Saturday, June 21, 2014

MDT, LXP/Added to PRPFX/SOLD Taxable Accounts: 100 CSX at $30.4, 100 FULL at $8.3, 200 XDV:CA at C$25.51, 100 MSF at $16.2, 50 WARFY at $14.82/Added 100 D_UN:CA at C$28.8


Stocks:

Stable Vix Pattern (bullish):
Short Term: Markets Needs a 15% Correction
Intermediate Term: Slightly Bullish (gain since August 2011 borrows from the future)
Long Term: Bullish

After computing that I had unintentionally increased my stock allocation by a net $31,000+ between February 2014 and early June, I am now embarked on reducing that allocation by an equivalent amount. Stock and Stock Fund Update 6/6/14  

Since I am no longer in an asset accumulation phase, preservation of capital and income generation have become paramount considerations. It is not necessary for me to squeeze every last dollar out of bull move. 

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

The bond forecast assumes an average annual CPI rate between 2% to 2.25%, consistent with the range predicted in the 10 year treasury TIP pricing.

There was a slight uptick in the break-even spread for the 10 year TIP last week. The break-even closed last Friday at 2.28%, the average annual CPI rate over the next 10 years for the 10 year TIP to break-even with the buyer of the non-inflation protected security. The close on the prior Friday (6/13/14) was at 2.19%.

The break-even spread is calculated by subtracting the real current yield, Daily Treasury Real Yield Curve Rates, from the nominal non-inflation protected yields for each maturity, Daily Treasury Yield Curve Rates.

Bill Gross believes that the new "neutral" federal funds rate will be 2% rather than the historic 4%. If that is the case, and assuming inflation remains around a long term 2% average going forward, then this would have material impacts on the relative prices and valuations of both bonds and stocks.

The Fed's lack of concern about inflation makes me even more nervous about my bond and equity preferred stock allocation. I am consequently reducing that allocation, virtually on a daily basis, and increasing my cash allocation. Some investors may want to wait until the worm clearly turns again against bonds, as it did in a mild way starting in May 2013. I am not one of those investors. I do not find the current yields to be sufficiently appetizing or enticing for the actual and potential risks. Sure, I would prefer to earn 4% in a MM fund rather than .01%, but I also place an emphasis on capital preservation ahead of income generation. That balance is shifting toward capital preservation for the bond/preferred stock side of the portfolio.
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Recent Developments:

CPI increased .4% in May on a seasonally adjusted basis. Over the last 12 months ending in May, CPI increased 2.1% before seasonal adjustment. Core CPI increased .3%, the largest increase since August 2011. Over the past three months, CPI has risen at a 3.3% annual rate. Core CPI has risen at a 2.8% annual rate over the last three months. Consumer Price Index Summary

The Atlanta Fed's flexible CPI, a weighted index of prices that frequently change, rose at a 7.5% annualized pace in May and was up 2.2% Y-O-Y in May. The sticky CPI, a weighted index of items that change price relatively slowly, increased at a 2.9% annualized rate in May. Sticky Price CPI - Federal Reserve Bank of Atlanta

As expected, the FED reduced its asset buying spree by another $10 billion per month starting in July. The new limits will be $20B in treasuries and $15B in mortgage backed securities. FRB: Press Release--Federal Reserve issues FOMC statement--June 18, 2014

Economic projections are released each quarter by the FED. The most recent projections decreased real GDP growth in 2014 and the ranges for unemployment in 2014-2016. The FED continues to forecast very subdued inflation:


federalreserve.gov.pdf 

In my opinion, the FEDs forecasts for PCE price inflation-ranging between 1.5% to 2% for the next 2 1/2 years-will probably be too low.

As noted by the Deutsche Bank economics team, the FED is basically saying that the inflation adjusted FF rate will be negative when the U.S. attains full employment. That is just bizarre. I would agree with the statement made by those economists that it "is highly unlikely that inflation will be as quiescent as the current FOMC forecasts suggests". Those economists believe, as I do, that there is a cyclical upswing in pricing power and inflation and that the vast improvements in consumer balance sheets is a "powerful tailwind" for consumer spending going forward. Barrons.com That balance sheet improvement is highlighted in stark terms by the FED's DSR Ratio: Household Debt Service Payments as a Percent of Disposable Personal Income- St. Louis Fed

Eleven FED members now anticipate that the FF rate will be 1% or higher by the end of 2015, and a clear majority expect the FF rate to end 2016 at 2% or higher:



Those consensus forecasts are particularly important for leveraged bond funds and Mortgage REITs, both of whom buy longer dated securities with short term borrowings.

The current FED prefers to use the PCE price index rather than CPI. The PCE price index has been running lower than CPI for several years now, as noted by the St. Louis FED President Bullard.  CPI vs. PCE Inflation: Choosing a Standard Measure The PCE price index number is released once a month as part of the "Personal Income and Outlays", with the next release scheduled for 6/26.

As I noted previously, the PCE price index has a about a 20.6% weighting in medical costs, compared to about 7.1% in the CPI Index. CPI and the PCE Giving Different Estimates of Inflation? -Federal Reserve Bank of Cleveland

Medical costs have started to accelerate.

A WSJ published last week noted that premiums for health plans offered by major insurers were going to rise anywhere from 8.5% to over 22% later this year.

The FED did not acknowledge the uptick in inflation when announcing its recent monetary policy decision. Yellen stated in the press conference last Wednesday that the recent rise in inflations is noise. WSJ

In last week's Barron's 2014 Midyear Roundtable, Abby Cohen noted that GS is predicting a 3.25% ten treasury yield by year-end with the S & P 500 at 1900. If the ten year treasury yield prediction proves to be accurate, there will be some pain endured by bond investors later this year. The ten year closed yesterday at 2.63% yield. Daily Treasury Yield Curve Rates

Industrial production rose .6% in May. Total capacity utilization increased .2% to 79.1%, one percentage below it long run average. Industrial Production and Capacity Utilization

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Medtronic (own):

In another proposed tax inversion merger, MDT announced last Monday an agreement to acquire Covidien PLC (COV), a company based in Ireland.

MDT expressly conditioned the consummation of this merger on no change in the IRS code provision that makes tax inversion deals possible. NYT

In addition to potentially securing Ireland's lower tax rate, MDT can use its overseas cash to fund the cash component of the deal, at least in part, and would acquire a diversified portfolio of medical supplies and devices that do not overlap with its own products. I would generally agree with the positive take given in this Barron's article.

It serves no useful purpose to discuss my personal opinions about U.S. corporations reducing their U.S. tax payments in this fashion. I would just note that MDT's recent effective tax rate was close to 18%, less than a large number of individual taxpayers.

And, the EU has launched an investigation into whether Ireland's tax code constitutes illegal state aid. Reuters; WSJ The abnormally low tax rates and favorable tax provisions offered by small countries like Ireland and Luxembourg slash corporate tax bills throughout the developed world, as corporations devise various shell games to eliminate or substantially reduce profits in any higher tax jurisdiction, even those with much lower marginal tax rates than the U.S.

A recent article in the International Business Times highlights how Amazon reduces its U.K. tax obligation to virtually nil by routing orders from its U.K. customers electronically through a Luxembourg corporation who then charges a fee to Amazon's U.K. to deliver the product.

These tax legerdemains are really quite elaborate, as shown in a Senate report from 2013 that focused just on some of Apple's maneuverings. (40 page report on Apple can be downloaded at Hearings| Homeland Security & Governmental Affairs Committee, exhibit 1A left side of page)

As I noted in a recent SA comment, my opinions on the wisdom of these tax dodges are irrelevant. The reality of those tax avoidance schemes, and any change in them, are simply factors to consider when making investment decisions.

As an owner of MDT stock, and focusing just on that ownership interest, I would like to see a lower effective tax rate.

MDT stock did gain over $3 per share last week:

Closing Price Last Friday : MDT: $63.86 -0.81 (-1.25%)
Closing Price 6/13/14: $60.7 MDT Historical Prices

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Lexington Realty (own):

Most REITs do not qualify for purchase under my dividend growth strategy. The dividend history of LXP illustrates some of the reasons.

Lexington Realty increased its quarterly dividend from $.165 to $.17 per share. That is about a 3% raise. While that is better than no increase, a dividend growth rate of 3% will take about 23.45 to double the dividend rate. Inflation has historically increased in the U.S. at about a 3% rate. While the future inflation rate may average 2.25% to 2.5% over the next 20 years, the real value of a 3% annual increase is minimal under either long term scenario.

Many REITs slashed their dividends in response to the last recession. LXP reduced its quarterly dividend rate in stages, going from a $.375 quarterly rate in 2007 to $.1 in 2010. Lexington Realty Trust (LXP) Dividend History

That kind of history is an automatic disqualification under a dividend growth strategy. Instead, I bought LXP shares based on valuation and current income considerations.

Since 2010, LXP has gradually been raising the quarterly rate. The last raise has not even returned the rate to 50% of its 2007 level. At a 3% annualized rate, it is unlikely, though conceivable, that I will live to see the dividend restored to its 2007 quarterly rate.

How does one measure a dividend increase? I would not call a rise from $.165 to $.17 a dividend increase when the firm was paying$.375 per share a few years ago.

When and if LXP returns to the $.375 rate, and assuming I am still among the living, I will call a raise above that amount a dividend raise, the first since LXP increased its rate from $.365 to $.375 back in the 2007 first quarter.

My first foray in an LXP security was during the Near Depression when I bought its equity preferred stocks. My first purchase of its common shares occurred late last year.

Bought:  100 LXP at $10.33 (12/3/13 Post)

Added 50 LXP at $9.95-ROTH IRA (1/31/14 Post)

So, I can be forgiving of LXP's past, as a new owner who did suffer financially for what happened to this REIT during the last recession. Both the share price and the dividend have a long, long way to go before being restored to their respective highs prior to 2008. LXP Interactive Chart

Given its dividend history, I will mostly likely be in a trading mode for this 150 share position.

Closing Price Last Friday: LXP: $11.50 +0.09 (+0.79%)

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Canadian Dollar Rising Against the USD:  

A higher than expected reading for inflation sent the CAD up in value yesterday. Bloomberg CPI rose 2.3% in May Y-O-Y. Yesterday, the CAD rose slightly above its 200 day SMA against the USD.

The recent rise in the CAD/USD provides a tailwind for Canadian securities that are traded in the U.S. and priced in USDs. That rise has given my Canadian energy stocks priced in USDs an added boost in price:

CNQ: $45.21 +1.05 (+2.38%) : Canadian Natural Resources

SU: $42.92 +0.49 (+1.15%) : Suncor Energy

When I last took a snapshot comparing the prices of CNQ and CA:CNQ, the ordinary shares were outperforming the U.S. listed shares by about 10%. That underperformance has shrunk to about 5% after the recent rise in the CAD:

One Year Chart Through 6/20/14
CNQ.TO: C$48.57 +0.76 (+1.59%)
SU.TO: C$46.07 +0.13 (+0.28%)
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1. Sold 100 CSX at $30.4 (see Disclaimer):

Snapshot of Trade:


Snapshot of Profit:

2014 CSX 100 Shares +$390.78

Company Description: CSX (CSX) has approximately 21,000 miles of track and access to 70 ports and nationwide transloading and warehouse services. Welcome to CSX.com - CSX One of those rail lines runs near my home in route from Nashville to Birmingham. I can affirm without any doubt that the conductor touts a very loud horn when a train approaches a nearby intersection. 



Rationale: As noted when I bought this stock, which has a snapshot of the intersection near my home, I wanted to earn some compensation for that horn honking waking me up at 3:00 A.M. in the morning. Since I was most unlikely to receive compensation from CSX for this public nuisance, even with a most persuasive letter written by our LB with many citations to appropriate authorities, I elected to receive compensation in a more indirect fashion by owning the stock With this $390 gain, I believe that I have been adequately compensated for the past three months of having my peace and solitude disrupted by that horn. 

The TTM P/E at my sale's price was over 17 which is high for a cyclical name struggling with earnings growth at the moment. 

Other more mundane reasons include valuation, a small dividend yield and the fact that I am reducing my stock allocation to erase the total additions made earlier this year. Something has to be sold to bring myself back into compliance with Headknocker's strong admonition that there shall be no stock net add additions under the current market conditions (LB has calculated that $55,000 has been added to the stock allocation since October 2013 notwithstanding HK's clear warning) 

Future buys: Depending on my big picture opinions, including the sustainability and acceleration of economic growth, I may come back to this name at or near the last buy price. I have no interest in CSX at the current market price.

Closing Price Last Friday: CSX: $31.00 +0.17 (+0.55%) 

2. Sold 100 FULL at $8.3 (see Disclaimer): 

Snapshot of Trade:



Snapshot of Profit:

2014 FULL 100 Shares +$34.6

Bought: 100 FULL at $7.8 (3/3/14 Post)

Company Description: Full Circle Capital Corp.  (FULL) is a small BDC.

Full Circle Capital Profile Page at Reuters

Rationale: This purchase was in part made due to the potential speculative appeal of FULL's investment in Advanced Cannabis Solutions (CANN). That investment does not appear likely to provide much upside to FULL's net asset value per share.

The net asset value per share was reported at $7.2 as of 3/31/14, down from $8.01 on 6/30/12, page 1 10-Q

This BDC's managers, like all others who are externally managed, do not deserve their generous pay in my opinion.

When discussing the purchase, I highlighted some negatives including a recent dividend cut and losses associated with two investments.

Given the many negatives and the only positive being the dividend yield, I elected to sell the position as part of my stock allocation pare.

Future Buys: Not likely. I view this BDC with more disfavor than the normal disfavor reserved for BDCs.

Closing Price Last Friday: FULL: $7.62 -0.11 (-1.42%)

3. Sold 200 shares of the Canadian Stock ETF XDV:CA at C$25.51 (Canadian Dollar (CAD) Strategy)(see Disclaimer):

Snapshot of Trade: 

2014 Sold 200 XDV:CA at C$25.51


Snapshot of Original Purchase:

2013 Bought 200 XDV:CA at C$22.21

I received in proceeds C$622 more than I used to buy this security. Since I am a U.S. taxpayer, my profit is calculated by converting CADs into USDs. Since the CAD declined against the USD after my purchase, my taxable profit was not C$622,  but USD$190.78.  

 This security was purchased pursuant to my Canadian Dollar Strategy. I increased my Canadian Dollar stash by C$622 plus dividends paid by this ETF.

Snapshot of Profit In USDs:

2014 XDV:CA 200 Shares +USD$190.78
Bought 200 XDV at C$22.21

Security Description: The iShares Dow Jones Canada Select Dividend Index Fund (TOR: XDV) is a Canadian stock ETF that owns the 30 stocks with the highest dividend yields in the Dow Jones Canada Total Stock Market Index. XDV Holdings - iShares ETFs

Distributions are paid monthly: iShares ETFs

Rationale: This security served its purpose in increasing my CAD stash. I still own another general Canadian stock ETF: iShares S&P/TSX Canadian Dividend Aristocrats Index (CDZ:TOR). I also own 200 shares of a Canadian stock CEF Canadian General Investments, and two other stock Canadian stock ETFs. So I have some duplication here, and I reduce my stock allocation some too.

The expense ratio is high at .55% for this kind of ETF. XDV Overview - iShares ETFs

Also, it is undesirable for to have a Canadian security priced in CADs remain constant in price, while the value of the CAD rises against the USD, assuming I want to sell the position for a profit. In that kind of scenario, I would be increasing my tax liability without receiving more CADs when I elected to sell the security.

Future Buys: I may buy this one back but only after a significant correction that takes the price at least 15% below C$25.

Closing Price Last Friday: XDV.TO: C$25.50 -0.04 (-0.16%)

4. Sold 100 MSF at $16.2 (see Disclaimer):

Snapshot of Trade:


Snapshot of Profit:

2014 MSF 100 Shares +$86.07
Bought: 100 MSF at $15.18 (12/3/13 Post)

Total Realized Gains: $630.95 ($86.07 plus prior gains noted below)

Prior Trades: Sold 201+ MSF at $15.62 (snapshot of profit: $109.64). In the preceding linked post, I also included a snapshot of two trades made in 2011 that netted $403.14 in profits. Sold 100 MSF at $17.02 (November 2010)-Added 100 MSF at $13.57 (July 2010)


Sold 100 of 200 MSF at 16.2 (April 2011)(realized gain $32.1)- Bought 100 MSF at $15.68 (January 2011)

2011 MSF 100 Shares +$32.1
Security Description: The Morgan Stanley Emerging Markets Fund (MSF) is a relatively high cost stock CEF that invests in EM stocks.

CEFConnect Page for MSF

Last SEC Filed Form N-Q (holdings as of 3/31/14)

Rationale: This fund was not producing any income. The last dividend payment was $.0526 per share paid on 7/15/13.

At the current time, I am in a stock allocation pare mode. A stock fund that fails to generate income is a candidate for disposition.

I will continue to add low cost EM ETFs that can be bought commission free in my brokerage accounts.

In my Vanguard brokerage account, I can buy VWO commission free which has a .15% expense ration: Vanguard - Vanguard FTSE Emerging Markets ETF I have bought and sold that one and currently have a small number of shares.

Fidelity currently offers a few on a commission free basis, including IEMG, EEMV, DVYE, EEMS, and EEME.  Of those, I currently own IEMG and EEMV:

iShares Core MSCI Emerging Markets ETF (IEMG)(expense ratio at .18% after a .02% waiver through 12/31/14)

iShares MSCI Emerging Markets Minimum Volatility ETF | EEMV (expense ratio at .25% after .42% waiver through 12/31/14)

I may dump EEMV when the waiver expires.

MSF: $16.03 -0.06 (-0.37%)

5. Sold 50 WARFY at $14.822 (The $500 to $1,000 Flyers Basket Strategy)(see Disclaimer): This is my third round trip for a 50 share lot. I did stick around long enough this time to collect a dividend.

Snapshot of Trade:

2014 Sold 50 WARFY at $14.822

Snapshot of Profit: 

2014 WARFY 50 Shares +$71.18
Bought:  50 WARFY at $13.08 (5/24/14 Post)

The foregoing snapshot includes two prior transactions, including one that was not discussed in this blog.

Total Realized Gain 2014: $187.94

 Prior Trades: Item # 6 Sold 50 WARFY at $14.51 (4/26/14 Post)-Bought 50 Wharf Holdings at $12.2 (4/1/14 Post)

Security Description: Wharf (Holdings) Ltd. (4:HKG) is a Hong Kong conglomerate operating in three business segments (1) property development in China, (2) investment properties and (3) logistics, hotels, communications, media and entertainment. The Wharf (Holdings) Limited

WARFY is an ADR traded on the U.S. pink sheet exchange (1 ADR=2 ordinary shares)

Rationale: I simply used this position as a source of funds in my ongoing stock allocation reduction.

Future Buys: I am apparently in a trading mode for this security. If the price falls back to where I have been nibbling, I will consider doing the same flip a fourth time.

Closing Price Last Friday: WARFY: $14.56 +0.08 (+0.55%)

6. Added 100  D_UN:CA at C$28.8 (Canadian Dollar (CAD) Strategy)(see Disclaimer): With this add to an existing position, I pick up about a 7.78% yield on my Canadian Dollars earning nothing otherwise.

Snapshot of Trade: 



Security Description: Dream Office Real Estate Investment Trust (D.UN:TOR) is a Canadian REIT that owns "high quality" office buildings in "key markets" across Canada with approximately 24.6M square feet of leasable space Dundee REIT - Portfolio - Portfolio Overview

Dream Office is currently paying a monthly dividend of C$.1866 per unit. Distribution History At that rate, the dividend yield at a total cost of C$28.8 per unit is about 7.78%. 

List of Properties in PDF Format:  Property List-12-31-2014.pdf

Major Tenants:



Prior Trade: This REIT was called Dundee REIT and recently changed its name to Dream Office REIT. Bought: 100 Dundee REIT at C$29.35 (3/3/14 Post)

Last Earnings Report: For the 2014 first quarter, Dream Office  reported AFFO per unit at C$.62 Diluted FFO increased C$.72. NOI from comparative properties increased .6%. Occupancy, included future commitments on vacant space, stood at 94.2%. Net debt-to-gross book value was 47.6%. The weighted average interest rate was 4.23%. The dividend payout ratio was 90% based on AFFO and 77% based on FFO. Q1-2014.pdf

The calculations of both FFO and AFFO can be found at page 30.

The company made C$4.9M in building improvements during the quarter, "substantially all of which are recoverable from tenants". (page 15)

Rationale and Risks: I discussed these items in the earlier post Bought: 100 Dundee REIT at C$29.35 The company discusses risks incident to its operations starting at page 43 of its 2012 Annual Report.pdf.

On the downside, recent same store NOI growth has been lackluster.

The AFFO payout ratio is at or near 90%. Unless that payout ratio falls significantly, I would not expect a dividend raise, or any raise would be insignificant (e.g. a fraction of a Canadian penny)

Closing Price Last Friday: D-UN.TO: 29.49 +0.15 (+0.51%)

7. Added $250 to PRPFX Last Thursday (see Disclaimer): 

PRPFX Position as of 6/19/14:

Unrealized Gain= $2,213.53 as of 6/19/14

I will add varying amounts to this fund annually, which I have owned since 2005 without selling any shares.  

This "moderate allocation" fund will maintain a relatively constant allocation among several asset classes. The fund will maintain a large position in gold and silver bullion which helped the fund between 2002 to about September 2011, but caused the fund to underperform over the past three years. Gold and silver prices perked up some last week.

Top 25 Holdings- MSN Money

PRPFX Page at Morningstar (currently rated 3 stars)

Last SEC Filed Shareholder Report: SEC Form N-CSR (holdings start at page 6; gold and silver bullion then at 25.73%; Swiss Government Bonds at 9.45%; REITs and Natural Resource Stocks at 16.76%; Growth Stocks at 16.95%; short term investment grade corporate bonds at 10.3%; U.S. treasuries at 20.39%)

I view this portfolio design as one tilted toward a disaster kind of scenario.

Normally, this fund pays only a small annual distribution. Last year was an exception with a $4.6 per share dividend, mostly sourced from long term capital gains.

I last discussed this fund when making another small add on 12/31/2013: Item # 6 Added to Vanguard Wellington (VWELX) and the Permanent Portfolio at $43.06 (PRPFX) That post has the snapshot of the shares purchased with the 2013 year end distribution: 20.849 shares at $43.07. 
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