Saturday, April 5, 2014

Zurich Financial/Sold 50 AREPRE at $24.8-Regular IRA/Added 100 TICC at $9.75-Main Taxable/Bought Roth IRA: 50 BOI at $16.72 and 50 AIY at $24/Paired Trade: Bought 100 ARCPP at $22.76-Sold 50 BMLPRJ at $21.05/Added 66 ELB at $25.07 to Bring Position to a 100 Share Round Lot

Trades made after 3/31/14 will be discussed in the next weekly post. I have decided to change the publication date of my weekly blog to the weekend.

Big Picture Synopsis:

Stable Vix Pattern (bullish)
Short Term: Hoping for a 15% Correction
Intermediate Term: Slightly Bullish
Long Term: Bullish

One analyst, a chief economist of a Danish bank, predicts that the S & P will inch above 1900 before plunging 30%. MarketWatch Maybe he is trying to make a name for himself.

This recent report prepared by FactSet is a worthwhile read for dividend investors who want to have a big picture snapshot of dividend land.

The Nasdaq index was down 2.6% last Friday, with the S & P 500 declining 1.25%. There is a considerable fluff among many large Nasdaq constituents, which I would never even consider buying. Some of the investors in those names need to be reminded about 1999. For many, that reminder will be delivered with pain.

I view it as important to go down a lot less on bad days which is one reason for having a balanced portfolio. Another reason is income production, preferably on a monthly basis.  Needless to say, I do not want to go down 50%, as many did during 2008 to March 2009, that requires a 100% gain just to return to even.

Bonds and bond funds were up and negatively correlated with stocks last Friday. Overall, my main taxable account was down .28% with the biggest sector loser being regional banks. My bond heavy IRAs rose slightly in value last Friday.

I have noted in several recent updates that I view the regional bank sector as overvalued; and I am currently below the minimum investment threshold of $40,000 for that basket. Interest rates declined last Friday, and this basket has been going down most of the time when interest rates decline, based on the perception that higher rates will improve their net interest margins.

The Equity REIT and Preferred Stock basket actually gained $21. That is notable given the downside action in stocks and the positive correlation with the up move in bonds. Another positive basket was the Exchange Traded Bond and Preferred Stock basket.

Most of my bond CEFs rose slightly in value including my larger positions:
ERC: $14.59 +0.13 (+0.90%) : Wells Fargo Advantage Multi-Sector Income
GDO: $18.34 +0.06 (+0.33%) : Western Asset Global Corporate
SGL: $9.20 +0.04 (+0.44%) : Strategic Global Income Fund
GHY: $17.75 +0.07 (+0.40%) : Prudential Global Short Duration
NBB: $19.86 +0.12 (+0.61%) : Nuveen Build America Bond Fund
MIN: $5.22 +0.02 (+0.38%) : MFS Intermediate Income Trust
PDT: $12.95 +0.04 (+0.31%) : John Hancock Premium (some utility/natural resource stocks)
FAM: $13.90 +0.03 (+0.22%) : First Trust/Aberdeen Global Opportunity
FAX:$ 6.08 +0.05 (+0.83%) : Aberdeen Asia-Pacific Income Fund
BWG: 17.37 +0.08 (+0.46%) : Legg Mason BW Global Income Opportunity

Due primarily to the bond CEFs in the CEF Portfolio, and a few stock CEFs that bucked the downdraft, the CEF Portfolio was down only $71.

This stock CEF, which owns utilities and MLPs, was notable in just being up for the day:
DPG: $19.84 +0.07 (+0.35%) : Duff & Phelps Global Utility

Other stock CEFs that managed gains include the following:
CGI.TO: C$18.17 +0.11 (+0.61%) : Canadian General
GGN: $10.06 +0.10 (+1.01%) : GAMCO Global Gold, Natural Resources
BCF: $9.01 +0.04 (+0.45%) : Blackrock Real Asset Equity Trust 

My BDCs were up or down fractions, mostly offsetting one another.

Coca Cola bucked the downtrend: KO: $38.22 +0.15 (+0.39%)

Two out of three Canadian energy companies that I own performed well:
CNQ: $39.73 +0.28 (+0.71%) : Canadian Natural Resources
SU: $35.97 +0.47 (+1.32%) : Suncor Energy

A few equity REITs performed well considering the downdraft:

HCP: $39.47 +0.46 (+1.18%) : HCP
O: $40.74 +0.34 (+0.84%) : Realty Income

All of the foregoing securities are currently owned.

What was working? Natural resource, utility, REIT and some consumer stable stocks, along with bonds.

What was hit? Overvalued sectors, outrageously priced Nasdaq stocks and the overvalued Russell 2000 index.

^RUT: 1,153.38 -27.74 (-2.35%) : Russell 2000
^NDX: 3,539.38 -98.20 (-2.70%) : NASDAQ-100
KRE: $41.22 -0.94 (-2.23%) : SPDR S&P Regional Banking ETF
TRIP: $85.69 -5.61 (-6.14%) : TripAdvisor
NFLX: $337.31 -17.38 (-4.90%) : Netflix
FB: $56.75 -2.74 (-4.61%) : Facebook
AMZN: $323.00 -10.62 (-3.18%) :
PCLN: $1,178.08 -59.37 (-4.80%)
TSLA: $212.23 -13.17 (-5.85%) : Tesla Motors

There are some Nasdaq 100 stocks that could go down 80+% and I would still have no interest in buying shares.

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

This forecast assumes an average annual increase in CPI between 2% to 2.25%, within the recent trading range for the 10 year TIP's break-even spread.

It is difficult to fathom the bond market's reaction to the employment report last Friday:

TLT: $108.46 +0.72 (+0.67%) : iShares 20 Year Treasury Bond ETF
LQD: $116.86 +0.49 (+0.42%) : iShares Investment Grade Corporate Bond ETF

This move was more a flight to quality and the junk bond ETF JNK rose only .17%.


Recent Developments:

The BLS reported that nonfarm payroll employment rose 192,000 in March with the unemployment rate remaining unchanged at 6.7%. Employment Situation Summary Construction employment rose 19,000 and is up 151,000 over the past year. The U-6 was reported at 12.7%.Table A-15. Alternative measures of labor underutilization BLS revised the jobs numbers for January and February up by a combined 37,000 jobs.

The ISM manufacturing index increased to 53.7 in March from 53.2. The new orders component edged up to 55.1 from 54.5.

The ISM services index increased to 51.1 in March from 51.6. The employment component rose to 53.6 from 47.5

MarketWatch produced a chart, prepared from CoreLogic data, that show how far each state had recovered from the home price bubble pop. Four states are now back over peak prices and another 18, including Tennessee, are within 10% of their respective peak. Several states, including Michigan, Illinois, Florida, and New Jersey, are still 20% or more below peak prices.

ADP reported that private employers added 191,000 jobs during March.

For the week ending 3/22/14, AAR reported a 4.5% increase in U.S. rail traffic compared to the previous week.

Breakdown By Category:

Grain shipments increased 16% Y-O-Y with coal up 3.5%.

The CAD rose some against the USD last Friday after Canada reported a 43,000 increase in jobs last month. Statistics Canada: Labour Force Survey, March 2014 The unemployment rate dipped to 6.9% from 7%. Hourly wages for permanent employees rose 2.4% Y-O-Y. Canada's central bank has maintained its main interest rate at 1% for more than the past three years.

I read a story at CNN about how individuals are being priced out of their housing market. One soul bid $600,000 in cash for a 890 square foot condo in Palo Alto, $20,000 more than the asking price, and was out bid. Maybe that lady needs to move to Brentwood, TN. I found her a property for about the same price that she could have by bidding under the ask price. (Current List Price $596,000: Zillow (5 Bedrooms, 4 baths, 4,288 sq. feet, built in 1989; property taxes=$2,961)

Admittedly, the SUV Capital of the World is in the hinterlands, but we do talk American down here, sort of, and do well considering our mental handicaps resulting from having our brains baked and fried during the summer. And if you had to breathe the humid and hot air during the summers, you would talk slow and a little funny too. Sure, Tennesseans miss the privilege of paying that California state income tax on earned income too, but I have gotten over it. California Income Tax Rates for 2014 I will remember to take one of those portable oxygen containers on my next visit to L.A. I did have trouble breathing during my last visit. I hear that it is better in L.A. than in China. I have not been to China, so I really can't say for sure. I have just seen pictures of the grey air. 

Zurich Financial (own): 

Zurich went ex dividend for its annual dividend payment last Friday:

The dividend is paid in Swiss Francs and then converted into USDs for the ADR shares that I own.

I have received three annual dividends since purchasing this stock. Each dividend has been paid out of "capital contribution reserves". While I do not understand the tax issue, the sourcing of this payment has avoided the Swiss withholding tax and has been treated as a return of capital that reduces my tax cost basis, which will soon be near $19 after I receive this latest dividend. Item # 2 BOUGHT 100 ZFSVY at $24.72 (February 2012)

Zurich stated that this last payment "will again be paid from the capital contribution reserves" and consequently "will be exempt from Swiss withholding tax". Annual General Meeting | Zurich That is unlike a ROC from a company that has not earned the dividend.

The company reported profits of $4+B in 2012: Zurich delivers solid results through 2013 and proposes dividend of CHF 17 | Zurich

One ADS share equals .1 ordinary share.

Shares are traded on the U.S. pink sheet exchange: ZURVY Zurich Insurance Group


In the post, I am discussing an ongoing effort to increase my cash flow by exchanging higher yielding securities for lower yielding ones. Some of the securities being dumped are equity preferred floaters currently paying their minimum 4% coupons and fixed coupon equity preferred stocks yielding less than 7%. The adds include higher yielding bonds, fixed coupon equity preferred stocks, leveraged bond CEFs and BDCs.  

1. Sold 50 AREPRE at $24.8 Regular IRA (see Disclaimer):

Snapshot of Trade:

Snapshot of Profit:

2014 Regular IRA AREPRE 50 Shares +$74.08

Security Description: Alexandria Real Estate Equities Inc. 6.45% Cumulative Preferred Series E (ARE.PE) is an equity preferred stock that pays cumulative and non-qualified dividends at the fixed coupon rate of 6.45% on a $25 par value. Alexandria Real Estate Equities (ARE) 

Rationale: I am trying to manage the equity preferred stock allocation in the Equity REIT Common and Preferred Stock basket strategy, taking into account the natural volatility of those securities, my current opinions about interest rates, and to hopefully increase my total return from them.

The current trading guideline being used requires me to consider selling one when the current yield at the sale's price falls below 7%. The yield at $24.8 is about 6.5%.

Future Buys: The general guideline for buying an equity preferred stock is a current yield at 8% or greater. I will make some exceptions for investment grade preferred stocks and will consider a 50 share purchase when the yield is over 7.5%.

Closing Price Last Friday: ARE-PE: $24.74 +0.06 (+0.24%) 

2. Paired Trade to Increase Income in Main Taxable Account: Sold 50 BMLPRJ at $21.05 and Bought 100 ARCPP at $22.76 (see Disclaimer): In this paired trade, I am simply attempting to generate more income. 

Snapshot of Trades:

2014 Bought 100 ARCPP at $22.76

2014 Sold 50 BMLPRJ at $21.05

Snapshot of BMLPRJ Profit:

2014 BMLPRJ 50 Shares +$40.08

Bought: 50 BMLPRJ at $19.93 (10/7/13 Post)

I received $25.56 in qualified dividends, bringing the total return up to $65.64 or 6.43% annualized in about 6 months. While that return beats a MM fund paying .01%, I would still like to do better. 

Security Descriptions: This is a yield pickup play using a standard small ball approach.

The Bank of America Floating Rate Non-Cumulative Preferred Series 4 (BML.PJ) is an equity preferred stock originally issued by Merrill Lynch and is currently a BAC obligation. This security pays non-cumulative and qualified quarterly dividends at the greater of 4% or a .75% spread to the 3 month Libor rate on a $25 par value. Final Prospectus Supplement

The 3 month Libor rate is near zero and has been for several years now. 3-Month London Interbank Offered Rate (LIBOR), based on U.S. Dollar-St. Louis Fed It will not likely rise about 3.25%, which would be necessary to trigger any increase in the minimum 4% coupon, before 2017. Consequently, it is now and will likely continue to be for a few more years a low yielding security.

At a $21.05 price and the 4% coupon, the current yield is about 4.75%. The dividend could be eliminated provided BAC first eliminated its current $.01 quarterly cash dividend per share to its abused long term shareholder base. That is what non-cumulative means-eliminated as in gone-not deferred.

The equity preferred floaters have generated decent profits for me as a trade. I have never had much exposure to them, but have generated over $11,000 in profits since 2009 plus dividends. (snapshots at the end of Advantages and Disadvantages of Equity Preferred Floating Rate Securities) I will probably switch to a long term hold when I have more confidence that short rates are going to rise sufficiently to trigger an increase. It is hard to see that far in the future at the moment. If inflation stays at 2% or less, it could be a long time. 

American Realty Capital Properties 6.7% Cumulative Preferred Series F (ARCPP) is an equity preferred stock that pays cumulative and non-qualified monthly dividends at the fixed coupon rate of 6.7% on a $25 par value.

At a total cost of $22.76, the current yield would be about 7.36%.

ARCP 2013 Annual Report 10-K (as described at page 7, this REIT has completed a number of recent acquisitions)

The yield is about 2.61% in favor of the fixed coupon security over the floater which has some built in protection for problematic inflation.

There are four significant differences in these two equity preferred stocks that are common in the preferred stock universe:

1. Cumulative vs. Non-Cumulative

2. Fixed Coupon at a higher current yield vs. a lower coupon with some problematic inflation protection in the Libor float.

3. Qualified vs. Non-Qualified Dividends

4. Likelihood differential of a recovery in a BK: None for BAC and at least possible for a equity REIT (owns real property rather than paper) depending on the then existing circumstances. Any equity preferred issued by a leveraged banking institutions would become worthless after the FDIC seizes the operating subsidiary banks and the holding company goes into a BK with a huge amount of senior debt on the balance sheet.

5. Monthly vs. Quarterly Dividends (money compounds more quickly with monthly payments assuming the same annual rate)

Similarities include the following:

1. Optional Call dates for the issuer only

2. $25 par values

3. Same position in the capital structure below all bonds and above only common stock

4. Similar Dividend Stopper Clauses which give priority over cash dividend payments to the preferred stockholder and requiring the elimination of a cash dividend payment to common shareholders as a precondition to a dividend elimination for non-cumulative preferred stock or a deferral for cumulative preferred stock.

Prior Trade-ARCPP: My first purchase was at a better price: Item # 1 Bought ROTH IRA 50 ARCPP at $21.33 (February 2014)

Related Trade (ARCP): Bought 100 ARCP at $12.74-Roth IRA (12/31/13 Post)

American Realty Capital Properties Announces Monthly Common Stock and Series F Preferred Dividends for April 2014

American Realty Capital Properties announced in March that it was going to spin off to shareholders all or substantially all of the multi-tenant shopping centers. The new company will be known as ARCenters (ARCM) and ARCP will initially retain a 25% interest. The company expects to distribute 1 share of ARCM for every 10 ARCP shares. The distribution is expected for 2014 second quarter.

This kind of spin off creates a problem when the investor only owns 100 shares. I do not want 10 shares of stock that will cost me $8 to sell. Consequently, I will dispose of this 100 share lot before the ex distribution date and look for an opportunity to reinitiate the small position after the ex distribution date.

Prior Trades BMLPRJ: I have bought and sold this one several times (snapshots of profits are in Gateway Post for this topic). Trading profits have been slim on this one and I have not owned more than 50 shares at one time.

Sold 50 BMLPRJ at $18.9-Added 50 BMLPRJ at $16.8

Sold 50 BMLPRJ @ 18.73-Added 50 BMLPRJ at $17.74

Sold 50 BMLPRJ at $19.25-Bought 50 BMLPRJ at $18.50

My first purchase was in 2010, and the coupon was then 4% as now.

Recent ARCP Earnings Report:  SEC Filed Press Release for the Q/E 12/31/13

Rationale: This is a pared trade designed to increase income. It is really hard to say which one will do better in price.

I discussed ARCPP recently, so most of the relevant discussion can be found in that post referenced in the prior trade section above. 

Risks: I would just refer anyone to my prior discussion and just add the following reference.

During the Near Depression period, I was able to buy a BAC non-cumulative floating rate preferred stock at $8.8 ($25 par value). Bought BMLPRG at $8.8

I bought a GRT equity preferred at $2.9 in October 2008, around a current yield of 75% per annum, (8.75% x. $25=75.43% per annum), and the company never missed a payment, eventually calling the security at its $25 par value. Stocks, Bonds & Politics: GRTPRF: A WALK ON THE WILD SIDE GRTPRF was a REIT equity preferred stock that paid cumulative dividends. 

The company discusses risks incident to its operation starting at page 14, 10-K.

The two dominant risks for any potentially perpetual equity preferred stock are interest rate risk (including the related risk of lost opportunity) and credit risk. 

The risks between the issuer and the owner of an equity preferred stock are asymmetric. This subject has repeatedly been discussed, and possibly the last discussion was in January: (Risk Section in Item # 1 Bought: 50 FPOPRA at $24.25

Future Buys and Sells: I am not likely to buy more of ARCPP. I now own 150 shares and it is included in a basket strategy.

I am likely to sell ARCP relatively soon for the reasons mentioned in the related trade section above.

I am in a trading mode for BMLPRJ. I would consider buying shares back at below $19.5 and possibly below $20: Risk section discussion in Item #1 Bought: 50 FPOPRA at $24.25, 50 OFCPRL at $24.04.

Closing Price Last Friday: ARCPP: $22.91 +0.09 (+0.39%) 

3. Added 100 TICC at $9.75- Main Taxable Account (see Disclaimer):

Snapshot of Trade:

2014 Bought 100 TICC at $9.75
Snapshot of Account Position After Trade:

Average Cost Per Share $9.88
Security Description: TICC Capital (TICC) is a relatively small BDC. 

TICC is currently paying a $.29 per share quarterly dividend. As previously noted, I view its dividend history, which includes a number of cuts, negatively which explains in part both the trading activity and the small position. TICC Capital Corp. (TICC) Dividend Date & History -

In mid-March, TICC sold 6M shares at $10.14 and granted the underwriters an option to purchase up to an additional 900,000 shares. TICC Announces Pricing of Public Offering of Common Stock So I was able to buy this 100 share lot at a better price and hopefully TICC will not find the need for another share issuance in the next few weeks.

Manager compensation is based in part on assets, plus an incentive fee. It is lucrative for the managers to increase assets through share offerings. There is also an admitted potential conflict of interest between shareholders and the BDC managers that can be found in the risk section of an annual report. (page 39 et. seq. "There are significant potential conflicts of interest between TICC and our management team")

2013 Annual Report

Prior Trades: By selling some higher cost shares recently, I was able to reduce my average cost per share in existence prior to that trade. Item # 7 Sold 202+ TICC at $10.5 (102+ Roth IRA & 100 in a Taxable Account (11/27/13 Post)

This buy replaced the 100 shares sold in the taxable account at $10.5 in late November 2013. Prior to this repurchase, I owned 50 shares in that account plus reinvested dividends. Item # 1 Added 50 TICC at $9.85 (June 2013)

I also reinitiated a position in the Roth IRA: Bought: 100 TICC at $9.97 (February 2014)

Recent Earnings Report: For the Q/E 12/31/13, TICC reported net investment income of $.32 per share or $.3 excluding special items. Net asset value was reported at $9.85 per share. SEC Filed Press Release 

Rational and Risks: As with all other BDCs, I will consider selling a position when and if I have a 10% annualized total return. Most or all of that return could be earned just from the dividend. I will consider selling TICC when the market price is greater than 5% of net asset value per share. The last reported NAV was $9.85 so a market price over $10.34 could trigger a sell, provided I am over that 10% bogey or even under it depending on material developments that make the OG nervous about this BDC. And, the OG is already naturally adverse to BDCs and nervous about them anyway.

Based on the current dividend rate, and a total cost per share of $9.75, the current yield is about 11.9%. 

BDC dividends are in no way "safe". There is no free lunch for a 11% yield when a ten year treasury is yielding 2.75% and T bills are hugging zero.

Given their numerous disadvantages, as disclosed in the risk section of an annual report, I view BDCs as a disfavored asset class and have a low opinion of them and their managers. Their managers receive hedge fund like compensation for results that are just not that good or anywhere close to it, just my opinion.

Again, I view it to be important for investors unfamiliar with a BDC to read every word, and comprehend it, that is found in the risk discussion. TICC's risk discussion starts at page 7 of its 2013 Annual Report, 10-k, and ends on page 48. I would recommend drinking some coffee before starting this exercise.

Closing Price Last Friday: TICC: $9.72 -0.07 (-0.72%) 

4. Nibbled: Bought 50 of the CEF BOI at $16.72-Roth IRA (see Disclaimer):

Snapshot of Trade:

Security Description: Brookfield Mortgage Opportunity Income Fund (BOI) is a CEF that invests in junk rated mortgage debt related securities. 

Data on Date of Trade 3/27/14
Closing Net Asset Value Per Share: $18.71
Closing Market Price: $16.7
Discount:  -10.74%

The discount was almost twice the average 1 and 3 year discounts, both reported at 5.93%.

CEFConnect Page for BOI

Sponsor's webpage: Brookfield Mortgage Opportunity Income Fund Inc. Overview

The last fact sheet found at the sponsor's website shows a duration of .13 years as of 12/31/13 Q4 2013 BOI -.pdf

Portfolio quality is deep into junk:

Fact Sheet Excerpt, as of 12/31/13
That weighting in CCC paper is a bit scary.

Last SEC Filed Shareholder Report: Brookfield Mortgage Opportunity Income Fund Inc. (semi-annual for the period ending 12/31/13/Cost at $456+M-Value at $448+; weighted average interest rate of borrowings at 1.07%-page 25; dividend supported in part by ROC-page 27)

Dividends are paid monthly at the current rate of $.1271. Brookfield Mortgage Opportunity Income Fund Inc. (BOI) Dividend Date & History -

Assuming a continuation of that rate which of course is in no way assured, the yield at a total cost per share of $16.72 would be about 9.12%.

Rationale: This one is about income generation with a possibility of capital appreciation assuming a continuation of relatively low rates and an improvement in the discount to net asset value per share. By buying this security in an IRA, I turn a taxable yield of more than 9% into a tax free one.

I improve my odds of capital appreciation by buying at a significantly larger discount than historical averages. A narrower discount may never be realized for a variety of reasons, including continued turmoil in bond pricing and a non-temporary rise in rates causing individual investors to sell in order to avoid what they perceive as a larger capital loss without such a disposition.

Risks:  Credit risk is acute given that 64% of the portfolio was rated CCC and below as of 12/31/13.

Normal CEF risks are highlighted by the expansion in the discount during a period of rising rates. On 5/1/13, net asset value per share was $19.14 and the closing market price that day was $20, creating a premium to net asset value of +4.49%.  At the time of my purchase, the premium had vanished and the fund closed at 10.74% discount to net asset value. The market price had gone down 16.5% ($20 to $16.7) while the net asset value per share, unadjusted for dividend payments, declined less at just 2.25% ($19.94 to $18.71). A larger percentage decline in market price than in net asset value is a known risk for CEFs that can become most undesirable at times such as last year.

The sponsor describes risks at its website.

Future Buys/Sells: By buying a 50 share lot, I am anticipating the possibility of a decline that will allow me to average down with another 50 share lot. I would be looking for a price lower than $16.3 with an expansion of the current discount.

Closing Price Last Friday: BOI: $16.98 +0.07 (+0.41%) 

5. Bought 66 ELB at $25.07 (see Disclaimer): After I had a partial fill of an odd lot ELB sell order, where Fidelity sold just 14 of my 50 shares at the limit price, I decided to add some shares simply to bring my total up to 100 which would allow me to enter a AON limit order at Fidelity. I do not currently intend to sell any shares at less than $25.5. 

As previously noted, I am considering selling exchange traded bonds that have current yields at less than 6% at the sale's price. ELB has a slightly less than 6% yield at my $25.07 purchase price. 

Snapshot of Trade:

2014 Bought 66 ELB at $25.07
ELB Position Before Buy: 34 Shares/Average Cost Per share=$24.6 
Security Description: Entergy Louisiana LLC First Mortgage Bonds 6.00% Series 2040 (ELB) is a First Mortgage Exchange Traded bond issued by a wholly owned distribution subsidiary of Entergy Corp.(ETR).

Interest payments are made quarterly at the fixed coupon rate of 6% on a $25 par value. The issuer has an optional call right on or after 3/14/15. Unless that optional right is exercised, and it would be exercised only when the issuer could refinance at a lower rate, the bond matures on 6/15/2040.

Prospectus for ELB

This bond currently has a A3 rating from Moody's and an A- from S & P.

As noted in earlier discussions, this bond closed at $26.55 on 5/1/13 and traded over $28 in October 2012. ELB Interactive Chart

Prior Trades  Partial Fill ELB: Sold at $25.6 (2/24/14 Post)-Item # 8 Bought Taxable Account: 50 ELB at $24.44 (12/3/13 Post)

I also own 50 shares in the Roth IRA, where I turn taxable interest into tax free interest. Roth IRA: Bought 50 ELB at $25.06

This last purchase brings me up to 150 shares.

Recent Earnings Report: Entergy reports results from its wholly owned distribution subsidiaries in its earnings reports. The annual results can be found in Entergy's 2013 10-K starting at page 330, ETR-12.31.2013-10K. Revenues were reported at $2.626+B for 2013 with $245+M in net income (page 349). Cash and cash equivalents at year end were $124M. Net debt to capital was at 49.6%. 

Rationale and Risks: In part, I am playing an alternate and less likely scenario when I buy a high quality long term bond. A much better play would be a long term "A" or better bond, with a 6% current yield selling near par value, that had a make whole provision providing the owner with protection against a call. That bond does not exist to my knowledge.

The issuer can call this bond when it is in its interest to do so.

The yield will be close to the 6% coupon rate.

I am not currently concerned about credit risk, given the investment grade quality of this bond and its security.

Interest rate risk is easily the dominant risk, along with the risk of lost opportunity associated with having funds tied up in a long term bond when interest rates are rising and better yields consequently become available as a result.

Future Buys/Sells: Without first selling the 100 share lot now owned, I am not likely to buy more unless the current yield goes over 7.5% which I do not view as likely within the next two years. If and when the shares pop again to over $25.6, I will consider selling the 100 share lot with a AON limit order. A successful exit will then allow me to accept a lower than 7.5% yield for a possible re-entry.

Closing Price Last Friday:  ELB: $25.26 +0.08 (+0.32%) 

6. Bought 50 AIY at $24-ROTH IRA (see Disclaimer): I placed this limit order when AIY was trading at a $24.13 bid and $24.15 ask. The trades thereafter blew through my $24 share limit order down to $23.75. 

Snapshot of Trade:

2014 ROTH IRA Bought 50 AIY at $24
Security Description: Apollo Investment Corp. 6.875% Senior Notes due 2043 (AIY) is an Exchange Traded senior baby bond issued by the BDC Apollo Investment Corp. (AINV).

This bond is rated BBB by S & P, an investment grade rating. S&P 

This security will make quarterly interest payments at the fixed coupon rate of 6.875% on a $25 par value. This bond went ex interest on the day of my purchase for its $.4296875 per share distribution, so the price was adjusted for the amount of the quarterly interest payment. I will not receive that distribution, since the position was not owned on the ex interest date. ETDs trade flat, unlike bonds bought and sold in the bond market which require the buyer to pay accrued interest to the seller. 

Apollo has the right to redeem this bond at par value plus accrued interest on or after 7/15/18. Prospectus 

This bond started trading in June 2013 near its $25 par value and had plummeted to $21.12 by 8/12. Needless to say, I would have preferred buying it at $21.12 rather than $24. AIY Interactive Chart However, I was not aware of it and consequently did not have the security on my ETD monitor portfolio at YF.  

Prior Trades: None

Related Trades: I have bought and sold the common shares. I last bought 100 shares and discussed that trade in a recent post. Item # 5 Bought Roth IRA:  100 AINV at $8.69 (3/17/14 Post) 

Recent Earnings Release: The last earnings release is discussed in the AINV post referenced above.

SEC Filed Press Release-Earnings Q/E 12/31/13

Debt to Equity: .66x

Leverage Ratio: .65x

Rationale: The rationale for buying an investment grade taxable bond in the ROTH IRA is to turn that taxable bond into a tax free one. At a total cost of $24 per share, the yield is about 7.16%. 

Risks: At the current time, interest rate risk is more of a concern to me than credit risk. Interest rate is asymmetric between the issuer and the owner of this security, with the favorable interest rate risk decidedly in favor of the issuer. If rates go up, then the issuer has locked in a favorable rate long term and the bond owner faces one of two bad choices: (1) sell at a loss or (2) hold as the value sinks, foregoing more income with the funds tied up in a losing position. If rates go down, the issuer can refinance on or after the optional call date, delivering the proceeds to the owner who will then have to accept less yield in another similar bond or the same yield with a riskier one.

Rising Rates and Your Investments

4 strategies for rising rates -

I would note that interest rate risk is mitigated when an investor has built up a significant cash flow that can be reinvested in higher yielding securities when interest rates rise and the small payments made by 50 AIY would be aggregated with payments from other sources to effectuate such purchases.

Credit risk is enhanced with a BDC given the extraordinary compensation paid to the managers and the requirement that at least 90%+ of net income be distributed to shareholders in order to maintain the BDC's tax status. In other words, money is flying out the door, providing little of a capital cushion for bond owners.

The company summarizes risks factors incident to its operations and BDC status starting at page 9 of its 2012 Annual Report: Form 10-K

Future Buys and Sells: I sliced a potential 100 share purchase into two fifty share lots, a typical risk mitigation trading technique made possible by today's low brokerage commissions. If the price falls below $22.75, I will consider buying another 50 share lot. The yield at a total cost of $22.75 would be about 7.56%. Assuming I am able to buy another lot below that target price, then I would consider unloading the first 50 share lot whenever I have a profit after commissions and at least one quarterly interest payment. This is just another example of small ball, trying to get on base by allowing a pitch to graze the uniform, or a drag bunt.  

Closing Price Last Friday: AIY: $23.92 +0.02 (+0.10%) 


  1. April 10th--
    Today the markets got hammered with the S&P down 2 % and the vix over 15.

    The Private sector jobs report looks good ; back to -pre 2008 levels. I could not find a good "reason" why there was such a hit today? Except valuation.
    THe comments on Breakout from Yahoo said that there is no buying; that there are no stocks to hide out in today. They were saying that this is the start of the correction ; they pointed out that Certain big Firms are rushing IPOS to market at the low range of price, even at the risk of some loss of reputation Just to get the " Liquidity" out of the investment.

    It would seem to me that a real correction would begin alot more subtly than this.

    I wanted to get your opinion on what the correction was in 1987 and if there is any pattern that you have seen for a valuation only corrections.

    thanks much Steve G.

  2. Steve: I just wrote a section in my weekly blog discussing today's hit, which will be published on Saturday.

    The S & P 500 is at the top end of a fair value range. A number of Nasdaq stocks are well within bubble land territory.

    There has not been a correction of 10% or more since the summer of 2011, which is an unusually long period to go without one, particularly given the huge move since September 2011.

    Possibly the precipitating cause today was a story that did not receive a headline. Putin reportedly sent a letter to European leaders arguing that he might have no choice to shut off natural gas to Ukraine which would shot off most of the flow to western Europe. Putin said that Europe needs to work out a deal to pay what Ukraine owes or else. That was the clear message, stated in slightly more diplomatic language.

    He increased Ukraine's bill by $17B or so to recoup historical discounts granted to Ukraine for Russian's lease of the naval base in Crimea. And according to his logic, since Russia seized Crimea in violation of the Budapest Memorandum and international law, and annexed it into the Motherland, Russia should be paid those discounts retroactively since it no longer needs a lease from the Ukraine.

    Only a madman would make such a claim.

    The correction in 1987 was a one day affair. I remember it vividly even now. I tried to place an order using the phone late in the day, when the averages were down 20%, but there was no way anyone could tell me the current prices since the tape was running way behind. It was total chaos. Only market orders were then allowed at Schwab. That cyclical bear market was in part a valuation correction since the S & P had moved up too far since August 1982 (100 or so to 330 or so) We have experienced a similar percentage move up since March 2009 and valuations are not very appealing at current prices. There was a major contribution from computer trading schemes hatched by the Masters of Disaster called "portfolio insurance" that accelerated the decline and caused a one day crash. The VIX model gave a warning in the Spring of 1987 with a Trigger Event. Today's move up in the VIX was mild and still well below 20 and nowhere near Trigger Event territory.

    Generally, bull market corrections are swift, lasting a few weeks or months. A typical pattern can be found in the corrections from 2010 and 2011. I prefer those quickies.

    A long term secular bear market can start with a much longer and far deeper down move, such as 1929-1932 (down 86.2%) or 2000-2002 (down 49.1%).

    Those are the worst, and I do not expect that to happen now. Putin does have the power to undermine the incipient worldwide recovery in furtherance of his clearly stated desire to restore the borders of the former Soviet Union and he is probably the most important actor on the world stage now. Hopefully, he will not carry through with his threats against Western Europe unless they play ball with his Hitler like foreign policy initiatives.

  3. Hi Southgent,

    If market does correct, are you staying with your nip and tuck approach or are you going to be a more aggressive buyer? Would your approach be different from that after a catastrophic decline?


  4. Peter: I define a catastrophic decline as 45% or greater. I would be more aggressive after one of those which I do not anticipate and view as highly unlikely at this point. Nothing is impossible but I am not worried about that scenario coming to past.

    The market needs a 10% to 15% correction followed by several months of churning.

    China and Russia are my two biggest concerns at the moment.

    I view myself as an opportunistic buyer and seller. The degree of my rotation into stocks would depend on the opportunities presented, and more opportunities are offered as the decline increases.

    Most of the stocks that interest me are blue chips and they are not falling much. Most of the declines are in the fluff Nasdaq names, along with a few overvalued areas of the market, including small caps.

    Depending on what happens, I may use some cash to buy stocks and/or I may pare bonds to buy stocks which was what I first did in February 2009 when I sold several investment grade bonds rated "A" or better and used the funds to buy stocks in March. If some REITs go up during the decline, which may happen assuming bonds continue to rally, I may pare that allocation and use the funds to rotate into other sector (s). So, in short, it depends. I evaluate my options continuously.

    I have not tallied the numbers, but I have increased by bond and bond fund allocation over the past several weeks and those securities may do well in a stock market correction which has been true so far on the last three down days. Those securities along with my cash allocation and preferred stocks are cushioning the decline for me, which I will discuss in some detail in Saturday's weekly post.

    On the last three down day (4/4, 4/7 and 4/10), the S & P declined 4.48%, while my main taxable account was down just 1.16%. I captured almost all of the S & P's gain on 4/5. I am more likely to capture a small gain in the S & P 500 than a large one. So I am not really down hardly at all so far, which is another consideration. My portfolio is hopefully designed to avoid 75% or so of a significant decline but to capture most of the upside except on major up days when I may capture half of the S & P 500 move.

  5. Southgent,

    Thanks for your insights. How do you think this needed/anticipated correction will play out and over what period? Also, notwithstanding your negative view of SDS ...etc. do you plan to take any preemptive strike?


  6. Peter: I will not use the double short stock ETFs to hedge anymore. I used them profitably, starting in late 2007 and continuing into 2008, but found them to be horrific products in that they lost tracking soon after purchase. Anyone using them as a hedge would need to do only for a brief period and be extraordinary lucky with their timing.

    I was able to exit the positions profitably by more or less timing entry and exit points to the movement in the VIX. The simple model was to sell the double short stock ETF when the VIX moved toward 30 and then buy them back when the VIX fell below 20. While that was working fine when the VIX was in the Unstable VIX Pattern, Phase 1, it left me without any hedges when the VIX started to soar after Lehman's failure, since I had sold the position on a spike toward 30 before that event and did not have an opportunity to reinitiate before the skyward burst. The VIX hit 31.7 on 9/15/2008 and had risen to 80.86 by 11/20/08. I have no similar guidance now with the S & P 500 in a Stable Vix Pattern.

    The market is proving to be remarkably resilient. I can not recall anything like it. The S & P 500 closed at 1,123.53 on 8/19/11 and at 1864.85 yesterday. That is a 66% gain in less than 3 years without a single 10% correction. This should make anyone cautious and to reset their future expectations of stock total returns.

    The VIX model is keeping me invested in stocks, but I am focusing more on income producing common stocks like REITs. Some of the other recent buys like COP, which is up almost $900, could be based on valuation criteria irrespective of the market averages.

    I have also used the robust stock rally to sell some stock CEFs that I wanted to get rid of anyway. So selling an underperforming mutual fund into this kind of strength is one way to pare the stock allocation some. However, given the large number of REITs bought over the past few months, and some other dividend paying stocks (e.g. COP, PEP, NVS), I am net up in stocks but not by much after selling recently some another stock CEF which I will discuss in a future post.

    By focusing on income generation, with a sizable bond and cash allocation, I will not be impacted much by a stock correction of 10% to 20% and would simply view that eventuality as a potential opportunity.

    There are investors who have substantially pare or liquidated their stock holdings expecting a correction. Many pundits have been predicting tops throughout the past five years. So, what can you say now. How far would the market have to go down now before hitting the September 2012 level, which was when several gurus were calling a top. In other words, the market will not act according to these forecasts, and may go up 30% before correcting 10% to 15%. I noted in the last weekly blog how far over the Wall Street oracles were in their predictions for 2013. All that anyone can say is that there will be corrections, long term bull and bear markets, cyclical bull and bear markets, dips of 4% to 10% that will cause Perma Bears to come out of hiding and say "I told you so", and worse of all, the 45% relatively quick catastrophic declines. I have gone through 3 of those and I am just 62 years old (1974, 2000-2002, 2008-March 2009). I have been through 2 long term secular bear markets, and more dips and corrections that I could possibly remember now. All of the foregoing has happened and will always happen.