Saturday, June 28, 2014

DPG, RMT,CVO/Sold ROTH IRA: 50 EPRPRF at $24.65, 50 BPFHP at $24.7/Bought 50 DGRO at $24.82/Sold 50 AGIIL at $24.21-Roth IRA/Sold Taxable Accounts: 50 LARK at $23.5, 222+ Shares of VWITX at $14.11, 50 EVERPRA at $24.9

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

I am continuing to pare my stock allocation. The reduction is aimed at eliminating the net additions since February 2014.

I am doing some ETF paired trades, where I am not increasing my stock allocation, but simply shifting it a tad. I call that kind of movement nip and tuck. I will be discussing those paired trades in subsequent posts. I am currently running about two weeks behind in discussing my trades.

Green Street Advisors recently noted that REITs are selling at about 18 times adjusted funds from operations, compared with a twenty year average of 15. The MSCI REIT Index was yielding only 3.8% at the end of May. WSJ I profitably sold my small position in the Vanguard REIT ETF (VNQ) which can be bought and sold commission free in my Vanguard brokerage account. 

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

I am continuing to pare my bond allocation.

The preceding bond forecast assumes an average annual inflation rate of 2.25% over the next ten years. That would be within the current range forecast made by the market when pricing the 10 year TIP.


Recent Developments:

Real GDP for the first quarter was revised down to a -2.9% annualized rate. This was the third and final estimate. News Release: Gross Domestic Product Excluding recessions, that -2.9% number was the worst GDP report going back to WWII. Even with that bad number, nominal GDP was still up 2.9% from a year ago. I do not attribute all of that decline to the weather.

The personal consumption price index (PCE) increased by .02% in May. Core PCE rose .2%. PCE rose 1.8% Y-O-Y (the rate was .8% Y-O-Y in February) Core PCE rose 1.5%. Real disposable income increased .2% in May. The personal savings rate for May was reported at 4.8%. Personal income rose .4%. Private sector wages increased by .05% and were up 4.3% Y-O-Y. On the negative side, consumer spending rose only .2% and was slightly negative adjusted for inflation. News Release: Personal Income and Outlays

The inflation and GDP numbers, taken together, raise the odds slightly of a Stagflation Scenario, which I do not view as likely.

HSBC's "flash" manufacturing PMI for China rose to 50.8 in June, better than expected and at a seven month high.

Markit's flash manufacturing PMI for the U.S. rose to 57.5 in June, "the strongest upturn in overall business conditions since June 2010".

A research report published under the auspices of the Russell Sage Foundation highlights the growing wealth disparity in the U.S. The 50th percentile went from a net worth of $87,992 in 2003 to $56,335. The 25th mean percentile went from $10,129 to $3,200. The 95th percentile went from $1,192,639 to $1,364,834. The 90th percentile increased from $736,853 to $763,099. Most Americans have their net worth tied up in their homes, and home prices have been much slower to recover than stocks.

Wage increases have barely kept up with inflation for most wage earners. Doug Short has a chart showing the growing spread in real incomes between the top quintile and the four others. That spread started to widen around 1985. A 45-Year Perspective Wealth created by increases in productivity has not been captured in comparable increases in wages. CNN Money Workers don't share in companies' productivity gains - Mar. 7, 2013A Decade of Flat Wages | Economic Policy Institute

Figure 2 at page 2 shows the disparities since 1984. The median household net worth has declined over that thirty year period.

Duff & Phelps Global Utility Income Fund (DPG) 

This leveraged stock CEF has done well since I purchased shares. I first bought a 100 share lot after this Morningstar article published in November 2012. Item # 1 Bought 100 of the CEF DPG at $17.3 (11/29/2012 Post) I later added 100 shares in a Roth IRA, where I am reinvesting the quarterly dividend. Item # 3 Bought 100 DPG at $17.31 (December 2012)

My last add was earlier this year in a taxable account. Item # 7 Added 100 DPG at $18.58 (2/3/14 Post)

Sponsor's website: Duff & Phelps Global Utility Income Fund — Home

This leveraged stock ETF invests globally in electric, gas and water utilities, telecommunication companies and MLPs. CEFConnect Page for DPGDPG Page at Morningstar Those kind of stocks are viewed as bond substitutes by many investors. Consequently, this fund struggled in 2013 when interest rates started to spike up, but has performed well this year when rates started to move back down.

The fund is currently paying a $.35 quarterly dividend per share. Unadjusted for that dividend, the net asset value was reported at $21.46 on 12/31/13. The closing market price that day was $19.08, creating a discount at that time of -11.09%. By 6/20/14, the unadjusted net asset value had grown to $24.28, an increase of 13.14%, with a closing market price that day of $21.54 which created a discount of -11.29%. The discount has remained fairly constant YTD as the unadjusted net asset value increased significantly.

DPG has gone ex dividend twice YTD for its $.35 per share quarterly dividend. DPG Historical Prices

Besides the tailwind created by a decline in interest rates, which could easily reverse and turn into a headwind, this fund has benefited from merger and acquisition activity in the electric utility sector. The fund had, as of 1/31/14, significant positions in Pepco ((POM) and Integrys Energy Group (TEG), both of whom have received and accepted acquisition offers this year:

SEC Form N-Q Duff & Phelps Global Utility Income Fund (period ending 1/30/14)

Shortly before posting this blog, I noticed that DPG had filed its shareholder report, so I made a snapshot of the relevant portion showing that the fund still owned Pepco and Integrys as of 4/30/14:

Duff & Phelps Global Utility Income Fund Semi-Annual Report

Integrys rose last Monday after accepting an acquisition offer from Wisconsin Energy. Wisconsin Energy to acquire Integrys Energy Group for $9.1 billion in cash, stock and assumed debt Pepco agreed to be acquired by Exelon.

Closing Price Last Friday: DPG: $21.93 +0.10 (+0.46%)

RMT Dividend: 

For about a year now, I have elected to receive RMT's dividends in cash which was ignored by the broker. I received 54.797 shares bought with a $673.45 distribution late last year. (snapshot in introduction to RMT; average cost per share for that reinvestment was $12.28)

Finally, the instruction was followed, and I received the last quarterly dividend in cash:

I am very concerned about small cap valuations and recently lightened my exposure to this stock CEF by selling my highest cost shares. Item # 9 Sold: 200 RMT at $12.8-Lowers Average Cost Per Share to $8.61 (snapshot of remaining 549+ shares).

According to Birinyi and Associates, the TTM P/E on the Russell 2000 is 84.41 which is calculated using "as reported" numbers. P/Es & Yields on Major Indexes - The forward estimated P/E, which is based on "operating earnings", is 19.6. The later excludes items that companies want investors to ignore.

Friday's Closing Price: Royce Micro Cap Trust (RMT) $12.54 +0.04 (+0.32%)

CEFConnect Page for RMT

I am likely, at some point this year, to sell my remaining highest cost shares, all purchased with dividends including the December 2013 distribution, provided I can do so profitably. I could do so now. This will enhance the value of those dividends and lower my average cost below the current $8.61 per share.

Cenveo Second Lien Note:

Last week, I received a notice that my Cenveo second lien bond was being called by the issuer. That note has a 8.875% coupon and matures in 2018. Bought 1 Cenveo 2nd Lien at 92.499 An optional redemption requires a premium payment of 104.44 ($1,044.38 for 1 bond), plus accrued interest.

The proceeds for this redemption were raised last week. Cenveo Closes New Secured Notes Offering


1. Bought 50 DGRO at $24.82 (see Disclaimer): This was a chicken buy. 

Snapshot of Trade:

Security Description: The iShares Core Dividend Growth ETF (DGRO) is a new and low cost ETF that focuses on dividend growth. 

One of the reasons for nibbling at this stock ETF was the .12% expense ratio. That simply means that the owner of this ETF will receive most of the dividends paid by the stocks owned by this fund (including, importantly for any long term holder, their dividend increases)  

Top Ten Positions as of 6/13/15:

As of 6/13/14, this ETF owned 269 stocks. DGRO Holdings 

The methodology for dividend increases is not as strict as some dividend growth funds. The increases in dividends only have to occur for five years. The payout ratio has to be less than 75%. A stock can remain in the index without an increase in the dividend provided it reduces its shares outstanding by stock buybacks and does not decrease the dividend. In my dividend growth strategy, I would prefer for my initial purchase a payout ratio of less than 50% and at least 10 years of consecutive dividend increases. 

Prior Trades: None. This is a new ETF. 

Rationale/Future Buys and Sells: Given the robust rally in stocks since March 2009 and particularly the move since August 2011 without a correction, I am hesitant to buy stock funds and that is reflected in my 50 share nibble. I would like to see at least a 15% correction, sooner rather than later, that will make stocks slightly more attractive than now.

Consequently, I would average down with another 50 share purchase, but will not average up. Instead, if this ETF went up in price by 10% or so without the market correcting, I would more likely than not sell this odd lot.

Closing Price Last Friday: DGRO: $25.07 +0.14 (+0.56%)

The remaining trades involve the downsizing of my fixed income portfolio and reflect my small ball and hyper trading approaches for this asset class. 

2. Sold 50 AGIIL at $24.21-Roth IRA (see Disclaimer):

Snapshot of Trade:

Snapshot of Roth IRA History:

Snapshot of Profit: 

2014 AGIIL 50 Shares +$186.48

Total Return= $227.1 or 22.33% in about 6 months

Item # 6 Bought 50 AGIIL at $20.2 (December 2013 Post)

Prior Trade: Item # 2 Sold: 50 AGIIL at $24.48 (6/7/14 Post)(snapshot realized gain=$152.58; total return $193.2 or 18.17% in about 7 months)-Item # 3 Bought:  50 AGIIL at $21.11 (October 2013 Post)

Total Return 100 Shares (two 50 share lots, different accounts)=$420.30 

Security Description: The Argo Group International Holdings Ltd. 6.5% Senior Notes Due 2042 (AGIIL) is a senior unsecured bond issued by the Argo Group, a U.S. subsidiary of the Argo Group International Holdings Ltd.  (AGII). This note makes quarterly interest payments at the fixed coupon rate of 6.5% per annum on a $25 par value. The issuer has the option to redeem at par plus accrued interest on or after 9/15/2017. If not redeemed early by the issuer, the notes matures in 2042. (asymmetric interest rate risk favoring the issuer)

Final Prospectus Supplement

Rationale: Bond yields are not properly reflecting current inflation and inflation expectations. That is just a huge understatement in my opinion.

The benchmark yields, which are established by the "risk free" treasuries, have been manipulated to artificially low levels. I simply do not view the current yield at my sale's price to be worth the risks inherent in this potentially long term bond, whose interest rate risk is asymmetric between the issuer and its owner.

When selling a bond in the Vanguard Roth IRA, I have been reinvesting the profit in a low cost Vanguard stock ETF, usually buying between 5 to 10 shares commission free. The profit from AGIIL was used to buy 5 more VWO shares. Vanguard FTSE Emerging Markets ETF (expense ratio .15%; 959 stocks as of 5/31/14)

Future Buys: I will want an 8% current yield before I would consider repurchasing this exchange traded bond.

Closing Price Last Friday: AGIIL: $24.64 +0.22 (+0.90%)

3. Sold 50 EVERPRA at $24.9 (see disclaimer):

Snapshot of Trade:

2014 Sold 50 EVERPRA at $24.9

Snapshot of History:

Snapshot of Profit:

2014 EVERPRA 50 Shares +$128.47
Item # 5 Bought: 50 EVERPRA at $22.05 (10/31/13 Post)

Total Return=$170.65 or 15.38% 

Security Description: The EverBank Financial Corp. 6.75% Non-Cumulative Perpetual Preferred Series A  (EVER.PA) is an equity preferred stock issued by the bank holding company EverBank Financial  (EVER) that pays non-cumulative and qualified dividends at the fixed coupon rate of 6.75% on a $25 par value. Final Prospectus Everbank has the option to redeem this security at its par value on or after 1/5/2018.

Rationale: Under the current trading rules, I will consider selling a fixed coupon equity preferred stock when the current yield falls to 7% or lower based on the market price. The yield is about 6.78% at a total cost of $24.9 per share.

I am in a hyper trading mode for equity preferred securities. If I can capture a 10% to 15% annualized return in a few months, I am more than willing to harvest that gain and then simply wait for a better buying opportunity.

Looked at another way, the profit of $170.65 is equivalent to more than two years of quarterly dividend payments captured in advance.

At their current prices and yields, interest rate and volatility risks to the price tilt the risk/reward balance toward disposition based on my opinions and goals (preservation of capital is more important to me than income generation).

Future Buys: Before considering a repurchase of even a 50 share odd lot, I would want a yield greater than 7.5%, preferably over 8%. The yield was about 7.65% at a $22.05 total cost per share.

Closing Price Last Friday: EVER-PA: $24.85 +0.07 (+0.29%)

4. Sold 50 LARK at $23.5 (REGIONAL BANK BASKET STRATEGY)(see Disclaimer):

Snapshot of Trade:

2014 Sold 50 LARK at $23.5
Snapshot of Profit:

2014 LARK 50 Shares +$174.07
Item # 3 Bought  50 LARK at $19.7 (1/13/14 Post)

I owned the shares long enough to receive two quarterly dividend payments, totaling $19:

Total Return: $193.07 or 19.44% (holding period 5+ months)

Company Description: Landmark Bancorp Inc. (LARK) is a bank holding company that owns Landmark National Bank which currently has 30 branches located in 23 communities across Kansas. Landmark National Bank Locations

Last Earnings Report: Q/E 3/31/14

Quarterly Dividend= $.19 per share Landmark Bancorp Inc. (LARK) Dividend History

Prior Trade: SOLD 52 LARK at $18.75 (1/9/12 Post)(snapshot realized gain=$91.89)-Bought 50 LARK @ 16.6 (5/2/11 Post)

Total Trading Gains=$265.96

Rationale: For some reason, this stock popped from a $19.8 close on 6/11/14 to a $23.59 close on 6/17/14, hitting a high intra-day of $23.98 on June 17th. I noticed that pop and elected to sell my shares on the 18th, thinking correctly as it turned out that the stock would quickly reverse gears and turn back down. LARK Historical Prices

Future Buys: I will consider buying this one back below my last purchase price.

Closing Price Last Friday: LARK: $19.91 -0.03 (-0.14%)

5. Sold Entire Position in VWITX (see Disclaimer)

Snapshot of Recent History:

Snapshot of Profit:

2014 VWITX +$74.91
Bought Back VWITX at $13.77 (10/7/13 Post)

Closing Price 6/19/14: VWITX: $14.11 +0.01 (+0.07%)

Rationale: This fund was a temporary repository for funds earning .01% in a Vanguard MM fund. The SEC yield of this fund, as of 6/18/14, was 1.79%, providing me with a negative real rate of return based on both the current and reasonably anticipated CPI numbers.

I would just as soon receive zero percent without risk as 1.79% with interest rate and credit risks. The average duration of this fund, as of 5/31/14, was 4.8 years. Vanguard - Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares A 1% rise in rates would cause about a 4.8% decline in net asset value or well over two years of dividends.

Future Buys: I have reached the point where I have no interest whatsoever in bond funds that have yields anywhere near this one.

6. Sold 50 BPFHP at $24.7-Roth IRA (see Disclaimer): Prior to this sell, I owned 150 shares, with 50 shares held in three separate accounts. I somehow came to the erroneous conclusion that I owned 100 shares which is what I reflected in the last relevant table: Stocks, Bonds & Politics: Update on Exchange Traded Bonds and Preferred Stock Table as of 5/16/2014 This kind of mistake would not have happened a few years ago, but is occurring now. Forgetting how many shares are owned would not happen if I only had accounts at one brokerage company or bought a security only in one brokerage account.

I consequently decided to sell my highest cost lot held in a Fidelity Roth IRA account. Snapshots of the other two 50 share lots can be found below in the "Prior Trades" section.

Snapshot of Trade:

2014 Roth IRA Sold 50 BPFHP at $24.7

Snapshot of Profit: 

2014 Roth IRA 50 BPFHP +$51.58

Bought Roth IRA: 50 BPFHP at $23.35 (5/10/14 Post)

I did hold this security long enough to receive one quarterly dividend payment:

Total Return: $73.3 or 6.24% (holding period about 2 months)

Security Description: The Boston Private Financial Holdings Inc. Non-Cumulative Perpetual Preferred Series D (BPFHP) is an equity preferred stock that pays qualified and non-cumulative dividends at the fixed coupon rate of 6.95% on a $25 par value. Prospectus

Prior Trade: For the remaining 100 shares, I purchased 50 shares in my main taxable account at Fidelity:

BPFHP Main Taxable Account as of 6/27/14/Purchased 12/6/13
Item # 2 Bought: 50 BPFHP at $22 (12/10/13 Post)

The other 50 share lot was bought in a satellite taxable account and was apparently not discussed in this blog:

Related Trade: I also own the common stock in my Regional Bank Basket strategy. Bought: 50 BPFH at $12.35 (5/10/14 Post)

Rationale: The current yield at a total cost of $24.7 per share was 7%. I am selling fixed coupon equity preferred stocks when the yield at the market price falls to 7% or less. That marker is based on a judgment that the balance between interest rate risk and income generation tilts toward disposition at a profit.

Future Buys/Sells: I will want  a 7.5% to 8% yield to buy back these shares. I am currently leaning toward keeping 50 of the remaining 100 shares until I can sell them above the $25 par value. The other 50 shares could be sold at anytime.

Closing Price Last Friday: BPFHP: $24.75 +0.05 (+0.20%)

7. Sold 50 EPRPRF at $24.66-Roth IRA (see Disclaimer): 

Snapshot of Trade:

2014 Roth IRA Sold 50 EPRPRF at $24.66

Snapshot of History:

Item # 1 Bought Roth IRA: 50 EPRPRF at $22.5 (3/17/14 Post)

Snapshot of Profit:

2014 Roth IRA $0 EPRPRF +$93.98

Total Return: $114.68 or 10.13%

Security Description: EPR Properties 6.625% Series F Cumulative Preferred (EPR.PF) is an equity preferred stock that pays cumulative and non-qualified dividends at the fixed coupon rate of 6.625% on a $25 par value. The issuer has the right to redeem on or after 10/12/2007: Prospectus

Related Trade: Bought  30 EPR at $53.3

Rationale: The yield at $24.66 is about 6.72%. The same rationale for selling this equity preferred discussed above applies to this transaction.

Future Buys: I will want a current yield of at least 7.5%, and preferably over 8%, before considering the purchase of this potentially perpetual equity preferred stock. I will take into consideration the current interest rate environment when and if the minimum yield bogey is hit as wells as the then existing credit risk issue.

Closing Price Last Friday: EPR-PF: $24.35 -0.21 (-0.86%)


This post is long enough.

I will discuss more pares in the bond segment of my portfolio in the next post.

I lump equity preferred stocks with bonds since their bond characteristics are more dominant than their equity features. Many of their equity features are undesirable including their potential perpetual terms without actually having an equity interest in the business and with interest rate risk being asymmetric with the issuer. I view equity preferred stocks as a disfavored asset class and will consequently attempt to trade them opportunistically.

I discuss the many disadvantages of REIT equity preferred stocks in this Gateway Post: REIT Cumulative Preferred Stocks: Advantages & Disadvantages

At least REIT preferred stocks pay cumulative dividends which is not the case for bank holding companies.