Saturday, September 6, 2014

Cash Flow/NVS, PNNT/Bought in Taxable Accounts: 100 KGFHY at $10.44, 50 SAN at $9.73, 50 FDIS at $27.63, 50 MXE/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

Stable Vix Pattern (Bullish-Historically An Intermediate Term Indicator)
Short Term: Market Needs to Correct
Intermediate Term: Slightly Bullish
Long Term: Bullish 

I continue to be a net seller of stocks. The S & P closed at a record high last Friday.

The TTM P/E numbers on the major indexes are stretched in my opinion: P/Es Major Indexes

With the paltry bond yields, and the non-existent yields on short term paper (3 month T Bill at .028%,, it is not surprising that stocks are being bid up in price, but that does not mean the rally this year can be justified based on valuations.  

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

This forecast assumes that the market is correctly predicting the average annual rate of inflation over the next ten years. That prediction is embodied in the 10 year TIP's break-even spread. The current break-even is 2.15%, the average annual inflation necessary over the next 10 years for the buyer of the 10 year TIP to break-even with the buyer of the 10 year 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


Recent Developments:

The government reported that 142,000 jobs were added in August, well below the 230,000 consensus estimate, and the unemployment rate declined .1% to 6.1% due primarily to persons dropping out of the labor force. Employment Situation Summary The job increase numbers for the prior two months were revised down by 28,000. Average hourly earnings rose by 6 cents to $24.53. Over the past year, average hourly earnings have increased 2.1%, slightly over the last reported Y-O-Y inflation rate.

The European Central Bank is becoming more aggressive as the deflation threat becomes more real. The ECB last Thursday unexpectedly reduced its refinancing rate to .05% from .15% and its deposit rate to  -.2% from -.1%. The ECB is also launching a QE program through purchases of securitized debt and covered bonds (not sovereign bonds). Bloomberg As expected, those moves caused a further decline in the Euro which the ECB has been attempting to weaken, so far successfully, since early May. EUR/USD Currency Conversion Chart

ISM reported that its August Manufacturing PMI index rose to 59%, up from 57.1% in July. The forecast was for 56.6%. The new orders component expanded to 66.7 from 63.4. Employment was basically unchanged at 58.1.

ISM reported that its August Services PMI index rose to 59.6%, up from 58.7 in July. The forecast was for 57.2.

ADP reported a 204,000 increase in private sector jobs during August, slightly lower than expectations.

Productivity rose at a 2.3% annual rate in the second quarter, with hours increasing 2.6% and output by 5%. Unit labor costs declined by .1% and has increased 1.7% over the past 4 quarters. Productivity and Costs, Second Quarter 2014, Revised

Markit's Eurozone Manufacturing PMI hit a 13 month low in August, falling to 50.7. Germany declined to 51.4, an 11 month low. This is a link to Markit's press releases, which I have bookmarked: Markit Economics - Press releases

In last week's post, I referred to the S & P/Experian Consumer Default Index, linking a two year chart found at YCharts. After visiting that site 10 times, I was requested to sign up for a "free" 14 day trial to enable me to view their data. I was requested to give my credit card number which would be charged $468 at the end of the trial, assuming I wished to continue using the service. I took a pass.

A chart of this index for up to five years is available at S & P's website. Just click the 5 year tab at S&P/Experian Consumer Credit Default Composite Index. I view that as an important chart. The composite default rate was over 5% in 2009 and has steadily been moving down over the past several years, now hovering at slightly over 1%. That site also has links to first and second mortgage defaults and consumer bankcard defaults. The First Mortgage Default Index has also been trending down.

The aggregate financial health of American households is important to my long term positive views about the U.S. stock market. The overall improving financial condition, seen in the downward sloping default rates is confirmed by other information.

The deleveraging is seen in the DSR chart, probably the most important chart underlying my views. Household Debt Service Payments as a Percent of Disposable Personal Income -St. Louis Fed

The cash build up in Savings Accounts, now totaling nearly $7.5 trillion is another sign. Total Savings Deposits at all Depository Institutions-St. Louis Fed The rich do not have their cash in bank savings accounts.

Home equity is increasing rapidly after collapsing in the Near Depression period. Households; Owners' Equity in Real Estate, Level-St. Louis Fed

Household net worth recently hit a new all time high at over $81 trillion. Net Worth That kind of information can be found in the FED's quarterly Z.1 release. FRB: Z.1 Release--Financial Accounts of the United States--June 5, 2014

Household debt as a percentage of GDP is in a steep decline. Household Debt to GDP

What is driving the stock rally? I believe that I just summarized some of those reasons applicable to the U.S. without delving into the secular forces that will drive demand in the coming decades throughout the developing world.

However, the market is probably ahead of itself at the current time and may be ignoring some potential near term problems, such as the economic slowdown in Europe. 

The Saudi Arabia King Abdullah has warned the west about the threat posed by ISIS. It is ironic that the Saud dynasty has helped to create the kind of fanaticism exemplified by ISIS.; NYT

It was no accident that most of the 9/11 hijackers were Saudis, as was Bin Laden. There is a great deal of similarities between ISIS and Saudi Wahhabism. Saudi Arabia bears considerable responsibility for creating this monster and now wants the West to kill it for them before the House of Saud loses its throne and possibly their heads. I do not foresee the Saudi military holding up too well under an assault by ISIS unless western powers intervene militarily. It looks like King Abdullah's wish will be answered by the west. 


A new study confirmed that an experimental Novartis drug represents "one of the biggest potential advances against heart failures in more than a decade". CBS News This news was released after the close on Saturday 8/30/14. Novartis’ new heart failure medicine LCZ696 cut cardiovascular deaths by 20% vs. ACE-inhibitor in landmark PARADIGM-HF trial

The U.S. market was closed last Monday, but this news did produce a new closing high in Zurich on 9/1/14. NOVN:SWL

Closing U.S. Price 9/2/14: NVS: $93.71 +3.87 (+4.31%)

The brokerage firm Cowen now estimates that NVS will earn $6.4 per share in 2016 and $9.45 by 2020. Barron's

My last add was a 50 share purchase last December. Item # 1 Bought: 50 NVS at $76.72 (12/23/13 Post) NVS is also a major holding of the CEF SWZ which I also own. Swiss Helvetia Fund (10.92% weighting as of 7/31/14); CEFConnect Page for SWZ. I discussed my last SWZ in a August 2014 Post. The SWZ position is one of my largest CEF positions at 701+ shares. I have been reinvesting the dividends. Swiss Helvetia Fund Dividend History

NVS pays an annual dividend which has been rising significantly. In 1997, the dividend was .62 Swiss Francs per share. The 2013 dividend was 2.45 Swiss Francs, made to shareholders of record on 2/26/14. Novartis dividend information One Swiss Franc will buy more than one USD. The 2013 dividend penny rate in USDs was $2.718+. Novartis AG (NVS) Dividend History

CHF/USD Currency Conversion Chart

Closing Price Last Friday: NVS: $93.27 -0.06 (-0.06%)

PennantPark (PNNT):

In a routine development for a BDC, the PNNT external managers decided that they wanted more money to manage, which will handsomely increase their compensation. I doubt that they see it the same way, at least not publicly.

Last Thursday after the close, PNNT announced that it wanted to sell 11 million shares. Preliminary Prospectus Supplement Perhaps, this game is becoming a bit tiresome and the BDC was only able to sell 8.5M shares at $11.63. PennantPark Investment Corporation Prices Public Offering There is a standard over allotment option.

The $11.63 price is the price paid by the public. After underwriting fees and costs, PNNT received significantly less. SEC Filing ($11.2811 per share before $500,000 in expenses) The last reported net asset value per share was $11.33 as of 6/30/14. SEC Filed Earnings Press Release

I view externally managed BDCs with significant disfavor and view them as primarily vehicles for the enrichment of those who manage them.

However, given the good dividend yields, I will own BDCs in small amounts and will trade them frequently under clearly defined criteria.

PennantPark Investment Corporation is currently paying a quarterly dividend of $.28 per share.

For PNNT, I currently own 100 shares. Item # 6 Bought 100 PNNT Taxable Account at $10.84 (5/3/14 Post) The net asset value per share reported for the Q/E 3/31/14 was $11.13, 10-Q, so that purchase was below book value per share.

I last sold PNNT when the market price was at a premium to NAV per share, viewed as substantial for an externally managed BDC in my opinion. Item # 5 Sold 50 PNNT at 11.92 (12/17/13 Post)(profit $71.68)-Item # 6 Bought 50 PNNT at $10.2-ROTH IRA (11/21/12 Post) When I sold that 50 share lot, the last reported net asset value per share was $10.49 as of 9/30/13, so an $11.92 market price was a 13.63% premium to that NAV number.

I had been thinking about selling the 100 shares currently owned the day before PNNT's announcement. It was only a matter of time that a share offering announcement knocked the price back down below book value again. Externally managed BDCs will give an investor plenty of opportunities to buy at discounts to book value. It is only necessary to have a small amount of patience.

Closing Price Last Friday: PNNT: $11.41 -0.45 (-3.79%)


1. Bought 100 KGFHY at $10.44 (see Disclaimer): This is a contrarian value play.

NOTE: This position was later sold in May 2015:

KGFHY 100 Shares +$65.57

1 ADS=2 Ordinary Shares: KGFHY Kingfisher plc 

Snapshot of Trade:

Snapshot of Ordinary Share Closing Price on 8/20/14:

KGF.L at Yahoo Finance

Conversion of Ordinary Share Price Into USDs

Company Description: Kingfisher PLC ADS (KGFHY) is Europe's largest home improvement retailer, and that sums up one of its major problems. It is the third largest home improvement retailer worldwide with 1,130 stores in 9 countries. 

Last Annual Report: annual-report.pdf

I perused the annual report. My primary source for financial data was Bloomberg. I did not copy the data when I made the purchase. When preparing this segment, I went back to Bloomberg when the price was 303.7 pence for the ordinary shares based on the closing price for 8/29/14, slightly below the 312.48 on my date of purchase.

On 8/29/14, the TTM P/E was shown at 10.12 and the forward estimated P/E for the F/Y ending in January 2015 was 13.2. Price to sales was shown at .645 and price to book value at 1.1449. The yield was 3.62% based on the 303.7 pence price. Five year dividend growth was shown at that time at 21.5%.

Company Website: Kingfisher plc

Sanford Bernstein reiterated an outperform rating on 8/15 with a price target of 400 pence, while BNP Paribas recently reiterated an outperform rating and a 500 pence price target. Kingfisher

The share price rose from $8.38 (3/1/13) to $14.71 (4/9/14) before cascading down. Some support seemed to arrive at near $10 when I purchased this lot. KGFHY Interactive Chart

My other primary source of information was the Morningstar analyst report. I am a subscriber and non-subscribers can probably access this page showing a 5 star rating and a fair value estimate for the ADR listed shares at $15. The consider to buy price was given at $10.5. KGFHY Page at Morningstar

Prior Trades: None

Recent Earnings Report: For the ten week period ending 7/12/14, Kingfisher reported that total sales rose .8% in constant currencies. 

Rationale and Risks: The stock chart highlights the risks better than my words. KGFHY Interactive Chart

Pictures frequently speak more clearly than the written word.

While that chart highlights the risks, it is also difficult to see the potential benefits from looking at it. The stocks heyday was in the late 1990s when the price went parabolic, hitting a high of almost $38, before crashing during the 2000-2002, and mostly trading in a $5 to $10 range since 2002 except for a recent spurt to $14 which was quickly retraced back to $10.

The Morningstar analyst goes into Kingfisher's historical problems. Basically, it was a multi-category retailer with no moats. Over the past few years, it has transformed itself into a focused home improvement retailer who is now in a position to exploit its scape and competitive advantages. That is my Cliff Notes version of the report. After reading it, the analyst convinced me to risk a thousand or so on that storyline.

GBP/USD Currency Conversion Chart

Future Buys: I am not likely to average down since I was catching a falling knife and would not want to risk more. This will have to be a long term hold.

Closing Price Last Friday: KGFHY: $10.18 +0.10 (+0.99%) 

2. Added 50 SAN at $9.73 (see Disclaimer):  I have avoided Spain's withholding tax on the dividend by reinvesting the dividend. This is a snapshot of my most recent SAN dividend payment:

Reinvestment of Dividend-No Withholding-Small ADR Fee Charged:

Snapshot of Trade:

Company Description: Banco Santander S.A. ADS  (SAN)

SAN Interactive Chart

Banco Santander SA (SAN) Profile Page at Reuters

Banco Santander SA (SAN) Key Developments Page at Reuters

SAN Analyst Estimates (as of 8/19/14-date of purchase):
2014: $.62
2015: $.8

SAN Key Statistics Page at YF

Prior Trades: My last add was in November 2013: Item # 5 Added  50 SAN at $8.62 I link other posts discussing purchases in that post including purchases at $5.5 and $6.8 (4/16/13 Post).

Related Trades in SANPRB: I  have realized $900.26 trading that equity preferred floater in small lots. (snapshots in Sold Roth IRA: 50 SANPRB at $20.41; Item # 4 Added 50 SANPRB at $18.24 (sold); and in the Gateway Post Advantages and Disadvantages of Equity Preferred Floating Rate Securities)

I currently own 80 SANPRB shares: Bought: STDPRB at $13 (August 2011)(symbol later changed to SANPRB); Added 50 STDPRB at $15.44 (November 2011)

I also own Banco Santander Brasil (BSBR) shares. SAN owns about 75% of this Brazilian bank and has offered to acquire the remaining shares. SEC Filed Document The last disclosed exchange rate offer was .7 SAN for 1 BSBR. If the acquisition is approved, I will simply accept however many SAN shares are offered in the exchange. I have not been attempting to follow developments since I do not really care one way or the other.

Last Earnings Report: 2Q2014 Results: Santander made a profit of EUR 2.756 billion, 22% more than the first half of 2013

The NPL ratio fell to 5.45%. In Spain NPLs stood at 7.59%. I would not invest in a U.S. regional bank with a 5.45% NPL. The reason for making an exception for SAN is its loan growth potential in Latin America. SAN also has decent capital ratios. Geographic diversity is large as shown in the snapshot above.

Rationale and Risks: Since I started to buy the common shares, I have recognized the near term challenges faced by Santander which include heavy loan losses in its home market and an elevated NPL ratio in its growth markets south of the Rio Grande.

The dividend yield is rich. Bloomberg Data. Based on the last 4 quarterly dividends, which totaled $.8211 per share, the dividend yield at a total cost of $9.73 is about 8.44%. Banco Santander, S.A. (SAN) Dividend History Since I have owned the common shares, I have viewed a dividend cut as a possibility.

Since July 2013, the share price has risen over 50%, moving from $6.5 per share to $10, and the price has fallen back some after hitting $10.75 in June.  SAN Interactive Chart  This rise has priced in a lot of the potential near term gains, and has resulted in a slightly expensive valuation based on the TTM P/E (18.4) and the current 2014 earnings estimates.

The current E.P.S. estimate for 2014 is $.62. SAN Analyst Estimates Assuming SAN hits the 2015 E.P.S. estimate of $.8, then I would view the current price as favorable based on that forward P/E of 12.16 based on the $9.73 price.

Another risk is that the NYSE listed shares are priced in USDs and will reflect the price of the ordinary shares priced in Euros. When the Euro was gaining in value, that helped the price of the NYSE listed ADR. However, Europe has adopted policies to weaken the Euro which have so far been successful as shown in the USD/EUR chart (the rise since early May indicates a rise in the USD). The EUR/USD Chart is just the opposite. The declining line shows the weakness in the Euro starting in early May (i.e. the Euro buys fewer USDs going from €1 buying $1.39 to buying $1.295)

On 8/19/14, the ordinary shares closed at €7.33: SAN.MC Historical Prices The exchange ratio with the ADR is 1:1. Converting that amount into USDs, I calculate a NYSE SAN price at $9.79. Currency Converter If I change the date to 5/5/14, when the Euro was stronger, the SAN price would be about $10.17 based on a closing price €7.33 per share.  The owner of SAN would want the Euro to be gaining against the USD and the reverse has been true since early May. That has not happened after this last purchase.

Since the ordinary shares are priced in Euros, a decline in the Euro/USD exchange after purchase will negatively impact to price of SAN.

Future Buys/Sells: I am more likely now to pare my position than to make another open market purchase. I will continue to reinvest the dividend however.

Closing Price Last Friday: SAN: $10.24 +0.11 (+1.09%)

3. Bought 50 of the ETF FDIS at $27.63-Commission Free at Fidelity (see Disclaimer):

Snapshot of Trade:

Security Description: Fidelity MSCI Consumer Discretionary Index ETF (FDIS) is a low cost ETF which can be traded free by Fidelity customers, provided the shares are owned for at least 30 days.

Sponsor's website: FDIS |Fidelity Investments

Snapshot of Top Holdings as of 8/22/14:

The largest individual stock weighting was in Disney at 5.42%, followed by Amazon at 4.65% and Home Depot at 4.61%. Others in the top 10 include McDonalds, Nike, Priceline, Comcast and Time Warner.

Rationale and Risks: One primary risk is that stocks have run up a lot since March 2009, and the aggregate P/E ratio for consumer discretionary stocks are on the high side. Fidelity calculates the TTM P/E as slightly over 20 at the time of my purchase. The dividend yield is minuscule at slightly over 1% according to Fidelity.Those issues explain my chicken buy at this time.

I am substantially underweighted in this sector and this minor purchase gives me some widespread exposure to the possible resurgence of the American consumer. This story line ties into the data referenced in the "Recent Developments" section above, including these charts:

Household Debt Service Payments to Disposable Income-DSR Ratio

Savings Account Deposits ( $7.5T)

Real Disposable Income Per Capita
Household Net Worth

Household Debt to GDP
I do have a framed Disney stock certificate near HQ's Trading Desk.

Future Buys: I may average down in small lots but will not average up.

Closing Price Last Friday: FDIS: $27.90 +0.07 (+0.25%)

4. Sold 100 ORKLY at $9 (see Disclaimer):

Snapshot of Trade:

Snapshot of Profit:

2014 100 ORKLY  +$122.48
Snapshot of Dividend:

Total Return: $164.16 or 21.35% (holding period 7+ months)

Company Description: ORKLY Stock Quote - Orkla ASA ADS Stock Price Today (ORKLY:OTC) - MarketWatch

Rationale: There is growing evidence that Europe is currently in a recession or very close to one. In addition, this security appears to be richly valued based on the TTM P/E and the estimated 2014 P/E, calculated by Bloomberg.

Future Buys: I will need to see better progress on E.P.S. growth or a much lower share price to reinitiate a small position. It is hard to follow a Norwegian company from Tennessee. I really do not have a good feel for its growth prospects and the full panoply of potential problems.

Closing Price Last Friday: ORKLY: $8.94 -0.06 (-0.61%)

5. Pared CHN-Sold Highest Cost Shares at $22.34 (see Disclaimer):

Snapshot of Trade:

Snapshot of Loss:

Item # 1 Added 30 CHN at $22.62 (3/30/12 Post)Item # 1 Bought Back CHN at $25.975 (10/31/2011 Post)

Position after Trade (snapshot as of the 8/22 close):

2014 CHN 124+ Shares Average Cost Per Share $20.91
Of the 124+ shares currently owned, 44+ shares have been acquired with the large year end distributions made by this fund, mostly characterized as long term capital gains.

2011: $2.9964 per share
2012: $3.2668    "
2013: $3.3127    "
China Fund, Inc. (The) (CHN) Dividend Date & History -
The China Fund, Inc. - Distribution history

The 50 share lot purchased in 2011 generated $149.82 that year that were used to buy 7.096 shares at $21.11. Then the 57.096 shares generated $186.52 in 2012 used to purchase 8.6513 shares at $21.56. Then the 65.7473 shares generated $218.8 in a 2013 year dividend payment used to buy 10.6341 shares at $20.5. After 2011, the 30 share lot purchased in March 2012 that was included in this 2014 disposition would have generated dividends in the same way.

While I did not calculate the total return numbers since I would have to isolate the dividend amounts generated by two lots bought in different years, the total return for those 80 shares would have been positive.

Security Description: The China Fund  (CHN)

Data From Date of Trade 8/22/14:
Closing Net Asset Value Per Share: $24.83
Closing Market Price: $22.34
Discount: -10.03%

CEFConnect Page for CHN

Performance Data as of 8/22/14-Total Return NAV (includes reinvested dividends)
YTD: 8.91%
Annualized Total Returns:
1 Year: 19.96%
3 Years: 7.76%
5 Years: 11.27%
10 Years: 15.2%

CHN Page at Morningstar (4 stars as of 8/22/14)

Sponsor's WebsiteThe China Fund, Inc. - Welcome

Data on China: China | Economic Indicators

Last SEC Filed Shareholder Report: The China Fund (period ending 4/30/14; 10 year cumulative return=277.82% based on net asset value-page 1)

Prior Trades-Shares Currently Owned: Bought: 30 CHN at $19.89 (3/24/14 Post);  Added 50 of the Stock CEF CHN at $21.2 (6/2/13 Post)

Rationale: This fund has paid unusually large year end distributions which is not tax efficient. It looks like another one may be on the way. At page 14 of the last shareholder report, the fund discloses that it had a net realized gain of $60.768+M as of 4/30/14. The fiscal year ends on 10/31/14.

I thought that I would lower my share count some in anticipation of another large distribution later this year and then possibly buy back the shares at some point after the ex dividend date. The small net loss this year can be used to offset profits and consequently lower my 2014 tax bill a slither.

The Hong Kong stock markets has enjoyed robust gains since May 2014-so far. HANG SENG INDEX Index Chart. The Shanghai SSE Composite Index Index has declined in value over the past five years, which makes CHN's performance, noted above, look really good in comparison.

Future Buys: I am reinvesting the dividend. After the ex dividend date for the next year distribution, I will decide whether to buy back some or all of the 80 shares sold.

Closing Price Last Friday: CHN: $22.45 +0.12 (+0.54%)

6. Bought 50 MXE at $16.74 (see Disclaimer):

Snapshot of Trade:

2014 Bought 50 MXE at $16.74

Security Description: The Mexico Equity & Income Fund (MXE) is a closed end fund that invests in Mexico's stocks.

Data on Date of Trade 8/25/14:
Closing Net Asset Value Per Share: $18.72
Closing Market Price: $16.72
Discount: -10.68%
Average Discounts:
1 Yr. -10.85%
3 Yrs. -10.79%
5 Yrs. -11.54%

Performance Numbers as of 8/25/14 Base on Net Asset Value and Total Return
Return Numbers Are Annualized at More than One Year

YTD +13.52%
1 Year +19.07%
3 Years  +20.98%
5 Years +22.34%
10 Years +18.15%

CEFConnect Page for MXE

Sponsor's Website: The Mexico Equity and Income Fund, Inc.

Top Holdings as of 7/31/14:

Last SEC Filed Form N-Q: Period Ending 4/30/14

Last SEC Filed Shareholder Report: Period Ending 1/31/14 (ratio of expenses to average net assets for the F/Y Ending 7/31/14=1.62% with a portfolio turnover of 179.1% up from a 277.48% turnover in the previous F/Y)

This fund has distributed mostly short and long term capital gains as dividends with large distributions in 2005-2008 and 2013: Mexico Equity and Income Fund Dividend History-NASDAQ and See Dividend Tab at Sponsor's website,  The Mexico Equity and Income Fund.

MXE Page at Morningstar (unrated)

Prior Trades: None

Rationale: I compared this fund's performance with the ETF iShares MSCI Mexico Capped ETF and the Mexico Fund (MXF), another CEF, and MXE had clearly superior past performance. I would emphasize the word "past".

Mexico seems to be doing better economically and is benefiting from the U.S. recovery. A report from the Boston Consulting Group identifies Mexico as a "rising global star" in manufacturing competitiveness.

A number of analysts believe that Mexico's economy will receive a positive "major economic jolt" from reforms to its domestic energy industry.

Mexico | Data-World Bank

Mexico GDP Growth Rate

The middle class is growing. (NYT; Mexican Economy; page 43: rapid-growth-markets-2014.pdf)

Risks: Needless to say, Mexico has an abundance of problems that are well known. I would view the "country risk" to be above average.

Mexico's stock index has had a robust rally since mid-March moving from 38K to over 45K. IPC Index Chart One reason for buying a small lot now is due to that already booked gain prior to my purchase.

Future Buys: I may average down, not up, and will make those decisions based in part on how Mexico is doing and the discount to net asset value per share.

Closing Price Last Friday: MXE: $17.30 +0.11 (+0.64%)

7. Sold 100 PSEC at $10.65-Roth IRA (see Disclaimer):

Snapshot of Trade:

2014 Roth IRA Sold 100 PSEC at $10.65

Snapshot of History:

ROTH IRA History for 100 Share Lot
Dividends: $230.67

Snapshot of Profit:

                         2014 Roth IRA 100 PSEC +$30.99
Bought 100 PSEC @ $10.2-Roth IRA (11/16/12 Post)

Total Return: $261.66 or 25.48%% (holding period about 21 months)

Security DescriptionProspect Capital Corp. (PSEC) is a business development corporation (BDC)

I left some comments to a recent Seeking Alpha article that delved into my reasons for selling those shares. I have an unfavorable opinion about this BDC.

I do recall that PSEC reduced its dividend when it went from paying quarterly to the monthly distribution schedule. Prospect Capital Reduces Its Distribution - Seeking Alpha (June 2010); Item # 5 Stocks, Bonds & Politics: Bought 50 PSEC at $9.5 (June 2010)

An  article published yesterday by Scott Kennedy, an accountant, contains a good discussion about issues relating to Prospect Capital.  At the current time, I would consider selling PSEC shares when the market price is in excess of net asset value per share, and would evaluate an add at a 5% below NAV.

Prior Trades: I have successfully flipped PSEC several times in my IRAs. The general goal is to escape with a profit after harvesting dividends. For my purchases, the dividend yield has been over 12%.

I previously held a 100 share lot, bought in the Roth IRA, for eleven months: Item # 2 Sold 100 PSEC at $10.83-Roth IRA (6/1/12 Post)-Added 100 PSEC at $10.1 (7/5/11) (see snapshot above)

In the regular IRA, I also sold a 100 share lot in 2012, Sold 100 PSEC at $11.36 (6/19/12 Post). Fifty of those 100 shares were acquired about four months earlier at $10.36, with the other shares bought in May 2011 and held for over a year.

I had two other flips in an IRA: Item #2 Bought 50 PSEC at $10.48 (9/2009)-Sold 50 PSEC In IRA at $12.16 (3/2010 Post); Bought 50 PSEC @ $9.97 in IRA (July 2010)-Sold 50 PSEC @ $11.5 (January 2011).

Trading Gains In IRAs: $273.41 ($242.82 prior gains, snapshots in Bought 100 PSEC @ $10.2-Roth IRA) I view any gain to be a success. Getting out of externally managed BDCs at a profit is easier said than done.  

Recent Earnings Report: I did not care for the last report. Net investment income was reported at $.25, well below the consensus estimate of $.32. NAV per share declined to $10.56 per share from $10.68 as of 3/31/14. PressRelease The short fall in net investment income was caused primarily by a decline in origination fees that declined from $24.5M in the prior quarter to $5.2M.

I have noted in the past that Wells Fargo will publish a table showing the coverage ratios for BDC dividends. I am not a client of WFC so I have to find that information elsewhere. Barrons published such a WFC table back in May that contained data as of 12/31/13. PSEC covered its dividend by 79% through recurring interest rate revenues.

After reading that report, I immediately decided to jettison my 100 share position in the Roth IRA, where I will assume less risk than in a taxable account.

Rationale: The last earnings report highlighted some problems with this externally managed BDC. The market was expected $.32 in net investment income and the company reported $.25 per share. PSEC is not covering its generous dividend with recurring cash interest income and is dependent on origination fees and other income sources to make up the difference. Last quarter, originations declined and the dividend paid exceeded net investment income by over 8 cents per share just in that one quarter. The net asset value declined as noted above.

While the external managers have clearly benefited by growing assets under management, their "talent" is not being manifested in net asset value per share, as I noted in my comments to that SA article.

12/31/11 AUM $1.8B; NAV $10.69 per share
6/30/14 AUM $6.477B; NAV $10.56 per share

The external managers receive a base fee of 2% on gross assets, so they have clearly benefited as assets under management exploded from $1.8B to $6.477B, and they are paid an "incentive" fee on top of that base fee. What is the justification for any incentive fee? Are the managers growing NAV per share?

The risk section in PSEC's last SEC filed Annual Report is 25 single spaced pages long. The "conflict of interest" discussion can be found starting at page 28. PSEC 2014 10-K

The market price of an externally managed BDC will hug its net asset value per share within a few percent. As that net asset value declines over time, the market price will follow. PSEC's net asset value per share has stabilized in the $10 to $11 range, at the moment, but is down from $15.31 per share as of 6/30/06. 10-Q at page 3 The market price topped out near $18 in 2007 and is now having difficulty staying over $11 with downdrafts to the $9 to $10 level. PSEC Interactive Chart

Recognizing the foregoing, I have an exit strategy and will not become a long term investor in an externally managed BDC. I view them with extreme disfavor but can not ignore entirely their income generation, particularly in a Roth IRA where the dividends become tax free. Given my disdain for them, I will keep my exposure low, break the potential exposure into several 50 or 100 share trades, trade the position for any profit whatsoever after collecting a number of dividends, possibly average down with a small lot and then selling the highest cost lot when and if I can do so profitably after a pop, and will generally try to buy when the shares are selling at below net asset value per share.

Future Buys: In an IRA, given my assessment of the risks, I will not own more than 100 shares of PSEC. Given my negative views about BDCs in general and this BDC in particular which has often been expressed in this blog, I will probably need a price in the $9.5 to $9.8 range before considering a repurchase of this 100 share lot. I view another dividend cut to be a distinct possibly next year and view it as probable that there will be dividend cut before PSEC returns to the dividend rate prior to the 2010 cut. Dividend History (quarterly rate of $.41 in the 2010 first quarter= $.13667 paid monthly)

I would also expect that the net asset value per share will trend down. Since the market price of an externally managed BDC will hug its net asset value per share, within a few percent, a continued decline in net asset value per share will result in a share loss to any investor holding long term. That would also apply to shares purchased with most dividends over a long period, with the possible exception of those shares purchased with dividends paid during a share price meltdown similar to what happened in 2008-2009. PSEC Interactive Chart

I view the compensation paid to PSEC's external managers to be unjustified for their performance.

Closing Price Last Friday: PSEC: $10.39 +0.03 (+0.34%)

8. Pared CSQ Again: Sold 180 at $12.19 (see Disclaimer):

Snapshot of Trade:

Snapshot of Position Before Pare:

CSQ 401 Shares Average Cost Per Share=$8.85
Snapshot of Position After Pare: I selected shares for disposition where the average cost exceeded $9 per share.

CSQ 221+ Shares Average Cost Per Share=$8.49
The remaining shares were purchased at less than $9: (e.g.: Item # 2 Added 50 of the Balanced CEF CSQ at $8.28 (12/27/11 Post)Item # 7 Bought:  100 CSQ @ $8.94 (11/29/2010 Post)

Snapshot of Profit:

2014 CSQ 180 Shares Long Term Gain +$514.14
This snapshot includes the short term gain on a 100 share lot sold earlier this year. Item # 7 Sold  100 CSQ at $12-Part of Ongoing Stock Allocation Reduction (7/12/14 Post)

Part of these gains represent a cost basis adjustment due to return of capital.

2014 CSQ Share Trading Profit: $685.68  

Security Description: The Calamos Strategic Total Return (CSQ) is a leveraged balanced CEF.

Data on Date of Trade 8/27/14
Closing Net Asset Value Per Share: $12.81
Market Price: $12.17
Discount: -5%
Average Discounts:
1 Yr. -9.26%
3 Yrs. -8.43%
5 Yrs. -10%

CEFConnect page for CSQ

Fund Sponsor's Website: Strategic Total Return Fund

Last SEC Filed Shareholder Report: N-CSR

Rationale: I sold this 180 share for a good profit after receiving monthly dividend for a long time. The current monthly dividend rate is $.0825 per share.

One reason for buying CEFs rather than ETFs is that the investor has the opportunity to make money (or lose it) in two ways. One of those ways is the same for both fund categories, the net asset value increases and the fund produces a decent annualized total return (including dividends) based on net asset value. For CEFs, there is also the possibility that the discount to net asset value per share will shrink after purchase which did happen for my purchases of CSQ. On the date that this 180 share lost was sold, the discount had fallen to 5%, about 1/2 of the 5 year average and significantly lower than the 1 and 3 year averages.

I am also continuing to pare my stock allocation a tad by harvesting profits, particularly in CEFs where the share disposition lowers my average cost per share.

Closing Price Last Friday: CSQ: 12.05 -0.01 (-0.08%)

9. Cash Flow 8/29 and 9/2 Main Taxable Account: Periodically, I take snapshots of a day's cash flow numbers to highlight the diversity of my portfolio. No single payment is material. Only in the aggregate does the cash flow become significant. I will invest that cash flow no matter what I think about the market or its direction. The general idea is simply to choose the buy whatever presents the best value and generates income at a particular moment in time.

The central thrust of my investing strategy is to generate income through a widespread and diversified portfolio and then to reinvest that cash flow into more of the same, generating a strong compounding effect over a long period of time. There is no desire or initiative to push the envelope or to swing for the fences.

The following snapshots captures the cash flow received on 8/29 and 9/2 in my largest taxable account:

The preceding snapshot includes semi-annual and quarterly bond interest payments, closed end stock and bond fund dividends, some Canadian ETF dividends, one equity preferred stock dividend, and a few quarterly stock dividends.

Taking all of the accounts together, cash flow is close to a daily occurrence during business days. The largest concentration will generally be in December when funds make their year end capital gains distributions and the usual number of quarterly dividend payments. Payments are general higher near the end and start of a quarter due to the monthly and quarterly dividend payers. There are generally a bunch of payments made on the 15th of each month including all of my Canadian REITs.

An interest payment of $59.38 from Travelport is shown at the top of the second snapshot. That would be a semi-annual payment on 1 senior subordinated bond maturing on 9/1/2016 ($1,000 par value), with an 11.875% coupon. Shortly after receipt of this payment, I received a notice that the bond was being called by the issuer.

The notice generally has to be given 30 days before the redemption. I believe the redemption will occur on 10/2/14. The redemption is discussed in this 8-K filing.

The prospectus requires a small premium payment of 102.25% of par value for an optional redemption after 9/1/14:

While I would prefer to keep this bond paying 11.875%, there was a time when this senior subordinated bond looked like a crap shoot on receiving anything at maturity. I recall having a discussion with a reader whether or not I was going to buy more of these senior subordinated 2016 bonds when the price was around 30. Bonds Detail I replied that my three Travelport bond issues were already giving this Old Geezer too much excitement and a bad case of motion sickness. I did not want to give myself a heart attack. I owned two other more senior bonds maturing in 2014 and 2016, both redeemed early by the company. .

All of my Travelport bonds paid every interest payment with high coupons and were redeemed at par or greater by the company. All is well that ends well, I reckon. 

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