Thursday, November 13, 2014

Sold SUSQ: 100 at $13.2 and 30 at $13.10-Being Acquired by BBT/Added 50 ESD at $16.91/SAN Dividend/Crude Oil Slide and Consumer Disposable Income

Big Picture: No Change

Recent Developments: 

For the week ending 11/7/14, the EIA reported today that the U.S. produced 9.06 million barrels of oil per day which is the highest level in 30 years.

West Texas Intermediate prices for December delivery sank to a four year low today, briefly falling below $75 per barrel.  

The decline in gasoline prices will save consumers about $8.4B in November and December, just in time for the holiday shopping season. Heating oil is also averaging about 15% less now compared to last year. NYT The decline in energy prices will have the most impact on lower and middle income households providing them with more discretionary disposable income.

Wal-Mart rose +$3.74 to close at $82.94 today after reporting better than expected earnings. Walmart reports FY 15 Q3 EPS of $1.15; Walmart U.S. delivers positive comp sales 

1. Sold 100+ SUSQ at $13.2 (REGIONAL BANK BASKET STRATEGY)(see Disclaimer):

Snapshot of Trade:

Snapshot of Profit: 

2014 SUSQ Sold 101+ Shares +$293.66
This lot was purchased a few weeks ago: Bought 100 SUSQ at $10.15 (7/28/14 Post) 

Rationale: BB&T is acquiring SUSQ in a cash and stock transaction. SUSQ shareholders will receive .253 BB&T shares and $4.05 in cash for each SUSQ share. The transaction is valued at $13.5 based on the average BB&T share price over the past 45 trading days. BB&T expects the acquisition to be accretive to E.P.S. in the first year excluding one time costs. 

Based on the BB&T closing price on 11/11/14 ($38.3), the day before the announcement, the share component would be worth $9.69.

2. Sold 30 SUSQ at $13.1 (Lottery Ticket Basket Strategy)(see Disclaimer):

Snapshot of Trade:

Snapshot of Profit:

2014 SUSQ 30 Shares +$110.99
Originally, I was trading SUSQ shares as part of my Lottery Ticket Basket Strategy. Bought 30 SUSQ at $8.75 (briefly mentioned in the introduction). In July 2014, SUSQ was upgraded to the regional bank basket strategy that allowed for the purchase of the 100 share lot referenced above. 

I had one other flip when SUSQ was still classified as a Lotto: 

Item # 6 Sold: 50 SUSQ at  $7.5 (11/3/2010 Post)(profit=+$66.54, snapshot in Gateway Post)-Item # 4 Bought 50 SUSQ AS LOTTERY TICKET (10/1/2009 Post) 

Total Trading Profits SUSQ: $471.19

I also traded a SUSQ TP which has been redeemed at par plus accrued interest. 

3. Added 50 ESD at $16.91 (see Disclaimer): I had attempted to buy 100 shares a few weeks ago, using a limit order, and received a partial fill at a higher price. Item # 3 Bought 54 ESD at $17.67-Partial Fill (9/26/14 Post) 

Snapshot of Trade: 

2014 Added 50 ESD at $16.91
Security Description: The Western Asset Emerging Markets Debt Fund (ESD) is a leveraged foreign bond CEF. Most of its bonds are denominated in USDs however, as noted below.

Last SEC Filed Shareholder Report: ESD (period ending 6/30/14; net unrealized appreciation=$39.47+M-page 26) 

Data on Date of Purchase 11/13/14:

Closing Net Asset Value Per Share: $19.19 
Market Price: $16.82 
Discount: -12.35%
Average Discounts:
1 Yr: - 10.41%
3 Yrs: -6.87% 
5 Yrs: -8.05%

The net asset value per share has declined 6 cents from last Friday's close (11/7/14) while the market price has declined by $.22 per share. That highlights a CEF risk. 

CEFConnect Page for ESD

Sponsor's website: ESD Details Overview

Portfolio Characteristics as of 9/30/14: Effective Duration 6.4 years; 223 holdings

Get to know your bond fund: Duration | Vanguard

The fund is weighted in investment grade foreign bonds denominated in USDs:

Portfolio Composition as of 9/30/14
Western Asset Emerging Markets Debt Fund Inc. Portfolio Composition as of September 30, 2014 (as of 9/30/14: 13.3% in Russia; 6.5% in Venezuela; 7.5% in Turkey's bonds; the foregoing describes why I will keep a very light exposure to this CEF)

Full Holdings

The credit quality is weighted in bonds rated investment grade (BBB or higher), but there is a significant junk bond weighting in both the BB and B ratings.  

In the latest Oppenheimer Chart Update (9/30/14), there is an interesting chart at page 34 that shows the public debt to GDP ratios of several emerging markets compared to the U.S., Japan and other developed countries, and then compares the sovereign debt yields on another axis. The emerging market countries have far lower debt to GDP ratios and far higher sovereign debt yields. Oppenheimer concludes that the market has not "fully" recognized that emerging market countries and central banks have "grown much more disciplined". 

The chart at page 25 shows how emerging market debt has performed against other debt categories in each year since 2004. The 2014 performance numbers are through 8/31/14. Emerging market debt was the top performing category in 2004-2007, 2010 and 2012, so that is a reason why I will not totally ignore that bond sector. Those bonds were in last place in 2011 and 2013. Emerging market currencies and bonds declined significantly last year when U.S. interest rates started to rise in May 2013.

For those investing in emerging markets, there is an important chart on page 35 that shows current account as a percentage of GDP for several emerging market countries. The chart compares 1997 with 2013. The Philippines, Korea and Malaysia have gone from a negative ratio to positive ones, while India, South Africa and Turkey have increased their negative numbers.

Prior Trades: In addition to the partial fill noted above, I have flipped this security on one prior occasion: 

Item # 4 SOLD 100 ESD at $18.54 (8/2/14 Post)(snapshot of profit=$110.05)-Bought 100 ESD at $17.28 (April 2014 Post)

I found a trade from 2009:

2009 ESD 50 Shares +$191.97
Trading Profits: $302.02

Rationale: Given the correction in emerging market debt, I thought that I wound nibble in this area and hope that the correction is mostly in the rear view mirror. You never really know. The ESD share price had fallen 9.28% since I sold out a few weeks ago (7/17/14 at $18.54 
Item # 4) and is substantially below the $22 level hit back in early 2013 before U.S. rates started to rise.

The monthly dividend rate was reduced from $.12 per share to $.115 to "better reflect both the current level of income and total return". Distributions

Assuming a continuation of the current monthly dividend of $.115 per share, which is in no way assured, the dividend yield is about 8.16% at a total cost of $16.91 per share. The dividend has not been supported by a return of capital over the past year according to CEFConnect.

Risks: The risks are highlighted in a long term chart. ESD Interactive Chart This CEF crashed and burned during the Near Depression, rapidly going from $18 or so per share to $10. Another mini crash started in May 2013 with a plunge from $22 to $17 over a 4 month period. That is huge for a bond fund. Since late August, the market price has stabilized mostly in the $17 to $18 range.

"Country Risk" is acute. I noted above the significant exposure to Venezuela's government bonds. The fund even had an allocation to Ukraine as of 6/30/14.

Then, there are the risks associated with CEFs, interest rate and credit risks-all kinds of potentially problematic risks associated with that 8.16% yield. Consequently, I will trade emerging market bond CEFs and keep my total exposure minimal at all times.

A rise in U.S. interest rates will likely cause a decline in emerging market bonds. ESD avoids most currency risk by owning bonds denominated in USDs, though it has some EM currency risk through securities priced in local currencies.

Future Buys/Sells: I am not likely to buy more than another 50 share lot, possibly in a Roth IRA where the distributions become tax free. I will harvest gains in leveraged bond CEFs after collecting several dividend payments. 

Closing Price 11/13/14: ESD: $16.82 -0.13 (-0.77%)

4. Santander (SAN) Dividend:

I received the SAN shares purchased with the last quarterly dividend payment today. By reinvesting the dividend at Fidelity, I do not have to pay Spain's withholding tax.

The SAN shares have been weak after hitting $10.75 last June and show no signs of finding a bottom in their current waterfall decline: SAN Interactive Stock Chart

I thought that the last earnings report was okay:

Excerpt from Press Release
Form 6-K (the NPL ratio is still too high)

The earnings report is discussed in this Seeking Alpha article.

Q3 2014 Results - Earnings Call Transcript | Seeking Alpha

I have been adding to my position in 50 share lots and may buy another odd lot when and if the spirit moves me. I may also buy a 100 share lot in an IRA. 

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