Saturday, August 9, 2014

Cincinnati Bell Bond Redemption/NMFC/Pared ADX Again-Sold 143 Shares at $13.97/Bought 100 TRMK at $23.12/Bought 200 FSC at $9.78-Regular IRA/Roth IRA: Sold 100 MSPRA at $20.7/Sold Taxable Accounts: 100 GYLD at $28.32, 35 AAPL at $97.22, 30 DLR at $64.06, 30 EPR at $55.22-Ongoing Stock Allocation Reduction

Closing Prices Last Friday:  

S & P 500  1,931.59 +22.02 (+1.15%)(still below its 50 day SMA: Chart)
DJIA: 16,553.93 +185.66 (+1.13%)(still below its 50 day SMA and came close last Thursday to Piercing the 200 Day SMA to the Downside: Chart)
VIX: 15.77 -0.89 (-5.34%)(Stable Vix Pattern-cyclically bullish intermediate term)

Big Picture Synopsis:

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

As of 8/6/14, I hit my $55,000 stock allocation reduction target, thereby eliminating the net additions between October 2013 and early June 2014.

I am attempting to replace the lost income by adding bond CEFs and hopefully trading them for profits after collecting a few dividends. Until last Thursday, bond CEFs were declining, even as interest rates for investment grade bonds went down some in response to a weaker stock market, a flight to safety and risk off trade, and a growing concern about an economic slowdown in Europe.

In this kind of stock allocation reduction, I am not attempting to time a market decline. I would being doing the same even in a rising market.

Instead, I am engaged in an assessment of the potential rewards and risks using standard valuation criteria. The mere fact that I am having trouble finding stocks to buy that meet my valuation criteria reinforces my opinion that the allocation needs some pruning. I view this stock allocation pare as somewhat analogous to a spring cleaning.

I will use many valuation metrics and weight them using my judgment based on the mass of data stored in the OG's brain and my macro views. It is not a scientific process and the evaluation always need to be done in context. I would arrive at one result looking forward in 1969, when problematic inflation was readily apparent to any observer and another in 2014 when the market is predicting low inflation over the next ten years.  

The market is primarily concerned about the future, rather than the past. The past and present just provide important and relevant information about predicting the future. The future is the key and that unfortunately causes a host of problems, and generates more than a smidgen of anxiety, for mere mortals.  One of the most common mistakes is paying too much for reasonably anticipated future growth. Another is to forecast the recent past too far into the future, a common mistake made for component suppliers to technology companies who may enjoy a spurt of 20+% annualized growth for two or three years based on some new thingamajig that has the life cycle of a fruit fly.

Two of the many inherent and glaring flaws in the Shiller P/E are that this valuation metric uses historical data for the past ten years and its proponents use data going back to the 1870s to establish a carved in stone "fair value" mean number. It does not bother those who cling to it with tenacious religious fervor, nor cause them to question their beliefs, that the S & P 500 index has been below that mean number about 2% of the time since 1990 when the S & P 500 was trading around 350, Bloomberg, and anyone following that approach to valuation would have been left in the dust a very long ago. 

Anyone who disagrees with, or has reservations about that tunnel vision focus on the past, is dismissed blithely as engaging in "this time is different" group think.

Facts do change, and the facts have changed dramatically over the past 140 years. Corporations that now dominate the S & P 500 are less capital and labor intensive and have major operations worldwide including the faster growing emerging markets. (e.g. Google, Amgen, Oracle, Microsoft) Just 18 American multinationals hold 36% of the corporate wealth in 2013, up from 27% in 2009. Bloomberg

Profit margins are also considerably higher for those companies than the heavy industrial companies that were once part of the DJIA, many of whom have long since been forgotten even by Stock Jocks. DJIA Historical Components

I would place more reliance on a modern historical average that at least makes a reasonable effort to forecast the future. One common future forecast is the consensus "operating earnings" estimate for the next 12 months. Since the early 1970s, which qualifies as the modern era for me, the average P/E on that forward estimated number is 13.7 according to Yardeni, which is in line with other average numbers that I have seen recently. (see Figure 1: yardeni) One of those similar numbers was found in William Bernstein's new book: Rational Expectations: Asset Allocation for Investing Adults (Investing for Adults Book 4) - Kindle edition by William Bernstein {I bought the Kindle edition from Amazon but I am reading the book on my IPad using Amazon's Kindle App. Frequently, Amazon is slightly cheaper than Apple or has books that are unavailable at Apple's Itunes.}

As of 8/1/14, the forward P/E based on "operating earnings (a non-GAAP measure) was 16.15 for the S & P 500. That number fell slightly to 16.1 as of 8/8/14. The combined operating earnings estimate for the next four quarters was 128.53 as of 7/31/14. If I slap a 13.7 P/E on that number, I arrive at 1760.86 for the S & P 500.

In this kind of analysis, I am not making a prediction that the S & P 500 will fall to that level or anywhere near it. And I would emphasize that 13.7 is an average number, which simply means that this index has been below that level for considerable periods, such as the 1970s when stocks and bonds were both suffering from a long term secular bear market caused primarily by problematic inflation. In a risk assessment, I have to note that fact too. This kind of analysis is a risk assessment rather than a prediction. If I look at an S & P 500 chart, I see that the S & P 500 was at 1740 in early February 2014. S&P 500 Index Chart

The Yardini charts are helpful in seeing potential buy and sell periods. The 1998-2000 was an obvious sell into the spike. Buying opportunities were presented in 1982, after the 1987 crash, in early 2009 and after the almost 20% correction in 2011. Using this kind of analysis, the current forward multiple represents a stretched valuation rather than a sell everything kind of multiple circa 1999.  

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

The bond forecast assumes that the market is correctly forecasting the average annual inflation rate at 2% to 2.25% over the next ten years. That forecast can be found in the break-even spread for the 10 year TIP. Last Friday, the break-even spread on the ten year TIP closed at 2.25%. The real yield on the ten year tip closed at .19%. Daily Treasury Real Yield Curve Rates

Goldman Sachs anticipates a "dramatic divergence" in the performance of stocks over bonds over the next several years. GS expects the S & P 500 to return 6.2% per year through 2018, compared to just a 1% return per year for the the ten year treasury. I suspect that the buyer of the ten year today at a 2.5% will have a negative annualized return before taxes and inflation over that period.

The bond market has apparently not received that missive from GS.

The German 10 year bond nudged up almost to a 1.05% yield last week. DE10YT Bond Last Friday's closing yield was the lowest on record.

The ten year treasury hit a 13 month low yield last Thursday. Daily Treasury Yield Curve Rates


Recent Developments:

The ISM services PMI rose to 58.7 in July, up from 56 in June. Last month's services PMI was the "highest reading for the index since its inception in January 2008". The new orders component rose to 64.9 from 61.2 in June. Employment rose to 56 from 54.4.  

In its most recent survey of senior bank loan officers, the FED reported a "broad-based pickup in loan demand" in its July survey. FRB: Senior Loan Officer Opinion Survey

The Federal Reserve reported that consumer debt rose an annual rate of 6.4% in June. Credit increased by a seasonally adjusted $17.3B. FRB: G.19 Release-- Consumer Credit

The HSBC China Service PMI was reported at 50, the lowest reading since HSBC started to compile the data nine years ago. The composite index, which includes both services and manufacturing, declined to 51.6 in July from 52.4 in June.

The Eurozone Composite Output Index, which includes services and manufacturing, rose to 53.8 in July, a three month high, from 52.8 in June. Germany's service sector growth hit the highest level in 37 months at 56.7 in July. German manufacturing orders declined 3.2% in June compared to May.

The market bounced last Friday based on reports that Russia had ended its military drills along its border with the Ukraine. CBS News Putin may have finally realized that an invasion was not worth the cost. Based on several reports, it appeared to be only a question of time before the Ukrainian government dislodges the separatists.

The U.S. bombing of the terrorists in Iraq was viewed as a non-event by the U.S. market. If anything, this bombing campaign is a net positive since it may halt the advance of ISIS before they can capture Iraq's oil fields. And, without any doubt, all civilized persons view that organization as an enemy most worthy of complete destruction. There is no other way to deal with those who are so completely evil.

New Mountain Finance (NMFC)(own): 

New Mountain Finance, a BDC, declared its regular quarterly dividend of $.36 per share and a special dividend of $.16 per share related to a realized gain from NMFC's sale of some warrants. As of 6/30/14, net asset value per share was reported at $14.65, up from $14.38 as of 3/31/14. Net investment income for the 2014 second quarter was reported at $.34 per share, in line with the consensus estimate. NMFC Analyst Estimates

Item # 3 Added 50 NMFC at $14.2-Roth IRA (4/26/14 Post); Bought 50 NMFC at $15.03 in the Roth IRA (5/29/13 Post); Item # 5 Bought 100 NMFC at $14.28-Taxable Account (6/22/13 Post)

Closing Price Last Friday: NMFC: $15.05 +0.18 (+1.21%)

Cincinnati Bell Bond Redemption:

I lost a 8.75% Cincinnati Bell bond, maturing in 2018, to an optional redemption by the issuer who had to pay a 4.375% premium to par value for that early redemption.

In addition to the premium par payment, the issuer had to pay accrued interest:

I bought this bond in a regular IRA. Item # 4 Added 1 Senior Sub 8.75% Cincinnati Bell Bond at 97.45 Maturing on 3/15/2018 (5/27/11 Post). So I made around a $70 profit and collected over three years of interest at almost a 9% current yield based on my cost. I view that as a victory.

I had profitably sold 2 of those bonds back in 2012 as a trade: Sold 2 Cincinnati Bell Senior Subordinated Bonds at $97


1. Bought 200 FSC at $9.78-Regular IRA (see Disclaimer): This is a trade. I am simply attempting to earn a return on excess cash earning .01% in a Fidelity MM fund. I also knew about the Cincinnati bond redemption noted above when I bought these shares, and this purchase was viewed also as a replacement for the lost income (and then some) generated by that bond.

Snapshot of Trade:

Security Description: Fifth Street Finance (FSC) is a business development corporation (BDC) that focuses on companies with revenues between $25M and $250M.

Sponsor's webpage: Individual Investor | Fifth Street

Fifth Street Finance Profile Page at Reuters

Fifth Street Finance Key Developments Page at Reuters

I noted in a 7/12/14 Post that Fifth Street Finance had raised its monthly dividend to $.0917 from $.0833 per share, effective for the September 2014 and that Fifth Street sold 13.25M shares at $9.95. At least there will not be another public offering, at least for a few months, that knocks the share price down.

I also mentioned in that July post that I do not regard the dividend increase as a dividend raise. FSC has cut its monthly rate several times since the 2010 4th quarter. The first cut was a small decline from $.11 to $.1066. The next cut was to $.0958 in January 2012 and then to $.0833. Fifth Street Finance Corp. (FSC) Dividend Date & History. When the dividend returns to $.11 per share, and is then raised, I will call that increase a dividend raise.

When any BDC is owned in an IRA, the general idea is to harvest several dividend payments, generally a year or more, and then to sell when the market price exceeds the net asset value per share by 5%.

As of 3/31/14, the FSC's net asset value per share was $9.81, down from $9.9 on 3/31/13. (page 3 FSC- 2014.03.31-10Q). That would give me a possible exit price of $10.3 for the shares owned in the Roth IRA.

Recent Earnings Report: When I added to my position with this 200 lot purchase, I only had the 2014 first quarter report as the latest one. 

Rationale and Risks: See above links for a discussion on these topics.

The only reason for owning this stock is to capture the yield hopefully without losing money on the stock. Easier said than done. My general trading rule is to consider a purchase when the market price falls below the net asset value per share, which frequently happens with the BDC announces a stock offering, and then hopefully unload the shares at any profit after collecting dividends for a year or more when the market price exceeds the net asset value by 5+%. That trading rule is not etched in stone. I may make an exception for purchases of ARCC above net asset value per share, viewing that one as better than most which is not saying much.

I view the compensation packages for externally managed BDCs as asinine in the extreme, particularly when there is a long term history of destroying net asset value per share.

FSC Historical Net Asset Values Per Share:
3/31/14:  $9.81 (page 3:  FSC- 2014.03.31-10Q)
3/31/13:  $9.9            "
3/31/12:  $9.87 (page 3 Form 10-Q)
3/31/11:  $10.68        "
3/31/10:  $10.7  (page 5 10-Q)
3/31/09:  $11.94      "
6/30/08:  $13.2  10-Q

Percentage Decline 6/30/08 to 3/31/14: 25.68% (incentive fees, must be some kind of joke?)

In its last Annual Report, FSC acknowledges "material conflicts of interest" at pages 16-17 and other material risks starting at page 22 and ending on page 40. A BDC's risk disclosure is probably the longest of any publicly traded company. FSC 10-K Ended 09.30.2013 Needless to say, there is no free lunch for a 8% to 13% yield when the ten year treasury is yielding around 2.5%.

Future Buys/Sells: Hopefully, I will not buy more shares reaching for yield. I intend to sell some shares when the market price exceeds the net asset value by 5% or whenever I become more concerned than now about this BDC.

Closing Price Last Friday: FSC: $9.85 +0.15 (+1.49%) 

2. Roth IRA-Sold 100 MSPRA at $20.7 (see Disclaimer):

MSPRA is a frequently traded equity preferred stock, issued by Morgan Stanley, that pays qualified and non-cumulative dividends at the greater of 4% or .7% above the three month Libor rate on a $25 par value. Prospectus The problem with this security is that the coupon will likely be stuck at 4% for several more years. The three month Libor rate will have to rise above 3.3% to trigger any increase in the minimum 4% coupon.

Advantages and Disadvantages of Equity Preferred Floating Rate Securities

This purchase was made a few weeks ago:  Bought 100 MSPRA at $20.19-Roth IRA

Snapshot of MSPRA Profit:

2014 Roth IRA 100 MSPRA +$37.48
Dividend Received MSPRA: $25.28
Total Return: $62.76 (holding period about 1 month)

Total Realized Gains MSPRA=$1,241.46 (excludes dividends) ($1,203.98 prior gains; snapshots in Advantages and Disadvantages of Equity Preferred Floating Rate Securities )

Prior Trades:  See Snapshots in preceding link.  

I am back down to owning 50 shares held in a taxable account: Bought 50 MSPRA at $16.6 (September 2011)

Closing Price Last Friday: MS-PA: $20.40 -0.11 (-0.54%) 

3. Sold 35 AAPL at $97.22 (see Disclaimer):

Snapshot of Trade:
2014 Sold 35 AAPL at $97.22
Snapshot of Profit:

2014 Sold 35 AAPL +$764.22
Rationale: My purpose in buying the stock was to realize a sufficient profit to buy a new IPAD, and I accomplished that objective sooner than I expected.

My main concerns with Apple are competition, potential cannibalization of IPAD sales when Apple launches larger screen IPhones, and most importantly, the law of large numbers. Apple's market capitalization was close to $580B at my sale's price. It is really hard to move the needle when a company is that big, but relatively easy to slide after a disappointing quarter or two. Still, I would not view those issues to be major ones at the current TTM P/E adjusted for the net cash on the balance sheet.

IPAD sales declined in the last quarter by 9% Y-O-Y. This is a link to 4 important charts highlighting historical IPhone revenues, IPAD sales, total quarterly revenues broken down into product categories, and average selling prices for IPADs and IPhones. Business Insider

I am also paring my stock allocation.

Future Buys: I will need a sharp decline in the price, probably below my last purchase price adjusted for the subsequent 7 for 1 stock split, before considering a purchase.

Closing Price Last Friday: AAPL: $94.74 +0.26 (+0.28%) 

4. Sold 100 GYLD at $28.32 (see Disclaimer):

Snapshot of Trade:

2014 Sold 100 GYLD at $28.32
Snapshot of Profit:

2014 GYLD 100 Shares (two 50 Share lots) +$145.61
Item # 2 Bought 50 of the ETF GYLD at $27.03 (January 2013 Post);

Snapshots of Dividends Received:

Total Dividends: $177.61
Total Return: $323.22 or 12.1%

Security Description: The Arrow Dow Jones Global Yield ETF (GYLD) attempts to track the Dow Jones Global Composite Yield index. The fund will have roughly equal weightings, with quarterly rebalancing, in five asset classes:


The sponsor reports the daily net asset value at its website. Welcome to Arrow Shares On 7/24/14, the price closed at $28.3, a .19% premium to the then net asset value per share of $28.11.

Prior Trades: I recently liquidated my position in a Roth IRA: Item # 6 Sold 50 GYLD at $28.09-Roth IRA 7/19/14 Post)

Rationale: My most important concern is the exposure to global sovereign debt. The yields are so low now that a minor and overdue rise in rates could easily wipe out a year or more of interest payments.

See:  Global Government Bonds-
France 10Y Gov't Bond Benchmark Bond Price
Spain 10 Year Government Bond Bond Price
Germany 10Y Gov't Bond Benchmark Bond Price

Long Term Charts:
France Ten Year: France
Germany Ten Year: Germany
Spain Ten Year: Spain

The expense ratio is high at .75%.

I also have concerns about the corporate bonds for the same reasons and stocks given the valuations. REITs have had a robust move in 2014, so far.  

Future Buys: I no longer have a position. I will need a substantial correction in bond prices, particularly the sovereign bonds owned by this fund, before considering a repurchase. The price will need to be materially below my last purchase prices.

Closing Price Last Friday: GYLD: $27.61 -0.05 (-0.18%)

4. Pared ADX Again: Sold 143 Shares at $13.97 (see Disclaimer): 

Snapshot of Trade:

2014 SOLD 143 ADX at $13.97
Snapshot of Position Before Pare:

I sold my highest cost shares including the 42.071 shares purchased with the 2013 year end dividend.

Position Before Pare: Average Cost Per Share=$10.02
Snapshot of Position Made 7/25/14 Shortly After Pare:

ADX Position After Pare: 467+ Shares at an Average Cost Per Share $9.75
Snapshot of Profit on 143 Shares:

2014 ADX 143 Shares +$427.9
This snapshot also includes prior pares this year. The total profit realized in 2014 now stands at $786.65.

Rationale: I am harvesting gains on shares purchased with reinvested dividends when those shares are among my highest cost ones. I am also paring my stock allocation. For stock CEFs that I intend to keep long term, like ADX, I am also reducing my average cost per share by selling my highest cost lots for profits.

Closing Price Last Friday: ADX: $13.58 +0.14 (+1.04%)

5. Sold 30 DLR at $64.06 (see Disclaimer):

Snapshot of Trade:

2014 Sold 30 DLR at $64.06
Snapshot of Profit:

2014 DLR 30 SHARES +$303.85
Bought: 30 Digital Realty (DLR) at $53.4 (3/3/14 Post)

Dividends Received:

Total Return: $353.65 or about 21.97% (holding period about 5 months)

Rationale: The main rationale was profit taking after a 10 point quick run up. I am also reducing my stock allocation and a 30 share lot, which can raise over $1500 in cash, will be a prime candidate for disposition when I am in that mode. The number of shares obviously makes the future upside relatively unimportant, standing alone, and a rapid spurt in price is frequently followed by a downdraft. If interest rates rise in the second half, as I anticipate, then I may be able to buy this one back at less than $50 which was my original plan for an average down when I bought this 30 share lot. I would also not average up at the current price, which is another reason for selling the small lot (at least in my trading book)  

Closing Price Last Friday: DLR: $64.61 +0.61 (+0.95%)

6. Sold 30 EPR at $55.22 (see Disclaimer):

Snapshot of Trade:

Snapshot of Profit:

Item # 1 Bought 30 EPR at $53.3 (3/17/14 Post)

Rationale/Future Buys: The price action looked weak to me above $55. I decided to go back to my original plan of buying when and if there is a break below $50. I may buy back the shares in an IRA.

EPR Interactive Chart

EPR-6.30.14 10-Q

EPR-6.30.2014 earnings release

Closing Price Last Friday: EPR: $54.41 +0.42 (+0.78%)

7. Bought 100 TRMK at $23.12-Satellite Taxable Account (see Disclaimer):

Snapshot of Trade:

Email Confirmation
Company Description: Trustmark (TRMK) is a bank holding company that operates 209 branches through its wholly owned subsidiary Trustmark national bank. TRMK is based in Jackson, MS.

TRMK has been active on the acquisition front, expanding its geographic footprint over the past several years. Recent acquisition activity is described at pages 29-30, 2013 Annual Report, the 2011 FDIC assisted acquisition of Heritage Banking Group, and the 2012 purchase of Panama City's Bay Bank & Trust Co.

Trustmark Profile Page at Reuters

Trustmark Key Developments Page at Reuters

Trustmark did participate in TARP. The government's preferred stock was redeemed in 2009 after TRMK sold 6.2+M shares at $18.5. Page 24 10-k

Prior Trades: Item # 1 Sold Taxable Accounts: 50+ TRMK at $24.63 (7/19/14 Post)-Item # 6 Bought: 50 TRMK at $22.73 (5/10/14 Post)Item # 3 Bought 50 TRMK at 19.57 August 2010-Item # 3 Sold 50 TRMK at 24.7 January 2012Item # 1 Sold 50 Trustmark at $26.52 July 2013-Bought 50 TRMK at $21.54 November 2012

Total Realized Gains from 3 Fifty Share Lots: $555.03

Recent Earnings Report: For the 2014 second quarter, Trustmark reported net income of $32.9M or $.49 per share, up from $.46 per share in the 2013 second quarter.  SEC Filed Press Release The consensus estimate was for $.43: Trustmark

ALL=Allowance for Loan Losses

The capital ratios are good as of 6/30/14:

Earnings Call Transcript | Seeking Alpha (excluding acquired loans, net interest margin was 3.55%, page 3)

Rationale and Risks: I have previously discussed these issues in the preceding linked posts. Nothing has changed other than the better than expected second quarter earnings report and a lower price since I last sold shares at $24.63.

This last earnings was sufficiently good to trigger another buy higher than my target price of $22.5 or below.

The bank is currently paying a quarterly dividend of $.23 per share. Assuming a continuation of that rate and a total cost per share of $23.12 per share, the dividend yield would be about 3.98%.  

While TRMK did not cut the dividend during the Near Depression period or its aftermath, the dividend has not been raised either since it was increased from $.22 per share in the 2007 4th quarter. Trustmark Corporation (TRMK) Dividend Date & History

The current consensus E.P.S. estimates are $1.78 this year and $1.75 next year. TRMK Analyst Estimates Nine analysts contributed estimates with a low of $1.63 and a high of $1.82 for 2015. TRMK will need to do better than $1.75 in 2015. I would like to see an E.P.S. next year at 8% or higher than the actual 2014 E.P.S. final print. So if TRMK hits $1.78 in 2014, that would be about $1.92, significantly higher than the highest current estimate.

The P/E on the 2014 estimate is 12.98 based on a $23.12 market price. That is in a fair value range for a bank currently yielding almost 4% in the current abnormally low interest rate environment, with no recent dividend growth and an anticipated slight Y-O-Y decline in 2014 to 2015 E.P.S.

While my training in technical analysis began and ended when I touched the cover of a thick book on that topic, the regional bank ETF KRE looks like it has formed a triple bottom: SPDR S&P Regional Banking ETF ETF Chart

The TRMK one year chart also looks like a triple bottom is in place: TRMK Interactive Chart

Future Buys/Sells: I will not buy more shares. A 100 share position is my limit. I considered buying two 50 share lots which would have worked out better since the share price slid soon after my purchase, closing at $22.67 on 8/1/14. I will likely sell on a pop which is what I have been doing. Given the valuation and the dividend yield, I do not foresee much downside without a recession or unexpected and major loan losses.

Closing Price Last Friday: TRMK: $23.03 +0.16 (+0.70%)

Next week's post will contain discussions of the remaining stock dispositions that brought the total reduction to $55,000 since early June 2014.