Stock Allocation and Fund Update

Note: The problem with Google finding the URL for this blog continues. After waiting for awhile for the page to load, Google says that the site is unavailable. If you click "blogger help" in that message, it will take you to the blog with a message "sorry, this page you are looking for in this blog does not exist". The page that allegedly does not exist is my URL which does exist. Once you are at that page, however, you can access the latest blog entry by going to the right side of that page. Or, you can bypass this problem by saving as a link any post in the blog, such as the last weekly post: Stocks, Bonds & Politics: SOLD: 300 HLP-UN:CA at C$14.17 and 300 AX-UN:CA at C$15.71

Closing Prices Today: 
S & P 500  1,972.29 -5.51 (-0.28%)
S&P 500 Index Chart
Russell 2000 1,101.68 -16.23 (-1.45%)
VIX: 16.31 +0.33 (+2.07%)-VOLATILITY S&P 500


The market is starting to make the OG a little queasy.

The last update was published June 8, 2014: Stocks, Bonds & Politics: Stock and Stock Fund Update 6/6/14

The foregoing information is current only through 9/5/14 and includes trades discussed in posts published to and including 9/29/14.

Click to Enlarge:

Stock Fund Table as of 9/30/13 Down -.29%

I am attempting to determine whether I have added to, or subtracted from my stock allocation since the last update. In the June update, I discovered that I had added $31,000+ to my stock allocation when I believed that I had pared it some. This was on top of a net stock add of $23,000+ for the period between October 2013 to February 2014. Stocks, Bonds & Politics: Stock Fund Update as of 2/28/14

In prior updates, I would link the stock fund deletions and additions in one section, and then compile the links to the individual stock purchases and deletions in another section.

To monitor more accurately what I am actually doing, rather than what I think that I am doing without double checking the factual basis for whatever belief is formed on the subject, I will now have one section that will simply keep a running total and will make those calculations every weekend. Given the number of trades, I certainly can keep the correct math number in my head.

To lessen the burden in this exercise, I will not include stock adds or deletions when the value is less than $500. Instead, I will just assume that those transactions, mostly LT selections, will just cancel each other out which may not actually be the case but close enough.  I will also round the cents to the nearest dollar and will exclude commission costs. Another slightly inaccurate assumption made for ease of computations is that 1 CAD=1 USD. I am just trying to get an approximate number with the following. Another assumption is that a balanced fund is 100% stocks which skews the results some. I do not want to go and check whether the Janus Balanced fund has 65% stocks/35% bonds, or 70% in stocks and 30% in bonds. I simply classify balanced funds with a greater than 50% stock allocation as part of my stock allocation for purposes of this exercise only, and others may want to actually segregate out the investments into stocks and bonds exactly.

There are several starter positions in low cost ETFs that I can buy commission free. For the most part, I do not discuss those trades unless the amount is over $500. The small buys are due mostly to my opinions about current market valuations, which I view as stretched, and zero need to push the envelope.

Some of those starter positions, where the position is currently less than 50 shares, are in the following listed ETFs:

Roth IRA Commission Free at Vanguard:

In that account, I have been buying those low cost stock ETFs in very small pieces with realized gains from bond trades.

Taxable Account-Fidelity Commission Free:

iShares MSCI Emerging Markets Minimum Volatility ETF | EEMV
iShares MSCI EAFE Minimum Volatility ETF | EFAV
iShares International Select Dividend ETF | IDV
iShares Core MSCI EAFE ETF | IEFA
iShares Core MSCI Emerging Markets ETF | IEMG
iShares S&P 100 ETF | OEF

I will discuss the 10 share purchase of OEF in the next weekly post.

Since early June 2014 and through my 9/20/14 post, I have reduced the stock allocation by about $72,229. A good chunk of this reduction comes from stock funds which can be seen by comparing the following table with the earlier one referenced above.

Stock and Stock Fund Adds and Deletions: 

Addition or Deletion / Amount / Running Total

Start Date: June 14, 2014 Post
End Date: September 29, 2014 Post
Total Net Stock Deletion Estimated at -$72,229

Deletions: Sold 50 EXL at $13.68/Sold Taxable Accounts: 100 MDIV at $22.17, 116 ADX at $13.61 (Lowers Average Cost to $10.02 per Share)(June 14, 2014 Post): -$4,479.76

Addition: Added 50 CCNE at $16.11 (6/14/13 Post) / +$806 / -$3,674

Deletions: 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 (6/11/14 Post) / -$9,713 / -$13,387

Additions: Added to PRPFX/ Added 100 D_UN:CA at C$28.8 (6/21/14 Post) / +$3,130 / -$10,257

Deletion: Sold Taxable Accounts: 50 LARK at $23.5 (6/28/14 Post) / -$1,175 / -$11,432

Addition: Bought 50 DGRO at $24.82 (6/28/14 Post) / +$1,241 / -$10,191

Addition: Bought 50 NKSH at $30.4 (6/30/14 Post) / +$1,520 / -$8,671

Deletions: Sold 155+ ENY at $17.55 (7/5/14 Post) / -$2,720 / -$11,391

Additions: Bought 100 ICLN at $11.85/ Bought 100 EWC at 32.11 (7/5/14 Post) / +4,396 / -$6,995

Deletions: Sold 50 HAP at $40.78/Sold on the Toronto Exchange: 200 CAR_UN:CA at C$23.16 and 100 XMD:CA at C$26.1/ Sold Taxable Account: 126 RMT at $12.6 and 100 CSQ at $12-Part of Ongoing Stock Allocation Reduction (7/12/14 Post) / -$12,069 / -$19,064

Addition: Bought 100 PWCDF at $27.29 (7/12/14 Post) / +$2,729 / -$16,335

Deletions: Sold Taxable Accounts: 50+ TRMK at $24.63, 100 REI_UN.CA at C$27.04/Sold 150 JDD at $12.25/Sold 50 GYLD at $28.09-Roth IRA (7/19/14 Post) / -$6,190 / -$22,525

Additions: Bought 20 of IEFA at $63.05/ Added 50 BHLB at $23.75 (7/19/14 Post)/ +2,449/-$20,076

Deletions: Sold Roth IRA: 100 ZTR at $14.43/Sold Taxable Accounts: 100 CDZ:CA at C$26.24, 100 FDL at $23.82. 100 EWS at $13.68, 100 EWM at $16.17, 100 ASEA at $17.14, 50 PIE at $18.95 (7/26/14 Post)/ -12,096 / -$32,172 (initial stock allocation reduction goal exceeded)

After completing this planned reduction, I decided to reduce the stock allocation further by another $23,000, which would eliminate the net stock additions made between October 2013 and February 2014.  

Deletions: Sold 101+ BRKL at $9.53 (7/28/14 Post) / -$963 / -$33,135

Additions: Bought 50 LARK at $19.76, 100 SUSQ at $10.15, 50 UVSP at $18.8 (7/28/14 Post) / +$2,943/ -$30,192

Deletions: SOLD Taxable Accounts: 100 PWCDF at $28.83, 100 ENF:CA at C$27.65, 100 FSTA at $27.36  (8/2/14 Post) / -8,384/ -$38,576

Additions: Added 100 SWZ at $14.49 and Bought 50 NSRGY at $76.76 (8/2/14 Post) /+$5,287 / -$33,289

Deletions: 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 (8/9/14 Post)/ -$11,326 / -$44525

Additions: Bought 100 TRMK at $23.12/Bought 200 FSC at $9.78-Regular IRA (8/9/14 Post)/ +$4,268/ -$40,257

Deletions: Sold Taxable Accounts: 300 FIE:CA at C$7.59, 50 SU at $40.95, 108+ WIN at $10.53, 50 FENY at $27.81, 100 BGAOY at $6.9 and All of JABAX at $30.99-227.41 shares/Sold 100 DPG at $21.19-Roth IRA/Completed Stock Allocation Reduction Goal (8/16/14 Post)/ -$ 16,694 /-$56.951

Additions:  Bought 50 FIDU at $27.41 (8/16/14 Post) +$1,371 / -$55,580

Stock Allocation Goal Reduction of $55,000 Hit

Decided to Continue Net Stock Selling But Not Necessarily Every Week

Deletions: Sold148+ FMIHX (8/23/14 Post)/-$3,301 / -$58,881

Additions: Added 200 NWH_UN:CA at C$10.16 Bought Roth IRA: 100 LXP at $10.64 (8/23/14 Post)/ +$3,096   / -$55,785

Deletions: Sold 100 CZNE at $19.52 (8/25/14 Post)/-$1,952/ -$57,737

Additions: Added 25 to BHB at $26.34 (8/25/14 Post)/ +$659 / -$57,079

Deletions: Sold  100 IAE at $13.49 (8/29/14 Post)/ -$1,349 / -$58,428

Additions: Bought Regular IRA 100 APTS at $8.75 and Bought Back 100 ARCP at $12.88/Added 100 CSG at $7.85-Average Down (8/29/14 Post)/ +$2,948   / -$55,480

Deletions: Sold Taxable Accounts: 180 CSQ at $12.19, 80 CHN at $22.34 and 100 ORKLY at $9/Sold Roth IRA: 100 PSEC at $10.65 (9/6/14 Post) /-$7,165/ -$62,645

Additions: Bought in Taxable Accounts: 100 KGFHY at $10.44, 50 FDIS at $27.63, 50 MXE at $16.84 (9/9/14 Post) / +$3,240 / -$59,365

Deletions: Sold 100 MPW at $14-Regular IRA/Sold: 200 CGI:CA at C$20.66, 471+ IGD at $9.77  (9/13/14 Post)/ -$10,138 / -$72,685   

Additions:  Bought 50 APO AT $23.46 /Bought 30 APO at $23.39-Roth IRA (9/13/14 Post)/ +$1875 / -$70,810       

Deletions: Sold 155+ AINV at $8.81  (9/20/14 Post) /-$1,365 / -$72,176

Additions: Bought  50 KRE at $39.55, 200 SWZ at $13.97, 50 PBF at $25.61, 20 IEUR at $48.24/ Bought 50 KKR at $22.59-ROTH IRA  (9/20/14 Post) / +$7,048 / -$65,128

Deletions: SOLD: 300 HLP-UN:CA at C$14.17 and 300 AX-UN:CA at C$15.71 (9/26/14 Post): /-$8,964 / -$74,092

Additions: Bought 50 ARCC at $16.38-Roth IRA/Bought 100 F at $16.59 (9/26/14 Post) / +$2,478 / -$71,614

Deletions: Sold 50 LARK at $22.42 (9/29/14 Post)/ -$1,121 / -$72,735

Additions: Added 50 NPBC at $10.12 (9/29/14) / +$506 / -$72,229

Update for Lottery Ticket, REIT and Regional Bank Basket Strategies/Lotto Trades: Bought 100 CVO at $2.85 and Sold 50 ZAGG at $5.99/ Added 50 NPBC at $10.12 and Sold 50 LARK at $22.42

Added: 

Google is still losing my URL http://www.tennesseeindependent.blogspot.com. It will stay lost for several days. I have notified Google of the problem, but they are of course unresponsive. The URL exists at Google's Blogspot, but Google can not find it. Instead, after waiting for awhile for the page to load, Google says that the site is unavailable. If you click "blogger help" in that message, it will take you to the blog with a message "sorry, this page you are looking for in this blog does not exist". The page that allegedly does not exist is my URL which does exist. Once you are at that page, however, you can access the latest blog entry by going to the right side of that page. Or, you can bypass this problem by saving as a link any post in the blog, such as the last one: Stocks, Bonds & Politics: Update for Lottery Ticket, REIT and Regional Bank Basket Strategies

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The regional bank, REIT and lottery ticket basket strategies are updated on the last Monday of each month. The price shown in the following tables will be from last Friday.

Last Update 8/25/14: Update for Regional Bank, REIT and Lottery Ticket Basket Strategies/UBSI, NBTB, BDGE, BHB/Added to BHB at $26.34 and to UBCP at $8.08/Sold 100 CZNE at $19.52/Bought as LTs: 400 NZEOF at $.7, 30 QLGC at $8.92, 40 RAS at $7.63, and 40 OGZPY at $7.07/Sold as an LT 150 RSHYY at $1.94

I frequently use a basket approach, particularly with industry sectors, that will vary in size as to the number of components. The focus will be on the total return of the basket, rather than individual components. Some of the advantages to this approach include diversification and risk mitigation. I am not concerned about a few mishaps provided other components are doing better than I anticipated when I made the initial purchase. As noted previously, I have been surprised by some of best and worst performers in the regional bank basket.

1. Update of Lottery Ticket Basket Strategy

The Lottery Ticket Basket Strategy uses a deep contrarian value strategy, appropriately characterized as catching a "falling knife". A common criteria for the stocks contained in this basket is a smashed stock price at the time of purchase and an ugly looking chart, though I may occasionally buy one who does not fit those common criteria. Any technical analyst would most likely have a sell rating on the stock.

See 2004 Study by the Brandes Institute: "Falling Knives Around the World" 

Selections are made primarily on statistical criteria including price to book, price to sales, forward P/E, cash per share and/or free cash flow. I spend anywhere from thirty minutes to an hour researching a potential purchase prior to purchase.

For many selections, I may be pessimistic about the firm's future, but not as pessimistic as the market. I will also occasionally see a ray of light at the end of a dark tunnel. Since I expect failures, which are inevitable and unavoidable in this kind of approach, I limit my exposure to $300 per stock plus any prior trading profits. 

After experiencing some success with this strategy, I now have a requirement that my total investment in all LT holdings can not exceed my total realized gains for this basket strategy. My total exposure is substantially below my net realized gain number, so I currently have a lot of available capacity to expand this basket under this particular risk control rule.

The name of the strategy aptly describes the risk. It is somewhat analogous in many cases to playing a hand of blackjack for the purchase amount knowing that the card count favors the house. It is a form of entertainment and an alternative to a casino visit.

Based on the results to date, this strategy is far more likely to produce positive results even with the LB's skill at the tables. The primary purpose of the LT strategy is to entertain Right Brain, let it swing for the fences with up to $300, and to keep the Nit Wit from interfering with Left Brain's management of Headknocker's portfolio.

Snapshots of realized gains can be found at the end of the Gateway Post on this topic: Stocks, Bonds & Politics: Lottery Ticket Strategy: New Gateway Post

There was one deletion and addition since the last update, both noted below.

Net Realized Gains: $14,140.68

Click to Enlarge: 

Lottery Ticket Basket as of 9/26/14 (poor performance last Friday)

This basket is having a bad September. Some of the leading gainers have retreated in price and a few other names, formerly just detractors from the overall performance, look like they want to make a hard run to zero (e.g.: KWK, SUTR). That is to be expected with a falling knife strategy and I have had some BKs.

UNREALIZED GAINS OVER 40%:

AMOT +128.01%

RFMD +122.51%

AWCMY +72.22%

FCE/A +67.83%

ING +58.6%

FCF +40.41%

A. Sold 50 ZAGG at $5.99 (See Disclaimer):

Snapshot of Trade:

2014 Sold 50 ZAGG at $5.99

Snapshot of Profit: 

2014 ZAGG 50 Shares +$72.59

Bought 50 ZAGG (2/24/14 Post)

Return: 33.17% (holding period 6+ months)

Based on the consensus 2015 E.P.S. estimate of $.37, which I believe is a non-GAAP number, a $6 price seems to be high to me at over 16 times forward estimated "operating earnings".  In the Q/E 6/30/14, GAAP E.P.S. was just $.03 while the "pro forma" number was $.09. ZAGG Inc Reports Second Quarter 2014 Revenue of $50.2 Million, GAAP EPS $0.03; form10-Q GAAP earnings have been erratic over the past five years:  10-k at p. 22

B. Bought 100 CVO at $2.85 (see Disclaimer):

I have done okay with Cenveo's bonds. My last one was just called early by the company. Cenveo Bond Redemption (profit $117.39 for 1 bond)-Bought 1 Cenveo 8.875% 2nd Lien at 92.499 (May 2012 Post); and Sold 2 Cenveo 7.875% Senior Sub Bonds Maturing in 2013 at 95-Averaged Down by Buying 1 Cenveo 7.875% Senior Subordinated Maturing 12/1/2013 at 81.5

In my mind's eye, I was basically using my bond profits to buy 100 common shares.

Snapshot of Trade:

Closing Price on Date of Trade 9/10/14: CVO: 2.87 -0.08 (-2.71%)

Company Website: Cenveo

Cenveo Profile Page at Reuters

Cenveo  Key Developments' Page at Reuters

EDGAR Filings For CVO

Last SEC Filed 10-Q: CVO-2014.06.28-10Q

For the 2014 second quarter, Cenveo reported a 17.9% increases in revenues to $479.4M (organic growth up 2%) and a 6.7% increase in "adjusted EBITDA" compared to the 2013 second quarter. Second Quarter 2014 Earnings Release The increase in sales was primarily due to the integration of National Envelope (NE) which had been operating in BK. Cenveo Enters Agreement to Purchase NE Cenveo acquired substantially all of NE's operating assets in September 2013. Cenveo had an adjusted GAAP loss of $.03 share, which excluded a charge relating to debt extinguishment.

The chart looks awful, with the shares trading below their 50, 100 and 200 day SMA lines at the time of my purchase. CVO Interactive Chart That is par for the Lotto course. The maximum chart looks interesting with mountain tops hit near $25 in both 1998 and 2007, followed by waterfall declines to a splat.

The company has too much debt in my opinion. A slither of equity supports a mountain of debt. At a $2.85 price, the market capitalization is about $194M and the company had $1.252+B in debt as of 6/28/14 (page 2 and page 11, 10-Q referenced above). As noted at page 11, the company has retired some of the higher cost debt, but still had $225M outstanding of an 11.5% senior unsecured note  as of 6/28/14.

The purchase was made primarily on the hope that the consensus estimate for 2015 will be hit.  At the time of my purchase, the consensus of the 4 analysts providing estimates was for an E.P.S. of $.53 in 2015, up from $.19 in 2014. If that 2015 number is hit, then the forward P/E at a $2.85 price is 5.377 with a 179% increase in Y-O-Y earnings.  Calculate Percent Increase

Another reason is that the President and Chairman Robert Burton has been buying stock at higher prices than my buy and he already has a substantial stake in the company. Insider Trades-BURTON; Robert G. Burton, Sr. Profile at Cenveo Website

Competition is probably intense in CVO's business lines, an obvious point noted in the business risk section of the Annual Report, CVO-2013.12.28-10K (e.g. page 9: "highly competitive"; generally no long term contracts and business is cyclical)


2. Update for REIT Common and Preferred Stock Basket:

This basket is starting to contract, primarily though preferred stock deletions under the current trading guidelines. The first publication of this basket was made on 3/5/14: Stocks, Bonds & Politics: Equity REIT Common and Preferred Stock Table as of 3/5/14

I am using a blended strategy of including both common and preferred stocks. I am not likely to add back preferred stocks until there is another meaningful correction in their prices.

I will publish, probably within thirty days, a Gateway Post for this topic which will aggregate my profit/loss snapshots since I started this basket strategy in September 2013.

Since my last update, I have bought and sold the following securities:

SOLD: 300 HLP-UN:CA at C$14.17 and 300 AX-UN:CA at C$15.71 (9/26/14 Post)

Sold 100 MPW at $14-Regular IRA (9/13/14 Post)

I have bought the following:

Bought Regular IRA 100 APTS at $8.75 and Bought Back 100 ARCP at $12.88 (8/29/14 Post)

I  added last week 50 shares of MPW at $12.33 and 30 shares of EPR at $50.72 yesterday, which are included in this table, but will not be discussed until the next weekly post.

Click to Enlarge: 

Equity REIT Basket as of 9/26/14

REITs have had a bad September and many of them are selling below their 50, 100 and 200 days SMA lines.  Fortunately, my main problem, CCG, is a small 150 share position.

Vanguard REIT ETF (VNQ), one of the benchmarks that I use for this basket, has declined 4.88% over the past month but was still up 14.84% YTD through 9/26/14.

3. Update for Regional Bank Basket Strategy:

This strategy is explained in my Gateway Post on this topic:

REGIONAL BANK BASKET STRATEGY GATEWAY POST

Snapshots of realized gains and losses can be found at the end of that post.

The dividend yield showed in this table is calculated by Yahoo Finance based on last Friday's close. My dividend yield for each position will be different based on my total cost numbers. In most cases, with FNFG and VLY being notable exceptions, my dividend yield will be higher.

Dividend Yields 5% or higher: Based on Total Cost
NYCB: 8.44%
WASH: 8.34%
UBSI: 7.66%
CZNC: 5.39%
FNLC: 5.38%
CBU: 5.15%
TRST: 5.1%
CCNE: 5.%

Washington Trust moved up after raising its quarterly dividend by 3 cents per share. The new quarterly rate will be $.32 per share ($1.28 per share annually). My total cost number for my remaining 50 shares is $767 or $15.34 per share. Since NYCB is unlikely to raise its dividend, I would expect WASH to surpass the dividend yield of NYCB next year based on my constant cost numbers.

I am not tracking reinvested dividends in the following table. The unrealized gains per holding do not include reinvested dividends.

Over the life of this basket strategy, I anticipate that the dividends will provide 40% to 50% of the total return. I am generally keeping my total exposure between $40,000 to $50,000.

After a number of adds, I am now over my minimum $40,000 allocation after a bout of profit taking last year.

SPDR S&P Regional Banking ETF (KRE) Total Returns: 47.5% in 2013

I have not been impressed with several of the recent earnings reports from regional banks. Some of the banks discussed below had decent 2014 second quarter reports. While net interest margin has not contracted much, it is yet to show any expansion either for most banks. Chart: Net Interest Margin for all U.S. Banks - St. Louis Fed

One ETF will own several of the small cap regional banks and REITs that I own now or have owned in the past: PSCF | S&P SmallCap Financials Portfolio

In 2013, my dividend total from this basket totaled $1,932,93, up from $1,896.25 in 2012 and $1,660.57 in 2011. I will have to increase my current exposure in order to exceed the 2013 amount this year, given my light exposure for the first four months which was several thousand below the "minimum" level. I may make some light adds during October assuming the correction in prices continues.    

Regional bank stocks are in a funk this year as interest rates started to go back down. One of the regional bank ETFs, KRE, closed at $40.61 on 12/31/13 and at $38.22 last Friday, but has closed as low as $36.84 this year (2/3/14). SPDR S&P Regional Banking ETF ETF Chart

I have nibbled at this ETF: Bought Taxable Accounts: 50 KRE at $39.55 (9/20/14 Post)

The abnormally low rates benefited banks some when deposit yields were repriced down, but even 5 year bank CDs taken out in 2008 at higher rates have now matured, and the positive impact of that repricing is no longer present to any meaningful degree. 

Instead, the decline in rates for loans simply compresses net interest margin. When rates were rising last year, regional bank stocks were in an uptrend based on the common belief that higher intermediate and long rates would be a net positive for them, particularly when short terms were likely to remain near zero through mid-2015 and then rise slowly and modestly in 2016-2017. The rate spike starting last May impacted intermediate and long term rates. Short term rates remained anchored by ZIRP. 

I have used the downdraft in prices this year to add positions to my basket after selling into last year's strength.  

Realized Gains 2010 to Date: $16,321.83  (snapshots in Gateway Post)
Dividends Received 2010 through 2013=$6,623.72

Click to Enlarge:

Regional Bank Basket as of 9/26/14

Regional banks have had a tough September. I have lost since the last update about $1,000 of my unrealized gain.

Through 9/26/14, the SPDR S&P Regional Banking ETF (KRE), which is my benchmark for this basket, was down -4.83% and had lost -2.34% over the past month.

Comparison Data From the St. Louis Fed:

Net Interest Margin for all U.S. Banks

Net Interest Margin for U.S. Banks with average assets under $1B

Net Interest Margin for U.S. Banks with average assets between $1B and $15B

Return on Average Equity for all U.S. Banks   (abbreviated to "ROE")

Return on Average Assets for all U.S. Banks (abbreviated to "ROA")

Nonperforming Loans (past due 90+ days plus nonaccrual) to Total Loans for all U.S. Banks (abbreviated to "NPL ratio")

Charge-Off Rate On All Loans, All Commercial Banks

Assets at Banks whose ALLL exceeds their Nonperforming Loans (I prefer a coverage ratio of  over 100% at the time of my initial purchase)(ALLL=Allowance for loan losses)

A. Added 50 NPBC at $10.12 (see Disclaimer)

National Penn Bancshares is a bank holding company that owns the National Penn Bank which has 110 branches in Pennsylvania. National Penn Bancshares, Inc. - Investor Relations

I discussed its last quarterly report in a recent post and have nothing to add to that discussion: Stocks, Bonds & Politics: Update for Lottery Ticket, REIT and Regional Bank Basket Strategies: NPBC

Last Earnings Report: National Penn Bancshares

National Penn Bancshares is in the process of acquiring TF Financial, a savings and loan, with 18 full services offices in PA and NJ. When announcing this acquisition last June, National Penn Bancshares asserted that the deal "is expected to accrete National Penn earnings per share by $.04".

National Penn recently sold $125M in senior unsecured notes, bearing a fixed coupon rate of 4.25% and maturing in 2024.

I own 30 shares as part of the LT basket. Item # 1 RB Bought as LT 30 NPBC @ $7.83 (4/26/11 Post) Those shares are still in that basket. This bank ran into some trouble during the recent Near Depression and cut its quarterly dividend from $.175 to $.01 in 2009 before starting to raise it again in 2011. The current quarterly dividend rate is $.1 per share.

I later elevated this bank to the regional bank basket strategy, which allows for more risk taking, and have now bought 200 shares for inclusion in that basket. Given the stock's valuation, I am reinvesting the dividend. Item # 2 Added 100 NPBC at $10.68 (8/17/13 Post); Added 50 NPBC at $9.85 (October 28, 2013 Post)

When I added this lot, the shares were then trading at below the 50, 100 and 200 day SMA lines. NPBC Interactive Chart I am more concerned about whether I am paying a fair price for the shares, rather than Mr. Market's current opinion about the shares. It is common for me to buy when the chart looks lousy.

At the time of my purchase, the consensus 2015 E.P.S. estimate was $.79, up from $.69 in 2014: NPBC Analyst Estimates.  Assuming those numbers are hit, which appears to be a reasonable guess, the forward P/E is about 12.81 at a total cost of $10.12 per share, with a 14.45% growth rate in E.P.S. Y-O-Y. The dividend yield is close to 4%. Altogether, the valuation and yield justify an add in my opinion, notwithstanding the technical weakness.

This kind of stock is not going to generate a home run or anything close to it. The general idea is simply to harvest an above average market yield and to realized a total annualized return anywhere over 8%.  The dividend gets me 1/2 of the way there, assuming it is not raised or lowered from its current quarterly rate of $.1 per share. National Penn Bancshares, Inc. (NPBC) Dividend History

Closing Price Last Friday: NPBC: $9.89 +0.12 (+1.23%)

B. Sold 50 LARK at $22.42 (see Disclaimer): Landmark Bancorp Inc. (LARK) is a bank holding company that owns Landmark National Bank which currently has 30 branches located in 23 communities across Kansas. Landmark National Bank Locations

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

Earnings Release for Q/E 6/30/14

I discussed that report in an earlier Post: Stocks, Bonds & Politics: Update for Lottery Ticket, REIT and Regional Bank Basket Strategies

Snapshot of Trade:

2014 LARK Sold 50 at $22.42

Snapshot of Profit:

2014 LARK 50 Shares +$117.08

Bought 50 LARK at $19.76 (7/28/14 Post)

The foregoing snapshot includes another 50 share trade from earlier this year. Sold Taxable Accounts: 50 LARK at $23.5 (6/29/14 Post)(snapshot of realized gain=$174.07)-Item # 3 Bought  50 LARK at $19.7 (1/13/14 Post) Together with that earlier 50 share lot, I have managed to hold onto the shares long enough to receive $28.5 in dividends this year:

I have developed a routine with this very small Kansas bank. I have been buying when the price falls below $20 and selling when the price goes over $22. I did not miss a quarterly dividend after selling the earlier lot.

This last trade was my third 50 share round trip.  The first round trip was at lower prices: SOLD 52 LARK at $18.75 (1/9/12 Post)(realized gain=$91.89)-Bought 50 LARK @ $16.6 (5/2/11 Post)

Total Realized Trading Gains (3 fifty share lots)=$383.04

LARK bounces around pretty good on extremely light volume. Only 514 shares traded last Friday.

Closing Price Last Friday: LARK: $23.13 -0.08 (-0.36%) 

SOLD: 300 HLP-UN:CA at C$14.17 and 300 AX-UN:CA at C$15.71/Bought 50 NABZY at $14.99/Bought 50 ARCC at $16.38-Roth IRA/Bought Taxable Accounts: 54 ESD at $17.67-Partial Fill, 100 F at $16.59

I finished writing the post this evening and decided to publish it before Saturday morning. I now have to write the monthly update on three basket strategies that will be published on Monday.

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 to Correct

Intermediate Term: Slightly Bullish

Long Term: Bullish

A SA contributor used this site, Dividend Reinvestment Calculator, to calculate the total returns for a stock which would include the reinvestment of dividends. It is worth bookmarking, but I can not vouch for the accuracy of its calculations.

As noted below, I continued to take some profits in equity REITs.

That sector has performed poorly, going into a minor tailspin, when the 10 year treasury rose from a 2.34% yield in late August to 2.6% a few days ago.

I noted in a comment to a Brad Thomas article about the REIT CSG, which I own, that REITs appear to be hyper sensitive to changes in the ten year rate at the moment. Seeking Alpha

Investors no doubt remember the big hit taken in this sector starting in May 2013 through December 2013 when the ten year treasury rose from 1.66% to 3%. Daily Treasury Yield Curve Rates Some of my best buys in the REIT basket occurred in December at the peak of that rate rise. Bought:  100 Realty Income (O) at $36.96 (12/10/13); Bought: 00 OHI at $29.85 (12/23/13 Post); Bought 50 HCP at $36.31 (12/31/13 Post) All of those have retreated in price significantly from their 2014 highs.

Subsequently, rates started to decline in 2014, surprising many, and that decline gave stocks viewed by many as bond substitutes a big lift. Prior to the recent rise in rates, the Utility XLU and the REIT ETF VNQ were among the best sectors for investors this year. Even with their recent price declines YTD performance is still good, but more may be subtracted from the YTD returns later in the year.

VNQ Total Returns
XLU Total Returns

No one can predict the future other than a few pundits who believe that they have a method to accurately predict the future, some sort of divine omnipotence or maybe something else entirely.  I responded to one of those supreme beings in several recent comments at SA.

I can only say that I am concerned about a rise in rates and that has motivated some profit taking in the REITs. Last week, I started to nibble by buying two back.   

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

That forecast is known as the break-even spread, the average annual rate of inflation for the owner of the 10 year TIP to break even with the owner of the non-inflation protected treasury.

The break-even spread is calculated by subtracting the yield of the TIP
Daily Treasury Real Yield Curve Rates

From the Yield of the Non-inflation protected treasury
Daily Treasury Yield Curve Rates

The 10 year TIP break-even spread closed today at 1.97% and has been trending down.

*****************

Recent Developments: 

The government reported that real GDP increased at an annual rate of 4.6% in the second quarter according to its third estimate. The prior estimate was 4.2%. Nominal GDP increased by 6.8%. News Release: Gross Domestic Product

Markit's September flash U.S. manufacturing was reported at 57.9, a 52 month high, with employment growth hitting a 2 1/2 year high. Markit reported that backlogs increased across the entire manufacturing sector. Underlying demand was described as "robust".

August new home sales increased to an annualized and seasonally adjusted rate of 504,000, the highest sales rate since May 2008 census.gov/construction.pdf New housing sales remain near prior recession lows, which is not surprising given the surge in new home construction during the housing bubble years and the severity of the last recession caused in large part by the popping of that bubble. Chart: New One Family Houses Sold

One major reason for the slow recovery is that new home construction, which normally leads the country out of recession along with light vehicle sales, has not provided its normal economic push coming out of a recession.

I am expecting a gradual improvement in new home sales and all of the economic activity generated by the new home construction. There are several reasons. Housing stock has not bee keeping up with household formations. Large numbers of foreclosed homes, which have been abandoned and vandalized, are being bulldozed to the ground (just google "demolishing foreclosed homes").

As more years pass since the traumatic housing price decline, people quit thinking about that past and focus more on the future, including the many long term advantages of home ownership. Mortgage rates are still way below historical standards, and prices in many localities are still well below their respective peaks reached in 2005-2007.

Freddie Mac's chief economist expects household formations to increase due to the improving economy. Net household formations totaled only 458,000 over the past four quarters, well below the long term projections of 1.2M to 1.3M per year. Lastly the mortgage payment to rent ratio is the lowest in 40 years which make home ownership a more appealing option than renting long term. Freddie Mac
.

****************************

1. Sold 300 Artis REIT at C$15.71 (Canadian Dollar (CAD) Strategy)(see Disclaimer):

Snapshot of Trade:

2014 Sold 300 Artis REIT at C$15.71

Closing Price on Day of Trade: AX-UN.TO: 15.69 -0.12 (-0.76%) 

Snapshot of Position Before Trade: 

Unrealized Gain in CADs=C$386; Unrealized Gain in USDs=$15.26

Snapshot of Profit in USDs:

2014 Artis 300 Shares +$6.92

Calculation of Gain in CADs:

Total Cost=C$4,327

Total Proceeds=C$4,694

Profit in CADs=C$367

Bought 300 of Artis REIT at C$14.36 (9/28/13 Post)

Dividends Expressed in USDs for Tax Calculation: $299.42

Dividends Actually Paid in CADs: 12 months x. C$27=C$324

Total Return in CADs=C$691 or 15.97% (holding period about 1 year) 

Security Description: Artis Real Estate Investment Trust(AX.UN:TOR) is a diversified Canadian REIT that owns office, retail and industrial properties in Canada and the U.S., with a focus on Western Canada. 

Property Map: Portfolio Map » Artis REIT (move cursor over dots and click dot to see properties)

As shown on that property map, U.S. properties are concentrated primarily in Minneapolis and Phoenix to a lesser extent.

The dividend rate is shown at $0.09 per share which is a monthly rate. The next ex dividend date is 9/26/13. Artis REIT Announces Monthly Cash Distribution

The dividend yield at a total cost of C$14.36 is about 7.52%. The yield at a total purchase price of C$15.71 is about 6.87%. 

Link to Distribution History: Distribution History » Artis REIT

Prior Trades: I flipped two 100 units lots in 2011.

2011 ARTIS REIT +$281.27

The tax gain will be dependent on the currency conversion values and will not simply reflect the change in value based on the Canadian share price.  

Given the high commission cost, I decided to buy 300 units back in September 2013 rather than just a 100 units.

Recent Earnings Report: For the 2014 second quarter, Artis reported AFFO per unit at C$.3, resulting in a payout ratio of 90%. (page 9: Q-2.pdf) Total long term debt and bank indebtedness to gross book value was reported at 48.6%. Same property net operating income increased 3.3% Y-O-Y. Portfolio occupancy was at 95.9%.

Rationale: The goal of the Canadian Dollar strategy is to increase my CAD stash and consequently to diversify some out of USD priced assets. I accomplished that objective by receiving a year's worth of dividends and a decent CAD profit. The CAD profit was certainly tax efficient as shown above which is a bonus. I would not want to sell one of my Toronto listed securities at a USD taxable profit but at a CAD loss due to the rise in the CAD after purchase while the ordinary shares declined some in price.

Future Buys and Sells: If REITs correct again due to a rise in rates, I will consider buying back the Toronto listed shares with my CADs, hopefully after a 10% to 20% correction in price.

Another alternative is to buy the ordinary units listed on the pink sheet exchange which are priced in USDs. My commission for the purchase of those units would be my regular Fidelity commission of $7.95. ARESF Artis Real Estate Investment Trust In addition to the lower commission cost, those units would be the best way to play a rebound in the CAD, compared to using my CAD stash to buy the units in Toronto. In that scenario, I could realize a USD gain while actually having a CAD loss due to the rise in the CAD vs. the USD. And, buying ARESF would be much better than buying the Artis units in Toronto using USDs now (receiving basically the same benefit in price as with ARESF before fees and commissions) and then converting the sale's proceeds from CADs back to USDs. In the later scenario, I would pay Fidelity a 1% fee for each currency conversion plus a higher commission rate. I will be looking at the ARESF prices daily next week. The stock went ex dividend for its monthly distribution today.

Closing Prices Last Friday:
ARESF: $13.62 -0.14 (-0.98%)
AX-UN.TO: C$15.29 -0.06 (-0.39%)

2. Added 50 ARCC at $16.38 in Roth IRA (see Disclaimer): This purchase brings me up to 100 ARCC shares in my Vanguard Roth IRA account. Item # 4 ROTH IRA: Bought  50 ARCC at $16.9 (June 2013 Post)

BDCs have been under consistent selling pressure over the past few weeks. The externally managed ones that I follow, including ARCC, are now selling at discounts to their net asset value per share and below their 50, 100 and 200 days SMA lines.

ARCC Interactive Chart

Their charts look like falling knives. When confronted with this kind of problem, I will frequently chop orders into small lots and average down at predetermined target levels. For ARCC, I would consider buying 50 shares in a taxable account at below $15.9.

Snapshot of Trade:

2014 Roth IRA Bought 50 ARCC at $16.38

Closing Price Day of Trade: ARCC: $16.42 -0.16 (-0.97%)

Snapshot of Vanguard Roth IRA History:

I am not reinvesting the dividend.

Security Description: Ares Capital is an externally managed BDC. I have an extremely negative view of externally managed BDCs, viewing the compensation paid to the external managers to be way out of line with performance.

Profile page at Reuters

Key Developments at Reuters

In July 2014, ARCC sold 15.525M common shares at $16.63 to the underwriters (page 77, 10-Q)

ARCC sold common shares last December at an offering price of $17.47 to the underwriters. 2013 10-K at page F-85; Ares Capital Corporation Prices Public Offering

ARES sold 19.1M shares back in April 2013 at $17.43. In 2012, the company sold 25.875M share at $16.55 and another 16.422M shares at $15.41 in January 2012 (page F-74, 10-k)

I took a snapshot summarizing the equity offerings made in 2012 and 2013:

ARCC SEC Filings

I would label ARES now as a serial issuer of common stock.

For the externally managed BDCs who were in existence prior to the Near Depression, ARES held up much better than most.

Historical Net Asset Values Per Share Taken from SEC Form 10-Qs:
6/30/14: $16.52
6/30/13: $16.21
6/30/11: $15.28
6/30/10: $14.43
6/30/09: $11.21
6/30/07: $15.84
6/30/05: $15.10

The share price was over $20 in 2007 and traded near $3 in early March 2009.  ARCC Interactive Chart That highlights the recession risk issue.

Prior Trades: My highest cost shares are owned in another ROTH IRA: Bought 70 ARCC at $17.24-REGULAR IRA (April 2013) Whenever I can sell that lot profitably, I will do it.

I also own 50 in a taxable account. Bought: 50 of the BDC ARCC at $16.17 in taxable account (January 2011 Post)

So far, with a little patience, I have managed to escape with profits after harvesting some dividends. The first link below is what I would characterize as an optimal result for an externally managed BDC. I held the stock for over 2 years and exited with a decent percentage gain too. The share profit and the dividends together resulted in a total gain of $241.07 on a a total cost of $822 or 29.38% in about 27 months (1.088% per month or about 13.06% per annum)

Item # 1 Sold 50 ARCC at $18.02 (5/6/13 Post)(snapshot of profit $71.97)-Item # 3 Bought: BDC ARCC at  at $16.3 (January 2011)

SOLD 100 ARCC at $17.54-IRAs in Two 50 Share Lots (September 2012)-Added 50 ARCC at $16.9-Regular IRA (May 2011) and Item # 3 Bought 50 ARCC at $16.51 Roth IRA (March 2011) (total profit=$53.07-no snapshots)

Item # 5 Sold 50 ARCC at $17.7 (May 2011)-Item # 3 Bought: 50 ARCC at 16.89 Main Taxable Account  (December 2010)(profit $24.81; no snapshot)

Related Trades: I have also bought and sold a senior ARCC exchange traded bond: Bought: 50 ARY at $24.2; Added 50 ARY @ $23.75-Sold 100 ARY @ 24.6

Recent Earnings Report: The last reported net asset value per share was $16.52 as of 6/30/14, page 2 10-Q (debt listed at page 73).  A list of investments can be found in that 10-Q filing starting at page 5.

ARCC missed expectations in its last earnings report and that miss has resulted in a persistent, though relatively small,  price decline. The overpaid Masters of Universe will need to do better in the coming quarters. I prefer to call them Masters of Disaster. Total operating expenses rose 19.69% Y-O-Y ($130.013M vs. $108.627M). Net investment income, however, declined by 1.7%. Loans on non accrual status represented 1.9% of total loans.

For the 2014 second quarter, ARCC reported core E.P.S. of $.34 and net investment income of $.31. SEC Filed Press Release The estimate was for core E.P.S. of $.37. The number of portfolio companies stood at 202. The weighted average yield on total investments at fair value was 9%. The weighted average yield on debt investments at fair value was at 10%.

Rationale: As always, the idea is to collect a year or more of dividends paid by a BDC and then escape somehow without losing money on the shares. It is not helpful to be paid a 11% dividend and to lose 10% on the shares.

With the recent slide in the share price, the dividend yield rose some. At a total cost per share of $16.38 and assuming a continuation of the current quarterly dividend $.38 per share, the yield is about 9.28%. And, importantly, that yield is tax free in the ROTH IRA now and when and if I withdraw the dividend from that account, at least under current law. Congress may at some point, when hunting for revenue to feed the beast, change the rules.

ARCC is probably the best externally managed BDC.

Risks: The company describes the myriad risks incident to its business starting at page 29 of its 2013 Annual Report, 10-K The risk summary ends at page 52. Again, I will emphasize the "conflicts of interest" discussion starting at pages  38-40.

It is my view that externally managed BDCs exist primarily to enrich their managers.

Externally managed BDCs suffer from a variety of problems that are related to the compensation arrangements paid to the managers which include a base management fee (applied to total assets including those acquired with debt) plus an incentive fee that is exceedingly generous. The incentive is to increase assets through a constant flow of stock offerings, irrespective of whether that is in the interest of existing shareholders and even if the price to the underwriters is below net asset value per share.

The general tendency of externally managed BDCs is to erode their net asset value per share over time. Since the market price will generally hug net asset value per share for externally managed BDCs, there is almost an inevitable built in mechanism that results in either share price stagnation or an elevator perpetually moving to the ground floor (though occasionally it may go up a floor before going back down again). ARES has done better with its current net asset value be above where it was in 2005.

Recognizing that the managers have conflicts and that the downside pressure to the share price over time, made worse by recessions and/or ill advised risk taking that would not occur without the compensation arrangement, I do not view BDCs as suitable for long term holds and I would certainly not want to own any of them when there is a recession on the horizon.

Future Buys/Sells: I am more likely to pare my existing position than to buy more shares. I would consider, however, buying another 50 share lot at below $15.9 in a taxable account where I currently only own 50 shares, provided the net asset value per share does not decrease in subsequent earnings reports.

I will definitely sell my highest cost shares (a 70 share lot bought at $17.24) owned in another IRA account when and if I ever have a profit again.

Closing Price Last Friday: ARCC: $16.20 +0.08 (+0.50%)

3. Bought 54 ESD at $17.67 (see Disclaimer): This was a partial fill of a 100 share limit order.

Snapshot of Trade-Partial Fill:

2014 Bought 54 ESD Partial Fill at $17.67

The stock went ex dividend the day after my purchase.

Security Description: The Western Asset Emerging Markets Debt Fund (ESD) is a leveraged foreign bond CEF. Most of its bonds are denominated in USDs however, as noted below.

Last SEC Filed Shareholder Report: ESD (period ending 6/30/14; 1% weighting in Ukraine bonds; 6.5% in Russia; 6.9% in Venezuela; 8.2% in Turkey's bonds; net unrealized appreciation=$39.47+M-page 26)

Data on Date of Purchase 9/16/14:
Closing Net Asset Value Per Share: $19.71
Market Price: $17.67
Discount: -10.35%
Average Discounts:
1 Yr: -10.1%
3 Yrs: -6.76%
5 Yrs: -8.04%

CEFConnect Page for ESD

Sponsor's website: ESD Details Overview

Portfolio Characteristics as of 6/30/14: Effective Duration 6.76 years; 214 holdings

Get to know your bond fund: Duration | Vanguard

The fund is weighted in investment grade foreign bonds denominated in USDs:

In the latest Oppenheimer Chart Update (6/30/14), there is an interesting chart at page 34 that shows the public debt to GDP ratios of several emerging markets compared to the U.S., Japan and other developed countries, and then compares the sovereign debt yields on another axis. The emerging market countries have far lower debt to GDP ratios and far higher sovereign debt yields. Oppenheimer concludes that the market has not "fully" recognized that emerging market countries and central banks have "grown much more disciplined". The chart at page 25 shows how emerging market debt has performed against other debt categories in each year since 2004. Emerging market debt was the top performing category in 2004-2007, 2010 and 2012, so that is a reason why I will not totally ignore that bond sector. Those bonds were in last place in 2011 and 2013. Emerging market currencies and bonds declined significantly last year when U.S. interest rates started to rise in May 2013.

For those investing in emerging markets, there is an important chart on page 35 that shows current account as a percentage of GDP for several emerging market countries. The chart compares 1997 with 2013. The Philippines, Korea and Malaysia have gone from a negative ratio to positive ones, while India, South Africa and Turkey have increased their negative numbers.

Prior Trades: Item # 4 SOLD 100 ESD at $18.54 (8/2/14 Post)(snapshot of profit=$110.05)-Bought 100 ESD at $17.28 (April 2014 Post)

I found a trade from 2009:

2009 ESD 50 Shares +$191.97

Trading Profits: $302.02

Rationale: Given the correction in emerging market debt, I thought that I wound nibble in this area and hope that the correction is mostly in the rear view mirror. You never really know. The ESD share price had fallen 4.69% since I sold out a few weeks ago and is substantially below the $22 level hit back in early 2013 before U.S. rates started to rise.

Subsequent to my last transaction, the monthly dividend rate was reduced from $.12 per share to $.115 to "better reflect both the current level of income and total return". Distributions

Assuming a continuation of the current monthly dividend of $.115 per share, the dividend yield is about 7.81% at a total cost of $17.67 per share. The dividend has not been supported by a return of capital over the past year according to CEFConnect.

Risks: The risks are highlighted in a long term chart. ESD Interactive Chart This CEF crashed and burn during the Near Depression, rapidly going from $18 or so per share to $10. Another mini crash started in May 2013 with a plunge from $22 to $17 over a 4 month period. That is huge for a bond fund. Since late August, the market price has stabilized mostly in the $17 to $18 range.

"Country Risk" is acute. I noted above the significant exposure to Venezuela's government bonds. The fund even had an allocation to Ukraine as of 6/30/14.

Then, there are the risks associated with CEFs, interest rate and credit risks-all kinds of potentially problematic risks associated with that 7.81% yield. Consequently, I will trade emerging market bond CEFs and keep my total exposure minimal at all times.

A rise in U.S. interest rates will likely cause a decline in emerging market bonds. ESD avoids most currency risk by owning bonds denominated in USDs, though it has some EM currency risk through securities priced in local currencies.

Future Buys/Sells: I am anticipating a more probable than not scenario for an average down given the weakness in this sector. If and when the shares decline below $16.75, I will consider buying 46 shares, thereby bringing the position up to 100 shares. I would consider selling the entire position when and if I achieve a 10% total return. The general idea with this kind of security is to generate income while avoiding if possible a capital loss.

Closing Price Last Friday: ESD: $17.31 -0.10 (-0.57%)

4. Bought 100 F at $16.59 (see Disclaimer):

Snapshot of Trade:

2014 Bought 100 Ford at $16.59

Company Description:  Ford Motor Profile Page at Reuters

Key Developments Page at Reuters

The company is currently paying a quarterly dividend of $.125 per share.  Ford Motor Company (F) Dividend Date & History Historically, the dividend is raised some during an economic up cycle and then slashed or eliminated during a recession. Ford did not pay a dividend after the 2006 second quarter until it resumed a 5 cent per share dividend in the 2012 first quarter. Ford Stock Historical Dividends

Ford's U.S. sales in August were up slightly to 222,174 vehicles, led by the best ever sales of the Ford Fusion and Escape.

Ford recently reported that European sales increased 14.4% Y-O-Y in August. YTD European sales increased have increased 7.1% through August. Ford's sales in the five largest European markets rose 35%.

Sales in China were up 30% YTD with 717,537 vehicles sold.

Link to recent bullish article published by Seeking Alpha.

At the time of my purchase, Morningstar rated Ford at 4 stars with a consider to buy price of $15 and a fair value price at $25. Ford Motor

In a Credit Suisse report summarized in a recent Barron's article, the CS analyst believes that Ford has more near term potential than GM, based on the new F150 launch. The analyst noted that investors had trimmed their auto exposure significantly during 2014, as many believe that the market is in a late cycle with a seasonally adjusted annual rate above 16M units.

Light Weight Vehicle Sales: Autos & Light Trucks-St. Louis Fed

I would just note that the 16+M annual run rate has lasted for about 7 years after reaching that level back in the late 1990s, and that the current run rate is of a recent origin occurring after several years of abnormally low sales. Ultimately, the future depends on job and wage growth and an overall improving economy with lower than normal interest rates.

Related Trades: I have bought and sold Ford and Ford Motor Credit bonds but do not currently have a position.

Last Earnings Report: For the 2014 second quarter, Ford recorded a pre-tax profit of $2.6B. After tax E.P.S., excluding some items, was $.4 and $.32 with items, up from $.3 in the 2013 second quarter with items.

The 2014 second quarter had $481M in charges, primarily related to the impairment of an equity investment in Ford's Sollers joint venture in Russia and separation related actions in its European operations.

Ford's European operations were on track to profitability in 2015. There was only a $14M pre-tax profit in the 2014 second quarter, which was a $320M improvement from the year ago quarter's results. Ford, however, expects the second half loss to be greater than the first half loss of $180M.

The Asia-Pacific region is a bright spot, reporting a pre-tax profit of $159M, up $29 from the 2013 second quarter.

Ford Credit's pre-tax second quarter profit was $432M, down $20 from a year ago. Ford expects that Ford Motor Credit's 2014 pre-tax profit will be higher than in 2013.

F 06.30.2014 10-Q

Rationale: When the economy and the stock market are in a long term secular uptrend, with temporary and relatively mild downturns, Ford Motor's stock can perform well.

Adjusted for stock splits, the price went from around $1 in 1982 to over $32 in 1998, the high water mark for the stock. F Interactive Chart The stock then cratered, falling to near $7 during the 2000-2002 correction and the 2001 recession. Over the past year, there has been a lot of chop in the stock price, mostly moving in a $15 to $17 channel. At the time of my purchase, the stock had pulled back from a $17.6 close (9/2/14) and had fallen below its 50 and 100 day SMA lines, though still above its 200 day SMA which was at $16.28 at the time of purchase.

One reason for buying Ford stock is that I expect the U.S. economic recovery to pick up steam during the 2014 second half and throughout 2015. Consequently, I would expect an acceleration in both revenues and profits. At the time of my purchase, the consensus E.P.S. was for $1.33 in 2014 and $1.92 in 2015, F Analyst Estimates, and that profit growth is consistent with my thesis of growth.

Ford also expects European operations to significantly improve in 2015, as noted above when discussing the 2014 second quarter report.

The problem is that investors realize Ford is a cyclical company and the downturns can be very severe. A market multiple will not be place on a TTM E.P.S. or the forward year's projected E.P.S., even when earnings growth Y-O-Y is far superior to the S & P 500 average.

Consequently ten times the $1.92 estimate may be optimistic as a price within the next 12 months. I would view a $19.2 price within a year plus two quarterly dividends to be a best case scenario within 6 to 9 months. A better outcome could be accomplished when investors have a better picture regarding the longevity of the U.S. recovery and when Europe will start to contribute meaningfully to worldwide economic growth.

Ford is moving toward better economies of scale by reducing the number of common platforms. By 2016, Ford anticipates that 99% of its global production will come from 9 platforms (5 global/4 regional), according to Morningstar's report.

Risks: A recession could easily send the stock price down to below $10 and result in a dividend cut. A key unknowable is the market multiple that investors will place on Ford's admittedly cyclical earnings during an economic upturn. For this investment to be successful, it is not necessary that the market assign a market multiple. The current multiple is close to 8.6 times projected 2015 earnings with a projected growth rate of 44.4% Y-O-Y. Something significantly higher than that multiple will be necessary.

There has been a large number of recalls recently.

Ford discusses the risks incident to its business starting at page 17 of its 2013 Annual Report: F 12.31.2013 10K

Future Buys/Sells: Considering the risks and the uncertainties, outlined above, I have modest goals with this small buy. I will consider selling the position when the annualized total return is in the 10% to 15% range. I may hold off based on my assessment of the longevity of the economic upturn.  If my best guess is that there will be a synchronized worldwide upturn lasting five more years without a U.S. recession, made say in June 2015, then I would be far more likely to hold the stock.

FYI, I went to the total return Calculator, referenced in the introduction, and found that the annualized total return for Ford stock was 9.27% with dividend reinvested since 1/1/1972.

Closing Price Last Friday: F: $16.33 +0.13 (+0.80%)

5. Added 50 NABZY at $14.99 (see Disclaimer):

Snapshot of Trade:

2014 Added 50 NABZY at $14.985

Company Description: The National Australia Bank Ltd. ADS (NABZY) is an ADS for the ordinary shares of the National Australia Bank Ltd. (NAB:ASX).

Bank Website: About Us - NAB

NAB has over 12M customers and operates more than 1,800 branches globally, primarily in Australia, New Zealand, the U.S. and the U.K.  In the U.S., NAB owns the Great Western Bank which has more than 160 branches in the Midwest and Arizona. (see map at page 18: 2013 Annual Report for Great Western Bank.pdf; 2013 cash earnings of $112+M up from $100+M in 2012 at page 19)

One share of NABZY equal .5 ordinary NAB:ASX shares.

When I first purchased NABZY back in 2010, the ratio was 1 ordinary share equals 1 ADR share. The ordinary shares were not split but the ADR did undergo a 2 for 1 split earlier this year. (see notice from custodian:  tss.db.com .pdf)

On the day of my trade, the ordinary shares closed in Australia at AUD$33.21 (9/18/14)

I used the currency exchange converter at YF to translate than number into USDs. The value will fluctuate during the day.

Since the ADR is equal to .5 ordinary shares, I need to divide $29.75 by two in order to calculate the equivalent price for NABZY which is priced in USDs. That price would be $14.88, which is close to what I paid for the NABZY shares bought after the Australian exchange had closed for the day.

Prior Trades: Prior to this last trade, I owned 50 shares: Item # 8 Bought 50 NABZY at $15.49 (3/10/14 Post). The stock went ex-dividend for its semi-annual distribution after that purchase.

Prior trades were made before NABZY split 2 for 1.

I traded this stock a couple of times before the ADRs split two for 1. Item # 1 Bought 50 NABZY at $24.7 (March 2010) and Item # 9 ADDED 50 NABZY AT $19.51 with Mid-May cash flow (May 2010)-Item # 2 Sold 100 NABZY at $25.2-Sold 100 NABZY at $25.2)($285.6 +$64.59 dividend payment); and Item # 7 Sold 50 NABZY at $25.47 (August 2012)-Bought 50 of the ADR NABZY at $24.55 (collecting one dividend).

Snapshot of 2010 Trade:

2010 NABZY 100 Shares +$285.6

Rationale: This bank pays a good dividend. Dividends are paid semi-annually in Australian Dollars. NAB's dividend payment history - NAB That page refers to the "franking level" of recent dividends as 100%.  I believe that means that no withholding tax would be applied to the payment.

In 2013, NAB paid out AUD$1.9 which would be equivalent to AUD$.95 for NABZY now after the 2 for 1 split. At the exchange rate in effect for 9/18/14, AUD$.95 would convert into USD$.8511 per share. At a total cost of $15, the dividend yield would be 5.674% based on all of those assumptions.

The value of the dividend to the owner of NABZY shares will in part depend on the currency conversion rate. The dividend becomes more valuable when the AUD rises in value against the USD, and less valuable when the Australian currency is declining, which has the same practical effect as a dividend cut.

The last dividend payment was "fully franked" and amounted to AUD$.99 per ordinary share. Shareholder Dividend - National Australia Bank Group - NAB That would amount to AUD$.495 per NABZY share and less when converted into USDs. I owned 50 shares when that payment was made and received $23.26:

So assuming that one AUD bought 1.05 USDs at the time of the dividend conversion, then the owner of NABZY would in effect receive more and would have a higher dividend yield based on the constant cost number. Going back to the 8/10/12 conversion rate, that AUD$.95 per share share dividend would convert into USD$1 which would equate to a 6.67% yield at a total cost of $15 for each NABZY share. The dividend yield goes up when the AUD rises against the USD based on a constant cost number for the shares and goes down when the AUD loses value which has the same effect as a dividend cut.

In order words, the U.S. owner of NABZY would want the AUD to gain in value against the USD after purchase, but the dividend's value is not the main reason. The NABZY share price is inextricably linked to the price of the ordinary shares in AUDs converted into USDs.

As previously discussed, that currency loss will flow through into the pricing of U.S. listed ADR priced in USDs.

What happens when the price of the ordinary shares and the AUD go up at the same time? This is just a hypothetical, but I can pick a historical time when the AUD was strong against the USD, with one AUD buying more than 1.0574 USDs. I did not have to go back far in time.

If the ordinary shares closed at AUD$33.21 (the closing price from 9/18/14, NAB.AX Historical Prices) when the AUD would buy $1.0546 USD (rather than .89), then NABZY would have then been priced before the 2 for 1 split at $35.02 or $17.51, adjusted for the split, rather than at the actual $15 per share price from 9/18/14:

Hypothetical Price With Exchange Rate as of 4/13/13

So that is a huge difference converting AUD$33.21, as of 9/18/14, into USDs which resulted in a USD$29.75, and converting the same AUD$33.21 on 4/13/13 which simply isolates the impact of currency on the U.S. ADR price after a significant decline in the AUD/USD exchange rate. The ADR market price decline due solely to the currency exchange was 14.33%.

International Trading and Currency Risks (7/11/14 Post)

Strong U.S. Dollar + Weak Market=Time to Start Looking Overseas (6/1/2010 Post)


Risks: Given the recent weakness in the Australian Dollar, currency risk is significant, but it can cut both ways as noted in the preceding paragraph.

Many commentators believe the Australian housing market is overheated. There are geographic areas in both Canada and Australia where housing prices have increased at far faster levels than incomes, an ingredient underlying the busting of the U.S. housing bubble. Needless to say, we are all familiar with how banks react to major declines in home prices.

I limited this average down purchase to just 50 shares due to these concerns and risks.

Future Buys:  I decided to chop a potential order for 100 shares into two 50 share lots primarily due to the ongoing weakness in the Australian Dollar. The shares have now continued to slide below the last 50 lot purchase price. I will consider averaging down at less than $14 with another 50 share lot purchase. I will refrain from averaging up. When I average down in these dribbles, I will frequently sell the highest cost lot bought first whenever I have a profit after commissions, so a $16 price would give me some profit on that first lot bought at $15.49 plus the dividends.

Last Friday's Closing price: NABZY: $14.39 -0.03 (-0.21%)

6. Sold 300 HealthLease Properties at C$14.175 (Canadian Dollar (CAD) Strategy)(see Disclaimer): HealthLease Properties Real Estate Investment Trust agreed to be acquired by Health Care REIT (HCN) for C$14.2 per unit in cash. I was lucky on this one, having bought the shares a few weeks earlier.

Snapshot of Trade:

Snapshot of Profit in USDs (taxable gain):

2014 HealthLease 300 UNITS +$1,039.15

Dividends Expressed In USDs=$84.5

Total Return in USDs: $1,123.65 (39.7% in 4+ months)

Profit Expressed in CADs: 

Proceeds: C$4,233.5
Cost: C$3,095
Profit: C$1,138.5
Dividends in CADs: $106.25
Total Return in CADs=C$1,244.75
Total Return on CAD Cost=40.22%

Rationale: I was thinking too much about what I should do with this lot, and finally decided to just harvest the profit and move on.

My Canadian Dollar stash, earning nothing, has increased significantly due to recent sales including the two discussed in this post. Other dispositions since mid-June, where the proceeds were received in CADs, include the following:

Sold: 200 CGI:CA at C$20.66 (9/13/14 Post)

Sold 300 FIE:CA at C$7.59 (8/16/14 Post)

Sold 100 ENF:CA at C$27.65 (8/2/14 Post)

Sold 100 CDZ:CA at C$26.24 (7/26/14 Post)

Sold 100 REI_UN.CA at C$27.04 (7/19/14)

Sold on the Toronto Exchange: 200 CAR_UN:CA at C$23.16 and 100 XMD:CA at C$26.1 (7/12/14)

Closing price last Friday: HLP-UN.TO: C14.14 -0.04 (-0.28%)