Monday, October 20, 2014

Bought 100 IGI at $20.11/ADDED 20 NSRGY at $68.8/Bought Roth IRA: 50 DPG at $19.64/Added 150 FAX at $5.76/Added 200 DRG:CA at C$8.92

Housekeeping: I am now on an irregular posting schedule after Google lost one of my very long weekly posts shortly before publication. I finished writing a post so here it is. It may be anywhere from 5 to 10 days before I publish another one.

Google is still losing my blog URL which invariably occurs now after I publish a new post. I no longer use the blog URL to access the blog, though I do periodically check to see whether or not it is working. Instead, I am using a bookmark link to the most current month: Stocks, Bonds & Politics: October 2014

Big Picture Synopsis 

Stable Vix Pattern (Bullish)(Requires a Trigger Event To End)                   
Short Term: Market Needs to Correct 10% to 15%               
Intermediate Term: Slightly Bullish (gains to date borrow from the future)
Long Term: Bullish

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

I tweaked my bond forecast due to the decline in inflation expectations.

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 last Friday at 1.92% and has been trending down.


Recent Developments:

GE's President Jeff Immelt told investors that the U.S. economy is "probably the best we've seen it since the financial crisis" GE U.S. orders for the Q/E 9/30/14 grew 25%. GE anticipates a "very strong" 2014 4th quarter led by an anticipated 40% increase in gas turbine shipments. Q3 2014 Results - Earnings Call Transcript | Seeking AlphaSEC Filed Earnings Press Release I intend to sell my highest cost GE shares profitably, somewhere in the $30 to $35 range, and to keep the remaining shares with an average cost near $15 bought after Lehman's failure. (snapshots at Stocks, Bonds & Politics) My current average cost is $20.13 Snapshot Introduction 4/18/14 Post-531+ shares

As previously noted, OPEC appears to be in disarray on production limits, as Saudi Arabia signaled its willingness to accept prices as low as $80 per barrel for a year or two. CNBC This constitutes an effort to regain market share that has been lost to increased production from non-OPEC members including the explosion in production flowing from U.S. shale and Canadian oil sands. The intent is to make those more expensive production sources less economical which may restrain future capital expenditures and drilling. Another possible reason for the Saudi change may be to enforce production limits as certain cartel members have a tendency to cheat on their assigned quotas. Bloomberg

One reason underlying OPEC's current problem is that one of their largest customers, the U.S., is producing more of its needs. The energy department has charts showing the rapid increase in U.S. oil and gas production

In a Seeking Alpha last Sunday, I discussed the difficulty in predicting oil prices. A number of articles appeared recently about OPEC's disarray and Saudi Arabia's willingness to accept "low" oil prices for a year or two. The reference to low was as low as $80 per barrel.

In October 1973, OPEC announced a 70% increase in their oil price to $5 per barrel:  Center for Strategic and International Studies

Over the ensuing years, OPEC has been in various states of disarray caused by one or more members cheating on their quotas and then lying about it.

As a swing producer, Saudi Arabia has been the enforcer of OPEC production quotas and has played that role by simply increasing production and/or cutting price at the margin. Whenever there is a price cut at the margin, say from a going rate of $100 to $80 per barrel for 50,000 barrels a day for a few customers, all of the oil is repriced at the new low fairly rapidly, as we have just witnessed.

This causes pain to OPEC members and eventually they kiss and make up, possibly with new production quotas to take into account current demand and non-OPEC production.

A recent article published at Bloomberg argued that discipline was the motive for the Saudi Arabia's recent price cuts and increases in production.

OPEC does have problems, including the usual differences between Sunni and Shiite led countries, supporting different factions in the Syrian civil war, different policies on Iran,  large increases in non-OPEC production, and so on. Cartel member cheating has been a problem for decades and may be the issue now more than any other consideration.

It is really unknowable to say when OPEC achieves cohesion again with adherence to production quotas, possibly aiming for a higher price somewhere in the $90 to $100 per barrel range.

I do know that my 101.912 shares of Conoco (COP), with an average cost of $66.55, went from an unrealized gain of $2,052.51, based on the $86.69 closing price on 7/16/14, to an unrealized loss last week. The stock recovered some last Friday, brining me back into profit territory. I bought 100 shares in two fifty share lot purchases earlier this year, with the last purchase made at $63.68. Bought 50 COP AT $63.68 (2/10/14 Post). Watching a $2200+ swing in a 101+ share lot over a few weeks (with the position held less than a year) is preferable to drinking a gallon of castor oil (constant streaming) or eating 40 hot dogs in ten minutes, Sonya Thomas Women's Champion, but I can not say much of anything more positive than that.

I see that IBM laid an egg this morning. I do not have a position. It is a component of the ETF TDIV which I recently sold. That transaction was discussed at length in the weekly post deleted by Google. Stocks, Bonds & Politics: Weekly Post Was Deleted by Google: I Will Not Write It Again/ Sold: 100 TDIV at $25.63 and 100 HBAN at $9.53/Bought 50 ARCC at $15.41 and 300 ACG at $7.53/Bought 50 BRG at $11.98-Roth IRA

First Trust NASDAQ Technology Dividend Index Fund (TDIV)(IBM weighted at 8.2% as of 10/17/14)


1. Bought 100 IGI at $20.11 (see Disclaimer): This is not what I would call a compelling investment. IGI is a low yielding bond CEF. I am just playing with it, hoping to earn some cash compared to the .01% being paid by the money market fund used to fund this purchase.

Snapshot of Trade:

2014 Bought 100 IGI at $20.11

Security Description: The Western Asset Investment Grade Defined Opportunity Trust  (IGI) is an unleveraged closed end fund that invests primarily in investment grade bonds.

Dividends are paid monthly at the current rate of $.10 per share. Distributions for the Months of September, October and November 2014

The next ex dividend date is 10/22/14 according to Marketwatch. .

IGI will be liquidated on or about 12/2/2024. This gives the fund one of the characteristics of owning an individual bond, the promise to pay a specific sum at a future date. Unlike an individual bond, however, there is no promise to pay a fixed sum (i.e. par value). The investor in IGI will receive their pro-rata share of the liquidation proceeds, which may be more or less than the current net asset value per share. Hopefully, the managers will keep that liquidation date in mind when selecting bonds to own.

Data as of Tuesday 10/14/14 (Day of Purchase):
Net Asset Value Per Share= $21.74
Market Price= $20.1
Discount: -7.54%

Prior to May 2013, the fund had been selling mostly at a premium to its net asset value since May 2011. The premium went over 6% at times. The shares have been trading mostly at a 6% to 8% discount to net asset value per share since May 2013, which has brought the 3 and 5 year averages into a slight discount. In other words, the rate spike starting May 1, 2013, which took the ten year treasury from 1.66% that day to 3.04% (Daily Treasury Yield Curve Rates), altered the premium pricing to a persistent range bound discounts to net asset value even as the ten year treasury retreated in yield during 2014. The ten year treasury closed at a 3% yield on 1/2/14 and fallen to a 2.21% yield when I purchased the IGI shares on 10/14/14.

Just to highlight the lack of consistency, I went back in time to 10/11/11, when IGI was selling at a 6.84% premium to its then net asset value of $20.62 and the ten year treasury closed that day with a 2.18% yield.

Average for 1 Year:  -6.17%
Average for 3 Years: .-1.28 %
Average for 5 Years: -1.6%

CEFConnect Page for IGI

IGI closed last Friday at $20.04, with a net asset value per share of $21.73, creating a discount at that time of -7.78%.

Morningstar Page

Sponsor's webpage: Individual Investor

As of 6/30/14, the sponsor claims that the "effective duration" was 6.52 years.

"Duration—What an Interest Rate Hike Could Do to Your Bond Portfolio" - FINRA

The credit quality is weighted in BBB and A rated bonds:

(located under "portfolio characteristics" at sponsor's website; CEFConnect provides this information also)

Last SEC Filed Shareholder Report: Western Asset Investment Grade Defined Opportunity Trust (period ending 5/31/14)(cost of $202.992+M vs. value of $236.210+M-reaping some of those unrealized short and/or long term capital gains can support the dividends without ROC which was the case for the June 2014 distribution: IGI-Distributions-June-August-2014.pdf)

This fund also releases a quarterly report on its financial position. The last quarterly report showed undistributed net income of $.28 per share. Western Asset Investment Grade Defined Opportunity Trust Inc. Announces Financial Position as of August 31, 2014 

Prior Trades: I have repeatedly flipped this one for small gains. Item # 2 Sold 100 IGI at $20.2 (12/31/13 Post)(profit snapshot=$76.56)-Item # 3 Added 100 IGI at $19.28 (10/14/13 Post)

I sold IGI and bought GDO as part of a paired trade. Item # 7 Paired Trade: Sold 100 IGI at $20.22 in Roth IRA (10/24/13 Post)(snapshot of profit $65.36)-Item # 3 Bought Roth IRA: 100 IGI at $19.43 (9/7/13 Post)

Snapshots of trading profits ($462.07) prior to 2013 can be found in Item # Item # 3 Bought Roth IRA: 100 IGI at $19.43 (9/7/13 Post)

Other trades to date include the following: Item # 3 Bought 100 CEF IGI at $19.89 in IRA February 2010; Item # 2 Added 100 of the CEF IGI at $19.79 February 2010; Item # 5 Sold 100 IGI at 21.26- IRA (June 2010); ITEM # 3 Sold:100 IGI @ $20.75 November 2010; Item # 1 Added 100 IGI at $19.65 March 2011; Item # 3 Sold 100 IGI @ $20.76 May 2011; Item # 5 Bought 100 IGI at $20.7 in Roth IRA July 2011Item # 2 Bought 100 IGI at $20.69Item # 2 Sold 200 IGI at $21.52+ August 2011Item # 3 Bought Roth IRA: 100 IGI at $19.43 September 2013Item # 7  Sold 100 IGI at $20.22 in Roth IRA October 2013Item # 3 Added 100 IGI at $19.28 October 2013

Total Trading Profits=$603.99

In order to generate a profit on the shares, I had to trade this security.

Rationale and Risks: The fund is weighted in investment grade bonds, and I am comfortable with the credit risk associated with a diversified fund owning over 200 investment grade bonds (total # 254 as of 6/30/14)

The two main risks are interest rate risk and the risks associated with bond CEFs. Some of the interest rate risk is mitigated by the relatively short duration and the fund's 2024 liquidation date.

A CEF type risk is illustrated by the 10%+ loss in value associated just with the movement from a 3.55% premium to net asset value, as of 5/6/13, to a discount of 7.71% on 8/29/13. A new buyer missed that loss, but may catch another one with a further expansion of the discount.

When the net asset value per share is declining as the discount to net asset value expands, then that is just known here at HQ as the Double Whammy-Not Good for those unfamiliar with that colloquialism.

Unadjusted for dividends, the net asset value per share declined from $22.63 on 5/6/13 to $21.14 as of 8/29/13, a decline of 6.58%. Yet the market value has gone from $23.43 to $19.51 as of 8/29/13, a 16.73% decline. The difference is to the change from a premium price to a discounted price.

Prior to this last purchase, the net asset value per share, adjusted for dividend payments, has been increasing while the market price has been declining some.

Future Buys/Sells: I am not likely to buy more of this low yielding bond CEF. I am in a trading mode for it and will look for an opportunity to profitably sell the shares after harvesting several dividend payments.

2. Bought 50 DPG at $19.64-Roth IRA (see Disclaimer):

Snapshot of Trade:

2014 Roth IRA Bought 50 DPG at $19.64
Security Description: The Duff & Phelps Global Utility Income Fund (DPG) is a leveraged CEF that invests in utility and telecommunication stocks as well as MLPs.

Sponsor's website: Duff & Phelps Global Utility Income Fund — Home

Holdings as of 7/31/14: Duff & Phelps Global Utility Income Fund (unrealized appreciation of $163.998+M)

Last SEC Filed Shareholder Report: Duff & Phelps Global Utility Income Fund

DPG Page at Morningstar

Data on Date of Trade 10/14/14
Closing Net Asset Value Per Share: $22.45
Closing Market Price: $$19.63
Discount: - 12.46%
Average Discounts
1 Year: - 11.66%
3 Year: -7.75%%

CEFConnect Page for DPG

Subsequent to my disposition, Kinder Morgan (KMI) announced that it wanted going to consolidate its MLPs into KMI and offered a premium price for the units in those MLPs. One of those MLP's, Kinder Morgan Energy Partners (KMP), rose 17.15% to $94.12 in response to that acquisition offer. KMI rose 9%. As of 4/30/14, DPG owned 800,000 shares of KMI and 283,803 shares of KMP. Duff & Phelps Global Utility Income Fund On the day of that announcement (8/11/14), DPG's net asset value per share rose 1.76% to $24.4.

Starting in September 2014, MLPs started to skid badly in price and those declines were the primary cause for the subsequent decline in DPG's net asset value per share.

As I noted in a recent post, DPG also had a significant stake in two electric utilities when they received acquisition offers earlier this year. (introduction section: Stocks, Bonds & Politics: DPG)

When I first bought shares in this stock CEF, I referenced this article published by Morningstar and titled "Looking for Income? Try This Global Utilities-Focused Fund"

Top 5 Holdings By Sector as of 7/31/14:

Prior Trades: I liquidated my Roth IRA position back in August: Item # 8 Sold 100 DPG at $21.19-Roth IRA (8/19/14 Post)(snapshots of profit=$403.07 and total return=$662.61 or 38.1%)-Item # 3 Bought 100 DPG at $17.31 (12/12/12 Post)

Item # 1 Bought 100 of the CEF DPG at $17.3 (12/29/12 Post)Item # 7 Added 100 DPG at $18.58 (2/3/14 Post)


(1) Dividend Yield: DPG has been paying a quarterly dividend of $.35 per share. At a total cost of $19.64, the dividend yield is about 7.13%.

(2) Recent Decline in Price and Expansion of Discount: For reasons that can best be characterized as irrational, utility CEFs will often trade at a premium to their net asset value. Individual investors are generally responsible for that pricing, as they focus on just two words-dividend and utility. 

A prime example of irrational pricing is presented by the Gabelli Utility Trust (GUT), which supports the dividend mostly by returning the investor's own capital back to them in the guise of a dividend. As of 10/15/14, GUT closed at a +18.31% premium to its net asset value per share. According to Morningstar, GUT's average premium was + 24.3% over a three year period.

I will periodically buy Utility ETFs but lack any enthusiasm for pure utility funds selling at net asset value. The ETFs do not use leverage.  {See, e.g.  Bought 100 XLU at $29.14 (11/19/09 Post); Bought:  100 XLU @ 30.83 (11/29/2010 Post). I no longer own that ETF. (Sponsor's webpage:XLU - Utilities Select Sector SPDR Fund  expense ratio .16%; 32 stocks

Vanguard also has a broader ETF in this space with a current .14% expense ratio: Vanguard Utilities ETF (VPU)

Risks: The risks are fairly typical for a leveraged stock closed end sector fund that buys securities worldwide. There will be some currency risks, the normal CEF risks (e.g. expansion of discount after purchase), and the risks associated with leverage (e.g. borrowing costs, buying assets which decline in price with borrowed money adding to the woes, etc.) The fund did not have any emerging market currency exposure. The last shareholder report shows the following:

Future Buys/Sells: Given the volatile market conditions, particularly in the MLP space, I decided to buy back now only 50 of the 113+ shares previously sold in the Roth IRA. I would consider buying another 50 at below $18.5.

3. Added 200 DRG:CA at C$8.92 (Equity REIT Common and Preferred Stock Basket Strategy and Canadian Dollar (CAD) Strategy)(see Disclaimer):

I discussed this trade in my first Instablog published at Seeking Alpha.

Snapshot of Trade:

2014 Bought 200 DRG:CA at C$8.92

Security Description: Dream Global Real Estate Investment Trust (DRG.UN:TOR) is a Canadian REIT that owns property outside of Canada. At the time of my purchase, those properties were located solely in Germany. This is a relatively new REIT that started trading in August 2011. Stock Market Chart Toronto Stock Exchange

As of 6/30/14, Dream Global's portfolio consisted of 286 properties consisting of approximately 15.7M square feet located in Germany. Portfolio | Dream Global REIT

The early history is summarized on page 1 of the 2011 Annual Report. Annual-Report-2011.pdf The Dundee Group initially funded this REIT with $120M and an IPO was completed in August 2011. The initial foray into Germany involved the purchase of a portfolio primarily occupied by Deutsche Post.

Link to October 2014 Investor Presentation:  Dream_Global_Presentation.pdf ("all of our acquisitions have been completed at a 400 bps between cap rate and cost of financing, which equate to to 10%-12% levered return of equity"; gross rental income from Deutsche Post has been reduced to 34% from 85% at the time of the IPO)

Assuming a continuation of that C$.0667 monthly rate per share and a total cost of C$8.92 per share, the dividend yield would be about 8.97%. I would emphasize that no dividend increases are likely in the foreseeable future since this REIT is already paying out over 90% of its AFFO.

Sponsor's website: Dream Global REIT

The Canadian shares traded in Toronto have been in a slide after hitting C$10 on 6/25/14: DRG.UN Stock Chart

Prior Trades: Dundee International REIT changed its name and stock symbol. Dream Global REIT Reports Change in Stock Symbols The new name is "Dream Global REIT" (DRG_UN:CA)

Item # 4 Bought: 300 Dundee International REIT at C$9.27 (3/17/14 Post)

Recent Earnings Report: Dream Global reported a 10% increase in AFFO for the 2014 second quarter compared to the same period a year ago. Occupancy increased to 87.9% from 87.7% at the beginning of the second quarter.

I took some snapshots from the second quarter report that have more details.

Click to Enlarge:

Key Performance Numbers
Financing Effective Rate on Debt=3.68%

As noted in footnote number one to the preceding table, results are converted from Euros to Canadian Dollars. This creates two currency risk issues for a U.S. investor. I have both the CAD to USD risk and the Euro to CAD risk. In exchange for the currency and other risks, I receive a good monthly dividend and exposure to high quality real estate in Europe's strongest economy without having to buy a European REIT with Euros.

AFFO for the first six months was $.43 per unit. Assuming a continuation of the trend to date, the 2014 AFFO number could reasonably be anticipated to be in the $.86 to $.9 per unit range. The P/AFFO is reasonable particularly compared to the comparable numbers for U.S. REITs. It appears to me that the consensus forecast is C$.87 for 2014. Dream Global REIT-The Globe and Mail The median target price is currently C$10:

Rationale and Risks:  I am using a basket approach in the REIT sector similar to what I do with other sectors. This purchase gives me exposure to Germany, which improves my geographical diversification, and provides me with a monthly dividend yield of about 8.97%.

The P/FFO or P/AFFO is much lower for Dream Global than the average for U.S. REITs which stood at 16.6 per the Lazard September 2014 REIT report: Lazard_USRealEstateIndicatorsReport.pdf

That dividend yield is far higher than the average 3.4% yield paid  by U.S. office REITs, as of 9/30/14:

I mentioned the dual currency risk above.

Needless to say, sitting at a desk in the SUV Capital of the World, I know zilch about the German real estate market.

I did note that the occupancy rate increased to 87.9% as of 6/30/14 from 83.2% on 12/31/12. Occupancy levels, particularly during recessionary times, can be a significant risk for obvious reasons. If this REIT can lease more of its vacant space over the course of 2014, this will increase funds from operations and increase the spread between the dividend payout and AFFO.  

When a U.S. investor buys any foreign security, then there are additional risks that are inherent in that purchase, including currency and country risks.

I am a long term holder of Canadian dollars and consequently I am not concerned about the short or intermediate fluctuations in the CAD/USD exchange rates. The fluctuation will impact my tax reportable gains and losses, however, even though I am buying the securities in CADs and receiving CAD when I sell the security. For tax reporting purposes, the cost and proceeds are converted from CADs to USDs. If the CAD falls in value after the purchase, I would have a smaller gain for U.S. tax reporting purposes than the profit actually realized in CADs. This has happened several times already this year due to the decline in the CAD against the USD.

The ordinary shares for Dream Global may be bought on the U.S. "Grey Market" using USDs. DUNDF Dream Global Real Estate Investment Trust: Chart The symbol ends in an "F" which indicates that the investor is buying the ordinary shares, not an ADR, using USDs rather than the foreign currency used for transactions in the host market.

I prefer to avoid that dark market whenever possible. Some brokerages will charge a fee in addition to the regular commission to buy foreign ordinary shares in that market. No bid or ask quotes are displayed and limit orders are absolutely essential when buying or selling in that market.

To determine the limit price, I would first acquire a quote from the host market. Dream Global Real Estate Investment Trust (DRG.UN:TOR). I would then use a currency converter to find out the value of that foreign currency price in USDs in order to set my limit order for a possible purchase of those ordinary shares in the Grey Market. For example, if the ordinary shares were being traded at C$8.94, and that converted into USD$7.93 at that point in time, I would then have an idea where to set my limit price for a USD priced ordinary share.

I will use the currency converters found at Yahoo Finance and at Bloomberg to make these calculations:

Currency Converter - Bloomberg

Currency Converter - YF

While Germany generally has a strong economy compared to other European nations, GDP growth is slowing to a crawl and may tilt over into a recession. The German government recently downgraded its forecast for GDP growth in both 2014 and 2014. REITs that own offices are particularly vulnerable to economic slowdowns and recessions which result in lower demand for space and the need to offer rent concessions to attract and keep tenants.

Future Buys: Unlikely. I am full at 500 shares. I will consider selling my highest cost shares when and if I can do so profitably after harvesting a year or more of monthly distributions.

4. Added 150 FAX at $5.76-Main Taxable Account (see Disclaimer): After buying these shares, I changed my distribution option to reinvestment based on this fund's unusually large discount to net asset value per share. As with IGI discussed above, this is a trade that will hopefully generate a better than .01% total return.

Snapshot of Trade:

Snapshot of Position after Trade:

Average Cost Per Share Currently at $6.02
Security Description: The Aberdeen Asia-Pacific Income Fund is a leveraged closed end bond fund that owns corporate and government bonds issued by companies and governments located in the Asia Pacific region (Australia, New Zealand, China and HK, Indonesia, India, Malaysia, South Korea, Philippines, and Singapore. The primary weighting is Australian government bonds (provinces and federal) at  % as of  .

Data as of Date of Trade 10/15/14
Closing Net Asset Value Per Share: $6.56
Closing Market Price: $5.76
Discount: -12.2%

Average Discounts:
1 Year -9.35%
3 Years -4.24%
5 Years -4.22


Sponsor's Webpage: Asia-Pacific Income Fund

October 2014 Fund Commentary

FAX Page at Morningstar (rated 3 stars at the time of purchase)

Aberdeen Asia-Pacific Income Fund: Holdings as of 7/31/14 (unrealized appreciation $43.983+M as of 7/31/14)

Last SEC Filed Shareholder Report-Period Ending 4/30/14: Aberdeen Asia-Pacific Income Fund, Inc.

As of 8/31/14, the fund is weighted in investment grade securities (35.7% in AAA; 15% in AA; 14.7% in A; 17.1% in BBB):

Credit Quality and Maturities as of 8/31/14

The average maturity was 6.9 years as of 8/31/14. Factsheet (annualized return since inception +8.5%/7.1% over ten years)

Top Ten Holdings as of 8/31/14
Dividends are paid monthly. The current monthly rate is $.035, partly supported by a ROC. Aberdeen Asia-Pacific Income Fund, Inc. Announces Record Date And Payment Date For Monthly Distribution

Aberdeen Asia-Pacific Income Fund Dividend Date &

At that rate, the dividend yield would be about 7.29% at a total cost of $5.76 per share. I am currently reinvesting the dividend and will likely continue doing so as the long as the discount remains above 7%. The fund went ex dividend for its monthly distribution (10/17) shortly after my purchase.

The stock suffered from what I call a known CEF risk recently and last year, when the market price declined at a faster rate than the percentage decline in net asset value per share.

Prior Trades: My most recent purchase was a starter position in the Roth IRA. Roth IRA: Bought 250 FAX at $6.11 (8/29/14 Post)

This 150 share bought in the main taxable account and was an average down. The other shares currently owned were bought at higher prices: Item # 4 Added: 150 FAX at $5.8 (February 2014 Post)Item # 2 Bought: 200 FAX at $6.08 (10/24/13 Post)Item # 6 Bought 100 FAX at $6.35 (6/15/13).

As noted in the last linked post, I was able to buy this bond fund at a greater than 30% discount to its net asset valuer per share during the Dark Period. I purchased 200 shares at $3.39 in October 2008 and quickly sold those shares for a $241.81 profit (see snapshot in Item # 6 Bought 100 FAX at $6.35 (6/13/13 Post); Some Nibbles Got Filled: JZE, PJS, INZ and FAX (10/10/08)

Rationale: (1) Monthly Income Generation: The current monthly dividend is $.035 per share. At a total cost of $5.76 per share, that would result in a dividend yield of about 7.29%.

Given the quality of the bonds, and the current interest rate environment, I would view that yield favorably.

(2) Bond Diversification: There is something to be said for a U.S. citizen owning higher quality foreign bonds, particularly AAA rated bonds issued by foreign governments such as Canada and Australia that are rational and more fiscally responsible than our own.

Brett Arends' identified both Canada, New Zealand and Australia has three countries whose debt is rated AAA. Australia's government debt to GDP ratio is 20.48% in 2013, while the U.S. is at 101.53% and growing fast.

My lack of confidence in the U.S. government's ability to address its long term fiscal problems is the main source for this kind of diversification.

(3) The factors that caused the recent price decline can reverse. Interest rates started falling again in 2014. Yet, the discount remains at historically high levels and could narrow creating an "artificial" gain in the shares even when net asset value per share remains constant.

Risks: This kind of fund has the usual interest rate, credit, leverage, currency and CEF risks inherent in a leveraged closed end bond fund that owns foreign bonds. I am not currently concerned about the credit quality given the fund's diversification and the credit quality of its bonds.

The fund has exposure to bonds in several different currencies.

USD/AUD Currency Conversion Chart (Australian Dollar)(42.7% as of 8/31/14)
USD/INR Currency Conversion Chart (India's Rupee)
USD/IDR Currency Conversion Chart (Indonesia Rupiah)
USD/SGD Currency Conversion Chart (Singapore Dollar)

There was a significant weighting in U.S. dollar denominated foreign bonds (38.5% as of 8/31/14).

Interest rate, currency, leverage and CEF risks have been pronounced recently as the market price slid from $7.76 on 4/25/13 to $5.86 on 8/6/13. In addition to the rise in rates during 2013, the Australian dollar was declining in value against the USD during that period. USD/AUD Currency Conversion Chart In April 2013, one AUD would buy more than 1 USD. By 8/6/13, 1 USD would buy AUD$1.12. This fund owns a lot of bonds denominated in AUDs. As the rise in interest rates and currency decline issues took a toll on net asset value, the use of leverage to buy more assets declining in value added to the decline.

When net asset value turns south in that fashion, the discount to net asset value per share will likely expand by a significant amount making the losses even worse. On 4/25/13, FAX closed at a premium to net asset value per share of .52%. The closing net asset value per share that day was $7.75. When I purchased shares on 10/16/13 at $6.08, the shares were selling at a 11.94% discount to a $6.87 net asset value per share.

Unadjusted for the monthly dividends, the net asset value per share had declined 11% but the market price per share had declined by 21.65%. The greater decline in the market price was due to the expansion of the discount to net asset value from a premium to a 11.94% discount.

I intend to sell within the next year my position in a taxable account. I am transitioning this security to ownership solely in the Roth IRA. In anticipation of that future transition, I started a position in the Roth with this 250 share purchase. FAX will own bonds, and consequently its dividends will not be classified of course as qualified dividends. I prefer to own bond CEFs in a Roth IRA, but will own several of them in taxable accounts periodically for their income generation.

The goal for this security is to harvest dividends for a year or two and exit the position with a 5%+ gain in the shares after commissions. The objective is a 8% to 10% annualized total return, mostly provided by the dividend.

To achieve that kind of return now for the shares owned in the taxable account, I would need for the discount to shrink significantly as the net asset asset value increases by a few percent.

Future Buys/Sells: I changed my distribution option to reinvestment given the current discount to net asset value per share. I intend to liquidate the FAX shares held in the taxable account whenever I have a net profit. I am transitioning the position to the Roth IRA which shelters the non-tax favored FAX income from taxation.

5. Added 20 NSRGY at $68.8 (see Disclaimer): While this was a small add, I wanted to discuss Nestle again to highlight one of my investing problems. We all have personality issues that need to be controlled, as much as humanly possible, in order to succeed as investors long term.

One of my problems is selling a high quality stock, bought at a highly opportune time, for a quick profit. What makes the mistake worse is that I know that I am making the mistake when I make it. That is why I call it a personality quirk rather than a mistake based on a rational analysis.

The best time to buy or add to a consumer staple is after a catastrophic stock market event. I know that to be true, so I was buying consumer staple stocks in March and April 2009. I purchased Nestle shares in two small lots during that period:

2009 NSRGY 100 Shares +$493.90
Bought Nestle Late Today at $33.88 (4/16/09 Post)

I will give myself a "A" on those purchases. I was doing what I was supposed to do. I was buying several consumer staple stocks that had been smashed in price. If I had held onto those shares, I would now have a dividend yield of over 6%, plus a 100%+ increase in the share price. Assuming a historical dividend growth rate, my dividend yield would likely be over 12% in another 6 to 8 years from now.

But that is not to be. Why? Left Brain sold the shares for a quick $493.9 profit on 6/23/09 shortly after their purchase, no doubt saying at the time that no one goes broke taking a profit, one of its favorite sayings consistent with its myopic tunnel vision.

So, what am I doing now. I am building up a position again at much higher prices than my June 2009 sale's price. Stupid is one word to describe it.

Snapshot of Trade:

Snapshot of Quote Before Trade:

Closing Prices on Date of Trade:

NSRGY: $68.88 -1.87 (-2.64%)-Pink Sheet Exchange Priced in USDs
NESN.VX: CHF64.95 -2.00 (-2.99%)-Ordinary Shares-Swiss Exchange-Priced in CHF

I will be mostly dragging and dropping an earlier discussion here:

Company Description:  NSRGY is an ADR traded on the U.S. pink sheet exchange. NSRGY Nestle S.A

1 ADR=1 Ordinary Share

Recent Nestle Dividend History (adjusted for stock splits):

Dividends | Nestlé Global 

Brands | Nestlé Global (e.g. NESCAFE, Nestle Pure Life Water, Perrier, Pet Food (e.g. Purina brand products, Alpo, Friskies), Lean Cuisine and Stouffer's, Hot Pockets, Boost, Carnation, Ice Cream (Dreyer's, Nestle, Haagen-Dazs, and  Edy's), Gerber, Butterfinger, Nestle Crunch)

Nestle also expanded it skin health care business by buying L'Oreal's 50% interest in Galderma, giving Nestle a 100% ownership interest in that company.  Dermatology Company Galderma – Specialist on skin medical solutions Nestle paid for this acquisition with 21.2 million L'Oreal shares that it owned, Strategic Transaction Approved by Boards of Nestlé and L’Oréal | Nestlé Global. As part of the same transaction, Nestle sold 27.2M shares L'Oreal to L'Oreal for €3.4B. Following this transaction, Nestle's stake in L'Oreal will be reduced from 29.4% to 23.29%. OR:EN Paris Stock Quote - L'Oreal SA - BloombergLRLCY:OTC US Stock Quote - L'Oreal SA - BloombergLRLCY L'Oreal Co (1 ADS=.2 Ordinary)

NSRGY 2013 Earnings Report:

Nestle released its 2014 first half earnings report last August: First Half 2014: 4.7% organic growth in a volatile trading environment, CHF 8 billion share buy-back

Rather than typing a summary, I just took a snapshot of the main points:

Nestle's senior debt is rated AA+ by Fitch.

Recent Report: The price was knocked down, as noted above, when I purchased this 20 share lot due to this Nestle press release: Nestlé nine-month sales: broad-based organic growth of 4.5% in a volatile environment

Some investors place a lot more emphasis on revenues after currency conversion than I do. I believe that Nestle stock sold off based on these two sentences in the report summarizing the first nine months: "Sales were CHF 66.2 billion, impacted by a substantial negative foreign exchange of -7.5%, and divestitures, net of acquisitions, further reduced sales growth by .01%. As a result the total evolution of sales was -3.1%".  The emphasized in bold lettering that it is still "aiming for organic growth of around 5% for 2014 with improvements in margins, underlying earnings per share in constant currencies and capital efficiency"

I am really only interested in revenues and earnings on a currency neutral basis, recognizing that the currency adjusted numbers move up and down and the revenues and profits are usually not actually converted back into Swiss Francs anyway except for accounting purposes.

Rationale: Nestle is a high quality, financially stable company that is likely to grow earnings, revenues and dividends at a relatively consistent pace over a long period of time. While no company is immune from misfortune that leads to a dividend cut, the likelihood of one occurring for a mega cap consumer staple is remote. Even during the recent Near Depression period, Nestle and other large consumer staple companies continued to raise their dividends every year.

It is impossible to actually calculate a forward dividend yield for a foreign stock since the conversion value into USDs will impact the amount. If the Swiss Franc goes up in value, that is in effect a dividend increase for the U.S. owner of NSRGY (i.e. the Franc buys more dollars). The converse is also true. A decline in the CHF/USD exchange rate results in effect to a dividend cut even if the rate is rising in CHFs.

I can calculate the historical dividend yield using the 2014 payment of $2.029756 per share. NSRGY History I would not vouch for that number which may be after the Swiss withholding tax that reduced the net amount, since 1 CHF would buy more than 1 USD throughout 2014 and the dividend in CHFs was 2.15. In any event, the per share number is close so I will use it for the purpose of calculating a dividend yield. At a total cost of $68.8 per share, a dividend of $2.029756 would result in a dividend yield of 2.95%.

Having noted this discrepancy and desiring an explanation, I went digging into my account history and found this dividend payment for a 50 share lot made this year:

The Swiss withholding tax was at a 15% rate applied to the total.

The total dividend paid, before reduction for the withholding tax and a ADR fee, was $120.87 or $2.4174 per share which makes more sense given the exchange values prevailing at that time. The net was $101.49 or 2.0298 per share which is the number shown above. Voila, figured it out.

So, recalculating the dividend yield based on $2.4174 per share, I arrive at 3.51%.

The foreign tax collected for a dividend paid into a TAXABLE ACCOUNT is recoverable to the extent provided by the Internal Revenue Code and explained in this Schwab Publication: Foreign Taxes If the dividend is paid into a retirement account, then it is not recoverable.

I will take the currency risk with Swiss Francs under the current and reasonably foreseeable circumstances.

There is only one reason why the USD has risen against the CHF since the 2011 summer. The Swiss National Bank has embarked on a massive QE program designed to lower the CHF's value. This is accomplished by creating a vast amount of new CHFs, converting them into Euros and then buying European sovereign bonds with those Euros. The purpose is to weaken the CHF which has been successful looking at a conversion chart starting in the 2011 summer. CHF/EUR Currency Conversion Chart

Eventually, this kind of beggar their neighbor money printing has to stop. I would not hazard a guess when that will happen.

I did go back to the five year peak price in the CHF vs. the USD, which occurred around 8/9/11 when 1 CHF would buy USD1.31+.  I then wanted to know what would be the value of CHF64.95, the closing Nestle price on my day of purchase assuming the conversion rate was the same as 8/9/11 (more than wishful thinking at the present):

Needless to say, $86.15 is a much higher than the conversion value of $68.88 as of my last purchase date. That highlights the currency risk issue.

However, it is hard to see the SNB driving down the Franc more in value, so maybe the current conversion rate is hopefully close to a low.

Risks: Given the quality of this company, a major risk could simply be described as multiple contraction from the current elevated level. Recessions and bear markets will be tough on consumer staple stocks. I did buy Nestle at $33.38 back in April 2009. The stock had traded over $50 in March 2008. NSRGY Interactive Chart It took about two years before the stock consistently traded over $50. A buyer in March 2008 needed to avoid panicking and selling in the low 30s.

For a company like Nestle, the dividends and price will rise over a long period of time, with occasional drama to the downside, and it is mainly important to avoid significantly overpaying for purchases. An example of overpaying would be a purchase of KO stock in 1998 at a split adjusted $42, higher than the current price in 2014. KO Interactive Chart

There is always currency and country risks for multinationals. I also have currency risk inherent in the purchase of any ADR. 

The spread of ebola in Africa may have a negative impact on Nestle's sourcing of cocoa.

One respected fund manager, David Giroux who manages the balanced T. Rowe Capital Appreciation fund (PRWCX), recently stated in a Morningstar interview that he had sold both Nestle and General Mills for the same reasons. His rationale is that consumer staple stocks are selling at higher than normal valuations at a time when their products are under pressure from store brands. The later issue has been ongoing for a long time and would generally fall under the category of "brand substitution". Personally, I just see that issue as a long term headwind for all consumer stocks which will vary according to the product. I am not going to buy a Kroger brand of Cheerios or Vanilla Ice Cream to save a few pennies. I will generally buy a name brand product like Cheerios when I see a markdown (plus a coupon), or when I am out of the product and have to accept full price with a coupon.

Future Buys: The next buy would be a 30 share lot when and if the price sinks below $65 which will bring me up to 100 shares in the main taxable account.

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