Friday, November 14, 2014

Sold 50 NLYPRD at $24.82-Roth IRA/Added 100 GDO at $17.79/Initiated Position in Matthews China Dividend Fund (MCDFX)/Bought 100 VGI at $16.65 as a Trade

Big Picture: No Change

Recent Developments: The government reported that retail sales in October increased .3% from September and by 4.1% over October 2013. Ex-gasoline, retail sales increased by .5% and 5.1% Y-O-Y.

The preliminary consumer sentiment number for November was reported at 89.4, the highest level since 2007. ReutersBloomberg


1. Sold 50 NLYPRD at $24.82 (see Disclaimer):

Snapshot of Trade: 

2014 Roth IRA Sold 50 NLYPRD at $24.82

Snapshot of History: 

Dividends: $70.32 (3 quarterly payments)

Snapshot of Profit: 

2014 Roth IRA NLYPRD 50 Shares +$83.47

Total Return: $153.79 or 12.46% (holding period 10+ months)

Security Description: The Annaly Capital Management Inc. Preferred Series D (NLY.PD) is an equity preferred stock issued by the Mortgage REIT Annaly Capital Management (NLY).

This security pays cumulative and non-qualified dividends at the rate of 7.5% on a $25 par value. NLY has the option to redeem this security on or after 9/13/17.

Prospectus (change of control provision summarized starting at page S-3 and S-18)

For as long as NLY pays a cash common share dividend, NLY can not defer payment on its preferred shares.

An equity preferred stock will be senior only to common stock and junior to all debt in the capital structure.

Prior Trades: I bought and sold a 50 share lot at higher prices. Item # 1 Sold 50 NLYPRD at $26.01 (5/20/13 Post)-Item # 6 Bought 50 NLYPRD at $24.99 (1/3/13 Post)

One of the risks is highlighted by that trade. I sold 50 shares at $26.01 and bought them back at $22.87 a few months later.

Rationale: I am content to harvest a few dividends and to exit this position at a profit. I place a strong emphasis on preservation of capital in my IRA accounts and consequently will never own in an IRA account more than 50 shares of a preferred stock issued by a Mortgage REIT.  

As noted earlier, I view Mortgage REIT preferred stocks to be riskier than equity preferred stocks issued by equity REITs, given the significant differences in debt to assets. Stocks, Bonds & Politics Item # 2

Given NLY's leverage and debt, I seriously doubt that the owners of its preferred shares would receive anything in a bankruptcy. In the event of a BK, NLY's preferred stocks would likely become worthless. So, the downside risk is a zero share price.

Nonetheless, I currently view interest rate risk for this potentially perpetual equity preferred stock to be at the top of my worry list, followed closely by volatility risk. Credit risk is important and potentially the most important risk given the leverage.

The common shares were pummeled last year but appear to have stabilized above $10. NLY Interactive Chart

The company summarizes risks starting at page S-9 of the NLYPRD Prospectus.

Future Buys: I will consider buying this 50 share lot back at below $22.5, slightly below my last purchase at $22.87 last February.

Closing Price Today: NLY-PD: $24.83 -0.03 (-0.12%)

2. Added 100 GDO at $17.79 (see Disclaimer):

Snapshot of Trade:

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 in the event I elect to hold until the liquidation date.

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. The fund may invest up to 35% in fixed income securities rated below investment grade. The emerging market bonds in internal currencies have been a drag recently given the strength of the USD:

Western Asset Global Corporate Defined Opportunity Fund Inc. Portfolio Composition as of September 30, 2014

Data as of date of trade 11/14/14
Closing Net Asset Value Per Share: $20.14
Closing Market Price: $17.8
Discount: -11.62%
Average Discounts as of 11/13/14:
1 Year: -10.45%
3 Years: -6.34%

The percentage increase in the average 1 year discount compared to the 3 year average is fairly typical for bond CEFs. The problem originates from the rise in interest rates that started in May 2013 and continued through 2013.

GDO's discount to net asset value per share was -4.13% as of 5/14/13 and had increased to -10.46% by 12/31/13. The ten year treasury closed out 2013 at a 3.04% yield, up from 1.66% as of 5/1/13. Daily Treasury Yield Curve Rates Even though rates have declined this year, with the ten year closing today at 2.32%, Daily Treasury Yields 2014, the discounts for bond CEFs remain at late 2013 levels.

On the day prior to my trade, the closing market price was $17.86, with the NAV at $20.15, creating a discount at that time of -11.36%. So the market price went down 6 cents with the NAV per share declining only 1 cent.

CEFConnect Page for GDO

Sponsor's website: Overview (after clicking the "portfolio characteristics" tab, I see the average effective duration at 3.84 years with 288 holdings as of 9/30/14)

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

CEF Details-Holdings

Last SEC Form N-Q Filing: GDO (holdings as of 7/31/14; unrealized gain $27+M-see page 10)

Last SEC Filed Shareholder Report: WA Global Corporate Defined Opportunity Fund Inc (period ending 4/30/14)

Prior Trades: My last purchase was in the same account a few weeks ago: Item # 2 Bought Taxable Account: 100 GDO at $18.44 (9/13/14 Post) I recently changed my dividend option to reinvestment in that taxable account. I have been and continue to reinvest the dividend to buy more shares held in a Roth IRA account. 

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)

Rationale and Risks: I am generally comfortable with this fund. Dividends are paid monthly at the current rate of $.1135 per share. Legg Mason Announces Distributions for the Months of September, October and November 2014 The next ex dividend date is 11/19/14. 

At that rate, the yield would be about 7.66% at a total cost of $17.79 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.

Short term borrowing costs for leveraged bond CEFs are likely to increase next year when the FED starts to raise the FF rate. 

I discuss other risks in the previously linked posts.

Future Buys: I may buy another 100 GDO in the ROTH IRA account. My current intent is to transition the position to the ROTH IRA where the distributions become tax free. My average cost for shares owned in the taxable account is currently $18.55. The general idea will be to sell all the shares held in the taxable account when I can do so profitably. My average cost will come down some through reinvestment of the monthly dividends and hopefully the shares will rebound as they have done in the past: GDO Interactive Stock Chart

I am not in a hurry to do anything since the proceeds from selling shares owned in a taxable account will land and probably stay in a money market fund yielding .01%.

Closing Price 11/14/14: GDO: $17.8 -0.06 (-0.34%)

3. Initiated Starter Position in Matthews China Dividend Investor Fund (MCDFX) (see Disclaimer): This fund is available on a NTF basis in all of my brokerage accounts. I elected to buy the minimum amount required by Fidelity which was $2,500.

I bought at the closing price today (11/14/14): MCDFX: $13.76 +0.04 (+0.29%)

MCDFX is currently rated 5 stars by Morningstar.

The Shanghai Composite has been rallying some this year, but is still near its peak hit back in 2001 SS Interactive Stock Chart There was a parabola spike, starting around October 2006 at 1,838, that peaked in October 2007 near 6000. The index then cratered to slightly below where it had started that parabola in October 2006.

Parabolas have a tendency to collapse onto themselves, taking back most or all of the gains during the spike.

Since bottoming in 2008, the Shanghai Composite has been meandering mostly in the 2000 to 3000 range and has mostly been bobbing up and down between 2000 to 2500 for the past three years. In other words, that index has significantly underperformed U.S. stocks since March 2009.

Bloomberg reported today that credit growth slowed sharply in October.

iShares China Large-Cap ETF Fund (FXI) has produced an annualized total return of 11.86% since March 9, 2009 through 11/13/2014, while SPY had generated a 23.87% total return over the same period. Calculator

There is some speculation that the opening of the Hong Kong Shanghai Connect on Monday will lead to a rally in share prices.

An ETF that owns "A" listed shares rose +3.29% today. (Sponsor's website: ASHR | Deutsche X-tr)ackers Harvest CSI 300 China A-Shares ETF)

I also own CHN: CEFConnect

Another mutual fund that I have owned for a long time, MAPTX, has a weighting in China and Hong Kong stocks (27.3% as of 9/30/14: Composition - Matthews Pacific Tiger Fund)

4. Bought 100 VGI at $16.65 as a Trade (see Disclaimer): Hopefully, my total return on this purchase will exceed the .01% paid by the money market fund used as the source of funds.

This lot was bought in a taxable account, where my last trade was to sell profitably a 100 share lot at $19.48 last year, as noted below.

VGI went ex dividend for its monthly distribution on 11/10/14. The next ex dividend date is 12/9/14.

Snapshot of Trade: 

2014 Bought 100 VGI at $16.65
Security Description: The Virtus Global Multi-Sector Income Fund (VGI) is a leveraged worldwide, multi-sector closed end bond fund.

Data As of Date of Purchase: 11/14/14:
Closing Net Asset Value Per Share: $18.98
Closing Market Price: $16.65
Discount: -12.28%

CEFConnect Page for VGI

The net asset value per share declined by 6 cents from 11/13/14 with the market price falling $.13 per share.

VGI Page at Morningstar: VGI (total return for 1 year shown at 9.53% based on net asset value under "performance" tab through 11/13/14)

Sponsor's Webpage: Closed-End Fund Detail | Virtus Investment Partners

Last SEC Filed Shareholder Report: Virtus Global Multi-Sector Income Fund (period ending 6/30/14)(borrowing cost at .95% as of 6/30/14-see page 33; net unrealized gain then at  $6.752M-see page 34)

Virtus Global Multi-Sector Income Fund is currently paying a monthly dividend of $.13 per share. The monthly dividend was raised to $.13 per share from $.12 earlier this year. The Morningstar page shows no ROC support for the dividend.

Credit Quality as of 9/30/14:

Page 2 VGI/ Factsheet.pdf (duration shown at 4.79 years)


Prior Trade: I did manage to sell my entire position held in a taxable account profitably:  Sold 100 of 250 VGI at $19.48 (5/13/13 Post)(snapshot of profit=+$87.45)-Bought 100 VGI at $18.46 (1/3/13 Post) I still own shares held in the Roth IRA where I am averaging down through dividend reinvestment only.  Item # 4 Pared Trade: Bought 50 of the Bond CEF VGI at $18.52 & Sold 100 SGL at $10.71-Roth IRA (11/29/12 Post)

Rationale: I am simply trying to clip a few monthly dividends and then escape with a profit.

The dividend yield is currently 9.37% at a total cost of $16.65 per share.

An ideal outcome from my perspective would be to receive 12 dividends and escape with any profit on the shares which would generate close to a 10% annualized total return just with the dividend.

Risks and Disadvantages: The expense ratio is high at 1.73% before interest expenses.

There are obviously risks when I noted above selling a 100 share lot at $19.48 (May 2013) and then buying that lot back at $16.65. Unadjusted for the dividend, the decline between those dates was 14.53%.

There are four primary sources for that decline. First, this fund owns foreign bonds priced in local currencies that would lose value when the local currency declines against the USD. Second, bonds went down in value when interest rates started to rise last year. Third, junk bonds have corrected some in price relative to treasuries. Fourth, those items have contributed to a widening in the discount. The discount to net asset value per share was -5.93% based on the closing numbers for 5/6/13.

Net Asset Value Per Share: $20.76
Market Price: $19.53
Discount -5.925%

11/13/14 (Day Before Purchase)
Net Asset Value Per Share: $19.04
Market Price: $16.78
Discount: -11.87%

Net Asset Value Decline= -8.285%
Market Price Decline= -14.081%

I calculated that the fund has paid $2.58 per share in dividends since 5/2/13.

The fund discusses risks in its Prospectus.pdf, starting at page 6 and ending at page 15. The risks are what an investor should expect to see when investing in a leveraged CEF that owns bonds, including significant weightings in foreign and junk rated bonds (e.g. currency and country risks, interest rate and credit risks, etc.)