Tuesday, November 18, 2014

ADX/Bought Back 50 FCG at $14.68/Bought 50 AIRR at $18.65/Gateway Post $500 to $1,000 Flyer's Basket Strategy With Snapshots of Round Trip Trades

Big Picture: No change

Stable Vix Pattern (Bullish):

Recent Developments: 

Adams Express (ADX) declared a year end dividend of $1.03 per share, consisting of the following:

$.9 per share in long term capital gains
$.05 per share in short term capital gains
$.08 per share from ordinary income

After several pares earlier this year, I am down to 467+ shares at an average cost of $9.75 per share. I have quit reinvesting the dividend. The current position snapshot can be found in Item # 4 Pared ADX Again-Sold 143 Shares at $13.97 (8/9/14 Post).

Closing Price Today: ADX: $14.81 +0.18 (+1.23%) 

Gateway Post for the $500 to $1,000 Flyer's Basket Strategy 

This post will also serve as a Gateway Post for one of my basket strategies which has not received much attention in my blog.

I simply call it the "$500 to $1,000 Flyer's Basket Strategy".

In my risk management system, this basket sits above the Lottery Ticket basket strategy that currently limits my "investment", more accurately described perhaps as a bet, to $300 per security plus any prior realized net gains for that security. Stocks, Bonds & Politics: Lottery Ticket Strategy: New Gateway Post

Like the Lottery Ticket strategy, the Flyer's basket strategy controls risk by limiting the amount of the investment to an insignificant amount for me. I view both of those strategies as an alternative to a casino visit.

Since I have an emphasis on preservation of capital, I will attempt to control risks through a variety of techniques.

The Flyer's strategy includes both ETFs and individual security selections. The ETFs will be narrowly focused ones like the two discussed in this post (FCG and AIRR in Items 1 and 2 below). I will tend to select sectors that are out of favor such as the natural gas ETF FCG where nothing positive can be seen short term unless the investor is hallucinating.

The individual security selections will generally be higher quality names than those selected for the Lottery Ticket strategy. However, as with LT selections, some of those selections will justifiably look like I am trying to catch a razor sharp falling knife.

I will also be buying some foreign stocks that I would not ordinarily buy in a meaningful amount. Many of those securities will be ADRs traded on the pink sheet exchange. Four examples to date include NRBAY, ORKLY, PRDSY, and WARFY.

I am going to devote more cash to this basket since I am not willing at the current market levels to invest much cash in stocks.

While some of the securities sold to date are at higher prices, several others referenced below are substantially below my sale's price.

Quotes for Securities Referenced Below:

Corning (GLW)
First Trust ETF NASDAQ Technology Dividend Index Fund (TDIV)
First Trust Value Line 100 Fund (FVL)
Global X Fertilizers/Potash ETF Fund  (SOIL)
Iridium Communications (IRDM)
iShares MSCI Hong Kong ETF (EWH)
LeapFrog Enterprises (LF)
Morgan Stanley (MS)
Nordea Bank AB ADS (NRBAY)
PowerShares DWA Emerging Markets Momentum Portfolio Fund (PIE)
Prada S.p.A. ADS (PRDSY)
Titan Machinery (TITN)
Vale S.A. ADS (VALE)
Wharf (Holdings) Ltd. ADS (WARFY)
Xerox (XRX)
Yamana Gold Inc. (AUY) 

1. Snapshots of Round Trip Trades: Flyer's Basket Strategy: (see Disclaimer) This post will be updated as I sell securities bought pursuant to this basket strategy. Like the LT basket strategy, this one is small ball.

Sold: 100 TDIV at $25.63 (10/17/14 Post)-Item # 1 Bought 50 TDIV at $19.95 (8/28/12)(later added 50 shares-count only 50 shares in this basket)

2014 TDIV 50 Shares +$272.05

Item # 4 Sold 100 ORKLY at $9 (9/6/14 Post)-Item # 2 Bought 100 ORKLY at $7.61 (1/13/14 Post)

2014 ORKLY 50 Shares +$122.48

2013 Sold 100 IRDM $34.89
IRDM was later demoted to the Lottery Ticket Basket Strategy with a 40 share purchase: Bought 40 IRDM at $6.82 (9/30/13 Post)

Sold 6/6/14 at a Loss-Item # 5 Bought 50 AUY at $14.25 (3/12/13 Post)

2014 AUY 50 Shares -$360.91

Item # 3 Sold: 50 PRDSY at $16.2 (5/3/14 Post)-Item # 3 Bought: 50 PRDSY at $15 (3/17/14 Post)

2014 PRDSY 50 Shares +$43.33

2012 MS 50 Shares +$105.1
Net Gain as of 11/17/14: $1,741.76 

2. Bought Back 50 FCG at $14.68 (The $500 to $1,000 Flyer's Basket Strategy)(see Disclaimer): 

Snapshot of Trade:

2014 Bought Back 50 FCG at $14.68
Closing Price Day of Trade: FCG: $14.63 -0.39 (-2.60%) 

Security Description: First Trust ISE-Revere Natural Gas Index Fund (FCG) is an ETF that owns natural gas energy producers. This energy sector is certainly out of favor at the moment.

This ETF has declined from about $24 last June to the current level. First Trust ISE-Revere Natural ETF Chart In June 2008, this ETF traded over $31 per share.

Natural gas producers pay almost nothing in dividends. The dividend yield will not contribute to total return potential as shown by this fund's distribution history. Dividends

The net expense ratio is currently .6%

Sponsor's web page: First Trust ISE-Revere Natural Gas Index Fund (FCG)

FCG Holdings

Prior Trade: I have one prior trade:
Rationale(1) Super Cycle for Gas Demand Emerging: When playing super cycles, I could care less what happens to a stock next year or the year after. Instead I am looking way out into the future. No one will be able to time when, or even whether, natural gas demand will cause a substantial non-temporary rise in price. I do not know, nor does anyone else who is not a divine being. I am going to admit up front that the Lord has not given me any guidance on this one, possibly draining the well of divine stock advice after sending me a sign about reinvesting the GE dividends. Stocks, Bonds & Politics: GE (introductory section near snapshot of GE buys)

Possibly the main long term trend that will soak up the natural gas supply is the increasing use of gas turbines for base load generation. For a long time, gas turbine power generation was limited to peak periods of electrical usage. During the hottest part of a summer day, an electric utility would turn them on to meet peak demand and then shut them down.

Power produced by large coal and nuclear units was much cheaper in the past, due to economies of scale, and those units were used to provide what is known as the base load requirements. Base Load and Peaking PowerSmartPlanet Those units would be running 24/7 except when shutdown for periodic maintenance. For the last several decades, base load generation consisted of coal fired generation and nuclear power plants. That is now changing-fast.

Coal plants are being retired and mothballed since their generation is no longer cost effective given the additional costs required for compliance with EPA's increasingly stringent emission requirements. Nuclear plants are simply not being built in the U.S.

That leaves a newly designed power generation station that is called combined cycle generation. A typical combined cycle plant would use both steam turbines and gas fired turbines.

An Overview of Combined Cycle Power Plant | EEP

These new generation plants are being built throughout the world now and many are already in service. Half of power plant capacity additions in 2013 came from natural gas - Today in Energy - U.S. Energy Information Administration (EIA)(April 2014 publication); "A Report on Combined Cycle Projects in North America-Power Engineering" (February 2014); Energy Business ReviewPlatts News ArticleProposed New Combined-Cycle Natural Gas Plant in Citrus County, Fla.- Residential-Duke EnergyBechtel Breaks Ground on 758MW Combined-Cycle Power Plant - Bechtel CorporationAstoria 500MW combined-cycle power plant - Power Technology

In an article published in a U.K. trade journal,  the main guy at GE Power was predicting a 25 year natural gas super cycle. I am always interested in super cycles, such as the one previously discussed in connection with the parabolic rise of middle class consumers in emerging markets or the super cycles supporting the 18 year long term bull market starting in 1982 or the strong secular forces supporting the current one.

Another article published in the same U.K. trade journal had a Siemens' representative saying that the competitive advantage of large coal fired plants was being eroded by the economics of low cost gas generation.

So will the natural gas fired units be the new base load, running 24/7, burning up all of that natural gas to produce energy instead of coal? That is the trend.

It just appears to me that there may be no other choice. Nuclear plants take an incredibly long time to build, and utilities are not exactly beating down the door to build new ones in the U.S.

Yet, the Obama administration has clearly embarked on an environmental policy to shut down a significant number of coal generating stations by making it uneconomical to retrofit those plants with pollution devices to meet new clean air standards promulgated by the EPA.

I am not going to repeat my discussion about those EPA rules, contained in the comment section of this SeekingAlpha article: Seeking Alpha The author of that article was recommending an Illinois Basin coal producer, so I took issue with that recommendation based on what was happening with the EPA.

In my capacity as an investor, it is irrelevant whether I agree or disagree with the EPA policy. The relevant consideration starts with a very simple question that trial lawyers and police officers like the TV character played by Jack Webb want to know: "what are the facts". Once an investor has a grip on the relevant facts, the issue then is simply how to respond. Knowing about the direction and potential impacts of EPA's new emissions rules, which have already resulted in plant shutdowns, I would not be in the market for a coal stock. The product is in abundance and the demand is falling and about to fall more in the U.S.

I suspect that the estimate made by a consultant group will be close to what will happen. America is in the process of losing about 20% of its coal fired generation. (Reuters Article Containing Consultant Estimate of 20% Closure Rate: Reuters)

I have discussed long term super cycles, impacting both natural gas and coal, in the comment section to this Seeking Alpha article.

Interview with Obama in 2008 relating to his views about coal: YouTube

Another way to play this theme would be with natural gas infrastructure plays (pipelines, storage and processing). Most of those firms are MLPs but there are several ETNs that incorporate those type of companies.

Risks: The normal risks for stocks in a sector, particularly one such as natural gas producers where current prices do not reflect optimism about the future or a foreseeable rebalancing of supply/demand in favor of demand and higher prices.

Many of the natural gas producers are highly leveraged and may have trouble servicing their debt load during a protracted decline in energy prices.

The problem with natural gas producers is that it will take a long time for those new demand uses to soak up the abundant supply, creating a non-temporary higher plateau in prices.

I have no idea when that may happen!!

A bell is not likely to ring notifying investors that the pricing power has shifted from users to suppliers.

At the moment, I can not look at a long term natural gas spot price chart and see that transition point arriving soon.

Henry Hub Natural Gas Spot Price (Dollars per Million Btu)

Natural gas production is exploding in the U.S. (and Canada):

Future Buys/Sells: With a starter position, I have seen something to perk my interest and simply want to monitor more closely what is happening in the months and years ahead. I will likely average down on up to 150 more shares. With more proof of the super cycle leading to higher prices, I would likely become more aggressive and branch out into other securities.

Until I see evidence of a more long term favorable pricing trend for natural gas producers, I may just continue to buy and flip this ETF for small gains. Buying in early winter and selling during the spring worked in my prior round trip.

Closing Price Today: FCG: $14.70 +0.07 (+0.48%)

3. Bought 50 AIRR at $18.65 (The $500 to $1,000 Flyer's Basket Strategy)(see Disclaimer):

Snapshot of Trade:

Closing Price Day of Trade: AIRR: $18.58 -0.24 (-1.27%)

Security Description: The First Trust RBA American Industrial Renaissance ETF Fund (AIRR) is a new ETF that attempts to track generally Richard Bernstein's American Industrial Renaissance index consisting of small and mid cap industrial companies and banks located in industrial hubs. 

Sponsor's Webpage: First Trust 

The fund currently has 41 holdings: AIRR Holdings

I own several of the banks but none of the industrial companies. I tend to go large cap when buying individual industrial stocks while I am mostly a buyer of small cap regional banks. 

Prior Trades: None

Rationale and Risks: One reason for a potential U.S. manufacturing renaissance is the abundant and relatively low cost natural gas supply. So, with this ETF selection, I am playing the same theme as with FCG, though with a different kind of ETF. 

I discussed the long term secular forces favoring American manufacturing in an earlier post that summarized a Barrons' article as follows: 

Here are some factoids from that article:

(1) U.S. production of petroleum and natural gas jumped to a twenty year high at 15 million barrels of oil-equivalent per day, while imports declined to 8 million barrels which was a 25 year low.

(2) By 2025, U.S. will be a net energy exporter. The U.S. is anticipated to become the largest energy producer by 2020. 

(3) The range of natural gas costs in the U.S. has been between $3 to $5 per million BTUs for several years now. The cost is expected to remain in that range due to increased production. Natural gas costs almost $12 per BTU in Europe and $16 in Japan.  

(4) To buy land for a new factory in Tennessee, the average square foot cost would range between $1.3 to $4.65. The average cost in China is $10.22, and considerably more in the coastal cities. 

(5) Labor costs are rising 15% to 20% per year in China. 

(6) And this fact was very interesting. A graduate of the South Dakota School of Mines and Technology has a 16% higher starting salary than a graduate from Yale.

Similar articles were published in the WSJ and at CNBC.

The sponsor describes risks at its main webpage for this fund and in a Prospectus. A risk that is in the forefront of my mind is simply the huge rise in the stock market since March 2009 and particularly the rise without a correction since the 2011 summer.

Those current market conditions make me nervous and cautious with new buys, so I am just nibbling here and there and have a hair trigger on most new buys.

Closing Price Today AIRR: AIRR: $18.75 +0.17 (+0.91%) 

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