7% at the sale's price.

Future Buys: I am looking for a 8% current yield for a re-entry, as previously noted, but I might accept less for this one given its Baa2 investment grade rating from Moody's. I would not, however, accept less than 7.5%.

Closing Price Last Monday: NNN-PD: $24.32 +0.01 (+0.04%)

7. Bought 50 FNCL at $26.57 (see disclaimer):

Snapshot of Trade:
2014 Bought 50 FNCL at $26.57
If I sell the shares within thirty days, I will be charged a commission. I have no intention of doing so.

Security Description: The Fidelity MSCI Financials Index ETF Fund (FNCL) is a low cost financial sector ETF that can be bought by Fidelity customers commission free. When a brokerage commission is eliminated, the investor can buy in small increments without worrying about the impact of a commission on the average cost per share.

This ETF will own banks, credit card and insurance companies, REITs and Berkshire Hathaway. There were 498 holdings as of 3/15/14. I just took a snapshot of one page containing the highest weighted stocks:

Sponsor's Webpage: FNCL | ETF Snapshot: Fidelity Investments

Expense Ratio: .12%

Rationale: I have exposure to smaller banks in my regional bank basket. This ETF gives me a low cost means to acquire exposure to large caps in both the banking and other financial sectors. My guess is that a significant recession will not occur for several years, and many of these companies will start to increase their dividends at a more robust rate.

Many of the large banks slashed their dividends during the Near Depression and have been slow to increase them. Others like Citigroup and Bank of America may not return to dividend levels existing prior to the Near Depression in my lifetime.

Bank of America Corporation (BAC) Dividend History - NASDAQ.com

Citigroup Inc. (C) Dividend  History - NASDAQ.com

BAC Interactive Chart

C Interactive Chart

Just despicable in my opinion. All of the Masters of Disaster need to return all of their compensation with interest. I do not own them and will not buy either of them.

Assuming no major catastrophe, however, financials can be a source of dividend growth for a long period until the banks blow themselves up again due to improvident lending decisions and an abundance of this time is different group think. I generally have a low opinion of large financial institutions and their overpaid Masters of Disaster who frequently lack any common sense.

Risks: Does anyone need to be told about the risks of financial stocks? I hope that everyone understands a thing or two about what can go wrong. Without a government bailout, Citigroup would now be winding down in BK. Other large institutions would have followed Lehman.

If anyone has any confidence in the Masters of Disaster, who are an egotistical bunch, reading the "Reckoning" series published by the NYT will quickly change your opinion:

The Reckoning - Series - The New York Times

I would particularly recommend the articles on AIG, Citigroup, WaMu, Fannie and Merrill Lynch.

Future Buys and Sells: I will be more inclined to sell this ETF when I sense a recession on the horizon. Financial companies will generally perform badly during garden variety recessions and horribly during a financial crisis such as the recent Near Depression.

Closing Price Last Monday: FNCL: $26.57 +0.26 (+0.99%) 


  1. Hi Southgent,

    I noticed that you have shifted from "expecting a correction", to "hoping for a correction", and now to "The market needs a correction".

    Ken Fisher says only two things can stop the bull market: "losing steam" or "newly emergent wall".

    Maybe it will be fortunate (or maybe unfortunate depending on your allocations)that the correction will never come. How would you want to deploy the 20% cash if this correction is less likely to occur?


  2. PETER: A normal cash allocation for me is 20%. In 2007, I went over 30% but I was receiving as I recall over 4% then in a MM. Unfortunately, Uncle Ben will not allow me to earn anything on that cash. Even with that high cash allocation, I try to outperform the S & P 500 with a much lower risk/volatility profile (in part due to the cash) and considerably more income. Sometimes I do it and last year I did not as my bonds dragged me down.

    The cash serves several purposes:

    1. It is like putting a pacifier in the OG's mouth on those nasty days and really bad downturns (e.g,2008)

    2. It is psychologically important to have that cash around gathering rays during a downturn since it makes it easier to buy something when most of what I own is getting shellacked.

    3. With the cash, I do not have to sell something that has probably gone down in price to buy something else that has gone down in price.

    4. I no longer need to be right about my big picture views that drive allocation decisions.

    It may not be the best approach for others, depending on how well they deal with market downturns, their age (not retired), and current and projected earnings. I have no earned income.

    The short term views about the market could be summed up simply by saying that the market needs a correction and I hope to see one soon. If it continues going up without one, the odds of a nasty market event like October 1987 increase in my opinion.

    I have not changed my stock allocation down in anticipation of a correction. If anything I increased my stock allocation due in part to the sector rotation to REIT common stocks, financed out of cash, and other stock and fund purchases:

    I know you are familiar with my Stock Fund Updates where I attempt to measure whether my overall allocation is moving up or down:


    In that February post, I figured that I had added over $23,000.

    I am finding it very difficult to find stocks to meet my valuation criteria with only a few non-REIT coming within those parameters recently, including an add to NVS and the initiation of positions in MET, COP, PEP and CNQ. I would welcome a relatively quick correction, typical for an ongoing bull market, such as the ones occurring in 2010 and 2011, which clearly defines for me opportunities to redeploy assets (e.g. sell bonds/buy stocks) or to dip into cash reserves to pick up something worthwhile at a much lower price.