Friday's Closing Prices:
S & P 500: 1,925.15 -5.52 (-0.29%)
DJIA: 16,493.37 -69.93 (-0.42%)(closing high 7/17/14=17,138.2)
VIX: 17.03 +0.08 (+0.47%) : VOLATILITY S&P 500
KRE: $37.85 -0.58 (-1.50%) : SPDR S&P Regional Banking ETF
VNQ: $74.72 -0.18 (-0.24%) : Vanguard REIT ETF
FSTA: $26.37 +0.19 (+0.73%) : Fidelity MSCI Consumer Staples ETF
XLU: $41.42 +0.17 (+0.42%) : SPDR Select Sector Fund -Utility ETF
VWO: $43.97 +0.25 (+0.57%) : Vanguard FTSE Emerging Markets ETF
TLT: $114.56 +0.88 (+0.77%) : iShares 20 Year Treasury Bond ETF
IEF: $103.55 +0.59 (+0.57%) : iShares 7-10 Year Treasury Bond ETF
LQD: $118.84 +0.63 (+0.53%) : iShares Investment Grade Corporate Bond ETF
JNK: $40.29 -0.06 (-0.15%) : SPDR Barclays High Yield Bond ETF
BABS: $60.44 +0.36 (+0.60%) : SPDR Nuveen Barclays Build America Bond ETF
JNK is below its 200 and 50 day SMA lines: High Yield Bond ETF Chart
The Russell 2000 was the first major index to break below its 200 day SMA: Russell 2000 Index Chart The volatility index for the Russell 2000 surged last week over 20: RVX: 22.40 +0.18 (+0.81%)
Big Picture Synopsis:
S & P 500: 1,925.15 -5.52 (-0.29%)
DJIA: 16,493.37 -69.93 (-0.42%)(closing high 7/17/14=17,138.2)
VIX: 17.03 +0.08 (+0.47%) : VOLATILITY S&P 500
KRE: $37.85 -0.58 (-1.50%) : SPDR S&P Regional Banking ETF
VNQ: $74.72 -0.18 (-0.24%) : Vanguard REIT ETF
FSTA: $26.37 +0.19 (+0.73%) : Fidelity MSCI Consumer Staples ETF
XLU: $41.42 +0.17 (+0.42%) : SPDR Select Sector Fund -Utility ETF
VWO: $43.97 +0.25 (+0.57%) : Vanguard FTSE Emerging Markets ETF
TLT: $114.56 +0.88 (+0.77%) : iShares 20 Year Treasury Bond ETF
IEF: $103.55 +0.59 (+0.57%) : iShares 7-10 Year Treasury Bond ETF
LQD: $118.84 +0.63 (+0.53%) : iShares Investment Grade Corporate Bond ETF
JNK: $40.29 -0.06 (-0.15%) : SPDR Barclays High Yield Bond ETF
BABS: $60.44 +0.36 (+0.60%) : SPDR Nuveen Barclays Build America Bond ETF
JNK is below its 200 and 50 day SMA lines: High Yield Bond ETF Chart
The Russell 2000 was the first major index to break below its 200 day SMA: Russell 2000 Index Chart The volatility index for the Russell 2000 surged last week over 20: RVX: 22.40 +0.18 (+0.81%)
Big Picture Synopsis:
Stocks:
Stable Vix Pattern (Bullish)
Vix Asset Allocation Model Explained Simply
Use of the VIX as a Timing Model
Short Term: Market Needs a 15+% Correction
Intermediate Term: Slightly Bullish
Long Term: Bullish
I am winding down my stock allocation reduction. My goal was to remove the $55,000 in net stock additions occurring between October 2013 and early June 2014. I have currently reduced the stock allocation by a net $45,000+ since early June 2014. To reduce the allocation further, I will need a rally in stocks early next week. A significant decline would probably result in some buying.
I am keeping track of additions and deletions on a weekly basis now after computing the net number last June and discovering that my net additions since October 2013 was $31,000+. I thought the number would be negative when I started to compile it. I was not that surprised by the result, however, since I do so much buying and selling that an erroneous opinion can be formed after six months of failing to actually net the amounts out.
Both the DJIA and S& P 500 broke their 50 day SMA lines to the downside last week. While I view that as a material piece of information, a 200 day SMA break is viewed as far more important.
There has not been a correction since the 2011 summer. Corrections and even cyclical bear markets are normal in long term secular bull markets. I believe that the weight of evidence supports characterizing the stock market as being in a long term secular bull market.
It is not normal to go up over 80% without a correction. The S & P 500 closed at 1,099.23 on 10/31/11, Historical Prices | S&P 500 Index, and hit a closing high at 1,987.98 just a few days ago (7/24/14). The rise between those two dates was 80.85%.
The close at 1,925.15 last Friday is only a 3.16% decline from the recent all time closing high. The S & P 500 has simply returned to its early June 2014 level. I would like to see now a quick 15% decline spanning about two to three months, similar to what happen in the 2011 summer. Those quick and relatively painful moves bring into focus potential buying opportunities.
In the August 1982 to 2000 long term secular bull market, when the S & P 500 had an annualized total return, AFTER INFLATION, of over 14%, there was one cyclical bear market and multiple corrections and dips greater than 5%. (see Yardeni Charts Figures 3 and 4)
As I noted in some recent SeekingAlpha commentary, a number of DJIA blue chips have pieced their respective 200 day SMA lines to the downside and the stocks represent a diverse group of companies:
United Technologies Interactive Chart
General Electric Interactive Chart
Coca-Cola Interactive Chart
Boeing Interactive Chart
Procter & Gamble Interactive Chart
Wal-Mart Interactive Chart
Pfizer Interactive Chart
McDonald's Interactive Chart
I am rotating slightly into regional banks and out of REITs. Those two sectors are managed together for the reasons discussed in this post: REIT and Regional Bank Baskets. The split was roughly 60% REITs/ 40% Regional Banks and is now closer to 55% REITs/45% regional banks. The regional bank ETF, KRE, is now in negative territory YTD.
The market perceives that regional banks will benefit by a rise in intermediate and longer term rates, based on the belief that their net interest margins will improve as deposit costs will remain abnormally low due to ZIRP and a likely slow and incremental increase in the federal funds rate starting in the 2015 summer. In addition, a better economy generates more loans and generally results in lower loan losses. REITs and utility stocks have risen significantly in 2014-so far-as interest rates fell. Those stocks are more bond like than regional banks. Utilities did well last Friday as bond yields fell.
Both REITs and utility stocks have befitted from hot money looking for yield this year. During the rate spike staring in May 2013, REITs and utility stocks corrected in price. It does not take much of a price decline to wipe out a 3% to 5% yield.
My rotation into REIT common and preferred shares started in September 2013 after their prices had dropped anywhere from 10% to 30%. Stocks, Bonds & Politics: Equity REIT Common and Preferred Stock Table as of 3/5/14 I will likely keep a number of REITs for their income generation. And, as always, I will have some "bets" that will hopefully work when I am wrong about the near term future. In a few days or weeks, I will publish a post that will aggregate my trading snapshots for the REIT basket.
I unfortunately can not foresee the future. I can only guess and assign probabilities. Anyone who is 100% certain is 100% delusional and in need of a conservator to handle their money.
I could end up being wrong about rates going up due to (1) a strengthening economy causing more demand for credit (2) increasing inflation and (3) the end of QE and the eventual long anticipated end of ZIRP. The FED's Jihad Against the Saving Class, which started late in 2008, is coming to an end. At some point, interest rates will normalize, meaning a return to market based rates rather than those engineered by the FED through massive interventions in the market and an abnormally long period of zero short term rates.
Last Thursday, the S & P 500 declined -39.40 or -2.00%. My main taxable account, where most of my stocks can be found, was down .99%. I do not view that result as acceptable, though it is understandable on a day when almost nothing went up in value.
It was noteworthy that TLT fell .3% last Thursday notwithstanding the large decline in stocks and the 27.16% spurt in the VIX. This suggests, at least to me, that one reason for the decline is a fear of rising rates. Interest rates are just way of line with normal spreads to inflation and inflation expectations. Bond market investors got over whatever was troubling them after one day. While it is just an opinion about the future course of events, I believe that those investors are delusional.
The ten year treasury note closed last Friday at a 2.52% yield. Daily Treasury Yield Curve Rates The yield on the 10 year TIP was then .25%. Daily Treasury Real Yield Curve Rates The break-even spread was 2.27% which is in line with recent history.
Bonds:
Short to Long Term: Slightly Bearish Based on Interest Rate Normalization
The Difficult Path to Interest Rate Normalization
The foregoing forecast assumes an average annual inflation rate of 2% to 2.25% over the next ten years, which is the range bound forecast currently made in the pricing of the ten year TIP.
Interest rates rose a tad last week and that was sufficient to cause a much larger percentage decline in leveraged bond CEFs.
Vix Asset Allocation Model Explained Simply
Use of the VIX as a Timing Model
Short Term: Market Needs a 15+% Correction
Intermediate Term: Slightly Bullish
Long Term: Bullish
I am winding down my stock allocation reduction. My goal was to remove the $55,000 in net stock additions occurring between October 2013 and early June 2014. I have currently reduced the stock allocation by a net $45,000+ since early June 2014. To reduce the allocation further, I will need a rally in stocks early next week. A significant decline would probably result in some buying.
I am keeping track of additions and deletions on a weekly basis now after computing the net number last June and discovering that my net additions since October 2013 was $31,000+. I thought the number would be negative when I started to compile it. I was not that surprised by the result, however, since I do so much buying and selling that an erroneous opinion can be formed after six months of failing to actually net the amounts out.
Both the DJIA and S& P 500 broke their 50 day SMA lines to the downside last week. While I view that as a material piece of information, a 200 day SMA break is viewed as far more important.
There has not been a correction since the 2011 summer. Corrections and even cyclical bear markets are normal in long term secular bull markets. I believe that the weight of evidence supports characterizing the stock market as being in a long term secular bull market.
It is not normal to go up over 80% without a correction. The S & P 500 closed at 1,099.23 on 10/31/11, Historical Prices | S&P 500 Index, and hit a closing high at 1,987.98 just a few days ago (7/24/14). The rise between those two dates was 80.85%.
The close at 1,925.15 last Friday is only a 3.16% decline from the recent all time closing high. The S & P 500 has simply returned to its early June 2014 level. I would like to see now a quick 15% decline spanning about two to three months, similar to what happen in the 2011 summer. Those quick and relatively painful moves bring into focus potential buying opportunities.
In the August 1982 to 2000 long term secular bull market, when the S & P 500 had an annualized total return, AFTER INFLATION, of over 14%, there was one cyclical bear market and multiple corrections and dips greater than 5%. (see Yardeni Charts Figures 3 and 4)
As I noted in some recent SeekingAlpha commentary, a number of DJIA blue chips have pieced their respective 200 day SMA lines to the downside and the stocks represent a diverse group of companies:
United Technologies Interactive Chart
General Electric Interactive Chart
Coca-Cola Interactive Chart
Boeing Interactive Chart
Procter & Gamble Interactive Chart
Wal-Mart Interactive Chart
Pfizer Interactive Chart
McDonald's Interactive Chart
I am rotating slightly into regional banks and out of REITs. Those two sectors are managed together for the reasons discussed in this post: REIT and Regional Bank Baskets. The split was roughly 60% REITs/ 40% Regional Banks and is now closer to 55% REITs/45% regional banks. The regional bank ETF, KRE, is now in negative territory YTD.
The market perceives that regional banks will benefit by a rise in intermediate and longer term rates, based on the belief that their net interest margins will improve as deposit costs will remain abnormally low due to ZIRP and a likely slow and incremental increase in the federal funds rate starting in the 2015 summer. In addition, a better economy generates more loans and generally results in lower loan losses. REITs and utility stocks have risen significantly in 2014-so far-as interest rates fell. Those stocks are more bond like than regional banks. Utilities did well last Friday as bond yields fell.
Both REITs and utility stocks have befitted from hot money looking for yield this year. During the rate spike staring in May 2013, REITs and utility stocks corrected in price. It does not take much of a price decline to wipe out a 3% to 5% yield.
My rotation into REIT common and preferred shares started in September 2013 after their prices had dropped anywhere from 10% to 30%. Stocks, Bonds & Politics: Equity REIT Common and Preferred Stock Table as of 3/5/14 I will likely keep a number of REITs for their income generation. And, as always, I will have some "bets" that will hopefully work when I am wrong about the near term future. In a few days or weeks, I will publish a post that will aggregate my trading snapshots for the REIT basket.
I unfortunately can not foresee the future. I can only guess and assign probabilities. Anyone who is 100% certain is 100% delusional and in need of a conservator to handle their money.
I could end up being wrong about rates going up due to (1) a strengthening economy causing more demand for credit (2) increasing inflation and (3) the end of QE and the eventual long anticipated end of ZIRP. The FED's Jihad Against the Saving Class, which started late in 2008, is coming to an end. At some point, interest rates will normalize, meaning a return to market based rates rather than those engineered by the FED through massive interventions in the market and an abnormally long period of zero short term rates.
Last Thursday, the S & P 500 declined -39.40 or -2.00%. My main taxable account, where most of my stocks can be found, was down .99%. I do not view that result as acceptable, though it is understandable on a day when almost nothing went up in value.
It was noteworthy that TLT fell .3% last Thursday notwithstanding the large decline in stocks and the 27.16% spurt in the VIX. This suggests, at least to me, that one reason for the decline is a fear of rising rates. Interest rates are just way of line with normal spreads to inflation and inflation expectations. Bond market investors got over whatever was troubling them after one day. While it is just an opinion about the future course of events, I believe that those investors are delusional.
The ten year treasury note closed last Friday at a 2.52% yield. Daily Treasury Yield Curve Rates The yield on the 10 year TIP was then .25%. Daily Treasury Real Yield Curve Rates The break-even spread was 2.27% which is in line with recent history.
Bonds:
Short to Long Term: Slightly Bearish Based on Interest Rate Normalization
The Difficult Path to Interest Rate Normalization
The foregoing forecast assumes an average annual inflation rate of 2% to 2.25% over the next ten years, which is the range bound forecast currently made in the pricing of the ten year TIP.
Interest rates rose a tad last week and that was sufficient to cause a much larger percentage decline in leveraged bond CEFs.
**********************
Recent Developments:
The BLS reported that 209,000 jobs were added in July, lower than the consensus forecast of235,000. Employment Situation Summary The unemployment rate rose to 6.2% from 6.1% as the labor force increased by 329,000 to 156M. The labor participation rate rose slightly to 62.9% from 62.8%. Average hourly wages edged up by 1 cents to $23.25. Employment gains for May and June were revised higher by a combined 15,000. The U-6 number increased to 12.2% from 12.1%. Table A-15. Alternative measures of labor underutilization
The government estimated that real GDP increased at a 4% annual rate, better than the consensus estimate of 3.2%. Current dollar GDP rose 6%. Durable goods increased at 14%. Real disposable income increased 3.8%. The personal savings rate was estimated at 5.3%. This estimate will be subject to several revisions. Personal consumption expenditures increased at a 2.5% annualized pace. The PCE price index rose at a 2.3% annual rate in the second quarter, compared to 1.4% in the first quarter.
bea.gov/gdp 2q 14 adv.pdf
The first quarter GDP was revised for the 4th time to show a real GDP decline of -2.1%, better than the previous estimate of -2.9%:
The estimates 2011 and 2013 were revised down, while 2013 was revised up.
New Old
2011: 1.6% 1.8%
2012 2.3% 2.8%
2013 2.2% 1.9%
Revisions-WSJ
In response to this report, bonds fell in price and rose in yield. Of the ETFs referenced below, ZROZ would have the longest duration.
Closing Prices 7/30/14:
ZROZ: $101.89 -2.38 (-2.28%) : PIMCO 25 Year Zero Coupon U.S. Treasury ETF
TLT: $114.32 -1.61 (-1.39%) : iShares 20 Year Treasury Bond ETF
BABS: 60.75 -0.70 (-1.14%) : SPDR Nuveen Barclays Build America Bonds ETF
JNK: 40.95 -0.16 (-0.39%) : SPDR Barclays High Yield Bond ETF
MUB: 108.74 -0.45 (-0.41%) : iShares National AMT-Free Municipal Bond ETF
ADP reported an increase of 218,000 private payroll jobs in July.
As expected, the FED announced that it will reduce its asset buying spree by $10B per month. Beginning in August, the FED will buy $10B in mortgage backed securities and $15B in treasuries. The Fed is likely to cease buying treasuries and mortgage backed securities this October. FRB: Press Release--Federal Reserve issues FOMC statement--July 30, 2014
The FED's balance sheet has ballooned to over $4.1 trillion. System Open Market Account Holdings - Federal Reserve Bank of New York
Eurostat reported that Euro area inflation rose .4% Y-O-Y in July, down from .5% in June.
Eurostat reported that the Euro are unemployment rate was 11.5% in June. Spain's unemployment rate was at 24.5%.
Perhaps, Europe needs to try something other than what they have doing.
The employment cost index rose at the fastest rate since 2008 during the second quarter. Benefit costs rose at the fastest pace in three years. Employment Cost Index; MarketWatch
Real personal consumption expenditures increased .2% in June. Purchase of durable goods increased by .4%. News Release: Personal Income and Outlays
The ISM manufacturing PMI for July rose to 57.1 from 55.3. The new orders accelerated to 63.4 from 58.9.
***********************
Cenveo Bond Redemption:
In a satellite taxable account, I lost my one Cenveo 8.875% second lien senior bond maturing in 2018 to an early issuer redemption. The issuer had to pay a 4.438% premium to par value plus accrued interest:
Issuers seem to believe that the days for refinancing at abnormally low rates are rapidly dwindling.
Bought 1 Cenveo 2nd Lien at 92.499 (May 2012 Post)
*******************
Texas Industries Bond Redemption:
After Texas Industries was acquired by Martin Marietta (MLM), a notice to redeem this bond was given by MLM. This bond had a 9.25% coupon and a scheduled maturity date of 8/15/2020. MLM had to pay a 13+% premium to par value, plus accrued interest, for this optional redemption.
Bought 1 Senior Texas Industries 9.25% Bond Maturing 8/15/2020 at 97.5 (7/18/11 Post)
****************************
Cenveo Bond Redemption:
In a satellite taxable account, I lost my one Cenveo 8.875% second lien senior bond maturing in 2018 to an early issuer redemption. The issuer had to pay a 4.438% premium to par value plus accrued interest:
Issuers seem to believe that the days for refinancing at abnormally low rates are rapidly dwindling.
 |
| 2014 Cenveo 1 Bond +$117.39 |
*******************
Texas Industries Bond Redemption:
After Texas Industries was acquired by Martin Marietta (MLM), a notice to redeem this bond was given by MLM. This bond had a 9.25% coupon and a scheduled maturity date of 8/15/2020. MLM had to pay a 13+% premium to par value, plus accrued interest, for this optional redemption.
 |
| Texas Industries 1 Bond +$152.29 |
****************************
Snapshot of Trade:
 |
| 2014 Sold 100 ENF:CA at C$27.65/Proceeds=C$2,746 |
Snapshot of Profit In USDs (reportable taxable gain):
Total Cost in CADs:
Profit in CADs: C$427
 |
| Total Cost in CADs= $2319 |
This is another example where my profit in CADs was higher than my taxable income calculated be converting both the cost and the proceeds numbers into USDs. The CAD declined against the USD during my period of ownership which resulted in a lower reportable profit according to my broker's calculation shown above.
Security Description: Enbridge Income Fund Holdings (ENF) owns an interest in the Enbridge Income Fund along with Enbridge Inc. (ENB). The operations of the Enbridge Income Fund include the generation, transportation, and storage of energy. Enbridge Income Fund
Rationale: The thrust of the Canadian Dollar strategy is to increase my CAD stash without having to incur additional fees for converting USDs into CADs. I want more CADs as a long term diversification hedge. I accomplish that objective by both selecting income securities for purchase and harvesting profits. Most of my securities purchased on the Toronto exchange, including ENF:CA, pay monthly dividends in Canadian Dollars. When I elect to harvest a profit, I settle the trade in Canadian Dollars rather than USDs. The Enbridge Income Fund paid me several monthly dividends and I harvested a C$ profit in a 100 share lot.
As shown by last Friday's closing price, I sold too soon.
Last Friday's Closing Price: ENF.TO: C$29.34 -0.02 (-0.07%)
2. Paired Trade: Sold 100 FSTA at $27.36 and Bought 50 NSRGY at $76.76 (See Disclaimer):
Snapshot of Trades:
NSRGY:
FSTA:
FSTA Profit:
Dividends Received:
Total Return: $226.84 or 8.9% (holding period 4+ months)
Security Description FSTA: The Fidelity MSCI Consumer Staples Index ETF (FSTA) has an expense ratio of .12% and can be bought and sold commission free by Fidelity brokerage customers.
Key Statistics FSTA at Time of Trade:
Security Description NSRGY: NSRGY is an ADR traded on the U.S. pink sheet exchange. NSRGY Nestle S.A
1 ADR=1 Ordinary Share
On the day of my purchase (7/11/14), the ordinary shares closed at CHF68.45: NESN.VX
Recent Nestle Dividend History (adjusted for stock splits):
Dividends | Nestlé Global
Brands | Nestlé Global (e.g. NESCAFE, Nestle Pure Life Water, Perrier, Pet Food (e.g. Purina brand products, Alpo, Friskies), Lean Cuisine and Stouffer's, Hot Pockets, Boost, Carnation, Ice Cream (Dreyer's, Nestle, Haagen-Dazs, and Edy's), Gerber, Butterfinger, Nestle Crunch)
Nestle also expanded it skin health care business by buying L'Oreal's 50% interest in Galderma, giving Nestle a 100% ownership interest in that company. Dermatology Company Galderma – Specialist on skin medical solutions Nestle paid for this acquisition with 21.2 million L'Oreal shares that it owned, Strategic Transaction Approved by Boards of Nestlé and L’Oréal | Nestlé Global. As part of the same transaction, Nestle sold 27.2M shares L'Oreal to L'Oreal for €3.4B. Following this transaction, Nestle's stake in L'Oreal will be reduced from 29.4% to 23.29%. OR:EN Paris Stock Quote - L'Oreal SA - Bloomberg; LRLCY:OTC US Stock Quote - L'Oreal SA - Bloomberg; LRLCY L'Oreal Co (1 ADS=.2 Ordinary)
Prior Trade NSRGY:
SOLD NESTLE & BOUGHT BRK/B (6/23/09 Post)-BOUGHT Kraft & Nestle (3/20/09 Post); Bought 70 Nestle at $33.38 (4/16/09 Post)
Recent NSRGY 2013 Earnings Report:
Full Year Results 2013 | Nestlé Global
Rationale: I am going to hold this one until the valuation becomes clearly excessive. My next move would be to average down with a 50 share lot when and if the price falls significantly below my last purchase price. The odds of a dividend cut occurring during my remaining lifetime are extremely low. The more likely long term scenario would be a continuation of dividend raises and a doubling of the dividend rate within 6 to 9 years.
Risks: Given the quality of this company, a major risk could simply be described as multiple contraction from the current elevated level. Recessions and bear markets will be tough on consumer staple stocks. I did buy Nestle at $33.38 back in April 2009. The stock had traded over $50 in March 2008. NSRGY Interactive Chart It took about two years before the stock consistently traded over $50. A buyer in March 2008 needed to avoid panicking and selling in the low 30s.
For a company like Nestle, the dividends and price will rise over a long period of time, with occasional drama to the downside, and it is mainly important to avoid significantly overpaying for purchases. An example of overpaying would be a purchase of KO stock in 1998 at a split adjusted $42, higher than the current price in 2014. KO Interactive Chart
There is always currency and country risks for multinationals. I also have currency risk inherent in the purchase of any ADR.
As shown by last Friday's closing price, I sold too soon.
Last Friday's Closing Price: ENF.TO: C$29.34 -0.02 (-0.07%)
2. Paired Trade: Sold 100 FSTA at $27.36 and Bought 50 NSRGY at $76.76 (See Disclaimer):
Snapshot of Trades:
NSRGY:
FSTA:
FSTA Profit:
 |
| 2014 FSTA 100 SHARES +$193.94 |
Total Return: $226.84 or 8.9% (holding period 4+ months)
Security Description FSTA: The Fidelity MSCI Consumer Staples Index ETF (FSTA) has an expense ratio of .12% and can be bought and sold commission free by Fidelity brokerage customers.
Key Statistics FSTA at Time of Trade:
Security Description NSRGY: NSRGY is an ADR traded on the U.S. pink sheet exchange. NSRGY Nestle S.A
1 ADR=1 Ordinary Share
On the day of my purchase (7/11/14), the ordinary shares closed at CHF68.45: NESN.VX
Recent Nestle Dividend History (adjusted for stock splits):
 |
| Dividends Paid in CHFs Per Share-Right Hand Column |
Brands | Nestlé Global (e.g. NESCAFE, Nestle Pure Life Water, Perrier, Pet Food (e.g. Purina brand products, Alpo, Friskies), Lean Cuisine and Stouffer's, Hot Pockets, Boost, Carnation, Ice Cream (Dreyer's, Nestle, Haagen-Dazs, and Edy's), Gerber, Butterfinger, Nestle Crunch)
Nestle also expanded it skin health care business by buying L'Oreal's 50% interest in Galderma, giving Nestle a 100% ownership interest in that company. Dermatology Company Galderma – Specialist on skin medical solutions Nestle paid for this acquisition with 21.2 million L'Oreal shares that it owned, Strategic Transaction Approved by Boards of Nestlé and L’Oréal | Nestlé Global. As part of the same transaction, Nestle sold 27.2M shares L'Oreal to L'Oreal for €3.4B. Following this transaction, Nestle's stake in L'Oreal will be reduced from 29.4% to 23.29%. OR:EN Paris Stock Quote - L'Oreal SA - Bloomberg; LRLCY:OTC US Stock Quote - L'Oreal SA - Bloomberg; LRLCY L'Oreal Co (1 ADS=.2 Ordinary)
Prior Trade NSRGY:
 |
| 2009 NSRGY 100 Shares +$493.9 |
Recent NSRGY 2013 Earnings Report:
Full Year Results 2013 | Nestlé Global
Rationale: I am going to hold this one until the valuation becomes clearly excessive. My next move would be to average down with a 50 share lot when and if the price falls significantly below my last purchase price. The odds of a dividend cut occurring during my remaining lifetime are extremely low. The more likely long term scenario would be a continuation of dividend raises and a doubling of the dividend rate within 6 to 9 years.
Risks: Given the quality of this company, a major risk could simply be described as multiple contraction from the current elevated level. Recessions and bear markets will be tough on consumer staple stocks. I did buy Nestle at $33.38 back in April 2009. The stock had traded over $50 in March 2008. NSRGY Interactive Chart It took about two years before the stock consistently traded over $50. A buyer in March 2008 needed to avoid panicking and selling in the low 30s.
For a company like Nestle, the dividends and price will rise over a long period of time, with occasional drama to the downside, and it is mainly important to avoid significantly overpaying for purchases. An example of overpaying would be a purchase of KO stock in 1998 at a split adjusted $42, higher than the current price in 2014. KO Interactive Chart
There is always currency and country risks for multinationals. I also have currency risk inherent in the purchase of any ADR.
CHF/USD Currency Conversion Chart
Future Buys: I will average down with another 50 NSRGY share purchase below $70. I may opt to buy that average down lot between $70-$72.
Last Friday's Closing Prices:
FSTA: 26.38 +0.20 (+0.76%)
NSRGY: 73.96 -0.19 (-0.26%)
3. Sold 331+ MIN at $5.35 Roth IRA (see Disclaimer): Although I had a positive total return, I view my investment in MIN to be a failure.
Snapshot of Trade:
ROTH IRA: Bought 300 MIN at $5.6 (6/8/13/ Post)
Snapshot of History-Roth IRA:
Total Dividends: $166.06
Prior Trade: I also liquidated my position in a taxable account: Pared MIN-Sold 300 at $5.42-Item #7 Bought: 300 MIN at $5.24 (10/31/13 Post)
Security Description: MFS Intermediate Income Trust (MIN) is a leveraged closed end bond fund that owns investment grade bonds.
MIN Data on Date of Trade (7/14/14)
Closing Net Asset Value Per Share: $5.58
Closing Market Price: $5.32
Discount: -4.66%
CEFConnect Page for MIN
The closing net asset value per share on the date of my purchase (6/3/13) was $5.97. Unadjusted for the subsequent dividends, the fund's net asset value per share declined by about 10.39% to the NAV as of 7/14/14.
MIN Page at Morningstar (rated 2 stars as of 7/14/14))
Last SEC Filed Shareholder Report: MFS INTERMEDIATE INCOME TRUST (capital loss carryforwards of $33.184+M as of 10/31/13)
Sponsor's Website: MIN
Rationale:
(1) The dividend is supported by a return of capital even after it has been cut several times since topping out at $.04838 in November 2010: MFS Intermediate Income Trust (MIN) Dividend History
(2) Given the powerful bull market in investment grade bonds, the existence of a loss carryforward indicates poor portfolio management, in my opinion, given that long and strong tailwind.
(3) The net asset value decline is an indicia of poor portfolio management, particularly given the fund's low duration and ownership of investment grade quality bonds.
(4) After giving the managers of this fund a year to improve their performance, I gave up and fired them.
Future Buys: I will take a look at this fund when the current portfolio managers find a profession more suitable to their abilities and the discount widens to over 10%.
Last Friday's Closing Price: MIN: $5.24 +0.02 (+0.38%)
4. Sold 100 ESD at $18.54 (see Disclaimer):
Snapshot of Trade:
Snapshot of Profit:
Bought 100 ESD at $17.28 (April 2014 Post)
Dividends:
Total Return: $146.05 or 8.41% (holding period 3+ months)
Security Description: The Western Asset Emerging Markets Debt Fund (ESD) is a lightly leveraged closed end fund that invests in emerging market debt.
CEFConnect Page for ESD
Data as of Trade Date (7/14/14):
Closing Net Asset Value Per Share: $20.26
Closing Market Price: $18.54
Discount: -8.49%
Fund Sponsor's Webpage: ESD
SEC Form N-Q: WESTERN ASSET EMERGING MARKETS DEBT FUND INC. (ESD)
This fund's currency exposure was 94% to the USD as of 6/30/14. Western Asset Emerging Markets Debt Fund Inc. Portfolio Composition as of June 30, 2014 In other words, it is not a local currency EM bond and instead owns mostly EM debt priced in USDs.
Rationale: As noted when I purchased this fund, emerging market bonds plummeted in value last year when U.S. interest rates started to move up in May. Part of that decline was due to EM currencies declining in value against the USD. It is important to remember that this fund is priced in USDs.
When I sold this CEF (7/14/14), I also had some concerns about Argentina's likely default and its impact. Argentina did default last week.
Future Buys: I may buy this one back, since Argentina's sovereign bonds did not lose much in response to the default. The 2033 bond declined to near 90 from 96 cents late last Wednesday and closed at 86 last Friday. WSJ I will wait a few days or weeks before making a decision. Emerging market bonds will likely react badly to a rise in U.S. interest rates, which is another consideration. One response from investors may be a shrug of the shoulders followed by a comment like "why take the risk for these yields".
Last Friday's Closing Price: ESD: $17.93 -0.04 (-0.22%)
5. Sold 100 PWCDF at $28.83 (see Disclaimer): I did not hold onto this one for very long. I flipped this one too quick.
Snapshot of Trade:
Snapshot of Profit:
Bought 100 PWCDF at $27.29 (7/12/14 Post)
Company Description: Power Corp. of Canada (PWCDF:OTC) is a Canadian holding company that has interests, directly and indirectly, in financial services, communications and other business sectors. Power Corporation of Canada | Home
Profile Page at Reuters
Rationale: I usually do not hold a security for such a short period. I decided to harvest the gain when the Canadian Dollar started to decline toward its 200 day SMA line on 7/18/14. That line was later broken to the downside: CAD/USD Currency Conversion Chart; Canadian Dollar ETF Chart After looking at a five year chart, this stock was near the top of its five year range and had not yet shown a willingness to break out. PWCDF Interactive Chart
Also, when doing a stock allocation pare, I am likely to choose some recently purchased positions that can be sold profitably.
If the Canadian dollar continues to decline, it could make some Canadian REITs more attractive whose ordinary shares are priced in USDs and traded on the U.S. pink sheet exchange.
Last Friday's Closing Price: PWCDF: $28.97 -0.63 (-2.13%)
6. Added 100 SWZ at $14.49 (see Disclaimer): This CEF took a tumble after this purchase on 7/16.
Snapshot of Trade:
Security Description: The Swiss Helvetia Fund (SWZ) is an unleveraged stock CEF that invests in companies based in Switzerland. Slightly more than 30% of net assets are invested in Roche, Novartis and Nestle.
CEFConnect Page for SWZ
SWZ Page at Morningstar
New Web Address for Sponsor: Swiss Helvetia Fund
During my ownership period, which dates back to 2008, I have received a number of long and short term capital gain distributions: Swiss Helvetia Fund Dividend History Dividends are not supported by a ROC.
Data as of Trade Date (7/16/14):
Closing Net Asset Value Per Share: $16.58
Closing Market Price: $14.5
Discount: -12.55%
Average Discounts:
1 Year: -11.1%
3 Years: -11.89%
5 Years: -12.23%
Last SEC Filed Form N-Q: THE SWISS HELVETIA FUND, INC. (holdings as of 3/31/14; unrealized gain $184.063+M)
Last SEC Filed Shareholder Report: The Swiss Helvetia Fund, Inc. (period ending 12/31/13-Annual Report)
Swiss Helvetia Fund Common (SWZ) Total Returns
After this last purchase, I received the shares purchased with the last dividend:
Prior Trades: I last added to this position in April: Item # 4 Added 50 SWZ at $14.32 (4/12/14 Post) The net asset value per share was then $16.25 and the discount was -11.94% based on the closing price of $14.31 on 4/3/14. Other purchases, made in 2012 and 2013, are discussed in these posts: Item # 1 Added 50 SWZ at $12.22 April 2013; Item # 3 Added 50 SWZ at $10.64 November 2012
Rationale and Risks: With this fund, I gain exposure to a number of Swiss blue chips and exposure to assets priced in Swiss Francs.
I discuss other potential benefits and risks in my Item # 4 Added 50 SWZ at $14.32.
Future Buys and Sells: I have periodically added shares whenever the spirit moves me. To lower my average cost per share, I may sell my highest cost 100 shares before the year end ex dividend date, which will generally be sometime in mid-December. Another option would be to sell-profitably-100 of my highest cost shares purchased with dividends, thereby enhancing the value of those dividends. I recently chose the later option when paring RMT, where I sold only shares purchased with dividends: Sold Taxable Account: 126 RMT at $12.6 (snapshot of realized gain on shares purchased with dividends=$149.91)
Last Friday's Closing Price: SWZ: $13.89 +0.03 (+0.22%)
7. Bought 100 GDO at $18.43-Roth IRA (see Disclaimer):
Snapshot of Trade:
Security Description: The Western Asset Global Corp Defined Opportunity Fund (GDO) is a leveraged world closed end bond fund. GDO will liquidate on or about 12/2/2024. This gives the fund one of the characteristics of an individual bond, the promise to return an investor's money at a time certain. However, unlike an individual bond, there is no promise to pay a fixed sum (i.e. par value). The investor in GDO will simply receive their pro-rata share of the liquidation proceeds, which may be more or less than the current net asset value per share. The current discount to net asset value does provide some cushion.
According to the sponsor, the duration is relatively short at 4.1 years as of 3/31/14. Portfolio Characteristics
"Investor Alert - Duration—What an Interest Rate Hike Could Do to Your Bond Portfolio - FINRA"
Data as of Date of Purchase (7/17/14)
Closing Net Asset Value Per Share: $ 20.57
Closing Market Price: $ $18.5
Discount: -10.06%
The net asset value per share declined 2 cents per share from the previous close on 7/16/14. While investment grade bonds generally rose in price on 7/17, junk bonds generally declined in price as reflected in the closing price of JNK that day: JNK: $41.00 -0.31 (-0.75%) : SPDR Barclays High Yield Bond ETF While GDO is weighted in investment grade bonds, it has a significant allocation to BB and B and to CCC rated bonds to a lesser extent.
Last SEC Filed Shareholder Report: WA Global Corporate Defined Opportunity Fund Inc (period ending 4/30/14)
As of 4/30/14, GDO had net unrealized appreciation of $30.638+M (note 3 at page 32)
I recently discussed this security in connection with selling 102+ GDO shares in another Roth IRA account. Sold Regular IRA: 102+ GDO at $18.79 (7/5/14 Post)-Item # 7 Bought 100 GDO at $17.79-Regular IRA
I have now consolidated the retirement account position in a Roth IRA account, where I am reinvesting the dividends. I now own over 575 shares with almost 360 of those shares now owned in a Roth IRA.
Other recent posts discussing currently owned purchases include the following: Item # 4 Added 100 GDO at $18.06 (2/25/14 Post); Item # 7 Bought 50 GDO at $18.03 (11/19/13 Post); Item # 4 Added 50 GDO at $17.58-Roth IRA (6/29/13) Risks and potential benefits are discussed in those posts. The normal risk for leveraged bond CEFs is also discussed in Item # 8 below.
A known CEF risk, an expansion of the discount greater than the decline in net asset value per share, was on display late last week:
7/31/2014
Net Asset Value Per Share: $20.48
Market Price: $18.24
7/23/14
Net Asset Value Per Share: $20.59
Market Price: $18.74
There was no ex dividend between those two dates. The last monthly ex dividend date was on 7/16/14. The net asset value per share declined .00534%, hardly anything to rationally cause more than a 10 to 15 cent decline in the market price, but the market price declined anyway by 2.67%. Unfortunately, frequently irrational individual investors who do not have a clue control CEF pricing at that margin. That presents both opportunities and risks.
Last Friday's Closing Price: GDO: $18.25
Closing Net Asset Value Per Share 8/1/14: $20.44
Discount at -10.71
Three Year Average at -5.88%
8. Bought 200 HYB at $9.89 (See Disclaimer): I am in a hyper trading mode for all leveraged bond CEFs, and HYB is certainly not an exception.
Snapshot of Trade:
Security Description: The New America High Income Fund Inc (HYB) is a leveraged bond CEF that owns high yield junk rated bonds. The sponsor is T. Rowe Price.
When I bought these shares, I was aware that investors were yanking money out of junk bond funds and that bond class was then underperforming investment grade bonds. Barrons.com
Data on Date of Trade (7/18/14):
Closing Net Asset Value Per Share: $10.9
Closing Market Price: $9.86
Discount: -9.54%
Average Discounts:
1 Year: -9.56%
3 Years: -2.52%
5 Years: -2.9%
CEFConnect Page for HYB
Performance 10 Years Through 7/18/14 (date of purchase)
Annualized Total Returns Based on
Net Asset Value: 10.85%
Market Price: 11.14%
HYB Page at Morningstar (rated 4 stars at time of purchase; no ROC support for monthly dividend within the past year according to Morningstar)
SEC Form N-Q (Holding as of 3/31/14; total cost $322.767M and value at $338.492M)
Last SEC Filed Shareholder Report (period ending 12/31/13; tax loss carryforwards at $31.940M, page 32)
Prior Trades: None
Rationale: I am in a hyper trading mode for all leveraged bond CEFs. I am attempting to balance their current income generation with the risk that the shares will lose value after my purchase, wiping out some or all of that income. As shown by what happened to bond CEFs starting in May, when interest rates rose, it did not take long for a decline in the market prices to offset a year's worth of income. It is simply not helpful to receive an annual dividend yield of 8% and to lose 10%+ due to a share price decline.
HYB is currently paying a monthly dividend of $.065 per share. Assuming a continuation of that rate, which is in no way assured, the yield at a total cost of $9.89 is about 7.89%. The benefits are summed up in the preceding sentence: monthly dividends and a yield of 7.89%.
If I can exit this position at any profit, I will view this investment as a success.
Risks: To understand the risks associated with leveraged bond CEFs, it is helpful to go back in time and see how the CEF performed between 5/1/13 and 9/30/13 which anyone can do at CEFConnect with a few minutes of effort.
HYB Data:
5/1/13:
Net Asset Value Per Share= $10.78
Market Price: $10.56
Discount: -2.04%
9/30/13
Net Asset Value Per Share=$10.45
Market Price: $9.51
Discount: -9%
HYB did okay on a net asset value per share basis, considering the circumstances. Unadjusted for dividend payments, the net asset value per share declined by just 3.06%. The market price declined by 9.94% as the discount expansion aggravated the decline by widening from -2.04% to -9%. The widening of the discount is known risk for CEF investors, which can also work to their benefit by narrowing after a purchase and hopefully this will happen going forward. One thing is for sure. If interest rates start to rise and the net asset value per share starts going down, the market price decline will most likely substantially exceed the net asset value per share drop on a percentage basis-and that can be painful!
Last Friday's Closing Price: HYB: $9.71 +0.05 (+0.52%)
Future Buys: I will average down with another 50 NSRGY share purchase below $70. I may opt to buy that average down lot between $70-$72.
Last Friday's Closing Prices:
FSTA: 26.38 +0.20 (+0.76%)
NSRGY: 73.96 -0.19 (-0.26%)
3. Sold 331+ MIN at $5.35 Roth IRA (see Disclaimer): Although I had a positive total return, I view my investment in MIN to be a failure.
Snapshot of Trade:
 |
| 2014 Roth IRA Sold 331+ MIN at $5.35+ |
Snapshot of History-Roth IRA:
Total Dividends: $166.06
Prior Trade: I also liquidated my position in a taxable account: Pared MIN-Sold 300 at $5.42-Item #7 Bought: 300 MIN at $5.24 (10/31/13 Post)
Security Description: MFS Intermediate Income Trust (MIN) is a leveraged closed end bond fund that owns investment grade bonds.
MIN Data on Date of Trade (7/14/14)
Closing Net Asset Value Per Share: $5.58
Closing Market Price: $5.32
Discount: -4.66%
CEFConnect Page for MIN
The closing net asset value per share on the date of my purchase (6/3/13) was $5.97. Unadjusted for the subsequent dividends, the fund's net asset value per share declined by about 10.39% to the NAV as of 7/14/14.
MIN Page at Morningstar (rated 2 stars as of 7/14/14))
Last SEC Filed Shareholder Report: MFS INTERMEDIATE INCOME TRUST (capital loss carryforwards of $33.184+M as of 10/31/13)
Sponsor's Website: MIN
Rationale:
(1) The dividend is supported by a return of capital even after it has been cut several times since topping out at $.04838 in November 2010: MFS Intermediate Income Trust (MIN) Dividend History
(2) Given the powerful bull market in investment grade bonds, the existence of a loss carryforward indicates poor portfolio management, in my opinion, given that long and strong tailwind.
(3) The net asset value decline is an indicia of poor portfolio management, particularly given the fund's low duration and ownership of investment grade quality bonds.
(4) After giving the managers of this fund a year to improve their performance, I gave up and fired them.
Future Buys: I will take a look at this fund when the current portfolio managers find a profession more suitable to their abilities and the discount widens to over 10%.
Last Friday's Closing Price: MIN: $5.24 +0.02 (+0.38%)
4. Sold 100 ESD at $18.54 (see Disclaimer):
Snapshot of Trade:
Snapshot of Profit:
 |
| 2014 Sold 100 ESD +$110.05 |
Dividends:
Total Return: $146.05 or 8.41% (holding period 3+ months)
Security Description: The Western Asset Emerging Markets Debt Fund (ESD) is a lightly leveraged closed end fund that invests in emerging market debt.
CEFConnect Page for ESD
Data as of Trade Date (7/14/14):
Closing Net Asset Value Per Share: $20.26
Closing Market Price: $18.54
Discount: -8.49%
Fund Sponsor's Webpage: ESD
SEC Form N-Q: WESTERN ASSET EMERGING MARKETS DEBT FUND INC. (ESD)
This fund's currency exposure was 94% to the USD as of 6/30/14. Western Asset Emerging Markets Debt Fund Inc. Portfolio Composition as of June 30, 2014 In other words, it is not a local currency EM bond and instead owns mostly EM debt priced in USDs.
Rationale: As noted when I purchased this fund, emerging market bonds plummeted in value last year when U.S. interest rates started to move up in May. Part of that decline was due to EM currencies declining in value against the USD. It is important to remember that this fund is priced in USDs.
When I sold this CEF (7/14/14), I also had some concerns about Argentina's likely default and its impact. Argentina did default last week.
Future Buys: I may buy this one back, since Argentina's sovereign bonds did not lose much in response to the default. The 2033 bond declined to near 90 from 96 cents late last Wednesday and closed at 86 last Friday. WSJ I will wait a few days or weeks before making a decision. Emerging market bonds will likely react badly to a rise in U.S. interest rates, which is another consideration. One response from investors may be a shrug of the shoulders followed by a comment like "why take the risk for these yields".
Last Friday's Closing Price: ESD: $17.93 -0.04 (-0.22%)
5. Sold 100 PWCDF at $28.83 (see Disclaimer): I did not hold onto this one for very long. I flipped this one too quick.
Snapshot of Trade:
Snapshot of Profit:
 |
| 2014 PWCDF Sold 100 +$138.71 |
Company Description: Power Corp. of Canada (PWCDF:OTC) is a Canadian holding company that has interests, directly and indirectly, in financial services, communications and other business sectors. Power Corporation of Canada | Home
Profile Page at Reuters
Rationale: I usually do not hold a security for such a short period. I decided to harvest the gain when the Canadian Dollar started to decline toward its 200 day SMA line on 7/18/14. That line was later broken to the downside: CAD/USD Currency Conversion Chart; Canadian Dollar ETF Chart After looking at a five year chart, this stock was near the top of its five year range and had not yet shown a willingness to break out. PWCDF Interactive Chart
Also, when doing a stock allocation pare, I am likely to choose some recently purchased positions that can be sold profitably.
If the Canadian dollar continues to decline, it could make some Canadian REITs more attractive whose ordinary shares are priced in USDs and traded on the U.S. pink sheet exchange.
Last Friday's Closing Price: PWCDF: $28.97 -0.63 (-2.13%)
6. Added 100 SWZ at $14.49 (see Disclaimer): This CEF took a tumble after this purchase on 7/16.
Snapshot of Trade:
 |
| 2014 SWZ Bought 100 at $14.49 |
 |
| Ten Top Holdings as of 6/30/14 |
SWZ Page at Morningstar
New Web Address for Sponsor: Swiss Helvetia Fund
During my ownership period, which dates back to 2008, I have received a number of long and short term capital gain distributions: Swiss Helvetia Fund Dividend History Dividends are not supported by a ROC.
Data as of Trade Date (7/16/14):
Closing Net Asset Value Per Share: $16.58
Closing Market Price: $14.5
Discount: -12.55%
Average Discounts:
1 Year: -11.1%
3 Years: -11.89%
5 Years: -12.23%
Last SEC Filed Form N-Q: THE SWISS HELVETIA FUND, INC. (holdings as of 3/31/14; unrealized gain $184.063+M)
Last SEC Filed Shareholder Report: The Swiss Helvetia Fund, Inc. (period ending 12/31/13-Annual Report)
Swiss Helvetia Fund Common (SWZ) Total Returns
After this last purchase, I received the shares purchased with the last dividend:
Prior Trades: I last added to this position in April: Item # 4 Added 50 SWZ at $14.32 (4/12/14 Post) The net asset value per share was then $16.25 and the discount was -11.94% based on the closing price of $14.31 on 4/3/14. Other purchases, made in 2012 and 2013, are discussed in these posts: Item # 1 Added 50 SWZ at $12.22 April 2013; Item # 3 Added 50 SWZ at $10.64 November 2012
Rationale and Risks: With this fund, I gain exposure to a number of Swiss blue chips and exposure to assets priced in Swiss Francs.
I discuss other potential benefits and risks in my Item # 4 Added 50 SWZ at $14.32.
Future Buys and Sells: I have periodically added shares whenever the spirit moves me. To lower my average cost per share, I may sell my highest cost 100 shares before the year end ex dividend date, which will generally be sometime in mid-December. Another option would be to sell-profitably-100 of my highest cost shares purchased with dividends, thereby enhancing the value of those dividends. I recently chose the later option when paring RMT, where I sold only shares purchased with dividends: Sold Taxable Account: 126 RMT at $12.6 (snapshot of realized gain on shares purchased with dividends=$149.91)
Last Friday's Closing Price: SWZ: $13.89 +0.03 (+0.22%)
7. Bought 100 GDO at $18.43-Roth IRA (see Disclaimer):
Snapshot of Trade:
 |
| 2014 Roth IRA Bought 100 GDO at $18.43 |
According to the sponsor, the duration is relatively short at 4.1 years as of 3/31/14. Portfolio Characteristics
"Investor Alert - Duration—What an Interest Rate Hike Could Do to Your Bond Portfolio - FINRA"
Data as of Date of Purchase (7/17/14)
Closing Net Asset Value Per Share: $ 20.57
Closing Market Price: $ $18.5
Discount: -10.06%
The net asset value per share declined 2 cents per share from the previous close on 7/16/14. While investment grade bonds generally rose in price on 7/17, junk bonds generally declined in price as reflected in the closing price of JNK that day: JNK: $41.00 -0.31 (-0.75%) : SPDR Barclays High Yield Bond ETF While GDO is weighted in investment grade bonds, it has a significant allocation to BB and B and to CCC rated bonds to a lesser extent.
Last SEC Filed Shareholder Report: WA Global Corporate Defined Opportunity Fund Inc (period ending 4/30/14)
As of 4/30/14, GDO had net unrealized appreciation of $30.638+M (note 3 at page 32)
I have now consolidated the retirement account position in a Roth IRA account, where I am reinvesting the dividends. I now own over 575 shares with almost 360 of those shares now owned in a Roth IRA.
Other recent posts discussing currently owned purchases include the following: Item # 4 Added 100 GDO at $18.06 (2/25/14 Post); Item # 7 Bought 50 GDO at $18.03 (11/19/13 Post); Item # 4 Added 50 GDO at $17.58-Roth IRA (6/29/13) Risks and potential benefits are discussed in those posts. The normal risk for leveraged bond CEFs is also discussed in Item # 8 below.
A known CEF risk, an expansion of the discount greater than the decline in net asset value per share, was on display late last week:
7/31/2014
Net Asset Value Per Share: $20.48
Market Price: $18.24
7/23/14
Net Asset Value Per Share: $20.59
Market Price: $18.74
There was no ex dividend between those two dates. The last monthly ex dividend date was on 7/16/14. The net asset value per share declined .00534%, hardly anything to rationally cause more than a 10 to 15 cent decline in the market price, but the market price declined anyway by 2.67%. Unfortunately, frequently irrational individual investors who do not have a clue control CEF pricing at that margin. That presents both opportunities and risks.
Last Friday's Closing Price: GDO: $18.25
Closing Net Asset Value Per Share 8/1/14: $20.44
Discount at -10.71
Three Year Average at -5.88%
8. Bought 200 HYB at $9.89 (See Disclaimer): I am in a hyper trading mode for all leveraged bond CEFs, and HYB is certainly not an exception.
Snapshot of Trade:
Security Description: The New America High Income Fund Inc (HYB) is a leveraged bond CEF that owns high yield junk rated bonds. The sponsor is T. Rowe Price.
When I bought these shares, I was aware that investors were yanking money out of junk bond funds and that bond class was then underperforming investment grade bonds. Barrons.com
Data on Date of Trade (7/18/14):
Closing Net Asset Value Per Share: $10.9
Closing Market Price: $9.86
Discount: -9.54%
Average Discounts:
1 Year: -9.56%
3 Years: -2.52%
5 Years: -2.9%
CEFConnect Page for HYB
Performance 10 Years Through 7/18/14 (date of purchase)
Annualized Total Returns Based on
Net Asset Value: 10.85%
Market Price: 11.14%
HYB Page at Morningstar (rated 4 stars at time of purchase; no ROC support for monthly dividend within the past year according to Morningstar)
SEC Form N-Q (Holding as of 3/31/14; total cost $322.767M and value at $338.492M)
Last SEC Filed Shareholder Report (period ending 12/31/13; tax loss carryforwards at $31.940M, page 32)
Prior Trades: None
Rationale: I am in a hyper trading mode for all leveraged bond CEFs. I am attempting to balance their current income generation with the risk that the shares will lose value after my purchase, wiping out some or all of that income. As shown by what happened to bond CEFs starting in May, when interest rates rose, it did not take long for a decline in the market prices to offset a year's worth of income. It is simply not helpful to receive an annual dividend yield of 8% and to lose 10%+ due to a share price decline.
HYB is currently paying a monthly dividend of $.065 per share. Assuming a continuation of that rate, which is in no way assured, the yield at a total cost of $9.89 is about 7.89%. The benefits are summed up in the preceding sentence: monthly dividends and a yield of 7.89%.
If I can exit this position at any profit, I will view this investment as a success.
Risks: To understand the risks associated with leveraged bond CEFs, it is helpful to go back in time and see how the CEF performed between 5/1/13 and 9/30/13 which anyone can do at CEFConnect with a few minutes of effort.
HYB Data:
5/1/13:
Net Asset Value Per Share= $10.78
Market Price: $10.56
Discount: -2.04%
9/30/13
Net Asset Value Per Share=$10.45
Market Price: $9.51
Discount: -9%
HYB did okay on a net asset value per share basis, considering the circumstances. Unadjusted for dividend payments, the net asset value per share declined by just 3.06%. The market price declined by 9.94% as the discount expansion aggravated the decline by widening from -2.04% to -9%. The widening of the discount is known risk for CEF investors, which can also work to their benefit by narrowing after a purchase and hopefully this will happen going forward. One thing is for sure. If interest rates start to rise and the net asset value per share starts going down, the market price decline will most likely substantially exceed the net asset value per share drop on a percentage basis-and that can be painful!
Last Friday's Closing Price: HYB: $9.71 +0.05 (+0.52%)
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