Saturday, November 22, 2014

Bought 100 MCQPF at $3.632-Lottery Ticket Basket/Sold 100 PWCDF at $28.07/Bought 40 BDCL at $23.53-Flyer's Basket

Big Picture: No change

Stable Vix Pattern (Bullish):
Trading Strategy Vix Asset Allocation Model Part 2: Hedging In An Unstable Vix Pattern - South Gent | Seeking Alpha

Recent Developments: 

The WSJ reporter who covered China since 2011 wrote a negative article about that nation's future prospects. WSJ He refers to the ghost cities dotting the landscape and the downturn in real estate development that had been a driver for GDP growth. He concludes that "we are witnessing the end of the Chinese miracle", and we "are seeing just how much of China's success depended on a debt-powered housing bubble and corruption-laced spending".

I am more concerned about a hard landing in China than the stagnation in Europe and Japan. I have never expected Japan and Europe to be significant contributors to worldwide GDP growth. The question is usually whether or not those countries are deadweights or minor contributors. Worldwide GDP growth is dependent on continued acceleration in developing countries and 2%-3% real GDP growth in the U.S.  It would certainly be helpful for the Northern European countries, Canada and Australia to grow at about the same rate as the U.S.

Jack Hough wrote an article in Barron's arguing that Intel has 30% more upside. My small position in Intel, with an average cost of $15.52 per share, has become bond like for me. After harvesting profits, I am simply interested now in Intel increasing the dividend which increases my "bond" coupon based on that constant cost number.


1. Bought Back 100 MCQPF at $3.632 (Lottery Ticket Basket Strategy)(see Disclaimer): I was allowed to exceed the $300 limit by up to $126.25 due to a prior realized gain.

Snapshot of Trade: 

2014 Bought 100 MCQPF at $3.63
I bought the ordinary shares traded on the U.S. pink sheet exchange using USDs.

CAD Priced Shares:
Closing Price 11/21/14: CSE.TO: C$4.15 +0.04 (+0.97%)

Prior Trade: I bought this stock when it was known as Macquarie Power and Infrastructure:

2010 MCQPF 100 Shares +$126.25

This prior purchase was not a Lottery Ticket. The stock has been demoted to the LT category. The price decline explains why without knowing what caused this stock to go from $7.18 to $3.63 in a strong bull market.

Company Description: Capstone Infrastructure (MCQPF) is a Canadian company that has investments in gas co-generation, wind, hydro, biomass and solar power generating facilities as well as interests in a U.K. water utility (Bristol Water) and a district heating business in Sweden.

The Canadian generation has a capacity of 449 megawatts and Capstone is developing another 79MW of wind generation in Ontario and Quebec. Capstone The largest is the Cardinal Power  plant with a nameplate capacity of 149MW that uses gas turbines. The most recently completed facility is the Skyway 9.48MW wind farm.

A list of those facilities by category can be found at Capstone

Company Website: Home

Capstone has a 50% interest in Bristol Water, a regulated U.K. water utility operating in the Bristol region and serving a population of more than 1.1M people.

The company owns a 33.3% equity interest in a district heating business operating in Sweden and providing power to residential customers in 10 communities. 

The company is currently paying a quarterly dividend of C$.075. 

Chart: The long term chart provides no comfort to investors going long: CSE.TO Interactive Stock Chart

On the positive side, the CAD priced shares stopped cascading down in December 2011, stabilizing just north of C$4.

Over the past two years through 11/21/14, the USD priced shares have significantly underperformed the ordinary shares priced in CADs due to the decline in the CAD's value versus the USD.  That differential highlights the currency risk issue for a U.S. investor using USDs to buy the ordinary shares or converting their USDs to CADs in order to buy shares on the Toronto exchange.  

CAD/USD Interactive Stock Chart

Capstone Infrastructure’s 2013 Annual Report

Dividends: The company is currently paying a quarterly dividend of C$.075 per share. Assuming a continuation of that rate, which is in no way assured, the dividend yield based on a C$4.15 price would be about 7.23%. The dividend is subject to a 15% Canadian withholding tax when paid into a taxable account. If a U.S. investor uses CADs to buy on the Toronto exchange, the dividend will be paid in CADs after the applicable withholding tax. Some brokers will not file the necessary paperwork with the Canadian authorities and consequently Canada may withhold 25%. Thomson Reuters Tax & Accounting

For a U.S. investor who buys the USD priced MCQPF, the dividends will be paid in USDs after conversion from CADs and after the applicable withholding tax. 

Last Earnings Report: All amounts are in Canadian Dollars. The third quarter is seasonally weak for Capstone "because of seasonality factors in the power segment". Revenues did increase 13.9% Y-O-Y. For the first nine months, CSE's dividend payout ratio, as shown in the following table, was at 58% year to date. The goal is to achieve an average payout ratio of between 75% to 80%. CSE Q3_2014.pdf

The company calculates AFFO in the following manner:

This is a summary of the AFFO calculations by power category:

The company reiterated its 2014 estimate adjusted EBITDA target of between $150M to $160M.

Long term debt as of 9/3014 was $887M which included debt owed by Capstone and its proportionate share of debt owed by Bristol Water and power assets.

Q3 2014 Results -- Earnings Call Transcript | Seeking Alpha

Rationale and Risks: The primary reason for owning this security is to harvest the dividend and hopefully exit the position with a profit on the shares.

A long term chart will frequently highlight the risk, which is the case for this stock.

Another similar company has already run into trouble, Atlantic Power (AT), and is currently attempting to sell of some assets. Atlantic Power Corporation Releases Third Quarter 2014 Results I have an unrealized loss for a LT purchase in AT, having gone to the well one too many times. Bought 50 AT at $4.08 (9/30/13 Post) Atlantic Power slashed its monthly dividend last year. AT Dividend History A few weeks ago, AT went from a monthly dividend of $.0333 per share to a quarterly dividend of $.03: Atlantic Power Corporation So one risk is that Capstone will end up following the same path.

The company discusses risks and uncertainties starting at page 74 of its last Annual Report. CSE Fiscal 2013 Annual Report 

Closing Price Last Friday: MCQPF: $3.6752 +0.0432 (+1.19%) 

2. Sold 100 PWCDF at $28.07 (see Disclaimer):

Snapshot of Trade: 

Snapshot of Profit: 

2014 PWCDF 100 Shares $210.03

Prior Trade: The prior trade which resulted in a $138.71 profit, is reflected in the preceding snapshot.  

Total Trading 2014 Trading Profit: $348.74

Company Description:  Power Corp. of Canada  (PWCDF:OTC) is a Canadian holding company that has interests, directly and indirectly, in financial services, communications and other business sectors. Power Corporation of Canada | Home

Profile Page at Reuters

I am trading the ordinary shares traded on the U.S. pink sheet exchange using USDs.

Power Corporation of Canada has a 65.8% interest in Power Financial. Power Financial 2014 1st Quarter Earnings Report (net earnings of C$467M, up from C$394M in the 2013 first quarter).

Power Financial owned 67% of Great West Lifeco's common shares and 58.6% of IGM Financial's common shares. IGM also owned 4% of Great West Lifeco's common shares; and Great-West Lifeco owned 3.6% of the IGM's common shares.

So Power Corporation of Canada directly controls Power Financial and consequently has an indirect controlling interest in Great-West Lifeco and IGM Financial.

Great West Lifeco which operates through a number of companies worldwide including Great-West Life, London Life, Canada Life, Great-West Financial and Putnam Investments. Great-West LifecoGWO 2014 First Quarter Earnings Report (net earnings of C$587M, up from C$417M in the 2013 first quarter)

IGM Financial is a financial management company.

An organization chart can be found at the firm's website: Organization Chart

Power Corporation of Canada is profiled in a recent Motley Fool Article.

The company is currently paying a quarterly dividend of C$.29 per share. Power Corporation of Canada | Dividends

Power's senior debt is rated "A" by S & P: Credit Ratings

2013 Annual Report .pdf (net earnings of C$2.12, up from C$1.78 in 2012)

Rationale: I mentioned when buying these shares that this would be a trade. Eventually, I may buy the ordinary shares on the Toronto exchange and hold for a longer period. 

There is not much that excites me looking at a five year chart. POW.TO Interactive Stock Chart 

Closing Price Last Friday: PWCDF: $28.07 +0.57 (+2.07%) 

3. Bought 40 BDCL at $23.53 ($500 to $1,000 Flyer's Basket Strategy With Snapshots of Round Trip Trades)(see Disclaimer): I am surprised that I even nibbled on this security. BDCL combines several items that I do not like in one security: an ETN that uses leverage to track an index of BDCs. My stomach just became queasy just writing those words all at once. 

Snapshot of Trade: 

2014 Bought 40 BDCL at $23.53
Closing Price Last Friday:  BDCL: $23.52 -0.19 (-0.80%) 

This is a trade. I bought near the close using a limit order. 

Prior Trades: None

Security Description: The 2xLeveraged Linked to Wells Fargo BDC Index ETN (BDCL) is an unsecured debt obligation issued by UBS that provides a monthly compounded two times leveraged long exposure to the Wells Fargo BDC Index. That index is a float adjusted, capitalization-weighted index of all NYSE and Nasdaq listed BDCs that have a market capitalization of at least $100 million at the time of inclusion in the index.

Wells Fargo Business Development Company Index Index Price (WFBDC:NAR) 

This security is an exchange traded senior and unsecured note, otherwise known as an ETN. The owner is exposed to the credit risk of UBS: UBS AG Stock Price; Last SEC Filed UBS Annual Report 20-F.  UBS senior unsecured debt is currently rated A2 by Moody's and A by Fitch according to FINRA. The fact sheet shows the UBS credit ratings, as of 11/30/13, at A2, A, and A by Moody's, S & P and Fitch respectively. 

On the day of my purchase, I took a snapshot of the index components that had a greater than 1% weighting in this index: 

I have relatively small positions in PSEC, ARCC, AINV, FSC, PNNT, BKCC, TICC and KCAP. I will trade those positions under clearly defined rules, where I will at least make an effort to realize a total return greater than the dividend yield at my total cost per share. That goal is far easier said than done. The general rules applicable to externally managed BDCs are to consider buying when the market price falls below the net asset value per share and to consider selling when the market price exceeds NAV per share by 5%. 

I will make exceptions to those general guidelines. 

I will now consider selling PSEC shares when and if the market price approaches NAV per share.  I require now a greater than 10% discount before I will even consider buying more PSEC or TICC shares. And, I am at my limit with 100 shares of KCAP. Bought 100 KCAP at $7.54 (11/1/14 Post)

This ETN is discussed in a Seeking Alpha published last September. 

Dividends: This ETN has been paying a variable quarterly distribution. BDCL Dividend The four quarterly dividends paid in 2014 total $4.1373 per share. At that rate, the dividend yield would be about 17.58% at a total cost of $23.53 per share.

The 2013 and 2012 dividend payments amounted to $4.0659 and $3.3596 per share respectively. ETRACS 

Rationale and Risks: The main reason for buying this type of security is to harvest one or more dividends and then escape with a profit. If BDCs do improve in price over the coming weeks or months, then I have a cushion to hold onto BDCL longer and to harvest more than one dividend. The best possible outcome from my perspective, as a conservative investor, would be to harvest 4 dividends and to escape with a profit selling the shares.

This is a trade, not a long term investment for me.

This trade is partly based on the fact that the share prices of several BDCs have declined significantly this year, creating larger than normal discounts to net asset values per share for several externally managed ones.

The price downtrend has occurred with interest rates declining, which makes the BDC yields more attractive compared to alternative income investments particularly junk bonds.

The following list is a sample of the current discounts to net asset value per share, based on last Friday's closing price and the last reported net asset value per share made in a 10-Q or 10-K filing:

Closing Market Price 11/21/14/Net Asset Value Per Share as of 9/30/14 (Except for FSC which is as of 6/30/14)/Discount (rounded)

PSEC: $9.60     NAV$10.47    10-Q Discount - 8.31%
FSC: $8.80       NAV  $9.71   10-Q Discount -  9.37%
TICC: $8.68     NAV  $9.4     10-Q Discount -  7.55%
AINV: $8.22    NAV  $8.72   10-Q Discount -  5.73%
BKCC:$8.93    NAV  $9.97   10-Q Discount -10.43
ARCC: $16.18 NAV $16.71 10-Q Discount -  3.17%
PNNT: $10.85  NAV $11.03 10-K Discount -  1.63%
SLRC: $18.47  NAV$22.34 10-Q  Discount - 17.32%

All of the foregoing BDCs are externally managed.

BDCs, particularly the externally managed ones, have been beaten up this year. One reason may be related to being kicked out of the S & P and Russell indexes earlier in the year.

Investors may have also soured on several of them due to persistent share offerings. Persistent weakness in share price can be self-sustaining even when it makes no sense at a certain price level.

Last Friday, for example, the price of TCPC was knocked down 4.12% after that BDC launched a share offering, Pricing Sheet. That BDC has an ATM offering prospectus outstanding for up to $100M, Prospectus TCPC had another large offering back in July 2014, Prospectus, priced to the public at $17.3. Yet another offering was made in December 2013, Prospectus. At least the public offering price in those sales was above TCPC's net asset value per share.

Tax loss selling may also be coming into play just looking at some one year charts:

PSEC Interactive Stock Chart

ARCC Interactive Stock Chart 

FSC Interactive Stock Chart

TICC Interactive Stock Chart

I am hoping that these stock will receive a bounce during the 2015 first quarter, as some of the selling pressure subsides. For externally managed BDCs, it would be most helpful simply for their market prices to converge to their respective net asset values per share. Maybe some of the worst offenders could actually increase their net asset value per share for a few quarters.

The discounts to net asset values has expanded significantly for several of them, including FSC, PSEC, and TICC.

Sponsor Summary of Risks is Very Long: 

The prospectus can be downloaded from the sponsor's website. A summary of the risks starts at page S-20 and ends at page S-31. The sponsor also summarizes risks at its website under the "key considerations" tab.

I view this security as extremely risky which explains why I place it under the restrictions of the Flyer's Basket Strategy.

Leverage Risks: 

BDCL does incur short term borrowing cost. A rise in the 3 month Libor rate, which will happen when the FED starts to raise the federal funds rate, will increase the borrowing costs and negatively impact the total return.

Leverage works both ways. If BDCL successfully goes up twice the value of the index after fees and expenses, it will also go down twice the value of the index's decline.

The decline in the BDC sector has caused BDCL to post poor total returns numbers YTD and over the past year, which include reinvestment of the dividends. Morningstar calculates the YTD and 1 year total  returns through 11/21/14 to be -7.61% and -6.96% respectively. The total annualized return over 3 years is +30.18%.

Based solely on tax considerations, it would make more sense to own this security in an IRA. I did not see any tax information at the sponsor's website, but I am assuming that all of the dividends would be taxed at ordinary income rates rather than at the qualified dividend rate. However, I view BDCL to be too risky for a retirement account and consequently bought the shares in a taxable account.

Net Asset Value Destruction by Several BDCs:

Several externally managed BDCs have a history of destroying the net asset value per share number. This is particularly important for a long term investor since the market price tends to hug the NAV per share number within a few percent above or below.

I have noted that less than stellar management performance in connection with AINV, PSEC and TICC. It applies to others as well.

AINV 10-Q Filings
6/30/07: $19.09 NAV Per Share
9/30/14: $ 8.72  NAV Per Share

PSEC 10-Q Filings
6/30/06: $15.31  NAV Per Share
9/30/14: $10.47  NAV Per Share

TICC 10-Q Filings
6/30/06: $13.81   NAV Per Share
9/30/14: $  9.40   NAV Per Share

BKCC 10-Q Filings
6/30/06: $15.04   NAV Per Share
9/30/14: $  9.97   NAV Per Share

KCAP 10-Q Filings
3/31/07:  $14.78  NAV Per Share
9/30/14:  $ 7.67   NAV Per Share

FSC 10-Q Filings
6/30/08:  $13.3    NAV Per Share
6/30/08:  $  9.71  NAV Per Share

Incentive Fees, for what? Possibly, the decline in market prices for several BDCs this year is based on a growing recognition that the preceding record is far from admirable and certainly not worth the compensation being paid to the managers of those firms.

Some of the internally managed BDCs have a history of increasing their net asset values:

MAIN 10-Q Filings
6/30/08:  $13.08
9/30/14:  $21.08

TCAP 10-Q Filings
6/30/07:  $13.75
9/30/14:  $16.64

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