Friday, April 18, 2014

Portfolio Management Goals-Snapshots of Performance Numbers YTD, 3 and 5 Years Cumulative/Cricket Bond Redemption/KO/Bought 200 Northwest Healthcare REIT at C$9.79/Sold 50 PFGPRB at $25.46/Sold Roth IRA: 50 SANPRB at $20.41/Bought Regular IRA-100 MPW at $12.76/Sold: 58+ DWX at $48.75 & 200 CA:ERF at C$22.14

Big Picture Synopsis:

Stable Vix Pattern (Bullish)
Vix Asset Allocation Model Explained Simply
Use of the VIX as a Timing Model
Short Term: Market Needs a 15% Correction
Intermediate Term: Slightly Bullish (rise since 3/2009 takes away some future gains)
Long Term: Bullish

If the market rises more than 20% this year, the odds of an October 1987 type event increases as that number goes above 20%. The best thing to happen in 2014 would be to have another year like 2011 when there is a correction, up and down chop, with the S & P gaining or losing less than 5%. Earnings need time to catch up with current multiples.

The market is once again proving resilient to downturns and resistant to corrections. The Nasdaq Composite came very close to a 10% correction from its recent high. MarketWatch

An article in Forbes, written by William Baldwin, attempts to make the case that stocks are overvalued by 43% and will provide negative real rates of return over the next seven years. Baldwin relies on the Shiller P/E and the work of James Montier, an "asset allocation theorist" at Grantham, Mayo, Van Otterloo (GMO). 

Short to Long Term: Slightly Bearish based on Interest Rate Normalization

The bond forecast assumes an average CPI rate of 2% to 2.25%, the current range bound range predicted in the pricing of the 10 year TIP.

My probable scenario has another rate spike occurring later this year or in the 2015 first half, similar to what happened in May-September 2013. I am anticipating a slight uptick in inflation as the year progresses, and that the FED will end QE by yearend or no later than the 2015 first quarter. When that price support is removed, bonds will become more susceptible to the interest rate normalization process.

The eventual end of ZIRP, followed by modest increases in the federal rates rates starting in the 2015 second half, will start to reduce another support for intermediate and long term rates, which is the borrowing of short term money to buy longer term securities. That becomes far more problematic and risky when short term borrowing costs are rising and investors lose confidence in abnormally low rates remaining in force. A modest increase in rates will cause a significant loss in vintage bonds.

As noted previously, I have upgraded the possibility of the less likely scenario, a long period of low inflation, interrupted by bouts of deflation, similar to Japan's experience since 1990. Stocks, Bonds & Politics: 1/6/14 Post in Bond Section To plan for that possibility, I have increased some my exposure to investment grade long term debt that would benefit from such a scenario. I am not going to buy low yielding ETFs, like TLT, since I am not being adequately compensated for interest rate risks in my opinion. If I view that possibility as diminishing significantly, I will consider paring those type of positions.  

Recent Developments:

The Commerce Department reported that retail sales rose 1.1% in March, the strongest showing since September 2012.  Retail sales were revised to show a .7% gain in February from the previously reported .03%.

CPI rose .2% in March on a seasonally adjusted basis. The annual increase was reported at 1.5% before seasonal adjustments.  Consumer Price Index Summary

The N.Y. Fed's Empire State manufacturing index decline to 1.3 in April, versus an expectation of a rise to 8 from March's 5.61 reading. New orders declined to a -2.8%. Empire State Manufacturing Survey (overview) - Federal Reserve Bank of New York

Industrial production increased .7% in March after increasing 1.2% in February. Capacity utilization increased to 79.2%, which is 1.2% higher than a year ago. Industrial Production and Capacity Utilization

China reported first quarter GDP growth of 7.4%, better than expectations.  

Portfolio Management and Performance Numbers: 

I have been discussing my portfolio management style in a number of recent SeekingAlpha comments. I have stated many times here that my general goal is to beat the S & P 500 with a balanced portfolio, including a substantial cash allocation.

Specifically, I am aiming for a 10%+ average annual total return over time while assuming far less capital and volatility risk than the S & P 500. 

My portfolio will go down far less on bad days; will have significantly less risk and volatility than a 100% allocation to stocks; and will generate income (dividends and interest) two to three more times greater than an investment in SPY. I have been hurt since 2008 by the low rates on MM funds. With higher rates, I would be in a higher range.

Last week, I cited some portfolio return numbers on the four recent bad days for stocks. Bonds rose in value on those days so the bond part of the portfolio acted as an income generating hedge for stocks. The bond heavy IRAs generated slightly positive returns on three of the four days.

The purpose of my analysis was to determine whether the portfolio design was accomplishing one of its primary objectives: avoid around 75% of a greater than 1% decline per market day.

The main taxable account was in that general neighborhood. The purpose of that goal is to avoid most of the major stock market decline, particularly those 45%+ catastrophic events.

I do not really want to go down more than 20% in the standard catastrophic decline exemplified by 1974, 2000-2002, and 2008 to March 2009. All of those events were followed by rebounds. I published back in December 2011 some tables showing how I managed during the three year period ending in October 2011. It is that kind of period where I will most likely beat the S & P 500 by going down less and then recovering fast with opportunistic buys and asset allocation shifts: Items 2 and 3 Snapshots: Main Taxable and Regular IRA Accounts Performance Numbers Calculated by Broker

If I lose 50%, I will need to gain 100% to get back to even. Sometimes that just needs to sink further into an investor's brain rather than percolating in the deep subconscious. It will be easier to outperform over a long period by going down substantially less in long term secular bear markets, cyclical bear markets within a long term bear market, corrections and dips in a long term secular bull market and catastrophic declines in long term bear markets. All of those bad things have happened repeatedly during my active years as an investor, and will continue to occur with unfortunate frequency.

I would note at this juncture that the S & P 500 was at 20 when I was born, and has risen almost 180% since March 2009. I do not want to lose most of those gains. I will have to lose some of those gains in order to protect capital during the bad periods.

Stocks are easily my largest allocation. I am not a Nasdaq 100 kind of guy and naturally gravitate to dividend paying blue chips when the price is reasonable. The stock part of the portfolio is an integral part of my income generation and the production of ever increasing amounts of cash flow is a central tenet in my investing strategy.

The cash and bond allocation will keep me from matching the S & P 500's performance in a robust year like 2013. The same would be true for days where the S & P 500 is up more than 1%. I would be lucky to achieve half of that gain. My stock selection and trading would have to be extraordinary to equal that robust S & P 500 up moves, when I have a 20% cash allocation earning just about zero. Last year was a bad one for bonds which also caused me to lag, but those securities hav helped so far this year.

Last Thursday was a good day simply due to beating the S & P 500's .14% gain by .13% in the main taxable account, helped by good performance in several stock positions including GE.

Still, I managed to have a good year last year, and recognize and accept that conditions were not ripe for beating a stock market average due to my emphasis on capital preservation. Maybe I will make up the difference this year.

It is important to recognize that this design is relatively new for me. I am now 62. Ten years ago, I did not own a single bond or preferred stock, viewing them as something that old people buy, and my cash allocation was much smaller.

I am no longer in an accumulation phase. I am in a capital preservation and income generation phase and now have a significant allocation to both bonds and bond like securities.

This is how I am doing with Fidelity accounts for the first three months of this year. A down year, particularly the really bad ones, or a non-robust up year for stocks, is when I will most likely outperform.  As customers of Fidelity know, the broker computes these numbers and they are available under the "performance" tab:

2014 1st Quarter Performance Numbers-Fidelity Accounts
The first two lines (4.17% and 5.65%) are large accounts, where there are significant stock positions. I am not providing the monetary numbers which would be visible with a larger snapshot. The bottom two are IRAs, a regular and a ROTH, which are bond heavy and far smaller.

Generally, all of my IRA accounts combined would be about 1/10th the size of taxable accounts.

Since I am not likely to ever need the IRAs, I manage them more conservatively than the taxable accounts. If I ever need those funds, they need be be around rather than in money heaven. The Near Depression made possible the purchase of many exchange traded bonds and preferred stocks that quickly rebounded 100% to 300% from their purchase prices. One of them is still owned in a regular IRA, the 25 par value trust certificate KTN, with a 8.205% coupon, bought at a total cost per share of $14.16 back in November 2008 (snapshot at Item # 3 Bought 50 of the TC HJO at 24.90-Roth IRA) All of the other bond and preferred stock purchases from that time have been called or sold. One of the last sales was 100 PFK. Sold Roth 100 PFK at $26.65 (profit snapshot +$705.51, earlier 100 share sell netted $962.38 in profit)

Fidelity has provides numbers for comparison purposes:

YEAR TO DATE 1/1/14 TO 3/31/14
Until last year, I was running ahead of the S & P 500 on a five year cumulative basis, but fell behind in the main taxable account last year. Only two of the accounts listed above were in existence for a five year period:

5 Year Cumulative Returns to 3/31/14
The bottom number is for a regular IRA. I transferred an existing ROTH to Vanguard when Fidelity started to impose substantial restrictions on the kinds of securities that could be purchased by their customers. That account would have similar gains to the regular IRA and is managed in the same manner. I later opened a Roth IRA again at Fidelity when I did a Roth Conversion over a year ago.

Comparison Data:

As I understand Fidelity's five year calculation, the robust move in stocks in March 2009 would not be included, and the calculation would start on 4/1/09 and end on 3/31/14. There have been some cash withdrawals, and no additions, to the main account shown in the first line, and I assume Fidelity's computers are accounting for those withdrawals properly. If they are treated as a decline, then the number would be much better.

I will invest in Vanguard mutual funds and have previously taken snapshots of those positions. Those snapshots are scattered and possibly the most recent ones, which included Vanguard Equity Income and Vanguard Health can be found in a 12/23/13 Post.

My positions are in the following funds:

Performance data for mutual funds can be found at MSN Money, Morningstar or the sponsor's website.

Performance numbers for Vanguard's mutual funds can be found at Vanguard:

YTD Numbers through 4/15/14:
Vanguard Health: 4.97%
Vanguard Wellington: 2.41%
Vanguard Equity Income: 2.31%

Except for Vanguard Health, the funds have been a slight drag on overall performance, but I view them positively.

I had to compute first quarter number for my Vanguard Roth IRA: +5.55% (larger of two Roth IRAs). That is in line with the other two referenced above and is not surprising since they are managed in the same way with the same or similar securities.

My worst performance was in a relatively small satellite taxable account with a first quarter gain of 1.13%.

I suspect that I will move ahead again this year in the main taxable account, provided the S & P is either down or up less than 5%, and assuming my bonds and bond like investments hold their values or rise slightly.

The S & P 500 went negative after four 1%+ down days in early April. I was barely nicked and was back to 3/31/14 levels in the larger accounts after the market rallied last Monday.

One way to hedge my stock portfolio is to find assets and sectors that are negatively correlated with stocks on bad days. I focus on hedges that pay income. So far in 2014, REITs and utilities have done well as shown by the charts of VNQ and XLU:

Vanguard REIT ETF

SPDR Select Sector Fund -Utility ETF Chart

So far, my sector rotation is giving me a decent total return in 2014 while the market is either slightly up or down.

Equity REITs are showing a lot of positive correlation with the 10 year Treasury. Last Thursday, VNQ declined .58% as the ten year treasury went down in price and up in yield.

IEF: $101.79 -0.58 (-0.57%) : iShares 7-10 Year Treasury Bond ETF

Needless to say, that is a really tight correlation.

Several of my common stock positions outside those sectors have demonstrated negative correlation to the major stock averages.

NVS Interactive Chart (price not adjusted for large annual dividend paid earlier this year)
UN Interactive Chart
UL Interactive Chart
COP Interactive Chart (since early February)

COP Close 4/17/14: COP: $74.77 +0.99 (+1.34%)

COP has done well since my two 50 share lot purchases earlier this year:

101+ Shares Unrealized Gain +$842.59 as of 4/17/14
Bonds and preferred stocks are also moving higher so far this year. I am somewhat surprised that rates have trended down even after the FED started to taper. Low inflation numbers, the continuation of ZIRP and still sizable asset purchases are contributing to the decline, which are supportive to both bond and fixed coupon preferred stocks.

Positive and negative correlations are dynamic and will frequently change in a heartbeat.

Coca Cola (own 265+ at an average cost per share of $25.41)

The Coca-Cola Company reported that global unit case volume grew 2% in the 2014 first quarter, with North America volume at even. Volume growth in China was robust at 12%, with growth in India and Russia increasing 6%. KO's growth opportunities remain primarily in emerging markets for its sparking beverage brands and "still beverage" brands worldwide. The still beverage brands (e.g. Dasani water, Minute Maid, Powerade, Honest Tea, Vitamin Water) grew 8% worldwide. The "still beverage" brands generated 3% growth in North America during the quarter. There was decent volume growth in the first quarter in Japan at 3%. Cash from operations was reported at $1.1B. The company is on track to repurchase $2.5B to $3B in shares this year.

Excluding the impact of structural changes and currency, revenues grew 2%. Comparable currency neutral E.P.S. was up 5% for the quarter. The company expects currency conversions to be an approximate 7% headwind this year on operating income.

I will not place that much emphasis on earnings headwinds and tailwinds caused by currency conversions, which change from year to year, sometimes juicing E.P.S. or reducing it. Instead, I view earnings and revenue growth on a currency neutral basis to be more important.

The shares enjoyed a robust rally in response to this report, with volume soaring to 47.5+M shares compared to an average 3 month volume of 17.4+M shares:

Closing Price 4/15/14: KO: $40.18 +1.45 (+3.74%)

That is a big move for KO shares.

Closing Price 4/17/14: KO: 40.72 +0.13 (+0.32%)

Snapshot of Position as of 4/17/14:

KO Unrealized Gain +$4,071.35/Avg. Cost Per Share=$25.41
Intel (own 110+ Shares):

Maybe I gave up on Intel too soon or maybe not, too early to tell. After selling several lots, I am down to 110+ shares with an average cost of $15.52 per share.

Snapshot of Position as of 4/17/14:

Intel Avg. Cost Per Share=$15.52/Unrealized Gain=$1,278.37 
I am not going to summarize the1st quarter report, which I found to be typically uninspiring. Earnings Release Q1 2014 Some found rays of hope in the report and CEO chatter:  BloombergReuters.

Analyst views of this report can be found in Tiernan Ray's blog at

Closing Price 4/17/14: INTC: $27.04 +0.11 (+0.41%)

General Electric (own): I will just link the GE press release:

GE Reports 1Q’14 Operating EPS $0.33; Industrial Organic Revenues +8%; 1Q Operating Margins Up 50 Basis Points; Backlog of $245B; Reaffirms 2014 Framework

Earnings Discussed: ReutersBloomberg

An article in Barron's summarizes a research report from Hilliard Lyons on the GE earnings report.

The market reacted favorably to this report.

Closing Price 4/17/14: GE: $26.56 +0.44 (+1.68%)

Position Snapshot Taken 4/17/14:

GE Snapshot 4/17/14 Average Cost Per Share=$20.13/Unrealized Gain $3,415.48
At some point, when the shares move above $30, I will sell my highest cost shares profitably, which will lower my average cost per share to around $15.


1. Sold 50 PFGPRB at $25.46 (see Disclaimer): This turned into a flip, more like T Ball rather than small ball.

The bottom line is that I simply do not like my income choices in the sixth year of the FED's Jihad Against the Saving Class. A few years ago, I would not even have considered buying an non-cumulative, potentially perpetual equity preferred stock with a 6.518% fixed rate coupon near its $25 par value.   

Snapshot of Trade:

2014 Sold 50 PFGPRB at $25.46
Snapshot of Profit:

2014 PFGPRB 50 Shares +$37.97

I received one dividend payment on 4/1 of $20.37. 

Security Description: The Principal Financial Group Inc. 6.518% Non-Cumulative Perpetual Preferred Series B (PFG.PB) is an equity preferred stock that pays non-cumulative dividends at the fixed coupon rate of 6.518% on a $25 par value.  

Rationale: At a $25.46 price, I do not view the interest rate risk/yield balance to be in my favor. The current yield at a $25.46 price is just 6.4% for a potentially perpetual equity preferred stock that pays non-cumulative dividends. 

My general consider to sell range for an equity preferred stock is when the yield falls below 7% at the current market price. I will give investment grade preferred stocks more latitude. This security is rated junk, but I have a BBB- comfort level with it. 

Future Buys: I am in a trading mode for equity preferred stocks and leveraged bond CEFs. I will consider buying back 50 shares of PFGPRB at below $24. I would much prefer buying it when the yield exceeds 8%. The price would have to fall below $19.25, and I do not see that happening for awhile.

Closing Price Last Thursday: PFG-PB: $25.52 -0.25 (-0.97%)

2. Bought 100 MPW at $12.76 (see Disclaimer):

Snapshot of Trade:

2014 Regular IRA Bought 100 MPW at $12.76
If any security purchased in the regular IRA goes down more than 10%, I will include it in a Roth conversion. I hope to transfer all securities owned in a regular IRA into the ROTH IRA long before I hit the mandatory withdrawal requirements. Required Minimum Distribution Calculator-;

There are no such requirements, at least now, applicable to a non-inherited ROTH IRA which allows me to continue growing the Roth free from any tax hits. My Roth IRA is not inherited so I am not subject to the required minimum distribution rules.

Security Description: Medical Properties Trust (MPW) is an equity REIT that owns net-leased healthcare facilities. As of 2/28/14, the company owned 114 properties (51 acute care hospitals, 24 long term acute care hospitals, 31 in-patient rehabilitation hospitals and 2 medical office buildings. 10-K at page 3.

Key Developments at Reuters

Company Website: Medical Properties Trust

Last month, MPW sold 7.7M shares at $13.05, excluding up to 1,245,000 shares in the over-allotment option: Form 8-K,  Press ReleaseProspectus.

MPW is currently paying a $.21 per share quarterly dividend, which was raised from $.2 in the 2013 4th quarter. Medical Properties Trust, Inc. (MPW) Dividend Date & History -

The $.20 per share quarterly rate was in effect since the 2008 4th quarter when it was reduced from $.27. I view that dividend negatively for two basis reasons: (1) the dividend was cut 25.9% and (2) after being slashed, it was kept at a constant amount for 5 years before being raised by a penny. Assuming a continuation of that dividend growth rate, I will not live to see a doubling and may not live to see the quarterly rate return to the pre-slash level of $.27.

2013 Annual Report: 10-K

Brad Thomas published an article about this REIT back in February at Seeking Alpha.

Prior Trades: I bought and sold this stock once. I was fortunate to buy it at a more favorable price that allowed me to realize a decent percentage profit. Item # 3 Bought 100 MPW at $9.9-ROTH IRA (2/13/12 Post)-Item # 6 Sold 100 MPW at $12.25 (1/3/13 Post).

2013 Roth IRA MPW 100 Shares +$221.08
I received 5 dividend payments totaling $100.

Total Return: $321.08

The total return was 32.2%, with about a 11 month holding period.

Recent Earnings Report:  For the 2013 4th quarter, MPW reported normalized FFO per share of $.24 per share. For 2013, FFO per share increased 7% to $.96, compared to 2012.    (SEC Filed Press Release

Rationale: Equity REITs do not pay qualified dividends and consequently are bought in IRAs by many investors who are in high marginal tax brackets. The reason for purchasing this security in the regular IRA is to generate current "tax deferred" income, to hopefully generate a modest capital gain on the shares, and to include the position in a Roth conversion when and if the shares fall 10%+ which reduces my tax obligation (i.e. the amount included in gross income is lower and consequently results in a lower tax bite). Once the security has been transferred from the regular IRA to the Roth IRA, I would then hope that the price recovers.

Risks: As mentioned above, I view the dividend history with extreme negativity.

A long term chart reveals the risk and a roller coaster ride for anyone owning this stock continuously over the past nine years. MPW Interactive Chart The OG no longer likes to ride roller coasters.

The company discusses risks incident to its business starting at page 13 of its 2013 Annual Report, 10-K

Future Buys/Sells: The current FFO estimate for 2014 is $1.11 per share. MPW Analyst Estimates I would definitely be a seller at 15 times that estimate which would be $16.65. I seriously doubt that price will be hit in 2014.

A more realistic target might be 13x the estimated 2014 FFO or $14.43. Assuming I could sell the shares at that price after collecting 4 dividends, the total return would consist of about a $149 realized gain after commissions and $80 in dividends, creating a total return of almost 18%.

If I buy more shares, it will be in a taxable account since I do not want to risk more money on MPW in an IRA given its history referenced above. I would want a 5%+ decline in the price for any average down.

Closing Price Last Thursday: MPW: $13.34 +0.11 (+0.83%)

3. Sold 58+ DWX at $48.75 (see Disclaimer):

Snapshot of Trade:

Snapshot of Profit:

2014 Sold 58 DWX +$235.40 (excludes fractional shares) 
Bought 50 of the Stock ETF DWX at $43.76 (November 2012)

Security Description: The SPDR S&P International Dividend ETF Fund  (DWX) is a relatively low cost international fund that focuses on dividend stocks.

Sponsor's webpage: DWX - SPDR S&P International Dividend ETF

Rationale: One reason for liquidating this ETF is that I want to substitute international ETFs that can be bought commission free and have lower expense ratios. I also wanted to harvest a profit while I still had one and hopefully redeploy the proceeds after a 10%+ correction.

There are several lower cost international ETFs that I can buy, depending on the brokerage account being used to make the purchase.

I have been nibbling at VEU and VWO in my Vanguard brokerage accounts. I took starter positions in IEMG and IDV in my Fidelity accounts: Bought:  20 of the Commission Free ETF IEMG at $48.4 (12/23/13). IDV has a slightly higher expense ratio than DWX.

I currently own in small amounts the following, purchased commission free at Fidelity (IDV, EFAV and IEMG) or at Vanguard (VEU and VWO)

iShares International Select Dividend ETF (IDV): Expense Ratio .5%

iShares Core MSCI Emerging Markets ETF (IEMG): Expense Ratio .18%

iShares MSCI EAFE Minimum Volatility ETF (EFAV): Expense Ratio .2%

List of iShares ETFs available currently for commission free purchase at Fidelity.

I probably have not discussed my IDV purchases since I have been buying in 5 and 10 share lots. My average cost per share is $34.14.

Vanguard FTSE All-World ex-US ETF (VEU): Expense Ratio .15%

Vanguard - Vanguard FTSE Emerging Markets ETF: Expense Ratio .15%

Vanguard ETFs can be bought commission free in Vanguard brokerage accounts: Vanguard - Vanguard Brokerage Services - Commission and fee schedules

TD Ameritrade currently offers the Vanguard ETFs commission free after the investor enrolls in their program.

There are several others under consideration for possible purchases:

Vanguard Global ex-U.S. Real Estate (VNQI): expense ratio .27%

Vanguard FTSE Developed Markets ETF (VEA): Expense Ratio .1%

iShares MSCI Emerging Markets Minimum Volatility ETF (EEMV): Expense Ratio .25%

4. Sold 50 SANPRB at $20.45-Roth IRA (see Disclaimer):

Snapshot of Trade:

2014 Roth IRA Sold 50 SANPRB at $20.45 

Snapshot of Recent ROTH IRA History:

Snapshot of Profit:

2014 Roth IRA 50 SANPRB +$105.01
Added 50 SANPRB at $18.24 (September 2013)

Security Description: Santander Finance Preferred S.A. Unipersonal Floating Rate Gtd. Pfd. Series 6 (SAN.PB) is a floating rate equity preferred stock that pays qualified and non-cumulative dividends at the greater of 4% or .52% above the 3 month Libor rate on a $25 par value. Prospectus

Snapshot of Remaining 80 Share Position-A Satellite Taxable Account:

I took that snapshot shortly before selling the 50 share position held in the Roth. I am inclined to keep these shares held in a taxable account. My cost basis is low, and this security pays qualified dividends.

Prior Trades: Links to prior trades can be found in Item # 4 Added 50 SANPRB at $18.24, which also has snapshots of the trades.

Realized Gains SANPRB=$900.26 ($795.25 prior to this trade)

Rationale: For better or worse, I am jettisoning some of my low yielding equity preferred floaters in order to acquire other securities with more current yield. I view it unlikely that these securities will have an increase in their minimum coupons prior to 2017. If inflation remains as projected in the 10 year TIP pricing, then it is unlikely that any meaningful increase in the minimum 4% coupon (defined as 1% or greater) will happen at all within the next 10 years. The 3 month Libor would to increase over 3.48% to trigger any increase during the relevant coupon period.

Future Buys/Sells: I am in a trading mode for the equity preferred floating rate stocks and will consider buying them whenever they dive in price, which has occurred several times over the past few years. The current yield increases as the price declines, but SANPRB would have to go to $12.5 now to produce a 8% yield.

Closing Price Last Thursday: SAN-PB: $20.15 +0.29 (+1.46%)

5. Sold 200 ERF:CA at $C22.14 (Canadian Dollar (CAD) Strategy)(see Disclaimer):

Snapshot of Trade:

Snapshot of Profit:

2014 ERF-CA 200 Shares +USD$389.87
I had one good buy and one really awful buy that netted this $390 profit.

My profit would have been reduced by the weakness in the CAD/USD exchange rate which started to improve in favor of the CAD shortly before I sold this position. If the CAD continued up, with the ordinary shares remaining at the same price, I would generate a greater tax gain, even without producing more CADs.

USD/CAD Currency Conversion Chart

When I purchase a security with CADs on the Toronto exchange and receive CADs when I sell the position, the buy and sell price is converted into USDs for tax reporting purposes, which creates some odd results, such as no taxable gain when I have a good one (received more proceeds in CADs than I used to buy the security); or a taxable profit when I actually have a loss in CADs. I try to avoid the later result. The former is okay with me. I have grown to like it some. I just allow the broker to figure it all out at tax time.

Rationale: ERF is in a bull move that is starting to look parabolic to me, which makes me uncomfortable.

It is easily the most expensive energy producer that I own based on estimated 2014 and 2015 E.P.S.

As of 4/9/14, the  consensus E.P.S. estimate for ERF, the U.S. listed shares, was $.77 in 2014 and $.95 in 2014. Using a closing NYSE price that day of $21.07, the P/E on estimated 2014 earnings is about 27.36. In contrast, COP closed at $71.54 on the same day, up $1.47, which translates into a 11.56 P/E on its 2014 E.P.S. consensus estimate of $6.19.

Morningstar currently has a $21 fair value on the ERF  shares and a consider to buy price of $12.6.

While it may have a lot more upside, I decided to harvest my profit and bid adieu after collecting monthly dividends for a long time.

I view it as helpful to compare the price of ERF:CA, the ordinary shares traded in Toronto, with the ERF shares listed on the NYSE and priced in USDs.

NYSE Listed ERF in Dark Blue
The roughly 10% decline in the CAD has caused the NYSE listed shares, priced in USDs, to underperform the ordinary shares priced in CADs by an equivalent amount.

Closing Price Last Thursday: ERF.TO: C$24.13 +0.34 (+1.43%) (sold too soon!)

6. Bought 200 NWH_UN:CA at C$9.79 (Canadian Dollar (CAD) Strategy)(see Disclaimer):

Snapshot of Trade:

2014 Bought 200 NWH_UN:CA at C$9.79
Quote Shortly Before Purchase on 4/8/14:

Security Description: Northwest Healthcare Properties Real Estate Investment Trust (NWH.UN:TOR) is a Canadian REIT that is "primarily focused on the medical office building and healthcare real estate sector". NorthWest Healthcare Properties - Investor Relations - Corporate Profile

The company operates in 7 Canadian provinces and owns 76 properties with approximately 4.6M square feet. This REIT is the largest non-government owner of medical office buildings and healthcare focused real estate in Canada.

This REIT started to tumble back in May 2013, when interest rates started to rise in the U.S. Interactive Chart  The price closed at C$13.21 on 4/29/13 and has been sliding down since that time, making a series of lower lows after failed rally attempts. From 4/29/13 to the date of my purchase on 4/8/14, the stock was still in descent and had made no successful rally attempts unlike many other Canadian and U.S. REITs. After reviewing the recent earnings reports, I came to an opinion that the market has just pummeled this stock too much.

This REIT is currently paying a monthly distribution of C$.06667 or C$.8 annually. Press Release Assuming a continuation of that rate, the yield would be about 8.17% at a total cost of C$9.79.

In 2013, 100% of the distributions were classified as a return of capital "by reason of the REIT's ability to claim capital costs allowance". Taxation of Unitholders

Portfolio Profile as of 12/31/13 

Mortgage Debt Maturities/Weighted Average Interest Rate
Subsequent to year end, the company repaid two mortgages: $5.455M at 5.89% and $7.712M at 6.19%. One of those properties remained free and clear at the time of the annual report release, while the REIT encumbered the other with a $13M mortgage at 3.31% for 5 years. I would anticipate that the weighted average interest cost will be lowered somewhat between 2014-2016, as those higher coupon mortgages are refinanced at lower rates. By 2018, however, the trend may start to go back up some.

Prior Trades: None

Recent Earnings Report: For the 2013 4th quarter, the company reported FFO per unit of C$.26 and an AFFO of C$.22 and C$.21 on a fully diluted basis. Occupancy was at 91.3% as of 12/31/13. Distributions for the quarter totaled C$.2, resulting in an AFFO payout ratio of 93% on a fully diluted basis. I would not expect a distribution increase anytime soon.

As of 12/31/13, the company had a weighted average interest cost of 4.8% for its mortgage obligations, down from 4.93% in 2012.

Risks: A major risk for a U.S. investor, who converts USDs into CADs to buy this security, is a decline in the value of the CAD after purchase.

As with all REITs, money is flying out the door in dividends and little is being retained to grow the business. That is the major downside that the investor pays in exchange for the high dividend.

The REIT discusses risks incident to its operation starting at page 38 of the Annual Report (which will not link here)

Future Buys and Sells: I hope to realized a 10% annualized total return, and most of that objective can be achieved with the distributions. I am earning zero on my CAD stash, so anything better than zero would be an improvement. I am not likely to buy more shares.

Closing Price last Thursday: NWH-UN.TO: C$10.15 +0.11 (+1.10%)

7. Bought 50 BKCC in Roth IRA at $9.22 and 60 in Taxable Account at $9.24 (See Disclaimer): The 60 shares bought in the taxable account was part of a paired where I sold 50 STIPRA and 50 GSPRJ and bought 100 ESD, as discussed in last week's post. The 60 share BKCC purchase brings the dollars amounts into equilibrium.

Snapshot of Roth IRA Purchase:

2014 Roth IRA Bought 50 BKCC at $9.22

Snapshot of Taxable Account Purchase:

2014 Taxable Account Bought 60 BKCC at $9.24 (part of a paired trade)

Security Description: BlackRock Kelso Capital Corp. (BKCC) is one of my more disfavored BDCs and I view all of them with disfavor. It is just a question of degree. However, given the price paid, I was willing to take a small chance that results will improve over the past.

The prices paid for a minimal number of shares was below the last reported net asset value per share of $9.54 as of 12/31/13, up from $9.31 as of 12/31/12 and down slightly from $9.58 as of 12/31/2011. Form 10-K at p.47.

Do those book value numbers justify the hedge fund like compensation? I would hope that no one would view the compensation as rational in light of the results.

Blackrock Kelso Capital Corp Profile Page at Reuters

Company Website: BlackRock Kelso Capital - Overview

List of Investments: BlackRock Kelso Capital - Investments

This BDC slashed it quarterly dividend from $.43 to $.16 per share in the 2009 first quarter, then raised it to $.32 in the 2009 4th quarter and then reduced it to $.26 in the 2011 second quarter where it has remained until now. Form 10-K at page 44 Needless to say, I view that history negatively, but it is to be expected in this sector.

Assuming a continuation of the current penny rate, which is a bold assumption given BKCC's history, the current dividend yield would be about 11.2% at at total cost of $9.24.

BKCC cratered during the Near Depression, with the share price falling to $2.72 after trading over $15 per share in late 2007. BKCC Interactive Chart

Recent Earnings Report: SEC Filed Press Release (self-explanatory-net investment income as adjusted of $.22 per share was below the $.26 per share dividend rate-E.P.S. was reported at $.42; weighted average yield of senior secured loans at cost=11.4%; weighted average yield of other debt securities at cost=13%; number of portfolio companies at year end=51, up from 47 as of 12/31/12; also noted in the press release a 2014 realized gain of $37.2M and a net reduction from that transaction and others of $122.9M in the portfolio to 3/5/14)

Rationale: Am I sounding optimistic about BKCC? I will buy stocks in low amounts even when I have disdain for the company and its management, provided the price is relatively attractive given those considerations. I simply hope to make a 10% total return, annualized, which could be accomplished by selling the shares at a slight loss after collecting four dividend payments.

The shares were trading a over $10.5 in early 2013. I would not hesitate to sell at $10.5, unless I start to see vast improvements in performance metrics like net asset value per share.

By selling the shares at $10, with a $7.95 commission, the 60 share lot would produce a total return of about 17.66% after receiving 4 dividend payments. I would consider that a victory. ($29.7 profit on the shares +$69.6 in dividends=$99.3 dividend by total cost of $562.35=17.66% return, hopefully in 15 months or less-Small Ball)

Risks: Anyone investing in a BDC needs to read and throughly understand the risk summary in an Annual Report. It is eye opening. BKCC's discussion of risks starts at page 20 of its 2013 Annual Report, Form 10-K. The discussion ends at page 42. That is 22 single spaced, dense pages! (see, just as an example, the disclosures at the end of page 28 starting with "conflicts of interest", and the management fees encouraging speculative investments and the assumption of leverage ) The ridiculous compensation has a 2% base fee applied to total assets, including those acquired with borrowed money (see page 13). There is also an incentive fee on top of that base fee (pp. 14-15). I have yet to see a single BDC management team come anywhere close to actually earning what they are paid judging by the results and changes in net asset value per share. It is not even remotely close in my opinion.

Again, I view BDCs as a disfavored security and will consequently own them only in small amounts and will trade them under clearly defined rules. One rule for a purchase, which unfortunately is sometimes broken, is that a purchase must be below net asset value per share.

Closing Price Last Thursday: BKCC: $9.19 -0.01 (-0.11%)

8. Cricket Bond Redemption: I received the proceeds on 4/14/14 for the optional redemption of a $1,000 par value bond originally issued by Cricket Communications, a subsidiary of Leap Wireless which was just acquired by AT & T. The bond was redeemed at a 14.215% premium to its par value plus accrued interest:

Snapshot of Profit:

Profit 1 Bond=$161.04 or 16.41% return on cost basis
Bought 1 Cricket Communications 7.75% Senior Note Maturing on 10/15/2020 at 96.5

My current yield on that bond was close to 8%. Given the low interest rate environment prevailing during my ownership period, I would have been happy just to receive that yield and to break-even on the bond. The profit added another 5.5% or so to that current yield number.  


  1. I has a quick procedural question;
    I see that you own both vanguard funds and ETFs. It seem that the expense ratio for ETFS is lower and I wondered why you chose for instance vanguard health fund vs etf


    GE J

  2. I see that you have increased the probability of low inflation/with periods of deflation like Japan in the 90s. It seems that although there are deflationary forces in the picture, some of these as low natural gas prices are very good for stocks; coupled with cheap labor and more disposable income, these forces would be very good for the stock market.

    It looks like the Japan market tumbled in there era of low inflation/deflation.

    I am confused by the conflicted data and hope you could clarify your thoughts of increased risk of this scenario compared to what happened in Japan.

    Thanks again.

    GE J

  3. GE J: VHT would be a good alternative the Vanguard Health fund (VGHCX). The mutual fund has outperformed the ETF. You can go to MSN Money and compare the total returns.

    1 year

    36.19 % to 30.49%

    10 years:

    11.64% to 9.65%

    That 2% per year difference over a decade mounts up.

    The 3 and 5 year total return numbers are similar, though the mutual fund edges out the ETF. The ETF will be more tax efficient.

    The other funds do not have ETF counterparts.

    The Star and Wellington funds are two lost cost balanced funds, and I am a balanced investor.

    I recently initiated a small position in the Capital Opportunity fund when it reopened to new investors.

    See Total Return Numbers:

    Year to Date=5.41%
    2013: 42.69%
    2009: 48.91%

    It takes more chances than I ever will.

    I have used the Vanguard ETFs for emerging markets and broad exposure to international stocks-VWO and VEU. The Vanguard ETFs are good alternatives particularly for anyone who can buy them commission free and needs to dollar cost average with relatively small investments.

    I eliminated all Vanguard ETFs in 2007 as part of my stock allocation reduction. I will opportunistically trade them. I have bought and sold several of them since 2009. I will use ETFs to move up and down my stock allocation.


    The low inflation/deflation scenario is relevant first to my selection of bonds. In a deflation scenario, long term investment grade bonds will shine. Stocks will not do well.

    If we have persistent low inflation numbers, averaging 1.5% to 2.25% on an annual basis, then that is a long term positive for stocks, as I have noted when discussing the long term secular forces underlying secular bull moves. Deflation will be bad for the economy and stocks.