Saturday, May 3, 2014

CANADIAN BASKET TABLE and Negative Correlation/SU, COP/Penn Virginia Resources Bond Redemption/Bought 100 of AIF at $17.88/Sold: 50 AEB at $21.28, 50 PRDSY at $16.2/Bought: 100 HLP_UN:CA at C$10.17 and 100 American Hotels at C$10.05/Sold 50 SLGPRI at $23.6

Closing Prices Last Friday:
S & P 500 : 1,881.14 -2.54 (-0.13%)
DJI: 16,512.89 -45.98 (-0.28%)
TLT: $112.71 +0.69 (+0.62%) : iShares 20 Year Treasury Bond ETF
GLD: $125.06 +1.26 (+1.02%) : SPDR Gold Trust
SLV: $18.69 +0.34 (+1.85%) : iShares Silver Trust
KRE: $38.55 +0.20 (+0.52%) : SPDR S&P Regional Banking ETF
VNQ: $73.22 -0.03 (-0.04%) : Vanguard REIT ETF
VIX: 12.91 -0.34 (-2.57%)

Several of my baskets were negatively correlated with U.S. stock indexes on Friday.

The Canadian basket, which includes only securities purchased on the Toronto exchange, rose .37% on Friday:

Click To Enlarge
Canadian Basket as of 5/2/14
The Equity REIT basket rose .26%; the Regional Bank Basket, which has some new additions since the last update was up .14%; and the Exchange Traded Bond and Preferred Stock Basket increased by .17%. Even the LT Basket was up by .28%. 

Big Picture Synopsis:

Stable Vix Pattern (bullish)
Use of the VIX as a Timing Model
Short Term: Market Needs to Correct 15+%
Intermediate Term: Slightly Bullish
Long Term: Bullish

Jeremy Grantham continues to say that the market is 65% overvalued, but believes that it is more likely than not to become even more so. Then, in his opinion, there will be another "reversion to the mean" or what others would call another crash. He cites John Hussman's negative views with approval. Barron's  The Hussman Strategic Growth Fund, HSGFX, has a 10 year annualized total return of -1.2% and lost -6.62 in 2013 and -12.62 in 2012.  

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

Under my current trading guidelines, I have been jettisoning a number of preferred stocks and bonds over the past few weeks.

I would argue that the long term secular bull market in bonds, which started in 1982, ended in July 2012 when the ten year treasury closed at a 1.43% yield on 7/25/12. (daily 10 year yields at the

In my opinion, the FED's substantial intervention in the bond market has caused rates to be lower than they would be in a free market where market participants set rates based on the usual criteria including inflation expectations and demand. The treasury yields for various maturities are the benchmarks for other bond yields.

While the FED has started to taper, it will still be buying $25B in treasuries in May and currently owns over $2.2 Trillion in treasuries. For many longer term notes and bonds, the FED owns more than 50% of the outstanding amount. (click T notes and bond tab at System Open Market Account Holdings - Federal Reserve Bank of New York)

When the government is buying that much of its own paper, it creates an artificial shortage in the longer dated paper which causes other buyers, mainly foreign governments, pension funds and other institutional buyers interested in long maturity bonds, to bid up the price and to accept lower yields.

The U.S. does not have a normal bond market, but we are clearly moving toward one again. The FED will end its asset buying spree late this year (or in the 2015 1st quarter at the latest), and will end ZIRP sometime in 2015.

While the FED has stated that it will not sell mortgage backed securities,, it has made no such commitment for its treasury holdings.

To reduce its balance sheet, while continuing to hold mortgage securities, the FED will have to start selling longer dated treasury notes and bonds, possibly starting in late 2015 or early in 2016. This will be occurring at a time when the government is continuing to face substantial budget deficits, due in significant part to retiring baby boomers starting to collect SS and to enroll in Medicare, and a need to refinance maturing treasuries at higher rates.

The long term fiscal outlook is not supportive of bond prices remaining at historically abnormal rates for much longer.

Sooner rather than later, there will be a leak in the dam and rates will shoot up from currently depressed levels.  

Recent Developments:

The BLS reported yesterday that the U.S. economy added 288,000 jobs in April, and the unemployment rate fell to 6.3% (lowest level since September 2008). The labor participation rate fell .4% to 62.8%. The job numbers for February and March were increased by a total of 36,000. Professional and business services added 75,000 jobs. Employment Situation Summary The U-6 number fell to 12.3 from 12.7. Table A-15. Alternative measures of labor underutilization

According to the government's first estimate, real GDP rose at a .1% annualized rate in the 2014 first quarter, compared to the year ago first quarter. News Release: Gross Domestic Product The consensus estimate was for 1.1% growth. Real personal consumption expenditures rose 3%. Disposable income increased by $103.1B or 3.3%. The personal savings rate was 4.1% in the first quarter. Personal savings (disposable income minus outlays) was reported at $518.7B. The PCE price index increased at an annualized rate of 1.4%.

As expected, the FED announced last Wednesday that it will reduce its monthly asset purchases by another $10B starting in May. This last reduction shrinks the monthly purchases of treasuries to $25B and mortgage backed securities to $20B. FRB: Press Release--Federal Reserve issues FOMC statement--April 30, 2014

ADP reported that private payrolls increased by 220,000 in April. ADP National Employment Report - April 2014

ISM reported that its manufacturing PMI for April rose to 54.9 from 53.7. The employment component rose to 54.7 from 51.1, while new orders remained flat at 55.1.  

Suncor (own):

The market reacted favorably to Suncor's first quarter results. The company reported record operating earnings of C$1.793B or C$1.22 per share and net earnings of C$1.01 per share. Cash flow was reported at C$1.96 per share.

Closing Price 4/29/14: SU: $38.94 +1.51 (+4.03%)

I own the NYSE listed SU shares which have underperformed the Canadian listed shares over the past year due to the weakness in the CAD. I took this snapshot after the close of trading on 4/29:

The Canadian Dollar rose against the USD on 4/29/14 so the NYSE listed shares, priced in USDs, outperformed the Toronto listed shares that day priced in CADs. The rise in the CAD is reflected in the currency ETF FXC priced in USDs:

Closing FXC Price 4/29/14: FXC: $90.80 +0.59 (+0.65%)

I own only 50 SU shares: Bought 50 SU at $28.67

I also own two Canadian energy ETFs that  own Suncor and CNQ, another Canadian energy company that I own. One of those is listed on the Toronto exchange and the other is traded in the U.S.: Canadian Energy Income ETF (ENY). I last bought ENY shares back in August 2013: Item # 4 Added 50 ENY at $14.04 I currently own 155+ shares at an average cost per share of $15.6.

Current ENY Holdings

The Canadian iShares Energy Index ETF (XEG:TOR) has much heavier weightings in Suncor (17.93%) and CNQ (14.4%), compared to ENY at 5.35% and 5.19% respectively, both as of 4/29/14.

Sponsor's website: iShares Canada ETF

The Canadian ETF is viewed as a long term holding. I have traded ENY several times in the past.

Closing Prices Last Friday:
SU: 39.33 +0.55 (+1.42%)
ENY: 16.15 +0.03 (+0.22%)
XEG.TO: 20.06 +0.18 (+0.91%)
Conoco (own): 

I would just add that the market liked COP's earnings report for the first quarter. ConocoPhillips Reports First-Quarter 2014 Results; Strong Production and Cash Margin GrowthEarnings Call Transcript - Seeking Alpha

The report is discussed in this Seeking Alpha article.

Item # 6 Bought:  50 COP at $63.68 (2/10/14 Post)Item # 1 Bought 50 COP at $68.87 (January 2014 Post);

Closing Price Last Friday 5/2/14: COP: $76.52 +1.49 (+1.99%)


1. Bought 100 AIF at $17.88 (see Disclaimer):

Snapshot of Trade:

Security Description: Apollo Tactical Income Fund (AIF) is a leveraged new closed end fund that uses a tactical approach in allocating investments between senior secured bank loans, high yield corporate bonds and other credit instruments.

Page 5, Annual Report as of 12/31/13-Apollo Tactical Income Fund Inc.

CEFConnect Page for AIF

Sponsor's Website: Apollo Tactical Income Fund

Dividends are paid monthly at the current rate of $.117 per share. Apollo Tactical Income Fund Inc. Declares May 2014 Monthly Distribution of $0.117 Per Share 

March Fact Sheet (weighted average rating "B", modified duration 3.3 years; number of holdings 150, average floating rate spread 5.65%; average fixed rate coupon 8.92%)

Since inception on 2/25/13 and through 3/31/14, the fund's total return based on net asset value was 11.82% but the return based on the market price was -3.88%.

I did not notice when I bought the shares for some reason, but AIF went ex dividend on 4/15 for its monthly distribution. I will receive that dividend since I bought on April 14th. 

Data on Day of Trade: 4/14/14
Closing Net Asset Value Per Share: $19.94
Closing Market Price: $17.87
Discount: -9.93%

Since this is a new fund in existence for slightly more than a year, the historical discount numbers are not relevant.

Prior Trades: None

Rationale: While the past may or may not be prologue, impossible to say really, this fund did perform well during the last rate spike compared the junk bond ETF JNK and the investment grade corporate bond ETF LQD:

5/1/13 NAV Per Share (unadjusted for dividends): $19.43
9/3/13 NAV Per Share:  $19.09
Down: 1.65%

JNK= -5.16% (greater weighting in BB-JNK - SPDR Barclays High Yield Bond ETF)

LQD (ETF Investment Grade Corporates)= -8.23%

The dividend yield of AIF is also higher than any bond ETF and much higher than investment grade bond ETFs.

The yield is about 7.85% at a total cost of $17.88 per share, assuming a continuation of the $.117 monthly rate. 

Risks: Credit risks are high given the credit quality of the junk rated portfolio. I would characterize credit risk to  be the biggest risk. Typical CEF risks are highlighted by the fund increasing its net asset value per share since inception as the market price went from a premium to almost a 10% discount. The leverage was at 32.5% as of 3/31/14.  

Future Buys/Sells: I regard this as a temporary holding and likely to be sold when and if I have a 10% annualized total return. I may sell sooner for a loss or a small gain provided I am spooked by the net asset value per share performance. I would not sell based on the market price declining more with the net asset value rising or being more or less stable. I would consider buying in that later scenario.

Closing Price Last Friday: AIF: $18.04 +0.02 (+0.11%) 

2. Bought 100 American Hotels at C$10.05 (Canadian Dollar (CAD) Strategy)(see Disclaimer):

Snapshot of Trade:

Snapshot of Quote Before Trade:

I was able to pay for the commission by waiting for a day when the price declined by more than $19 CADs for a 100 share order.  

Snapshot of Exchange from USDs to CADs to Fund the Entire Purchase Including the $19 CAD brokerage commission (just to show how it is done):

When I was entering the order details, I elected to settle the trade in USDs, which caused an automatic conversion from USDs into CADs immediately after the order was filled.

This would include a conversion fee of 1% paid to the broker built into the exchange price. (click "what are the international stock commissions and fees": International Stock Trading - Fidelity Investments)

Security Description: American Hotel Income Properties REIT LP (HOT.UN:TOR) is an unusual Canadian REIT in that it owns hotels mostly located in U.S. that cater primarily to railroad employee accommodation.

Given the small size and narrow focus, I did want to own more than 100 shares. Since I have to pay Fidelity a C$19 commission to buy a stock traded on the Toronto exchange, I just waited for the share price to sink more than C$19 before I entered an order. Even after a 1% conversion fee and the C$19 commission, I only paid USD$942.1 for the 100 shares, priced at C$1,024 with the commission. 

Website: American Hotel Income Properties REIT LP

Pictures of the Hotels can be found at Properties.

This is a new Canadian REIT which is another reason for the small purchase. The current monthly distribution is C$.075. Assuming a continuation of that rate, which is in no way assured, the yield at a total cost of C$10.05 per share would be about 8.96%.

This REIT went ex dividend for its monthly distribution on 4/28 (13 days after my purchase), which is the date when all of my Canadian REITs went ex dividend for their monthly distributions. There will only be some slight variations in some of the payment dates. 

Prior Trades: None

Rationale: There are three themes for U.S. investors in Canadian REITs now. First, the distributions are paid monthly and the yields are generally superior to American REITs. Second, for those with no CAD stash and have to convert USDs into CADs, the securities are cheaper based on the roughly 10% decline in the CAD/USD over the past year. It was not that long ago that 1 CAD would buy 1.05 USDs, and the rate now is close to 1 CAD/.9 USD which means that the security will cost less for a buyer in a stronger currency. Third, many of the prices were slammed during the rate spike period last year, and have not recovered much lost ground when rates stabilized and started to drift down.

Risks: Currency risk is always present, but I mitigate that risk by being a long term holder of CADs and an opportunistic buyer of the currency. This is a both a small and a new REIT, and both of those observations entail risks. The business model is unique and limited in scope. What if the firm loses a major railroad contract? Would there be enough demand to fill the empty spaces. Those types of considerations led to me to buy only 100 shares. 

Future Buys and Sells: I will not buy anymore shares. If and when I can harvest a 10% annualized total return after commission, I will consider doing so.

Closing Price Last Friday: HOT-UN.TO: C$10.71 +0.02 (+0.19%) 

3. Sold 50 PRDSY at $16.2 (The $500 to $1,000 Flyers Basket Strategy)(see Disclaimer): Trades in this particular strategy have turned into flips. 

Snapshot of Trade:

2014 Sold 50 PRDSY at $16.2
Snapshot of Profit:

2014 PRDSY 50 Shares +$43.33

Security Description: Prada S.p.A. ADS (PRDSY) is an Italy based company engaged in the design, manufacture and distribution of high end luxury goods.  

Rationale: I am just entertaining myself. This kind of security pays a negligible dividend, and I am an income focused investor.

Closing Price Last Friday: PRDSY: $15.85 -0.05 (-0.31%)

4. Sold 50 AEB at $21.28  (See Disclaimer)

Snapshot of Trade:

The AEGON Floating Perpetual Capital Security (AEB ) is an Aegon Hybrid that pays qualified dividends at the greater of 4% or 7/8% above the 3 month LIBOR rate on a $25 par value:

AEB Recent History-Satellite Taxable Account:

Snapshot of AEB Profit:

2014 AEB 50 Shares +$49.98
Total Realized Gains: $3,259.4 ($3,209.42 in prior trades with small lots, snapshots at the end of Stocks, Bonds & Politics: Aegon Hybrids: Gateway Post)

Prior Trades: My two lowest purchase prices were $4.8 and $5.5.

Rationale: I am gradually shifting, at least temporarily, from lower yielding securities, particularly floaters that pay the greater of a minimum (3.5% to 4% depending on the security) or a percentage above the 3 month LIBOR rate. I do not currently anticipate an increase in the low coupon before 2017.

5. Sold 50 SLGPRI at $23.6 (see Disclaimer):

Snapshot of Trade:

Share Profit: $29.58 (no snapshot, less than $30)

Bought: 50 SLGPRI at $22.69 (11/6/13 Post)

I received $60.93 in dividends.

Total Return: $90.51 or 7.92%. 

Related Trades: Snapshots of related trades, which include both the common shares and another equity preferred issue, since redeemed, can be found in the previously linked post.

Security Description: The SL Green Realty Corp. Preferred Series I (SLG.PI) is a REIT equity preferred stock that pays cumulative and non-qualified dividends at the fixed coupon rate of 6.5% on a $25 par value.

Rationale: When I started my Equity REIT Common and Preferred Stock Basket, I added several equity preferred stocks to increase income. I am in a trading mode for all fixed income securities. The current guideline requires that I consider selling an equity preferred stock when the yield at the sale's price falls below 7%. This policy is designed to balance current income with interest rate risks. At a total cost of $23.76, the yield would be about 6.89%.

Future Buys: I will want a 7.5% yield on any future purchase. At a total cost of $22.69 per share, the yield was only 7.16%. There is significant interest rate risks in potentially perpetual equity preferred stocks that have a fixed coupon. Just as a reminder I was able to buy SLGPRC at $10.5, which had a 7.625% coupon and was redeemed at its $25 par value back in June 2013. When and if another 2008 returns, a buy of an equity REIT preferred stock anywhere near par value will not look so hot.

Closing Price Last Friday: SLG-PI: $24.67 +0.03 (+0.12%)

6. Bought 100 HLP-UN at $C10.17 (Canadian Dollar (CAD) Strategy)(see Disclaimer):

Snapshot of Trade:

Quote Near Time of Trade:

Security Description: Healthlease Properties Real Estate Investment Trust (HLP.UN:TOR) is a Canadian REIT that owns senior assisted living facilities in the United States and Canada. This REIT uses "long-term and triple-net" leases. About Us - Overview

HealthLease Properties REIT - Home

Map of Properties: Properties

HLP went ex dividend for its monthly distribution on 4/28/14, seven days after my purchase on 4/21.

Prior Trades: None

Recent Earnings Release: I only had the 2013 4th quarter report to examine when I made this investment. For that quarter, the company reported AFFO per share of $.24 and FFO per share of $.26. Distributions paid during the quarter amounted to $.21 per share. The company has 43 income properties at year end, up from 13 as of 12/31/12.

Rationale: This is primarily an income play. If I could liquidate this position in two to three years at break-even on the shares, I would be satisfied with the result. I also receive some sector diversification with this company.

Risks: Currency risk is important for those investors who use a foreign currency to buy a security on the Toronto exchange.

This REIT is not internally managed which adds a variety of risks, particularly when the external management company is selling property to the REIT after an appraisal made by an "independent" third party. There is at least a potential for conflicts of interest. Related party transactions are summarized in note 18 of the 2013 4th quarter report, starting at page 37.

This is a new REIT that is growing through acquisitions.

Closing Price Last Friday: HLP-UN.TO: $10.09 -0.04 (-0.39%)

7. Penn Virginia Bond Redemption:

Snapshot of Profit:

1 Penn Virginia 8.25% Bond +$53.25

Bought 1 Penn Virginia Resources 8.25% Senior Bond Maturing 4/15/2018 at 98 (August 2011)


  1. Can you explain the actual mechanics of buying on the Toronto exchange and how you hold Canadian dollars.

    Which broker can you buy through and can you do this in an IRA?

    ge j

  2. I use Fidelity.

    That site explains how it is done and provides a snapshot of an order box.

    Other brokerage firms allow for international trading.

    I would not own any dividend paying foreign stock in an IRA that is subject to a withholding tax.

    You can not recover the foreign tax when the dividend is paid into a retirement account.

    See: Claiming Foreign Taxes: Credit or Deduction?

    All of my Canadian securities are owned in taxable accounts for that reason.

    When I first started international trading at Fidelity several years ago, that firm did not allow for international trading in IRAs. I also had to talk to a Fidelity representative first, which may or may not be required now.

    You would enter a trade just as you do for a U.S. exchange listed stock.

    You first have to know the symbol. For Fidelity, the symbol for a Toronto listed security will always end in


    So, if I wanted to buy more of COMINAR REAL ESTATE INVESTMENT TRUST UNITS, I would enter the symbol CUF_UN:CA. You could do a symbol search using the company name "Cominar" at the brokerage website to see what symbol is used by each broker.

    Once you know the symbol, then you would enter either a limit or a market order and the number of shares (Fidelity does not allow for odd lots for Toronto purchases, so I have to buy 100, 200, or 300, etc rather than 150 or 250 or 50)

    I then have to enter how I want to settle the trade. Since I own CADs, I could settle the trade with CADs. If I did not own enough CADs or none at all, I could select to settle the trade in USDs which would cause a conversion from USDs into CADs once the order is filled as I noted in today's blog.

    When available, the brokerage commission would be lower by buying the ADR (e.g. SU) rather than the ordinary shares SU:CA. Fidelity also has a currency conversion fee of 1%. Except for this one trade discussed today, I settle the Toronto trades (buy and sell) in CADs, so I am just charged that fee for the initial conversion which occurred some time ago. The main benefit for buying a dividend paying stock in Toronto is that I receive payment in CADs, which is what I want, rather than USDs which would be the case for an ADR.

    I have to break my answer into two parts due to the length.

  3. The other reason for buying on the Toronto exchange is liquidity and narrower buy/ask spreads compared to buying Canadian securities in the U.S. Grey Market which should be avoided (some brokers also add a $50 fee for trades of a foreign ordinary stock in the U.S. Grey Market). The Canadian ETFs and most Canadian REITs are only available for purchase in the U.S. using USDs on the Grey Market, a dark market where bid and ask spreads are never displayed and it is like going into a dark room and asking whether anyone is willing to sell a stock and at what price, and no one answers.

    For most individual investors, foreign securities should be purchased only in the ADR form of ownership on a NYSE exchange using USDs. You face the same currency risk buying those shares, good or bad, that I would have by converting USDs into the foreign currency to buy on a local exchange and then converting back when I sell the stock. In both cases, the foreign currency exchange rates at the time of purchase and sell will impact the profit/loss.

    In addition to the Canadian stocks traded on the NYSE as ADRs, some others are traded in the ADR format on the pink sheet exchange which is a less liquid market.

    Before buying in that market, the investor needs to convert the ordinary share price in Toronto into USDs before entering a limit order.

    Some Canadian REITs are available in the U.S. pink sheet exchange and their price will reflect the conversion rate. So an investor could have bought ARTIS last Friday using USDs on the U.S. pink sheet exchange at USD$14.5:

    The closing price on the Toronto exchange was $C15.93.

    I used the YF currency converter to translate C$15.93 into USDs and got $14.53:;_ylt=AjXxUIxjHZYPiBea0gm8xSleXfV_;_ylu=X3oDMTE4dnVxcTUyBHBvcwM3BHNlYwNjdXJyZW5jaWVzTmF2BHNsawNjdXJyZW5jeWNvbnY-#from=CAD;to=USD;amt=15.93

    I could spend the same amount of USDs buying Artis shares on the Toronto exchange, assuming no currency conversion fee and an identical commission rate. Some brokers may have much better rates on currency conversion and brokerage commissions than Fidelity. Interactive Brokers may be one.

    Anyone buying a foreign security needs to first fully comprehend how the foreign currency exchange rate impacts the pricing of the ADR. You do not escape that risk by buying the U.S. listed ADR using USDs.

    My profits in SU and CNQ has been negatively impacted by the weakness in the CAD vs. the USD. I am still doing well, but I would do better if the CAD had risen back to par with the USD after my purchase.

    My ownership of UL and UN has been positively impacted by the strength of the British Pound and the EURO, respectively, against the U.S.D.

    And, when I buy shares on Toronto, the broker calculates my gain or loss based on the conversion values back into USDs, not my profit or loss in CADs even thought both the purchase was made with CADs and I received CADs when selling the stock. So, for Artis, I could sell my 300 shares and receive over C$400 more CADs than I used to purchase the stock but my U.S. gain would be slightly over $100 since the CAD has fallen in value since my purchase.

    This is complicated and most individuals just need to stick with the ADRs.