Saturday, May 31, 2014

Bought: 100 ARMF at $22.15, 100 EMD at $12.8, 100 ASEA at $16.57, 100 FDL at $23.04/Paired Trade: Sold 200 KMP:CA at C$10.45 and Added 200 HLP_UN:CA at C$10.2/Bought 300 of the Canadian ETF FIE:CA at C$7.26/Sold: 50 OFCPRL at $26.21, 50 CBLPRE at $23.81


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

It is helpful for me to download from S & P its data on the S & P 500 and the various sectors contained in that index. This data contains current and historical information on S & P 500 earnings (as reported and forecasted), sales, operating margin, book value, dividends per share, etc. It can be downloaded in XLS format and can be found using the following search terms in google:

XLS S & P Earnings- S & P Dow Indices


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

This forecast assumes that the average inflation rate over the next 10 years will be between 2% to 2.25%, within the range being priced into the 10 year TIP.

Last Wednesday, the government released a worst than expected revision to first quarter GDP. The stock market responded with the S & P 500 hitting a new all time closing high: S & P 500 1,920.03 +10.25 (+0.54%) And bonds went down in price and up in yield: TLT: $114.15 -0.61 (-0.53%).

The Merrill Lynch global technical strategist  predicts that treasuries are fast approaching the "eventual resumption of the larger, long-term bear trend".

Another strategist suggests that pension funds are responsible for the rise in bond prices this year, leaving the treasury bond in a "very lopsided return profile: a low upside in terms of positive returns and the possibility of sizable losses ... " While I would not agree with all of this strategist's reasons for pension fund buying, the reasons are not as important as the increases in demand, for whatever reason, when the FED has caused a shortage in available treasuries to purchase maturing in 10 years or later. (click tab "T-Notes and T-Bonds" at System Open Market Account Holdings - Federal Reserve Bank of New York)

It is questionable whether a ten year treasury at its current yield will have a positive real rate of return. The average annual real rate of return based on the inflation forecast embodied in the 10 year TIP is minimal. It would not take much of an increase in that average inflation rate, which is almost 1% below the historical long term average, to cause a negative real return before taxes.


Recent Developments:

The government revised first quarter real GDP to an annualized decrease of 1%. News Release: Gross Domestic Product The prior estimate was a .1% increase. The consensus estimate for the revision was a -.6%.

The government reported that seasonally adjusted initial unemployment claims BLC decreased 27,000 to 300,000. DOL Press Release.pdf The 4 week moving average was 311,500, the lowest level since August 2007:

4-Week Moving Average of Initial Claims

While this chart shows that the 4 week moving average of initial unemployment claims has returned to levels consistent with prior expansions, it is also important to keep in mind that the labor participation rate is hitting new lows, returning to early 1978 levels, as more people leave the labor force:

Civilian Labor Force Participation Rate

And the duration of unemployment remains at elevated levels: Number of Civilians Unemployed for 27 Weeks and Over; Average (Mean) Duration of Unemployment

Durable good orders increased a seasonally adjusted .8% in April compared to March, better than the consensus estimate of a .7% decline.

The Case Shiller housing index for 20 large cities increased 12.4% in March Y-O-Y. Home Prices Rise in March Average home prices, however, are only back to mid-2004 levels (see chart at page 3).

The PCE Price index for April increased by .2%. The Y-O-Y increase was 1.6%, up from 1.1% in March (page 3: Personal Income and Outlays April 2014.pdf) The FED prefers the PCE price index over the CPI. Various reasons are given for that preference. One reason which is not given is that the PCE price index has been running lower than CPI. The PCE price index has an over 20% weighting in medical costs compared to 7%+ in the CPI calculation. Federal Reserve Bank of Cleveland The PCE price index was reduced last year due to temporary government budget cuts to healthcare providers. Prior to those cuts, medical cost inflation was running at 3.1%, and was reduced to 1.9%. The historical long term rate of increase is about 5.5%. Medical cost inflation has started to pick up.

The ISM Chicago's Business Barometer rose 2 points to 65.5 in May. The consensus was for 61. Prices paid "experienced the largest monthly gain in nearly five years". {Business Insider (see chart at the bottom of the page); Business Insider (chart of medical cost component of PCE); "Rising Medical Costs Boosting Inflation" - Barron's}


1. Bought 100 ARMF at $22.15 (see Disclaimer): I really wanted to wait for a lower price before buying more of this leveraged bond CEF. Since I have been selling some lower yielding securities, and consequently hurting my cash flow some, I decided to buy this high yielding bond CEF to replace some of that lost income generation.  

This lot was bought in a taxable account. I currently own 50 shares in the Roth IRA. I view this security as too risky for further adds in a retirement account.

I have been substituting some higher yielding leveraged bond CEFs and some equity REITs for lower yielding equity preferred stocks and long dated bonds. The Canadian REITs have been a fertile area for yield over the past several months.

I view this movement into leveraged bond CEFs to be temporary, lasting for a few weeks or months at the most. When there is another significant correction in equity preferred stocks that send their yields significantly higher, then I will start to transition back to some of those including the ones that I have been selling recently. 

Snapshot of Trade:

Security Description: The Ares Multi-Strategy Credit Fund (ARMF) is a new leveraged income CEF that attempts to provide an "attractive level of total return" by "dynamically" investing in a broad range of credit instruments.

SEC Form N-Q-List of Holdings as of 1/31/14

Data From Date of Trade 5/9/14
Closing Market Price: $22.14
Closing Net Asset Value: $24.23
Discount: -8.63

CEFConnect page for ARMF

SEC Filings for ARMF: EDGAR

SEC Form N-Q: Holdings as of 1/31/14

Last SEC Filed Shareholder Report: Period Ending 10/31/13

Even a knowledgeable investor will not have any knowledge about most of the securities owned by this fund.  

Rationale and Risks: See Discussion in the preceding link. The fund has a summary of risks at its website, available for review after clicking the "Risk Considerations" tab. Ares Publicly Traded Credit Funds-Risk Considerations I regard this fund as high risk.

This CEF pays monthly dividends at the current rate of $.1525 per share. At that rate, the dividend yield is about 8.26% at a total cost of $22.15 per share. Ares Multi-Strategy Credit Fund, Inc. Declares Monthly Distributions of $0.1525 Per Share; Distribution Tab at CEFConnect.

Last Friday's Close: ARMF: $21.83 +0.10 (+0.46%) 

2. Bought 100 EMD at $12.8 (see Disclaimer): 

Snapshot of Trade:

Security Description: Western Asset Emerging Markets Income Fund (EMD) is a leveraged closed end fund that invests in emerging market sovereign and corporate debt.

As of 3/31/14, the fund was weighted in investment grade bonds and over 80% of the weighting was in EM bonds denominated in U.S. Dollars, which removes currency risk for those securities:

As of 3/31/14, the fund owned 195 holdings with an effective duration of 6.69 years. Duration is the method that investors use to measure interest rate sensitivity. Get to know your bond fund: Duration | Vanguard

Data From Date of Trade 5/12/14
Closing Net Asset Value Per Share: $14.15
Closing Market Price: $12.83
Discount: -9.33%
Average 1 Year Discount: -10.41
Average 3 Year Discount: -6.34%
Average 5 Year Discount: -8.3%

CEFConnect Page for EMD

EMD Page at Morningstar (3 stars)

Sponsor's Website: Individual Investor

The sponsor's fact card shows an average annual total return, based on net asset value, of 12.86% since inception (6/25/93) through 3/31/2014:  Emerging Markets Income Fund Fact Card.pdf

For 10 years through 5/23/14, the average annual total return was 10.07%. That number can be found by clicking the "performance" tab at CEFConnect.

Last SEC Form N-Q: Western Asset Emerging Markets Income Holdings as of 2/28/14

Last SEC Filed Shareholder Report: Western Asset Emerging Markets Income Fund (EMD)

EMD Page at Morningstar (rated 3 stars at the time of purchase)

Prior Trade: None

Related Trade: I recently bought a similar fund from the same sponsor. Item # 2  Bought 100 ESD at $17.28 (4/12/14 Post)

Rationale: The fund is currently paying a quarterly dividend of $.255 per share. Western Asset Emerging Markets Income Fund, Inc (EMD) Dividend History Assuming a continuation of that rate, the dividend yield would be about 7.97% at a total cost of $12.8. Income generation is the primary rationale for investing in this fund. 

Risks: Emerging market bonds are subject to a wide variety of significant risks which explains why I only nibble in this sector and will generally hold a position for a relatively brief period. This bond class fell significantly in 2013 as interest rates rose in the U.S. These EM bond funds have exposures to countries which I do not favor, such as Venezuela, and I would prefer that a fund simply avoid their debt altogether.

Closing Price Last Friday: EMD: $13.06 +0.03 (+0.23%)

3. Paired Trade: Sold 200  Killam Properties at C$10.44 and Added 200 Healthlease Properties REIT at C$10.2 (Canadian Dollar (CAD) Strategy)(see Disclaimer): This pared trade was motivated by the Healthlease's significantly higher yield and better first quarter earnings report. 

Snapshot of Trades:


2014 Sold 200 KMP:CA at C$10.44

2014 Added 200 HLP_UN:CA at C$10.2
Profit Killam: The profit was negligible: 

2014  KMP:CA 200 Shares +$38.87

Item # 1 Bought 200 KMP:CA at C$10.16 (4/12/14 Post)

Total Profit Realized Gains: $145.93 (prior trade $107.06)

Security Descriptions: Killam Properties (KMP:TOR) is a Canadian non-REIT that owns apartments and manufactured housing sites. Investor Facts Killam reported first quarter FFO per share of C$.13, down from $.15 in the 2013 first quarter. The company blamed higher heating an operating costs and the timing of redeploying proceeds from a 4th quarter property disposition. Investor News

Healthlease Properties Real Estate Investment Trust (HLP.UN:TOR) is an externally managed REIT that owns senior housing and care facilities and is expanding rapidly in the U.S. The company recently completed the acquisition of 5 senior housing and care properties described in this news release: HealthLease Properties REIT Announces Completion of Acquisitions of Five Senior Housing and Care properties (5/21/14).

The company sold in early May 7.5M units at $C10. HealthLease Properties Real Estate Investment Trust Announces Closing of CDN$75 Million Equity Financing

Prior Trade Healthlease: Item # 7 Bought: 100 HLP_UN:CA at C$10.17 

Recent Earnings Reports: As of 3/31/14, Healthlease owned 45 properties, up from 15 as of 3/31/13. Debt to gross book value was reported at 58.76%. The weighted average interest rate was 4.33%. Diluted FFO per unit was C$.27, up from $.2 in the 2013 first quarter. AFFO per unit was C$.25 with a payout ratio based on AFFO at 81.3%. HLP Q1 2014.pdf

Under triple net leases, the company has "minimal" operating expenses. However, the REIT pays its external manager 3% of gross rent on each property and an incentive fee of 15% of AFFO per unit "above a certain threshold" established by the Board based on forecasted AFFO each year. (page 10). 

Page 9 of report:

The largest tenant is a company called Saber. Saber Healthcare Group

Page 10 of Report:

Rationale: I am picking almost 3% more in yield with the Healthlease shares, and Killam is not expected to grow FFO during 2014.

HLP leases properties under long term triple net leases.

This REIT is currently paying a monthly distribution of C$.07083 per unit or C$.85 annually. At that rate, the dividend yield at a total cost of C$10.2 is about 8.33%. HLP went ex dividend for its monthly distribution on 5/28/14, the same data as all of my monthly dividend paying Canadian REITs. 

Risks: I discuss risks in the preceding linked post. Among those risks, the company is externally managed and will purchase some properties developed by its manager after an "independent" appraisal. I always view external management agreements with disfavor. I would much prefer that a REIT be internally managed by its own employees.

Healthlease is the only externally managed REIT that I currently own.

Currency risk is always present when buying a foreign security.

As with any REIT, the bankruptcy of a large tenant can have serious implications. 

Future Buys/Sells: I will be monitoring Killam for a potential re-entry at below C$9.75. The flat FFO guidance for 2014 is understandable but nonetheless undesirable. 

I will not be buying more of Healthlease. I hope to hold the 300 shares for a couple of years, harvest the monthly dividend payments, and hopefully make 5% to 10% on the shares.

Closing Price Last Friday: HLP-UN.TO: C$10.45 -0.06 (-0.57%) 

4. Bought 300 FIE:CA at C$7.26 (Canadian Dollar (CAD) Strategy)(see Disclaimer):

Snapshot of Trade: 

Snapshot of Quote Before Trade:

Security Description: The iShares Canadian Financial Monthly Income ETF (FIE:TOR) is a Canadian ETF.

Sponsor's Website: IShares Canada ETFs

Top Ten Holdings as of 5/12/14:

The top two holdings are two other Canadian ETFs. I already own 300 shares of the low cost 1-5 Year Laddered Corporate Bond ETF (CA:CBO) (corporate bonds rated "A" or better, staggered equal weightings, expense ratio .28%):

Bond Ratings CBO Holdings as of 5/12/14:

The other ETF holding is the Canadian Preferred Share Index Fund (CA:CPD) which has 205 holdings and a .45% expense ratio. FIE will include acquired fund fees in its expense ratio.

The other holdings are a smattering of REITs, banks and insurance companies:

I do not own any of the top ten holdings other than the ETF CBO. I own individual positions in the REITs Cominar (300 Shares), Artis (300 shares) and Riocan (100 shares) which together accounted for 2.28% of the weighting as of 5/12/14.

The current monthly dividend is C$.04 per share:  Distributions

Rationale: My main purpose for buying this security is to generate income on my CAD stash. The dividend yield at a total cost of C$7.26 is good at 6.61%. Secondarily, I pick up more indirect exposure to Canadian banks and insurance companies. I have already some minor indirect exposure to a few of those companies in my 200 share position in the Canadian Dividend Aristocrats Fund (CA:CDZ) They have a higher weighting in the Canadian Select Dividend Index ETF (CA:XDV), which I also own.

Risks: In addition to currency risk, there are the normal risks associated with a narrow sector ETF, particularly one that focuses on financial institutions. While the six large Canadian banks did far better than their U.S. counterparts during the Near Depression, their stock prices still suffered, and next time may be different.

There is a concern expressed by some investors that the Canadian housing market is overheated or already in a bubble. (e.g. Morningstar article: "When the Canadian Housing Bubble Pops").

Those concerns do have some factual foundations, as shown in the series of charts contained in this article: 11 charts

However, more than 1/2 of the mortgages are guaranteed by the Canada Mortgage and Housing Corporation. CMHC Mortgage Loan Insurance Overview | CMHC The Canadian banks will have different exposures to non-insured mortgages and different loan to value ratios. A recent article published by Seeking Alpha noted that Toronto-Dominion (TD) had 65% of its mortgages insured by the CMHC, with the uninsured mortgages having a loan to value ratio of 60% (page 24: Q2 Presentation.pdf)

Future Buys/Sells: I am not likely to buy more. I will consider selling when and if I have an  annualized total return greater than 10% or I become spooked about Canadian bank stocks.

Closing Price Last Friday: FIE.TO: C$7.24 0.00 (0.00%)

5. Bought 100 ASEA at $16.57 (Emerging Market Consumer Super Cycle Strategy)(see disclaimer):

Snapshot of Trade:

Security Description: Global X FTSE ASEAN 40 ETF (ASEA) tracks the 40 largest companies located in the ASEAN regions: Indonesia, Philippines, Singapore, Thailand and Malaysia.

Sponsor's Webpage: Global X ASEAN 40 ETF - ASEA

Fact Sheet as of 3/31/14: Global X Funds (40 holdings; expense ratio .65%)

Weightings as of 3/31/14:
Singapore: 37.86%
Malaysia: 26.97%
Indonesia: 17.47%
Thailand: 14.65%
Philippines: 3.04%

The three annualized three year total return is just 3.24% through 3/31/14 which just highlights how far emerging stock markets have fallen behind the U.S. stock market.

Singapore | Economy
Indonesia | Economy
Malaysia | Economy
Thailand | Economy

Prior Trades: I have not been able to hold this one for very long. Item # 1 Bought 100 of the ETF ASEA at $17.09 (January 2013)Item # 4 Sold 100 ASEA at $17.8 (April 2013)

Related Trades: I currently own small positions in iShares MSCI Singapore ETF (EWS)iShares MSCI Malaysia ETF (EWM), and a CEF that invests in Indonesia's stocks, Aberdeen Indonesia Fund (IF). I also own several diversified EM stock funds that would have some overlap with ASEA. I recently added to my position in IF and will discuss that trade in a subsequent post.

Bought: 100 EWM at $15.23 (1/20/14 Post)
Bought Back 100 EWS at $13.1 (12/17/13 Post)

Some broader EM funds would include the two Asian mutual funds sponsored by Matthews, small positions in EM ETFs bought commission free (e.g. VWO, PIE, EEMV, IEMG), and the CEF MSF. Bought: 100 MSF at $15.18 (12/3/13 Post); Bought 50 PIE at $18 (12/3/13 Post); Bought:  20 of the Commission Free ETF IEMG at $48.4. I have not discussed the small recent acquisitions of VWO and EEMV

Rationale: One reason is simply the underperformance of the ASEAN stock markets over the past three years.

I am also playing the super cycle for the huge increase in EM middle class consumers, but I am using this ETF more as a trading vehicle. I discuss that super cycle throughout this blog (e.g. Item # 3 Bought 50 of the Stock ETF EELV at $27.2 November 2012)

The long term trend is the parabolic increase in middle class consumers throughout this region. Many U.S. and European multinationals will benefit from that trend in addition to local companies.

One firm estimates that the middle class will add 3 billion consumers in the next two decades, coming almost exclusively from the EM nations.  (Reuters and EY publication cited below)

See also:

Ernest and Young Publication: "Middle class growth in emerging markets" (525M in Asia alone are now in the middle class, more than the population in the European Union)

Deloitte Publication:  "Business Trends 2014"

Forbes Article: "Why Your Business Needs To Break Into Emerging Markets"

Nielsen Publication: "Meet the New Indonesian Consumer Class of 2020"

Nikeii Asian Review Article: "Asia's expanding middle class"

This major long term secular trend is discussed in a large number of articles easily found on the internet. It is not a secret. The problem over the past few years is that this major trend has been masked and dampened by lower than normal growth in several developed countries over the past six years, including the U.S. and several European countries.

Risks: This ETF has the usual set of risks for a foreign stock fund, including country risk. Recently, there has been turmoil in Thailand for example which has close to a 15% weighting in this ETF.

Currency risk is very important when a fund owns stocks in emerging markets, as highlighted most recently by what happened starting last May when interest rates started to rise in the U.S. Emerging market currencies declined significantly and rapidly, which would then cause a decline in a fund priced in USDs that owns stocks whose prices are denominated in those depreciating currencies. When there is a spike down in EM currencies, there also tends to be capital flight by some owners of EM stocks and bonds, and that will contribute to the decline in the U.S. fund's value as the securities owned by it fall in value.

A Rise in the Chart Line Indicates USD Strength:
USD/IDR Currency Conversion Chart (Indonesia's Rupiah)
USD/MYR Currency Conversion Chart (Malaysia Ringgit)
USD/SGD Currency Conversion Chart (Singapore Dollar)
USD/THB Currency Conversion Chart (Thai Baht)

Future Buys/Sells: I will most likely be using ASEA as a trade given its overlap with other existing positions.

Closing Price Last Friday: ASEA: $16.61 -0.18 (-1.07%)

6.  Bought 100 of the Stock ETF FDL at $23.04 (see Disclaimer):

Snapshot of Trade:

2014 Bought 100 FDL at $23.04
Security Description: The First Trust Morningstar Dividend Leaders Index Fund (FDL) is an ETF that attempts to track, before fees and expenses, the Morningstar Dividend Leaders Index.

Sponsor's website: First Trust Morningstar Dividend Leaders Index Fund (FDL)(net expense ratio .45%; five year annual total return through 4/30/14=20.49%; 30 day SEC yield at 3.4% as of 4/30/14)


Holdings Over 1% Weighting as of 5/22/14
Distribution History (2013=$.6851 per share in uneven quarterly installments)

Prior Trades: None

Rationale and Risks: This is a trade. I am simply attempting to earn more than zero which is what I was earning with the funds used to settle this trade. This ETF is weighted in large cap blue chip companies that pay good dividends. That will not stop this fund from going down in price during a correction in an ongoing long term secular bull market.

And, as shown in a long term chart, FDL was smashed during the Dark Period, hitting a high around $25 in May 2007 before doing the swan dive to $7.9 or so just before 3/9/12009. Chart First Trust Morningstar Dividend Leaders ETF The fund was hurt by a substantial weighting in financials that were "dividend leaders" before they crashed and burned. Bank of America and Citigroup are no longer "dividend leaders", and I will not live long enough to see their dividends restored to pre-2009 levels.

Bank of America Corporation (BAC) Dividend History (quarterly rate now $.01 per share, down from $.64 paid during the 2008 third quarter)

Future Buys/Sells: I am using this security primarily as a trading vehicle and a short term depository for a cash allocation in taxable accounts that has grown beyond the normal 20%.

Closing Price Last Friday: FDL: $23.39 +0.11 (+.47%)

7. Sold 50 KFN/P at $25.48 Roth IRA (see disclaimer):

Snapshot of Trade:

2014 Roth IRA Sold 50 KFN/P at $25.48
Snapshot of Profit:

2014 Roth IRA KFN PR 50 Shares +$110.02 
Security Description:  KKR Financial Holdings LLC Pfd. 7.375% Series A (KFN.P)

Rationale: I am raising cash in my Roth IRA for later redeployment. I believe that the FED is ignoring current inflation trends in their ongoing effort to jump start the economy, hoping that inflation will not become problematic.

Closing Price Last Friday: KFN-P: $25.60 -0.08 (-0.31%)

8. Sold 50 OFCPRL at $26.21 (see Disclaimer):

Snapshot of Trade:

2014 Sold 50 OFCPRL at $26.21

Snapshot of Profit:

2014 OFCPRL 50 Shares +$92.58

Item # 2 Bought: 50 OFCPRL at $24.04 (1/6/14 Post)

Security Description: The Corporate Office Properties Trust Preferred Series L (OFC.PL) is an equity preferred stock that pays cumulative and non-qualified dividends at the fixed coupon rate of 7.375% on a $25 par value. The issuer has the option to redeem on or after 6/27/2017. Prospectus

Rationale: My current trading guidelines require that I consider selling a preferred stock when the price exceeds $25.75 and the yield is less than 7.25% based on the sale's price. This was the case with OFCPRL. The yield at a $26.21 price is about 7%. The trading guidelines represent an attempt to balance interest rate risk with current income generation. The markers are basically a judgment call that current inflation trends and the Fed's pedal to the metal abnormally accommodative and easy monetary policies tilt the balance toward selling when the marker is hit.

I also view REIT equity preferred stocks with some disfavor. REIT CUMULATIVE PREFERRED LINKS IN ONE POST/Advantages & disadvantages

Future Buys/Sells: I will want at least a 7.5% yield prior to considering a repurchase.

Closing Price Last Friday: OFC-PL: $26.25 +0.08 (+0.31%)

9. Sold 50 CBLPRE at $23.81 (see Disclaimer):

Snapshot of Trade:

2014 Sold 50 CBLPRE at $23.81

Snapshot of Profit:

2014 CBLPRE 50 Shares +39.58 
Item # 5 Bought 50 CBLPRE at $22.7 (Sept 2013 Post)

Security Description: The CBL & Associates Properties Inc. 6.625% Cumulative Preferred Series E (CBL.PE) is a potentially perpetual equity preferred stock that pays cumulative and non-qualified dividends at a 6.625% fixed coupon rate on a $25 par value. Prospectus

I still own 50 CBLPRD: Bought 50 CBLPRD at $24.6

Rationale: The yield fell below 7% based on the sales price of $23.81. At $23.81, the yield is about 6.96%.

Future Buys/Sells: I may not buy this one back. I am becoming more concerned about REITs that own malls with JCP and Sears as major anchors.

Closing Price Last Friday: CBL-PE: $24.59 +0.09 (+0.37%) 

Thursday, May 29, 2014

Google Search Box Deleted Again-No Longer Functional

I have deleted once again the Google search box formerly located in the upper right hand corner. The search returns no results when a properly functioning search engine would return multiple hits. Instead, a search would simply return the entire last published post. 

For several weeks now, the Google box has been mostly worthless anyway. I could have a recent discussion of a new stock purchase, never before discussing that stock, where a competent search engine would return only one result. The Google search box would return results from 2009 or 2010 that would contain a tag from that recent post, but none of the information would actually be contained in those old posts. I have no idea how Google screws it up so bad. 

The search box in the upper left corner still works but returns an entire post with the relevant search term, making it less useful that a properly functioning google search box, which may be a bridge too far for Google. 

Monday, May 26, 2014

Updates for the Regional Bank, REIT and Lottery Ticket Basket Strategies/ Bought 50 ONB at $13.29/Bought 30 MGIC at $7.9/BHB Stock Split

The regional bank and lottery ticket basket strategies are updated on the last Monday of each month. The price shown in the following tables will be from last Friday.

Last Update 4/28/14: Update for Regional Bank, REIT and Lottery Ticket Basket Strategies/Bought: 50 RSO at $5.56 and 150 RSHYY at $1.536/Sold RSH and LF for Losses/FISI, FNB, MBVT, HBAN, WTBA, CBU, WASH, TRST, CCNE, CZNC

I frequently use a basket approach, particularly with industry sectors, that will vary in size as to the number of components. The focus will be on the total return of the basket, rather than individual components. Some of the advantages to this approach include diversification and risk mitigation. I am not concerned about a few mishaps provided other components are doing better than I anticipated when I made the initial purchase. As noted previously, I have been surprised by some of best and worst performers in the regional bank basket.

I will periodically include an update of the REIT Common and Preferred Stock Basket. I recently published the first table of a recently initiated basket featuring equity REIT common and preferred shares. Stocks, Bonds & Politics: Equity REIT Common and Preferred Stock Table as of 3/5/14

1. Update of Lottery Ticket Basket Strategy 

The Lottery Ticket Basket Strategy uses a deep contrarian value strategy, appropriately characterized as catching a "falling knife". A common criteria for the stocks contained in this basket is a smashed stock price at the time of purchase and an ugly looking chart, though I may occasionally buy one who does not fit those common criteria. Any technical analyst would most likely have a sell rating on the stock.

See 2004 Study by the Brandes Institute: "Falling Knives Around the World" 

Selections are made primarily on statistical criteria including price to book, price to sales, forward P/E, cash per share and/or free cash flow. I spend anywhere from thirty minutes to an hour researching a potential purchase prior to purchase.

For many selections, I may be pessimistic about the firm's future, but not as pessimistic as the market. I will also occasionally see a ray of light at the end of a dark tunnel. Since I expect failures, which are inevitable and unavoidable in this kind of approach, I limit my exposure to $300 per stock plus any prior trading profits. 

After experiencing some success with this strategy, I now have a requirement that my total investment in all LT holdings can not exceed my total realized gains for this basket strategy. My total exposure is currently slightly under $6,000.

The name of the strategy aptly describes the risk. It is somewhat analogous in many cases to playing a hand of blackjack for the purchase amount knowing that the card count favors the house. It is a form of entertainment and an alternative to a casino visit. Based on the results to date, this strategy is far more likely to produce positive results even with the LB's skill at the tables. The primary purpose of the LT strategy is to entertain Right Brain, let it swing for the fences with up to $300, and to keep the Nit Wit from interfering with Left Brain's management of Headknocker's portfolio.

Snapshots of realized gains can be found at the end of the Gateway Post on this topic: Stocks, Bonds & Politics: Lottery Ticket Strategy: New Gateway Post

Net Realized Gains: $14,024

Click to Enlarge:

Lottery Ticket Basket as of 5/23/14
The leading unrealized percentage gain continues to be AMOT:

AMOT Unrealized % Gain as of 5/23/14=113.21%
Allied Motion Reports Record Results for the Quarter Ended March 31, 2014
AMOT Closing Price 5/14/14 Day of Earnings Report: AMOT: $12.19 +0.69 (+6.00%)

A. Iridium: The market liked IRDM's first quarter report, and the surge in the stock price brought me back into profit territory:  SEC Filed Press Release

Closing Price 5/1/2014: IRDM: $7.61 +0.94 (+14.09%)

Subsequently, the stock dipped when Iridium announced that it was selling over 7 million shares at $5.795 per share to the underwriters: Form 8-K The underwriter price to the public was $6.1 per share. The underwriters had an option to purchase up to another 1.1+M shares. Iridium Announces Pricing of Common Stock and Series B Preferred Stock

The price remained above $6 per share after that announcement and has subsequently recovered. IRDM Historical Prices

Closing Price 5/23/14: IRDM: $7.55 +0.10 (+1.34%)

B. Banco Santander Brazil: On 4/29/14, BSBR stock rose 13.84% in response to an offer made by Santander to acquire the remaining 25% stake from minority shareholders. If accepted, BSBR shareholders will receive .7 shares of Banco Santander (SAN) for each BSBR ADR share. SEC Filed Document

Closing Price 4/29/14: BSBR: $6.58 +0.8 (+13.84)

Since I already own Santander's common, I will probably just take the .7 SAN offer for each BSBR share. The offer is currently being evaluated.

After I bought the BSBR shares, the company underwent a recapitalization and paid out two dividends totaling $.7807 per share. I was set up to reinvest the dividend, but Fidelity paid me in cash.

Bought as LT: 40 BSBR at $6.01

Q1 2014 Results - Earnings Call Transcript | Seeking Alpha

Closing Price 5/23/14: BSBR: 6.68 -0.02 (-0.30%)

C. R. F. Micro: Rocky Holdings will be the tentative name for the company resulting from the merger of R.F. Micro and TriQuint Semiconductor (TQNT). S-4

Rocky Holdings will be a major component supplier for Apple and Samsung phones.

Both RFMD and TriQuint recently reported better than expected earnings. For its fiscal 4th quarter ending 3/29/14, RFMD reported non-GAAP E.P.S. of $.12 on $288.5M in revenues and forecasts non-GAAP E.P.S. of approximately $.17 in the current quarter.

Earnings Call Transcript | Seeking Alpha

Bought as LT: 50 RFMD at $5.18 (12/31/13 Post)

RFMD has just about doubled in price during 2014 so far. RFMD Interactive Chart

Closing Price 5/23/14: RFMD: $9.45 +0.19 (+2.05%)

D. Bought 30 MGIC at $7.9 (see Disclaimer): 

Snapshot of Trade:

Any small technology company is automatically assigned to the LT category. There is nothing in my background that would allow me to make an intelligent assessment about the products and services offered by a company like Magic Software. There is nothing that I could say about this company that would be worth anything.

The buy was made primarily on statistical criteria:
MGIC Key Statistics (Based on $7.83 Share Price and Earnings Through Q/E 3/2014)
Forward P/E: 14.29
5 Year Estimated P.E.G: 1.7
P/B: 1.68
Return on Equity: 11.76%
Cash Per Share: $2.2
Dividend Yield (before Israel's withholding tax):  3.1%

Magic Software Enterprises (MGIC) is an Israeli based company that is a "global provider of mobile and cloud-enabled application and business integration platforms". For the 2014 first quarter, the company reported non-GAAP earnings of $.12 per share, up from $.11. Non-GAAP operating income increased 23% Y-O-Y to $4.5M. There were more shares outstanding in the current quarter due to an offering made earlier this year which knocked that the share price some. SEC Filing

The company closed an offering of 6.9M shares at $8.5 per share. SEC Filing

This stock was on my LT monitor list. I happened to notice a decline in price during early May and decided to tip my toe into the water. The stock was selling above its 200 day SMA and below its 50 day SMA. The share price hit $9.6 last February: MGIC Interactive Chart

The current E.P.S. forecast is for $.49 in 2014 and $.55 in 2014. MGIC Analyst Estimates

Closing Price 5/23/14: MGIC: $7.99 +0.13 (+1.72%)

2. Update for REIT Common and Preferred Stock Basket:

Added: I discovered on 6/10/14 that I had not been including 50 HCP in the following table. I have corrected that omission which will be reflected in the next updated table. Bought 50 HCP at $36.31 (12/31/13 Post)

This basket continues to expand, though there have been some preferred stock deletions under the current trading guidelines. The first publication of this basket was made on 3/5/14: Stocks, Bonds & Politics: Equity REIT Common and Preferred Stock Table as of 3/5/14 I am using a blended strategy of including both common and preferred stocks. I have also recently initiated a starter type position in VNQ which can be bought commission free in my Vanguard brokerage account. I am not discussing most of those small ETF adds.

Since the last update on 4/28/14, I have deleted a few preferred stock holdings in this basket:

Sold Roth IRA: 50 DREPRL at $24.93/Paired Trade: Sold 100 ARCPP at $23.43 and Bought 300 ARCP at $12.69/Sold 100 DLRPRG at $21.55 (5/10/14 Post)

Sold 50 SLGPRI at $23.6 (5/3/14)

There are some preferred stock eliminations that have not yet been discussed: CBLPRE and OFCPRL.

The table also reflects common stock additions and deletions that have not yet been discussed.

I have discussed adding these common stock position

Bought 300 ARCP at $12.69 (5/10/14)-Sold 100 of 400 ARCP at $13.35 (5/17/14 Post)(net add of 300 shares)

Bought: 100 HLP_UN:CA at C$10.17 and 100 American Hotels at C$10.05 (5/3/14 Post)

I also added for ETF for international diversification in this sector: Bought 50 IFGL at $31.27 (5/24/14 Post)

I am picking up higher yields with the common shares. The ARCP common had a higher yield than its preferred at the prices noted above. The Canadian REITs have over 8% yields. The equity preferred stocks were yielding less than 7% at the sales' prices noted above.

Click to Enlarge:

EQUITY REIT Common and Preferred Stock Basket
3. Update for Regional Bank Basket Strategy:

This strategy is explained in my Gateway Post on this topic:

Snapshots of realized gains and losses can be found at the end of that post.

The dividend yield showed in this table is calculated by Yahoo Finance based on last Friday's close. My dividend yield for each position will be different based on my total cost numbers. In most cases, with FNFG and VLY being notable exceptions, my dividend yield will be higher.

Dividend Yields Based on Total Cost Over 5%:
NYCB: 8.44%
UBCI: 7.66%
WASH: 7.56%
CCNE: 5.86%
CZNC: 5.39%
TRST: 5.1%

I am not tracking reinvested dividends in the following table. The unrealized gains per holding do not include reinvested dividends.

Over the life of this basket strategy, I anticipate that the dividends will provide 40% to 50% of the total return. I am generally keeping my total exposure between $40,000 to $50,000.

I am near the lower end of that range after several small adds since my last update.  

Several stocks previously sold at higher prices are moving back into my fair value range. The price declines over the past few weeks have brought a few others near the upper end of my fair valuation range.

I have not been impressed with several of the 2013 4th quarter and the 2014 first quarter earnings reports from regional banks. While net interest margin has not contracted much, it is yet to show any expansion either for most banks. Chart: Net Interest Margin for all U.S. Banks - St. Louis Fed

One ETF will own several of the small cap regional banks and REITs that I own now or have owned in the past: PSCF | S&P SmallCap Financials Portfolio

In 2013, my dividend total from this basket totaled $1,932,93, up from $1,896.25 in 2012 and $1,660.57 in 2011. I will have to increase my current exposure significantly in order to exceed the 2013 amount this year.   

Regional bank stocks have declined since my last update, as interest rates started to go back down. The abnormally low rates benefited banks some when deposit yields were repriced down, but even 5 year bank CDs taken out in 2008 at higher rates have now matured, and the positive impact of that repricing is no longer present. Instead, the decline in rates compresses net interest margin. When rates were rising last year, regional bank stocks were in an uptrend based on the common belief that higher intermediate and long rates would be a net positive for them, particularly when short terms were likely to remain near zero through mid-2015 and then rise slowly and modestly in 2016-2017. The rate spike starting last May impacted intermediate and long term rates. Short term rates remained anchored by ZIRP. 

The SPDR S&P Regional Banking ETF

The problem is highlighted by regional bank earnings for the first quarter. Money center banks have sources of income that are not meaningfully available to small banks whose bread and butter primarily involves taking deposits and lending those funds to small businesses and individuals. 

For several small banks more dependent on mortgage originations, the uptick in rates last year hurt their mortgage origination business and caused Y-O-Y declines in earnings. 

There were no sells since the last update. Including the purchase of ONB discussed below, I have previously discussed the following minor adds since the last update: 

Bought 50 FNLC at $15.6 (5/24/14 Post)

Bought  50 CZNC at $18.5 (5/17/14 Post)

Bought: 50 BPFH at $12.35, 50 TRMK at $22.73 (5/10/14 Post)

Realized Gains: $15,808.58
Dividends Computed Annually Only 2010-2013: $6,623.72 

Click to Enlarge:

Regional Bank Basket as of 5/23/14

The regional bank basket outperformed the regional bank ETF KRE last Friday. My basket was up .83% while KRE closed at  38.14 +0.18 (+0.47%).

This year has been a tough one so far for regional banks.

Comparison Data From the St. Louis Fed:
Net Interest Margin for all U.S. Banks
Net Interest Margin for U.S. Banks with average assets under $1B
Net Interest Margin for U.S. Banks with average assets between $1B and $15B
Return on Average Equity for all U.S. Banks   (abbreviated to "ROE")
Return on Average Assets for all U.S. Banks (abbreviated to "ROA")
Nonperforming Loans (past due 90+ days plus nonaccrual) to Total Loans for all U.S. Banks (abbreviated to "NPL ratio")
Charge-Off Rate On All Loans, All Commercial Banks
Assets at Banks whose ALLL exceeds their Nonperforming Loans (coverage ratio over 100%)(ALLL=Allowance for loan losses)

A. Berkshire Hills: Berkshire Hills Reports reported core earnings of $.42, up from $.40 in the year ago period. The consensus estimate was for $.4 per share.

Net Interest Margin: 3.35%
Efficiency Ratio: 64.42%
NPL Ratio: .6%
NPA Ratio: .46%
Charge Offs Annualized: .3%
Coverage Ratio: 132%
ROTE: 10.84%

After selling 50 BHLB shares at $28.74 (+$338.12), I reinitiated a 50 share position at $24.51 last February. I am now in the red for those shares.

2015 E.P.S. Estimate: $1.87 BHLB Analyst Estimates

Closing Price Last Friday: BHLB: 22.67 +0.12 (+0.53%)

B. Bridge Bancorp: Bridge Bancorp reported core E.P.S., which excludes acquisition related expenses of $.35 per share, up from $.32 in the year ago quarter. The consensus estimate was for $.28.

Financial Data 2014 1st Q vs. 2013 1st Q
The following numbers are excellent:

NPL Ratio: .33%
NPA Ratio: .18%
Coverage Ratio: 431.22%

The capital ratios remain good:

After selling my higher cost shares profitably, I currently own 109+ shares at an average cost of $19.05 per share (see snapshot at Item # 4  Pared BDGE Selling Highest Cost 56 Shares at $24.71)

Closing Price Last Friday: BDGE: $24.15 +0.22 (+0.92%)

C. NBT Bancorp: NBT Bancorp reported core net income of $18.4M for the 2014 first quarter or $.42 per share, up from $.39 in the 2013 first quarter.

Net Interest Margin: 3.68%
NPL Ratio: .99%
NPA Ratio: .73%
Coverage Ratio: 128.19%
Charge Offs Annualized: .27%
ROTE (core): 14.48%
Total Risk Based Capital Ratio: 13.06%

Subsequent to 3/31/14, NBT also noted that one of its wholly owned subsidiaries sold its 20% ownership interest in Springstone Financial, acquired for $3M. to LendingClub who acquired all of Springstone's outstanding equity for $140M in cash and preferred stock, or $28M for a 1/5th ownership interest.

Closing Price Last Friday: NBTB: $22.79 +0.21 (+0.93%)

D. First Financial: First Financial Bancorp reported first quarter net income of $15.1M or $.26 per share, up from $.24 in the year ago quarter. Loans, excluding "covered loans", rose 12.6% on an annualized basis. Covered loans are subject to a loss sharing agreement with the FDIC. FFBC acquired two failed banks in 2009 through FDIC assisted transactions. (page 2 2013 Form 10-K) FFBC currently has 106 banking centers in Ohio, Indiana and Kentucky.

Net Interest Margin: 3.82%
NPA Ratio: .95%
Charge Offs Annualized: .23%
Coverage Ratio for Nonaccrual Loans: 121.76%
Adjusted ROA: 1.02%
Adjusted ROTE: 11.13%

The capital ratios remain good:

Earnings Call Transcript - Seeking Alpha

Between the 2011 third quarter through the 2013 4th quarter, FFBC paid a special quarterly dividend that resulted in paying out 100% of net income. The regular dividend is currently $.15, up from $.12 during the period when FFBC was paying that special dividend. Stock Splits & Cash Dividends | First Financial Bank

After profitably selling my highest cost shares, I currently own 137+ shares at an average cost of $14.84. Item # 4 Sold 57 FFBC at $17.03-Highest Cost Shares The current dividend yield based on that total cost number is 4.04%.

Closing Price Last Friday: FFBC: $16.16 +0.16 (+1.00%)

E. United Bankshares: United Bankshares reported first quarter net income of $30.1M or $.48 per share up from $.43 in the 2013 first quarter.

Net Interest Margin: 3.7%
Efficiency Ratio: 50.92%
NPL Ratio: 1.11%
NPA Ratio: 1.18%
ROA: 1.14%
ROE: 8.57%
Total Capital Ratio: 13.3%

Item # 2 Bought 50 of UBSI at $16.56 (November 2009 Post)

The current quarterly dividend is $.32 per share: United Bankshares, Inc. (UBSI) Dividend History

Closing Price Last Friday: UBSI: $29.76 +0.18 (+0.61%)

F. New York Community: New York Community Bancorp reported cash earnings of $.29 per share and GAAP earnings of $.26 per share.

The current quarterly dividend is $.25 per share. New York Community Bancorp, Inc. (NYCB) Dividend History Given the payout ratio, a dividend cut is certainly a possibility.

I currently own 150 shares after paring my position: Added 50 NYB at $12.79 (February 2012) and two trades from October 2009: Bought 50 NYB at $11.3 and Added 50 NYB at $11

I have sold 100 shares, with the largest gain ($331.02) realized on a 50 share lot. Sold 50 NYB in IRA at $17.51-Added 50 NYB at $10.57

Earnings Call Transcript - Seeking Alpha

Closing Price Last Friday: NYCB: $15.35 +0.07 (+0.46%)

G. Bought 50 ONB at $13.29 (see Disclaimer):

Snapshot of Trade:

Old National Bancorp (ONB) is the largest financial services company headquartered in Indiana and is among the top 100 banking companies in the U.S.

I have previously bought and sold Old National Bancorp twice as part of the regional bank basket.

Item # 1 Sold 50 ONB at $14.12 (7/6/13 Post)(snapshot of profit=$95.13)-Item # 4 Bought Back 50 ONB at $11.9 May 2013

Item # 1 SOLD 100 ONB at $13 (August 2012)(snapshot of profit=$99.07)-Item # 4 Bought 100 ONB at $11.85 (5/24/12 Post)

Total Realized Trading Gains=$194.2

My only observation about the foregoing history is that my last purchase was at least below my last sale's price.

I decided to repurchase shares after reading the 2014 first quarter earnings report. ONB reported net income of $26.5M or $.26 per share, up from $.24 in the 2013 first quarter.

Net Interest Margin: 4.22% (good)
Efficiency Ratio: 67.77% (ex item: 65.81%)(needs to go below 60%)
NPL Ratio: 2.15% (viewed as too high, down from 2.31% as of 12/31/13)
Coverage Ratio: 41.5%  (excludes FDIC covered loans)
ROA: 1.12%
ROE: 9.03%
Tangible Equity to Tangible Assets: 8.82%
Charge Offs: (.02%) (i.e. a net recovery)

The capital ratios are good:

The Board declared the regular $.11 per share quarterly dividend.

At that quarterly rate, the dividend yield at a total cost of $13.29 is about 3.31%.

2014 1st Q 10-Q

2013 Annual Report SEC Form 10-K (historical financial data for 2009-2013 at page 27)

As of 12/31/13, ONB had 169 "branches and financial centers".

ONB SEC Filings

The consensus E.P.S. as of 5/18/14 was $1.05 for 2014 and $1.17 for 2014. ONB Analyst Estimates At a total cost of $13.29 per share, the forward P/E based on that 2015 estimate is about 11.36

Closing Price Last Friday: ONB: $13.73 +0.01 (+0.07%)

H. Bar Harbor: I received 25 shares in a 3 for 2 stock split, and now own 75 shares:

Bought 50 BHB at $30 (adjusted to $20 per share post split)

Snapshot of Position with Revised Adjusted Cost:

75 Shares of BHB-Average Cost Per Share=$20.11
Closing Price Last Friday: BHB: $25.76 -0.29 (-1.10%)