Saturday, September 13, 2014

Performance Numbers Year to Date/JZJ and MetroPCS Bond Calls/Sold 100 MPW at $14-Regular IRA/Sold: 200 CGI:CA at C$20.66, 471+ IGD at $9.77/Bought Taxable Accounts: 50 APO AT $23.46, 100 GDO at $18.44, 50 RFTA at $25/Bought 30 APO at $23.39-Roth IRA/

Last Friday's Closing Prices:
S & P 500 1,985.54 -11.91 (-0.60%)
Russell 2000:  1,160.62 -11.73 (-1.00%)-Russell 2000 Index Chart

VNQ: $73.86 -2.34 (-3.07%) : Vanguard REIT ETF
XLU: $42.28 -0.75 (-1.75%) : SPDR Select Sector Fund Utility
TLT: 113.38 -1.20 (-1.05%) : iShares 20+ Year Treasury Bond ETF
KRE: $40.01 +0.17 (+0.44%) : SPDR S&P Regional Banking ETF

Commodities and Currencies: 
U.S. Dollar Index (DXY) Interactive Index Chart (USD very strong)
SLV: $17.89 -0.07 (-0.38%) : iShares Silver Trust
GLD: $118.38 -1.09 (-0.91%) : SPDR Gold Trust 
FXC: 89.63 -0.37 (-0.41%) Canadian Dollar ETF
CAD/USD Currency Conversion Chart
AUD/USD Currency Conversion Chart
EUR/USD Currency Conversion Chart
iPath Dow Jones UBS Commodity Chart
iShares GSCI Commodity-Indexed ETF Chart
XLE: $93.54 -$1.44 (-1.52%) : SPDR Select Sector Fund - Energy

Big Picture Synopsis: 


Stable Vix Pattern: Bullish
Short Term: Market Needs a 15% Correction
Intermediate Term: Slightly Bullish (2013 to Date Gains Borrow from the Future)
Long Term: Bullish

I am continuing to pare my stock allocation. Starting with the securities discussed in my 6/14/14 Post through this one, the net reduction is about $71,000. Most of the chopping has been in stock funds. I started to add back to the allocation during the past week, with a few stock fund buys and some dividend paying contrarian stock selections which will be discussed in next week's post.

Given my age, and current and anticipated future financial condition, it is not necessary for me to swing for the fences or to push the envelope. My primary goals are capital preservation and income generation.

Needless to say, I would prefer a money market rate of 4% rather than .01% for my cash allocation, but I will not let the current abnormally low rate for cash and cash alternatives dissuade me from those two primary objectives taking into account the huge gains realized already over the past five plus years.    

Virtually every week now, I read some missive from Professor Shiller warning about the market's valuation.

Shortly after the publication of my last weekly post, I read an article published at Business Insider where Shiller gave another stark warning. That article was simply summarizing an interview conducted by another publication-This is Money-that contains the usual Shiller admonitions.

The frustration expressed by President Truman, who wanted a one handed economist rather than one with two hands, is easily understood simply by listening to a typical Shiller interview. The general thrust of a Shiller interview is to scare the daylights out of the average individual investor, while giving his supporters enough cushion to argue that he really was not predicting a crash. It is consequently okay that stocks continued to soar for years after one of these chicken little type interviews.

A long term chart of the Shiller P/E can be found at that article and is updated regularly in Doug Short's blog.

As of 9/5/14, the Shiller P/E was at 26.3, and the Professor noted that it had been higher only on three other occasions since 1881. Those three other times were just before the great crash in 1929, in 2000 and in 2007. In all three of those examples, the market crashed shortly thereafter. It is not difficult to catch his drift, even with the constant equivocations and caveats, or to predict how many individual investors will react.

The Shiller P/E is clearly at very high levels. As I noted when discussing this P/E ratio in earlier blogs, this backward looking P/E, using the prior ten years of inflation adjusted earnings, will keep investors out of the market most of the time.

In fact, the market has been below the mean number less than 2% of the time since 1990 when the S & P was around 350, now near 2000. Bloomberg

{see also: Lord Abbett Publication Titled-"Is the Shiller P/E Overrated?" and ValueWalk article titled: "Shiller PE: Problems Behind The Broken CAPE Tool"}

Judging from what I have read over the years at SeekingAlpha and other financial websites, Professor Shiller has been successful in scaring investors out of stocks for a very long time. He was sounding cautious when interviewed in February 2009, just before the S & P 500 started its epic 200% run Business Insider I happened to see that February 2009 article and several other interviews with the Professor throughout early 2009. I thought that many individuals would stay out of stocks after listening to him, and many of them sold out of stocks at the worst possible time shortly after Lehman's failure.

Notwithstanding the caution expressed by Shiller in early 2009, the S & P 500 has managed to gain almost 200% since the Professor's warnings (see third chart in Doug Short's blog)

It is far from an intelligent observation to note that the market is no longer at 2009 levels, so the Professor is more likely to be omniscient now than he actually was in early 2009. All P/E measures are elevated and stretched beyond recent historical norms.

And, Mebane Faber, one of Shiller's acolytes, has come up with a list showing how other valuation measures confirm that the U.S. stock market is one of the most highly valued ones worldwide. Meb Faber Research He uses a CAPE type calculation and substitutes book value, dividends and cash flow for earnings. The U.S. market is at #41 out of 43 among the world's stock markets, using the standard Shiller P/E, and in the high 30s using the other three.

I would just note that those other ratios also use cyclically adjusted numbers for the past ten years. That kind of analysis could mean that all of the markets listed are undervalued, fairly valued or overvalued, or that some are less undervalued than others or some are undervalued while others are fairly valued, and so on. And, we are to believe that Greek stocks, #1 on Faber's list, have the same or even better future growth prospects as the major U.S. companies.

As an aside, it is amazing how easy it is to become a stock market guru, no insight or particular skills are required as long as one is a disciple of some other person who has a devoted following of True Believers such as Shiller (who basically borrowed from Ben Graham in developing the Shiller CAPE: Robert Shiller’s CAPE, so it is not even original with Shiller) Another means to financial guru status is to appear on CNBC frequently and to make a lot of predictions. Making lots of predictions improves the chances of being right on one of them. Saying the market is about to crash is one way to stardom. When one prediction hits the mark, then the guru in waiting calls every financial publication to tout their financial prowess, provides a link  to the relevant CNBC video interview, and then reinforces their deserved status as a guru by issuing press releases humbly mentioning that one success while of course ignoring the many failures. Guru status once bestowed by financial news outlets can not be lost by being dead wrong for years thereafter.

A more sensible evaluation about the current market's valuation is given by the well regarded manager of T. Rowe Price's Capital Appreciation Fund in that fund's recently released semi-annual report, which I read last weekend. I would agree with his assessment. I was particularly impressed with that fund's performance in 2000-2002, when it gained 22.17% in 2000, 10.26% in 2011, and .54% in 2002. The S & P 500 declined 49.1% during that period. The Four Totally Bad Bears

The major problem with any cyclically adjusted valuation metric that uses historical data is really easy to comprehend. The market is more concerned with the future than the past, let alone a mean established by data going back to the 1870s. The past only provides some guidance about the future and a value can be assigned to existing plant, products and services, and net cash on the balance sheet.

The market is trying to assess future earnings when valuing companies, including the present value of future net income, an angst filled and perpetually problematic endeavor.

Consequently investors fall back on the present and the past as crutches, and one measure of past performance is the Shiller P/E. The relevance of establishing a mean with data going back to the 1870s is another issue which is just per se asinine, in my opinion.

So, that brings me to the point in this section. What is a reasonable prediction about the future?

Is it reasonable to predict another meltdown in the world's financial system within the next ten years that devastated earnings and has resulted in an abnormally slow recovery?

In their book "This Time is Different", written by Professors Reinhart and Rogoff, the historical parallels suggested that it takes on average of around 8 years to recover to pre-crisis levels of income, with the median at 6.5 years. {The Big Picture-contains a recent 2014 paper from the duo on the historically slow recoveries from a financial crisis) Those who rely on the Shiller CAPE ratio with religious zeal have to be assigning a near 100% likelihood that such an event will occur again soon.

It is possible that another Near Depression will occur within ten years, but I would not view that as likely. My current guess would be less than a 5% possibility. The more likely possibility is a garden variety recession lasting a few months followed by a quick recovery. If an investor believes in that type of forecast, why is current valuation being heavily influenced by a historically rare and past occurrence?

An alternative future scenario is one recently outlined by a Morgan Stanley strategist and economist and outlined in last week's Barron's. In their view, the past five year's has been part of a "repair phase" following a deep recession caused by a financial crisis. Only now is the U.S. economy about to enter an expansion phase which could take the S & P 500 up to 3,000 after five years or so, based on 6% earnings growth and a P/E multiple of 17. So if MS is right about the next five years, then will that be more important than the past ten? I would think so.

The question, as always, is whether that future prediction is rational, supported by the preponderance of the evidence and more likely than not to happen with some variance that would not meaningfully impact the outcome. Make your best guess is all that mere mortals can do.

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

I will make future predictions. Unfortunately, that is necessary in order to manage my portfolio in the present.

I have consistently been saying that the long term secular bull market in bonds, which started in 1982, ended in July 2012 when the ten year treasury closed at a 1.43% yield. The precise date was 7/25/12: (daily closes at Kaput. I sold out of my ten year TIPs back then when the buyer paid such a high price that their current yield was almost a NEGATIVE 1%. Stocks, Bonds & Politics: Sold 3 TIP Bonds Maturing in 2019 at 120.45 I viewed that to be the bond market equivalent of stocks in 1999. The overall trend will be toward higher rates with intermittent rallies going forward.

The last long term bond bear market started around 1949 and lasted until 1982. For about 15 years, it was more like a series of paper cuts to bond investors before the real carnage and bloodletting started in the late 1960s, with the coup d' grace administered in the late 1970s and early 1980s. Can't have a repeat? Why not? History has a way of repeating over and over again, as fallible humans fail to learn much of anything from the past.

The 1949-1982 bond bear market started out really slow. I am sure than many bond investors during the 1950s still viewed the market favorably and may have even called it a continuation of the long term secular bull market in highly rated credits like treasuries that had started in the wake of the 1929 stock market crash. However, while those investors may have believed that they were still in a long term bull phase back in the 1950s, that clearly was not the case: Long Interest Rates, 1790 to Present | The Big Picture It may have taken a decade before the consensus rolled around to believing that there was something seriously wrong in Bond Land.

My outlook forecast assumes that the market is correctly forecasting the average annual CPI rate over the next ten years. If inflation expectations start to trend higher, then I will become more bearish about bonds. Bond losses due to higher inflation on top of losses resulting simply from rate normalization will not be pretty.

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

Bond yields drifted higher last week. REITs, which have been positively correlated with bonds recently, moved down in price and up in yield last week, thereby maintaining their relatively tight positive correlation with bonds. I have pared my REIT allocation by selling some positions into the bond rally, as previously noted, and have added to my regional banks, which have been showing negative correlation to bonds. I sold 300 Artis last Friday and MPW at $14 discussed below, adding to the overall previous paring. It will be a couple of weeks before I discuss the Artis disposition.

What is causing those correlations?

Many investors have been buying REITs as bond substitutes. While the correlation with bonds has been tight for that reason, there will be days when a REIT stocks act more like a regular stock than a bond substitute and the correlation may break temporarily. That could happen for example when bonds rise during a strong down move in stocks.

Overall REITs have been demonstrating positive correlation with bonds. Bonds and REITs tanked in tandem last year when rates started to rise and then both started to rise this year when rates started to fall. Now, with rates rising over the past week or so, REITs have declined in price as shown by the recent action in VNQ. Vanguard REIT ETF Chart Yesterday, VNQ had a particularly bad day. VNQ: $73.86 -$2.34 (-3.07%)

As for regional banks, investors generally believe that they will be helped by a rise in intermediate and longer term rates, at least when short term rates remained artificially anchored near zero and the banks have to pay their depositors almost nothing for use of their funds. In addition, when rates are rising due to investor's perceptions about an improving economy, then regional banks will likely make more loans and suffer fewer defaults.

Consequently, when rates were rising last year, regional banks had a robust rally (KRE up over 40% in 2013), and I sold into that rally. I plowed some of the proceeds into REITs which I started to buy in September 2013. Over the past several weeks, I have been a net seller of REIT common and preferred shares and have added to my regional bank basket. All of the foregoing is tied to my opinions about the movement in interest rates and relative valuations.

With their robust rally this year, REITs became slightly overvalued as an asset class, though there are exceptions. Generally, in making that kind of determination, I am keying off the average P/FFO historical valuation for REITs as an asset class and I acquire that information from Lazard's quarterly reports that can be found on the internet. (July 2014 Report: USRealEstateIndicatorsReport pdf) According to Lazard, the historical average is 15.7 and the REIT class valuation was at 17.5 times in July.

As another aside, I would note that I am becoming less likely to sell my 300 shares of HLP-UN.TO: 14.10 -0.01 (-0.07%) which is in the process of being acquired by Health Care REIT for C$14.2. Assuming that deal is completed, my CAD profit would be close to C$1,200 based on my recent purchases this year at C$10.2 and at C$10.17. I am anticipating losing this stock one way or the other and have already partially counted it toward my REIT allocation reduction after substituting already 200 NWH_UN:CA at C$10.16 for that 300 unit HLP lot.

I am reluctant to sell the HLP lot now for several reasons. While my profit in CADs is locked due to the C$14.2 cash tender, my reportable USD profit for tax purposes is declining due to the CAD/USD exchange rate. Consequently my taxable profit is being reduced while my potential CAD profit remains the same. I view that trend favorably provided it continues. In addition, my dividend yield is over 8%, paid monthly, so I am receiving decent compensation to wait for the C$14.2 deal price to be paid, rather than to incur a C$19 commission and a lower sale's price now. The danger is that the deal may fall through and I lose my profit and then some depending on the reason. I do not expect that to happen. To avoid that remote outcome, based on what I know now, I may elect to sell soon provided the CAD continues to fall in value and I am entitled to receive one or maybe two more dividends. "Based on what I know now", recognizing of course that what I do not know can and will wreck havoc from time to time.

Performance Numbers YTD Calculated by Fidelity: 

I took a snapshot of the performance numbers YTD for my 4 Fidelity accounts. The calculation is made by Fidelity and is current through 8/31/14. The first two numbers are taxable accounts and the last two are a regular and Roth IRA. The largest taxable account, listed first, had close to an average 25% cash allocation during August.

Fidelity also provides returns for other indexes which can be used as yardsticks for the investor's performance numbers. Given the rally in stocks during August, my large cash allocation earning nothing, and my bond allocation, it is not surprising that I started to fall behind the S & P 500 during August. I am surprised about the outperformance of the IRAs which are free of common stocks other than a few REITs and BDCs.

I have to compute my number for my Vanguard accounts. The Vanguard Roth IRA was up 11.18% Y-T-D through 8/31/14. That is surprising to me also since it is managed in the same way as the two Fidelity IRAs.

The Vanguard Mutual fund accounts continued to be led by the outperformance of the Vanguard Health fund which was up 19% Y-T-D through 8/31/14: Vanguard - Health Care Fund Investor Shares - Price & Performance My position in the Vanguard Equity Income Fund, the largest in this grouping, was up +8.69%; while the second largest position, Vanguard Star was up 7.03%. A small position in the Vanguard Capital Appreciation Fund had the second best YTD percentage gain at +13.25% through 8/31/14. I invested in that fund when it temporarily opened to new investors, just to get my foot in the door. Initiated Position in VHCOX (4/9/13 Post)

Performance numbers through May 2014 were published in this post: Performance Numbers YTD

Other performance updates include the following:

Portfolio Management Goals-Snapshots of Performance Numbers: YTD and 5 Year Cumulative (April 2014)

Main Taxable and Regular IRA Accounts Performance Numbers Calculated by Broker: 1, 3 and 5 Years (12/13/11Post)

I will take more risks in my taxable accounts than in my IRAs. Even in the taxable accounts, preservation of capital and income generation are the primary goals. I am not swinging for the fences.

As previously noted, the portfolio design is intended to avoid 75% of a greater than 1% daily decline in the market.


Recent Developments:  

The government reported that seasonally adjusted retail sales rose .6% in August. Excluding autos, sales increased by .3%. gov/retail.pdf The government revised the July number to show a .3% gain from unchanged. June sales were revised up to .4% from .2%.

The Fed's recently released survey of consumer finances for the period 2010-2013 provides more evidence of the growing income disparity. During the period, median family income fell 5%. The top 3% of the families collected 30.5% of all income in 2013, up from 27.7% in 2010. The top 3% owned 54.4% of the wealth, up from 44.8% in 1989 (pages 10-11 and Figure B at page 11). The percentage of families that directly owned stock fell to 13.8%.

Before Tax Median and Mean Family Income
Mean income is the amount obtained by dividing the aggregate income of a group by the number of units in that group, whereas the median is the amount that divides the income into two equal groups, half having income above the median and the other half below. The mean or average household income gain between 2010-2013 was 4% but that was generated by surging incomes at the very top. Mean income per family rose to $87,200 while the median household income fell 5% to $46,700.

Overall debt burdens declined, with only 8.2% of households devoting in excess of 40% of income to debt payments, the lowest rate since the mid-1990s.

The ration of deb to income fell to 104.6%in 2013 from 124.7% in 2010 (Table 5 at page 29).

The Census Bureau has income data, dividend into quintiles, going back to 1967. The data also adjusts for inflation. Historical Income Tables - Households - U.S Census Bureau The pertinent file is "Table H-3 All Races". The "mean" middle quintile's income was $51,179 in 2012 $51,715 in 1989 adjusted for inflation.

General Electric (own):

GE agreed to sell its appliance business to Electrolux for $3.3B. The transaction will generate an approximate after tax gain of $.05 to $.07 per share at closing which is expected in 2015.

Notice of Redemption: MetroPCS Wireless (own 1 senior bond): 

In a recurring routine, I received last week a notice that MetroPCS will be redeeming its 7.875% senior unsecured bond, maturing in 2018, on 10/6/14. The notice states that the redemption price will be 103.938 or $1,039.38 for one $1,000 par value bond. I will also be paid accrued interest to the redemption date:

Final Prospectus Supplement (optional redemption price at page S-31)

MetroPCS was acquired by T-Mobile (TMUS) on 5/1/13. T-Mobile just sold $1.3B in 6% senior notes maturing in 2023 and $1.7B in 6.375% senior notes maturing in 2025. Prospectus One purpose of that offering was to redeem the 2018 MetroPCS note, see page S-19.

Bought 1 MetroPCS 7.875% Senior Bond Maturing 9/1/2018 at 98 (8/26/11 Post)

Unilever (Own Both UN an UL):

My UL shares were acquired in March 2009 at $18. I recently bought the UN shares in a satellite taxable account. Item # 2 Bought 100 Unilever at $38.10+ (9/21/13 Post) I included in that last linked post some snapshots of some trading gains in UN shares.

The Unilever group, Unilever PLC and Unilever NV, is a large consumer staples company operating in 190 countries.

Unilever has two sets of common shareholders that originate from its history. Unilever PLC is based in the UK and Unilever NV is from the Netherlands.

{A similar type of situation and history exists for Royal Dutch Shell with its RDS/A and RDS/B shares Difference between A and B shares - Shell Global}

Unilever NV (UN) Profile at Reuters

There is a unity of shareholder's rights agreement that makes the Unilever PLC and Unilever NV shares equivalent.

Understanding NV & PLC shares | Unilever Global

However, there are some important differences.

The U.K. does not withhold a tax from UL's dividend:

UL Dividend: No Tax Withheld 
The Netherlands does withhold a tax from UN's dividend (which occurred even when I instructed the broker to reinvest the dividend):

UN Dividend $39.04 (15% tax withheld=$5.85)
Some individual investors have claimed that no dividends are withheld when it is reinvested to buy more shares, which has not been the case for me. I have bought UL in a tax advantaged account, rather than UN, due to that tax withholding difference. A U.S. investor can not recover a foreign dividend tax when that dividend is paid into a retirement account, so 15% of the UN dividend would just be lost forever when that share class is held in an IRA.

Another important difference is the UL ordinary shares are traded in London and are price in British pounds, whereas the UN shares are priced in Euros. The NYSE shares will track the ordinary price converted into U.S. dollars. That will create a variable causing differences in the prices, as will the disparity in foreign withholding, even though each share class has the same claim on earnings and dividends.

Recently, both the Euro and the British Pound have been weak against the USD for different reasons. The ECB has embarked on a deliberate effort to weaken the Euro whereas the pound has suffered some due to the uncertainty about the upcoming vote on Scotland's independence.

GBP/USD Currency Conversion Chart

EUR/USD Currency Conversion Chart

The recent decline in both of those currencies have had a negative impact on the NYSE listed UN and UL.

Closing Prices Last Friday:
UN: $41.32 +0.02 (+0.05%)
UL: $43.75 +0.14 (+0.32%)

Notice of Full Redemption: JZJ

The owner of the call warrant has given notice of its intention to redeem JZJ at its $25 par value plus accrued interest of $.5269+ per trust certificate. Notice of CONDITIONAL PARTIAL Redemption Corporate Backed Trust Certificates, AT&T Note-Backed Series 2003-18 Trust 960,000 $25 Par ($24,000,000 Certificate Principal Amount) Class A-1 Certificates Due November 15, 2031 CUSIP No. 21988K503* (NYSE: JZJ), $24,000,000 Notional Amount Class A-2 Certificates Due November 15, 2031 CUSIP No. 21988KAE7*

Prior to this full call, the owner of the call warrant had partially called the JZJ trust certificates on two prior occasions.

2014 JZJ Partial Call 94 Shares +$488.17

2010 JZJ Partial Call 82 Shares +$567.44
I also lost the functionally equivalent JZE to a full call (100 shares +$1,242.), as shown in the preceding snapshot.

I received the redemption proceeds today, plus the accrued interest payment:


1. Sold 471+ IGD at $9.7743 (See Disclaimer): This underperforming stock CEF was selected for elimination due to poor performance and to meet my ongoing stock allocation reduction goals.

Snapshot of Trade:

2014 Sold 471+ IGD at $9.77+
Snapshot of Position Before Trade: 

While the profit reportable on a 1099 will be over $500, as shown in the preceding snapshot, the monthly dividend payments were supported in large part by a return of capital. Consequently, there was a significant downward adjustment in my cost basis.

I did not calculate a total return number due to the difficulty associated with ROC. I can not simply add the dividend received to the profit. An approximate total return number can be calculated using the performance numbers shown below.

Security Description: The ING Global Equity Dividend & Premium Opportunity Fund (IGD) is a buy-write worldwide stock CEF. 

Data on Date of Trade: 8/27/14
Closing Net Asset Value Per Share: $10.09
Closing Market Price: $9.78
Discount: -3.07%

CEFConnect Page for IGD

IGD Page at Morningstar (rated 2 stars at the time of disposition, rated 4 stars at the time of my last purchase)

Performance Numbers as of 8/27/14-Based on Net Asset Value
Total Return
YTD 5.98%
1 Yr 13.71%
Total Return Annualized
3 Yr. 11.62%
5 Yr. 8.32%
Last SEC Filed Shareholder Report: Period Ending 2/28/14

The current monthly dividend, supported mostly by ROC, is $..076 per share.

Prior Trades: Links to Posts Discussing IGD Purchases: Item # 3 Added 100 of the Stock CEF IGD at $8.91 (1/9/13 Post)Added 50 IGD at $8.78 (December 2011)Bought 100 IGD at $10.94 (August 2010)

Rationale: The fund was fired due to underperformance. 

Future Buys: Highly Unlikely. I now have a very negative view of this fund.

Closing Price Last Friday: IGD: $9.45 -0.04 (-0.42%) 

2. Added 100 GDO at $18.44 (see Disclaimer): Bond CEFs declined last week, so I would have been better off waiting to add to GDO.

Snapshot of Trade:

2014 Added 100 GDO at $18.44

Security Description: The Western Asset Global Corp Defined Opportunity Fund (GDO) is a leveraged world closed end bond fund. GDO will liquidate on or about 12/2/2024. This gives the fund one of the characteristics of an individual bond, the promise to return an investor's money at a time certain. However, unlike an individual bond, there is no promise to pay a fixed sum (i.e. par value). The investor in GDO will simply receive their pro-rata share of the liquidation proceeds, which may be more or less than the current net asset value per share. The current discount to net asset value does provide some cushion.

The current monthly distribution is $.1135 per share, with the next ex dividend date on 9/17/14. Distributions for the Months of September, October and November 2014

Portfolio Composition as of June 30, 2014

Credit Quality: While the fund is weighted in investment grade bonds, it has a substantial exposure to junk rated securities, mostly rated BB or B.

Data as of date of trade 8/29/14
Closing Net Asset Value Per Share: $20.62
Closing Market Price: $18.48
Discount: -10.38%

On the day prior to my trade, the closing market price was $18.52, with the NAV at $20.61, creating a discount at that time of -10.14%.

CEFConnect Page for GDO

Sponsor's website:  Overview (after clicking the "portfolio" tab, I see the average effective duration at 3.96 years with 291 holdings as of 6/30/14)

Last SEC Filed Shareholder Report: WA Global Corporate Defined Opportunity Fund Inc

EDGAR Filings for GDO

Prior Trades: I have frequently bought and sold this leveraged bond CEF for small gains after harvesting its monthly dividends. I liquidated my entire position early in 2013 and started to buy shares back later in the year and into 2014.

Completed Round Trip Transactions:

Bought 100 of the CEF GDO at $18.6 March 2010; Bought 70 of the CEF GDO in Regular IRA at $18.61 March 2010; Bought 200 of the CEF GDO at 18.63 and 18.53 (100 in Roth and 100 Taxable Account respectively) March 2010; Bought 200 of the CEF GDO at 18.63 and 18.53 (100 in Roth and 100 Taxable Account respectively) March 2010;  Bought 100 GDO at $18.57 April 2010; Bought Back 50 shares of GDO at 17.8 in the Roth IRA previously sold at $19.24 December 2010; Sold 100 GDO at $18.72 January 2012Sold 200 GDO at $19.18 June 2012; Sold Remaining GDO in Taxable Account at $19.69 July 2012Bought 100 Shares of GDO at $18.9 November 2012Sold 100 GDO at $20.79 December 2012; Sold 120 GDO at $20.73 (February 2013)Sold 102+ GDO at $18.79-Regular IRA (July 2014)(some snapshots of realized GDO trading gains=+701.62)

With this last purchase, I currently own shares. Item # 4 Added 100 GDO at $18.06 (2/25/14 Post)Item # 7 Bought 50 GDO at $18.03 (11/19/13 Post)Item # 7 Bought 100 GDO at $17.79-Regular IRA (10/24/13 Post); Item # 4 Added 50 GDO at $17.58-Roth IRA (6/29/13)

Rationale and Risks: I am generally comfortable with this fund. Dividends are paid monthly at the current rate of $.1135 per share. At that rate, the yield would be about 7.39% at a total cost of $18.44 per share.  Over the past year, the monthly dividend was first cut from $.12 to $.115 before being raised to $.116 and then cut to $.1135.

As noted above, I liquidated my position in early 2013.  All of the shares previously sold were bought at higher prices, with the exception of one 50 share lot, than my recent buys of shares that are currently owned.

Like other bond CEFs, GDO was hurt by the rise in rates starting in May 2013 and lasting until year end, which caused a decline in net asset value. One known risk for CEFs is that the discount has a tendency to expand during periods of market declines for owned assets, as individual investors flee. The use of leverage aggravates the decline.

On 5/1/13, the net asset value per share was $21.07 and the discount was at -4.79%. The market price close that day was $20.06. From 5/1/13 through this month, the fund has paid $1.158 per share in dividends. The discount has expanded by 6.45% between 5/1/13 and 2/13/14, which is largely responsible for the market price decline.

I discuss other risks in the previously linked posts.

Closing Price Last Friday:  GDO: $18.34 -0.04 (-0.22%)

3. Bought 50 RFTA at $25 (see Disclaimer): This one declined last week as bonds weakened in price and rose in yield. I view the issuer as being a high credit risk.

Snapshot of Trade:

2014 Bought 50 RFTA at $25
Security Description: The RAIT Financial Trust 7.125% Sr. Notes 2019 (RFTA) is a new senior unsecured Exchange Traded Bond issue by RAIT Financial Trust (RAS).

RFTA is scheduled to make quarterly interest payments at the per annum rate of 7.125% on a $25 par value. The bond may be called at the issuer's option on or after 8/30/17.

Prospectus Supplement

This bond is not rated.

If it was rated, it would be in junk territory. I did a FINRA search for bonds maturing in 2019-2020 that had a 7%-7.25% yield. A bond issued by Ruby Tuesday's fell into that range and was rated Caa1 by Moody's and B- by S & P. Bonds Detail Ruby Tuesday 7.625% Maturing 5/15/2020

The first interest payment goes ex interest on 11/12/14 at the penny rate of $.5294 according to Fidelity:

That includes more than one quarter and the yield information shown in that snapshot is obviously incorrect. The quarterly rate will be $.445312 per share. At that rate, the yield at a total cost of $25 per share would be the coupon rate of 7.125%.

EDGAR Filings for RAIT Financial

Prior Trades: None

Related Trades: I recently bought the common stock as a Lotto. Bought as LT: 40 RAS at $7.63 (8/25/14 Post) I also recently bought another RAIT exchange traded bond with a 7.625% coupon maturing in 2024. Bought Roth IRA: 50 RFT at $24.28 (August 23, 2014 Post)

Rationale and Risks: I discuss these issues in the preceding linked post. Rather than buying more of the bond maturing in 2024, I decided to accept about .5% less with a senior bond maturing about five years earlier which mitigates interest rate significantly. While the credit risk will be the same for the two bonds over the next five years, the likelihood of a BK in 5 to 10 years is greater than one in 1 to 5. Credit risk is the main risk with this five year senior bond.

Closing Price Last Friday: RFTA: $24.37 +0.07 (+0.31%)

4. Sold 200 CGI:CA at C$20.66 (Canadian Dollar (CAD) Strategy)(see Disclaimer): This disposition was part of my ongoing stock allocation reduction. I also realized a larger profit in CADs than the broker will report after converting the purchase cost and sale's proceeds into USDs.

Snapshot of Trade:

2014 Sold 200 CGI:CA at C$20.66

Snapshot of Position Before Trade:

Unrealized Gain: C$911 or USD$549.29
Snapshot of Profit:

2014 CGI:CA Reportable Profit USD$532.55
Bought 100 of the CEF CGI:CA at 15.78 CAD-Toronto ExchangeAdded 100 of the Canadian Stock CEF CGI at C$16.03

Reportable Dividends Received: $239.93

Total Taxable Return: $789.22  

CAD Dividends Received Before 15% Withholding: $258
Profit in CADs: C$894
Total Return in CADs: C$1,152

Security Description: The Canadian General Investments (CGI:TOR) is a Canadian stock CEF.

Sponsor's Webpage: Canadian General Investments

Data on Date of Trade 9/2/14:

Net Asset Value: C$29.27
Market Price: C$20.66
Discount: -29.42%

This CEF's market price generally stays near a 30% discount to net asset value per share. There is really no effort made to narrow the discount through an active and significant stock repurchase program. The CEF is also sitting on a large pile of unrealized gains. A more consistent harvesting of profits, resulting in larger than traditional long term capital gain distributions, might narrow the discount. There would obviously be a large gain when and if some determined person or entity forced a conversion into an open end fund selling at net asset value which sometimes happens in the CEF universe.

Rationale: While I am continuing to be a net seller of stocks, my primary reasons for selling this CEF were profit taking and the current weakness in the CAD/USD exchange rate causing a much lower U.S. tax liability than the tax liability at a higher exchange rate.

In the Canadian Dollar strategy, I am interested in increasing my CAD stash for diversification purposes.

I will favor selling a security for a $1000 CAD profit,  but at a $600 USD reportable long term capital gain taxed at 15% due to the decline in the CAD during my ownership period.

I would not want to sell for a CAD loss and a reportable USD tax profit, due to a rise in the CAD/USD exchange rate.

Future Buys/Sells: I may buy this one back after a 15%+ correction in the market price.

Closing Price Last Friday:  CGI.TO: C$20.70 -0.02 (-0.10%)

5. Bought 30 APO at $23.39-Roth IRA and 50 in Taxable Account at $23.46 (see Disclaimer): I noticed that this security was at a 52 week low so I nibbled in a Roth IRA. APO Interactive Chart This is a contrarian value play.

The chart does indicates some souring by institutional investors. WFC downgraded the stock to market perform in mid-August.

Snapshot of  Roth IRA Trade:

2014 Roth IRA Bought 30 APO at $23.39
Snapshot of Taxable Account Trade:

Security Description: Apollo Global Management LLC Cl A (APO) is a global alternative asset manager. Operations are divided into several segments including private equity and credit segments.

List of Private Equity Holdings as of 12/31/13: Page 12,  APO-12.31.2013-10-K

Description of Apollo's Credit Platform: Pages 13-14

A complicated chart showing how APO fits within the Apollo organization structure can be found at page 64.

APO Page at Morningstar (Rated 4 Stars at time of purchase with a consider to buy at $24 or lower and a fair value estimate of $40)

Bloomberg Page for APO (at time of purchase,  2014 Estimated P/E= 10.27; P/B=1.53)

APO Profile Page at Reuters

Apollo Global Management, LLC (APO) Dividend History

EDGAR Filings for APO

Recent Earnings Report: For the 2014 second quarter, APO reported GAAP net income of $72M, up from $59M in the 2013 second quarter. "Total Economic Net Income" was $.52 per share and the company declared a $.46 per share second quarter dividend per class A share. The $.46 per share dividend consisted of a $.15 regular dividend and $.31 "attributable to additional carried interest earned by Apollo funds through realizations and Management Business earnings".  Total assets under management was $167.5B as of 6/30/14. APO Earnings Release 2Q-14

Economic net income is defined at page 67: APO-12.31.2013-10-K

As noted in that press release, Apollo intends to "distribute to its shareholders on a quarterly basis substantially all of its distributable earnings after taxes and related payables in excess of amounts determined by its manager to be necessary or appropriate to provide for the conduct of its business." There is no guarantee or assurance that any dividend will be payable.


Rationale: The primary rationale is income generation and secondarily potential capital appreciation. The Morningstar analyst believes that there is potential for capital appreciation.

The "earnings" estimates made by analysts may be based on the economic net income number rather than the lower GAAP number. I suspect that is the case. The consensus for 2014 is $2.36 per share and $2.54 in 2015. APO Analyst Estimates Based on the 2015 estimate, the P/E is around 9.21 at a total cost of $23.39 per share.

APO Key Statistics

Risks: The company describes risks incident to its business starting at page 22 of its 2013 Annual Report: APO-12.31.2013-10-K

The primary reason for investing in this stock is to generate income, but the dividends will be erratic in amounts depending on income realization.

The objective in the IRA is achieve a 8% to 10% annualized total return.

Closing Price Last Friday: APO: $23.60 -0.08 (-0.34%)

6. Sold 100 MPW at $14-Regular IRA (see Disclaimer): As noted above, I have been paring my REIT allocation.

Snapshot of Trade:

Snapshot of Profit:

2014 Regular IRA Sold 100 MPW +$108.27
Dividend: $21
Total Return: $129.27 or 10% (holding period 5 months)

Item # 2 Bought Regular IRA-100 MPW at $12.76 (4/18/14 Post)

Security Description: Medical Properties Trust MPW) is an equity REIT that owns net-leased healthcare facilities. As of 6/30/14/28/14, MPW's portfolio consisted of 118 properties (56 acute care hospitals, 23 long term acute care hospitals, 31 in-patient rehabilitation hospitals; 2 medical office buildings; and six "wellness centers". 10-Q at page 36

Key Developments at Reuters

Company Website: Medical Properties Trust

Last March, MPW sold 7.7M shares at $13.05, excluding up to 1,245,000 shares in the over-allotment option: Form 8-K, Press ReleaseProspectus.

MPW is currently paying a $.21 per share quarterly dividend, which was raised from $.2 in the 2013 4th quarter. Medical Properties Trust, Inc. (MPW) Dividend Date & History -

The $.20 per share quarterly rate was in effect since the 2008 4th quarter when it was reduced from $.27. I view that dividend negatively for two basis reasons: (1) the dividend was cut 25.9% and (2) after being slashed, it was kept at a constant amount for 5 years before being raised by a penny. Assuming a continuation of that dividend growth rate, I will not live to see a doubling and may not live to see the quarterly rate return to the pre-slash level of $.27.

2013 Annual Report: 10-K

Last Quarterly Report: 10-Q
Debt: $1.64+B, page 17
Medical Properties Trust, Inc. - Press Release

EDGAR Filings for MPW

Brad Thomas published an article about this REIT back in February at Seeking Alpha.

Prior trades: I bought and sold this stock once in an IRA. I was fortunate to buy it at a more favorable price that allowed me to realize a decent percentage profit. Item # 3 Bought 100 MPW at $9.9-ROTH IRA (2/13/12 Post)-Item # 6 Sold 100 MPW at $12.25 (1/3/13 Post)(snapshot of profit=$221.08 & total return of $321.08).

Rationale: I am satisfied with a 10% annualized return achieved in five months. Profit taking in an account where preservation of capital is the prime objective is routine when my objective is hit for a particular security.

Given the dividend history described above, MPW is on a short leash.

Future Buys/Sells: I will consider buying 100 shares back in an IRA at a lower price than my last purchase. That would be less than $12.76. My first purchase, as noted above, was at $9.9 in early 2012.

The shares hit $2.91 in early March 2009: {MPW Interactive Chart; closed at $2.91 on 3/9/09,  MPW Historical Prices)

Closing Price Last Friday: MPW: $13.15 -0.43 (-3.17%)

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