ADX Year End Distribution/Sold 50 RFMD at $16.52-Total Realized Gain 206+% -Lottery Ticket Basket/Added 50 CHN at $17.79 and Added to MCDFX

Big Picture: No Change

Stable Vix Pattern (Bullish):

Vix Asset Allocation Model - South Gent | Seeking Alpha

Vix Asset Allocation Model Explained Simply

Use of the VIX as a Timing Model

Trading Strategy Under The Vix Asset Allocation Model: Part 1 - South Gent | Seeking Alpha

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

Recent Developments:

During 2014, I significantly pared my position in the stock CEF Adams Express. I sold my highest cost shares including a number of shares purchased with dividends. The overall position went from over 900 shares to 467+ with a current average cost per share of $9.75. A snapshot of the current position can be found in this post: Item # 4 Pared ADX Again-Sold 143 Shares at $13.97 (8/9/14 Post) I realized a $786.65 profit selling those ADX shares. The total return would be much higher given the dividends paid by this CEF which I was reinvesting prior to 2014. And those reinvested dividends produced more dividends that were reinvested and later sold for profits.

I received yesterday the year distribution generated by the remaining 467+ shares:

ADX Year End Dividend +$481.29 Paid in Cash

Most of the year end distribution consisted of long term capital gains.

CEFConnect Page for ADX

Adams Express Company

The Shiller home price indexes are still showing Y-O-Y price increases, but at a far slower rate. The 20 metropolitan area index rose 4.5% in October compared to a year ago. Home Prices_October 2014.pdf

I subscribe to the free service ePropertyWatch that keeps me apprised of developments in my neighborhood, including nearby home sales and foreclosures. The information is generated by the firm CoreLogic which probably has the largest  nationwide database of real estate information. This firm will constantly update the value of my home, based on its square footage compared to the price per square foot of nearby sales. That will not be a precise estimate given the differences inside each of those homes and their respective conditions.

Nonetheless, I have a good idea of how my home's price was impacted by the housing bubble and how fast the price recovered from the 2008-2009 downdraft.

I knew that the roughly 10% compounded price increase from 2002-2006 was unsustainable and that knowledge actually contributed to my decision to pare my stock allocation in 2007. The historical rate of growth was near 4% (1% real; 3% inflation).

I also knew that many geographic areas were experiencing 20% compounded growth rates even though median real incomes were stagnant. It only takes a modest amount of common sense to put those two factors together, a parabolic increase in home prices and stagnant real wage growth, and to reach the only conclusion possible.  Frequently, it pays not to think too much.

Since I live in a robust economic area (the Nashville metropolitan area), my home price has now returned to well above the prior peak reached late in 2006. Basically, trend line 4% growth has been restored by eliminating the excess from 2002-2006.

Several metropolitan areas that experienced parabolic price increases will take several more years to reach their respective 2006 peak levels, while others are slow to recover due to economic factors unique to their areas.

S&P/Case-Shiller 20-City - St. Louis Fed

*******************

1. Sold 50 RFMD at $16.52 (Lottery Ticket Basket Strategy)(see Disclaimer): When I last updated the Lottery Ticket Basket, I mentioned that RFMD would likely not be in the basket when I next updated it. Lottery Ticket Basket as of 12/19/14


Snapshot of Trade:

2014 Sold 50 RFMD at $16.52

Snapshot of Position Before Trade: 

Unrealized Gain +208.89%

Snapshot of Profit: 

2014 RFMD 50 Shares +$551.08 Long Term

Bought as LT: 50 RFMD at $5.18 (12/30/14 Post)

The percentage gain was 206.436% after commissions ($266.95 total cost to $818.03 proceeds after commission), using this calculator: Calculate Percent Increase

Rationale: I waited until I had a long term capital gain to harvest the profit. I believe that the merger between RFMD and TriQuint Semiconductor will occur on 12/31/14. If my memory is correct, which is an assumption that I no longer will make, I would have received 50 shares in the new entity formed by that merger called Qorvo, and then there would be a 1 for 10 reverse stock split, leaving me with 5 Oorvo shares. Given that my gain was over of 200+% in one year + one day, I did not see any reason to go through that process, and I have no opinion on the fair value of the new entity.

Needham did downgrade RFMD and TriQuint on 12/29, since both stocks had exceeded the analyst's price targets, Seeking Alpha, but that had no bearing on my decision to sell my 50 share RFMD position.


2. Added 50 CHN at $17.79 (see Disclaimer): The China Fund (CHN) is a closed end stock fund that invests in companies with significant assets, production, trading or other business interests in China.

Morningstar currently has a 4 star rating on the China Fund  (CHN).

As of 12/26/14, Morningstar calculated the annualized 15 year total return at 16.23%.

I recently sold an 80 share lot at $22.34 after figuring out that the China Fund was going to have its 4th consecutive $3 per share or higher year end distribution. I mentioned in that post that I would add those shares back after the ex dividend date.

Snapshot of Trade:

Snapshot of Position After Trade:

174.513 Shares Average Cost Per Share $20.06

That only looks like a loss. My total return is decent given the dividends paid by this fund since my original purchase in 2011.

Dividends: I am reinvesting the dividends paid since I first acquired shares in 2011. The last distribution was $3.7651 per share and has already gone ex dividend. The China Fund, Inc. Confirms Distribution Of that amount, CHN classified $3.4669 per share as a long term capital gain distribution.

I will receive the shares purchased with that dividend on 1/5/15. This fund is not what anyone would call tax efficient.

The China Fund, Inc. - Distribution history

Total Dividends 2011-2014= $13.33 per share

Fund Description and Performance History: This fund will own securities traded in Taiwan, Hong Kong and Shanghai, as detailed in the following snapshot. The China Fund does not own shares in Chinese stocks like Baidu. I do not know whether the fund has a stake now in Alibaba. The fund did report a position in Tencent (TCEHY) as of 7/31/14. This fund has a value oriented style.

I noted when I last bought shares that the fund managers are aggressive, Item # 5, and there is a frequent turnover in the top ten positions. That is not surprising given the huge long term capital gains realized by this fund over the last several years. If I had known in 2011 what I know now about the capital gain distributions, I would have bought shares in the Roth IRA back then.

Holdings as of 7/31/14: The China Fund (SEC Form 10-Q)

Manager's Report for November 2014 (latest issue): The_China_Fund_Fact_Sheet_Nov 2014.pdf

In that report, I took a snapshot of the country allocation, the top 10 holdings and the portfolio characteristics:

As expected, the P/E ratio at 12.78 is low compared to the U.S. stock indexes.

Fund Website: The China Fund, Inc. - Home

Data From Date of Purchase 12/29/14:
Closing Net Asset Value Per Share: $20.29
Closing Market Price: $17.76
Discount to Net Asset Value Per Share: -12.47%
Average Discounts:
1 Year:  -10.96%
3 Years: -10.24%
5 Years: - 8.8%

Data Collected From CEFConnect

The China Fund's last SEC filed shareholder report was for the period ending on 4/30/14. The performance numbers provided by the fund as of that date are included in this snapshot:

Total Return Data Through 4/30/14

The Shanghai Composite has been rallying this year, but is still well below its peak hit back in 2007. SS Interactive Chart The SSE composite started 2014 near 2115 and is now close to 3,165. There was a parabola spike, starting around October 2006 at 1,838, that peaked in October 2007 near 6,000. 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.

This fund also has a significant weighting in companies based in Taiwan. Over the past five years, the Taiwan stock index has significantly underperformed the S & P 500. TWII Interactive Chart

This fund also has exposure to stocks traded on the Hong Kong exchange. HSI Interactive Chart The Hang Sang index has had a subdued 2014, rising from about 23,306 to around 23,501.

Rationale and Risks: China has its problems that are generally well known. Growth is slowing. Growth after the Near Depression was financed in large part by massive increases in debt that funded large construction projects that were a serious misallocation of capital. I am referring to the ghost cities, bridges to nowhere, shopping centers with no stores, etc.

Manufacturing has been hurt, as shown in the recent PMI numbers published by Markit due in large part to the economic slowdowns in Europe and other areas. The Markit press releases for all geographic regions can be found at Markit Economics-Press releases.

Some of these problems are discussed in the following articles:

The Economist; Forbes; Barron's; Fortune; Sidney Morning Herald; CBS News (story on the ghost cities)

The P/E ratios for the stocks owned by CHN are far lower than U.S. stock market indexes, and the Hong Kong, Taiwan and Shanghai stock markets have not experienced anywhere near the move generated by the S & P 500 since March 2009. So, there is more long term value in those markets than in U.S. stocks at their current valuations.

There is however considerable country risk. I view that risk as far less than in places like Russia or Venezuela, but the country risk is still significant and noteworthy.

Overall and for the long term, I want to have some participation in China's stock market. Those companies will become some of the largest in the world.

The growth in middle class consumers will be unmatched by any developed country. McKinsey & Company; EY - Global; PBS NewsHour; McKinseyChina

GDP growth will be better than the western democracies. There simply needs to be a transition to more of a consumer led economy from one emphasizing exports and government misallocations of capital for unnecessary internal projects.

Future Buys/Sells: I am in a trading mode for this security. I consequently will consider selling my highest cost shares when and if I can do so profitably. The dividend adjustments to net asset value per share make that a difficult task given their size. I may continue to average down with 50 share lots when the discount to net asset value per share is greater than the 3 and 5 year averages which was the case for this last purchase. I will not average down when and if I see another large capital gain distribution coming. Instead, I would simply wait until any such future distribution goes ex dividend and then I will consider buying more shares.

Large dividend distributions are not in my interest. I have to pay taxes on those distributions and the share price is adjusted down by the amount of the distribution. I do not have more money after one, but less. They can work out long term only when I reinvest the dividend and the shares bought with the dividend generate a total return after tax greater than the tax that I had to pay when that dividend was paid. That can happen in a long term secular bull market when the annualized total return for reinvested dividends could exceed 10%. When there is a long term secular bear market, the reinvested dividends are losing part of their original value.

I will consequently pay a lot of attention to the total return after reinvestment of dividends when I am reinvesting the dividend, which is the case for CHN.

I can find those total return numbers at a number of places, including the sponsor's website, Morningstar, and CEFConnect.

I can also use the Dividend Reinvestment Calculator at longrundata.com.


3. Added to Matthews China Dividend Fund (MCDFX)(see Disclaimer): This fund is available on a NTF basis in all of my brokerage accounts.

I reinvested a small year end distribution ($60.75) to buy additional shares, as noted in a snapshot found in the introduction section to a 12/13/14 Post.

Snapshot of Trade:

Prior Trade: I recently initiated a starter position in this fund. Item # 3 Initiated Position in Matthews China Dividend Fund (MCDFX)(11/14/14 Post)

Description: The Matthews China Dividend Investor Fund (MCDFX) is currently rated 5 stars by Morningstar. Some of the dividend opportunities are in Taiwan, where the fund had a 16.7% weighting as of 6/30/14.

Overview - Matthews China Dividend Fund

The weighted average P/E ratio is low particularly compared to U.S. stock funds.

The prospectus discusses risks starting at page 8, including the important country and currency risk issues. Prospectus .pdf

The last shareholder report is for the period ending 6/30/14: 2014SemiAnnualReport.pdf Data relating to the China Dividend Fund starts at page 22.

Top Ten Holdings: 

The gross expense ratio is 1.24% which I view favorably for this kind of fund.

I also pick up some exposure to China, Hong Kong and Taiwan through my long standing position in the Matthew Pacific Tiger Fund (MAPTX). Overview - Matthews Pacific Tiger Fund That fund is closed to most new investors. I have owned shares for more than 10 years. The 10 year annualized total return is 12.36% through 11/30/14.  

Australia Taxation of Dividends/Mueller Bond Redemption/MXE/Paired Trade Roth IRA: Sold 50 KKR at $23.25 and Bought 50 AMJ at $45.95/

Big Picture: No Change

Stable Vix Pattern (Bullish):

Vix Asset Allocation Model - South Gent | Seeking Alpha

Vix Asset Allocation Model Explained Simply

Use of the VIX as a Timing Model

Trading Strategy Under The Vix Asset Allocation Model: Part 1 - South Gent | Seeking Alpha

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

Recent Developments:

MasterCard reported that Christmas sales, excluding automotive sales, were up 5.5% form Black Friday through Christmas Eve.

Mueller Water Products redeemed its 7.375% senior subordinated note maturing in 2017. The note was redeemed at a slight premium to par value:

Bought Back 1 Mueller Water 7.375% Senior Subordinated Bond Maturing on 6/1/2017 at 94.5 (6/29/11 Post)

At the time of redemption, this bond was rated B3 by Moody's and B by S & P.

I received a dividend payment from National Australia Bank (NABZY):

I am mentioning this dividend simply to show that there was no withholding tax but simply a $1 fee collected out of the dividend by the ADR custodian. It is my understanding that Australian will not collect a tax when the dividend is "fully franked" by the company. Shareholder Dividend - National Australia Bank; Australian Taxation Office; Australian taxation of dividends.

The Mexico Equity and Income Fund went ex dividend last week for a $1.618 per share distribution that included a $1.42 per share long term capital gain distribution. I own 50 shares and will average down after this distribution. I will want a larger discount to net asset value then the -9.39% as of 12/26/14. The historical 5 year average was -11.18% as of 12/26/14.

1. Bought Back 50 AMJ at $45.95 Roth IRA (see Disclaimer):


Snapshot of Trade:

2014 Roth IRA Bought 50 AMJ at $45.95

The closing "indicative value" on 12/26/14 was $46.02.

Security Description: The J P Morgan Alerian MLP ETN (AMJ ), as indicated by its name, an exchange traded note (ETN) that tracks the Alerian MLP Index.

The Alerian MLP Index consists of MLPs involved in various aspects of the energy business, including pipelines, production, storage, gathering and processing. This index has a light exposure to a few beaten up E & P MLPs, including Linn Energy (LINE);  Memorial Production Partners LP (MEMP), and Vanguard Natural Resources  (VNR) 

I generally keep my exposure to ETNs limited, since that form of ownership exposes me to the issuer's credit risk, in addition to the numerous risks associated with the index being tracked by the ETN as well as other risks relating to this product. "Exchange-Traded Notes Avoid Unpleasant Surprises- FINRA; NYSE Publication: "What You Should Know about Exchange Traded Notes.pdf.

ETN's are unsecured senior notes. I am reasonably comfortable with the JPM credit risk, so I will buy 50 shares and will occasionally harvest profits as noted below.

I would simply explain the credit risk as follows. If JPM went bankrupt, the owners of AMJ are screwed.  The investors who owned Lehman unsecured senior notes found out the hard way about the value of those notes in a bankruptcy.

Sponsor's Webpage: JPMorgan Alerian MLP Index ETN

The sponsor, J P Morgan, quit creating shares in this ETN back in 2012, and consequently this ETN has taken on some of the characteristics of a closed end fund.

The AMJ senior unsecured note matures on 5/24/24. The ETN structure has a complicated issue relating to the sponsor's redemption of the note. The calculation is difficult to comprehend and is explained starting at page PS-8 of the Prospectus. To deal with this kind of issue, I will simply avoid owning this security on or 1/1/2020.

I believe that this is the quote for the Alerian MLP VWAP Level Index which appears to be used in that calculation. The Initial VWAP Level is shown as 190.36605. Amendment No. 11 to Pricing Supplement No. 152 I also read that the principal amount of the note is Initial VWAP Level dividend by 10 or just over $19.

This ETN does not own any of the securities that are components of the index.

The Sponsor's website did not have an updated list of the index's components, and still had KMP as a member of the Alerian MLP Index. The sponsor's website was deficient in other respects as well, including no reference to the recent distribution payment in the distribution history as well as omitting some other prior historical dividends. I give JPM an "F" for its poor AMJ website.

Kinder Energy Partners, which formerly traded under the symbol KMP, did have close to a 10% weighting in that index when I last bought some AMJ shares. KMP is no longer a component after being acquired by Kinder Morgan, Inc. (KMI).

I consequently went to the Alerian website and downloaded the current components and their weightings as of 12/19/2014.

Constituent Members as of 12/19/14:

Quotes for Top Five Holdings with 12/26/14 Closing Prices (weightings as of 12/19/14):

17.08%  EPD     $35.55 +0.10 (+0.28%): Enterprise Products Partners
8.53%    ETP     $63.69 -0.26 (-0.41%): Energy Transfer Partners L.P.
7.88%    MMP   $85.11 -0.63 (-0.73%): Magellan Midstream Partners L.P.
7.65%    PAA    $51.52 -0.14 (-0.27%): Plains All American Pipeline L.P.
5.23%   MWE   $66.62 +0.22 (+0.33%): MarkWest Energy Partners L.P.

Total Weighting TOP FIVE= 46.37%

As of 12/26/14, Morningstar has a 3 star rating on AMJ and calculates the 3 year standard deviation at 14.13.  

With both MLP ETN and ETFs, I can avoid the K-1 hassle.

Since I prepare my own tax returns, I am going to avoid the tax preparation issues connected with owning MLPs directly, which involves imputing K-1 data into my tax return. I have been there and done that. When and if I ever decide to hire a CPA, I will start owning them directly again.


Prior Trades:

2014 Roth IRA 50 AMJ Shares +$78.45

Item # 4 Sold 50 AMJ at $47.49-Roth IRA (4/26/14 Post)-BOUGHT ROTH IRA 50 AMJ AT $45.6 (11/12/14 Post) 

2013 Roth IRA 50 AMJ Shares +$490.94

Item # 6 Sold 50 AMJ at $47.99-ROTH IRA (5/13/13 Post)-Bought Roth IRA: 50 of the ETN AMJ at $37.89 (12/19/12 Post)

Total Realized Trading Gains: $569.39

AMJ Distributions: The distributions are paid quarterly at a variable rate that is linked to the distributions paid by the MLPs in the index less accrued tracking fees. The tracking fee is high at .85%.

The dividends will be taxed at ordinary income rates so I bought this last lot in the Roth IRA where I effectively turn the distributions into tax free income.

The last distribution for 2014 went ex dividend on 11/26/14. JPMorgan Chase & Co. Declares Quarterly Coupon on Alerian MLP Index ETN

In 2014, this security paid $2.3278 per share in distributions. AMJ Dividend Date & History The total distribution for 2013 was $2.1887.

The Y-O-Y distribution increase was 6.355%.

If I assumed a 6.3% increase in 2015 over the $2.3278 rate for 2014, the total distribution would be about $2.474. Assuming further a total cost per share of $45.95, the dividend yield would then be about 5.38%.

Rationale: Given the dividend yield, I can achieve a 10+% total return with about a 4.6% in  rise in the share price after commission next year, assuming a 6.3% distribution increase, and less with distribution increases in the out years.

Many of the infrastructure MLPs have a history of steadily rising distributions.

I will just link the dividend history webpages for the 5 largest weightings:

Enterprise Products-Distribution Payments
EnergyTransfer-Distribution History
Magellan Midstream-Distribution History (up 409% since IPO) 
Plains All America Pipeline-Distributions
Historical Distributions | MarkWest Energy

Risks: 

(1) Income May be Devoured by a Loss on the Shares:  MLPs have been volatile recently with a downside bias. The downside pressure has coincided with the precipitous decline in crude oil prices.

AMJ closed at $53.83 on 9/19/14, declined to a $45.72 closing price on 10/14, shot back up to $52.4 on 11/20 and then hit another air pocket with a spike down to $42.11 (12/15) before recovering some to the date of my purchase. Peak to valley over about a 3 month period was about a 21.77% variance.

AMJ Interactive Stock Chart

AMJ Historical Prices

My purchase price of $45.95 represented a 14.64% decline from the 9/19/14 closing price.

AMJ's volatility in price indicates to me that investors have become more uncomfortable with MLPs, most likely due to the unsettling decline in crude oil prices.

It does not take much of a price correction to wipe out a 5% yield. Hopefully, the recent volatility will simmer down, as investors realize that most of these MLPs are not directly exposed to energy prices and will consequently focus more on the long term benefits associated with the infrastructure MLPs including rising payouts.

Part of the distribution has been offset by price depreciation YTD through 12/26/14. Morningstar calculates the YTD total  return number at +3.25. The annualized total return over 5 years through 12/26/14 was 15.34%.

(2) JPM Default Risk: I would just note that this risk does exist, even though it is remote based on what we know now.   

(3)  Risks Associated with the Securities in the Alerian MLP Index: There are risks associated with the securities tracked by the index that are discussed in the prospectus. There may be added risks coming from Congress in future years due to changes in the tax code as the government attempts to raise more money.

(4) Sponsor's Discussion of Risks: The sponsor discusses risks relating to AMJ in the Prospectus starting at page PS-17. A summary of risks can be found in the pricing supplement which can be downloaded at the sponsor's website: JPMorgan Alerian MLP Index ETN

(5) Increasing Correlation with Crude Oil: Over the past ten years, energy infrastructure MLPs have had a .38 correlation with crude oil prices, as noted by the Oppenheimer Funds' Director of Research. Since 2010, however, there have been 5 periods when WTI crude declined more than 15%, with an average 22% decline, and the Alerian MLP index has declined by more than 11% on each such occasion.

Some MLPs in that index have more exposure to crude oil and natural gas prices including the E & P MLPs and those with commodity exposed gathering and processing. Cohen and Steers MLP Strategy November 2014 Other companies, including the pipelines, have more of a fee based cash flows under long term contracts.

Another firm, CBRE Clarion, argues that the majority of MLPs have fee based businesses "that are not directly exposed to the price of any commodity". MLPs that operate in the oil infrastructure business "tend to operate under fee-based contracts that have volume risk, not commodity risk". "MLP Prices Driven by Secular Demand for Energy not Oil Prices"  JP Morgan has also noted that most "core energy infrastructure MLPs possess limited direct commodity price exposure; these business models are akin to toll roads as volumes times tariffs largely drives profitability". Barrons.com

While CBRE and JPM are expressing my understanding of the commodity exposure outside of the E & P MLP sector, the market has increasingly sold off MLP infrastructure companies during crude oil declines. If this proves to be a irrational correlation based on future MLP earnings reports, then the market will hopefully revisit the wisdom of the MLP  infrastructure selloff.

(6) Note Valuation at Maturity: As I mentioned above, the maturity value of this note will be difficult for most individual investors to calculate. Trying to understand the calculation caused my head to hurt so I just quit trying to figure it out.

(7) Lose Tax Benefits of Direct MLP Ownership: Fidelity Investments (general discussion of risks and benefits); Andersen Tax; MLP ETFs And ETNs-Seeking Alpha

(8) Non-Temporary Rise in Interest Rates: A rise in interest rates will increase borrowing costs for MLPs and increase the competitiveness of other income investments that lack the tax preparation issues involved with direct ownership.

Last year, the ten year treasury rose from a 1.66% yield (5/1) to 3.04% (12/31/13). Daily Treasury Yield Curve Rates Unadjusted for distribution payments during that same period, AMJ held up well in that period, closing at $46.35 on 12/31/13, up slightly from a closing price of $45.98 on 5/1/13.

A more permanent rise to normal historical levels for the ten year treasury and other income generating securities competing for investors' dollars may have a significant adverse impact on MLP unit prices.

I can only speak for myself on the yield competition issue. I would have significantly less exposure to risk categories with a ten year treasury at 4% or higher. The rise in rates last year was from an extremely low level to a less abnormally low level.

10-Year Treasury Constant Maturity Rate-St. Louis Fed

Younger investors have not actually had to cope with a problematic inflation scenario, such as the that started in the mid-1960s: Consumer Price Index, 1913- | Federal Reserve Bank of Minneapolis


2. Sold 50 KKR at $23.25 Roth IRA (see Disclaimer):


Snapshot of Trade:

Snapshot of Profit and Total Return: This trade was slightly better than break-even.

Total Return +$42.2 

Bought 50 KKR at $22.59-ROTH IRA (9/20/14 Post)


Rationale: I am substituting AMJ for KKR in the Roth IRA after AMJ's recent price correction. With AMJ, I am picking up diversification and a less erratic dividend distribution.

I was also concerned about KKR after reading this article in the WSJ earlier this month about a large investment in an E & P company: WSJ That article just raised my already existing discomfort level.   

Update of Equity REIT Common and Preferred Stock Basket as of 12/26/14

The last update for this basket was in October 2014: Update for Equity REIT Common and Preferred Stock Basket Strategy/OHI Earnings Report and Dividend Increase (10/27/14 Post) 

For the reasons discussed in a March 2014 post, I started a tactical allocation shift into REIT common and preferred stocks starting in September 2013. Equity REIT Common and Preferred Stock Table as of 3/5/14 This particular shift started after prices had significantly corrected in the May to September 2013 time frame. Most of my best buys were made in December 2013 that marked the high point in the correction process. 

I still own three of those, with closing prices today noted as well: 

Snapshot at Item # 6 Bought: 100 Realty Income (O) at $36.96 (12/10/13 Post)
O: $49.31 -0.11 (-0.22%) 

Snapshot at  Item # 1 Bought 50 HCP at $36.31 (12/31/13 Post)
HCP: $44.27 +0.27 (+0.61%) 

Snapshot at Item # 2 Bought: 100 OHI at $29.85 (12/23/13 Post) 

OHI: $39.74 +0.36 (+0.91%)

I viewed the 2013 correction to have two primary causes. 

First, REIT valuations had hit stretched valuation levels by May 2013 based on historical norms, 

Second, interest rates started to spike in May 2013, making alternative income investments more attractive compared to REITs for some investors. The 10 year treasury closed at a 1.66% yield on 5/1/13 and had risen to 3.04% by 12/31/13. Daily Treasury Yield Curve Rates

Aggregate P/FFO data can be found in Lazard's monthly Real Estate Report. The aggregate P/FFO has become somewhat elevated again.

Canadian REITs are undervalued compared to U.S. REITs based on P/FFO or P/AFFO and dividend yields. Many of the Canadian REITs have recently hit 52 week and/or all time lows. The latest downdraft in prices was concurrent with the abrupt decline in crude oil prices, as I have noted in recent posts discussing adds to my Canadian REIT positions.

REIT Basket Strategy: Added 100 Northwest Healthcare Properties REIT At C$8.3-Seeking Alpha;

Equity REIT Basket Strategy: Bought 50 Units Artis Real Estate Investment Trust At $12-Seeking Alpha;

Equity REIT Basket Strategy: Added 200 Of The Canadian REIT Dream Industrial At C$9.03-Seeking Alpha

I currently have a total realized gain of $3,107.79 (snapshots at Gateway Post: Equity REIT Common and Preferred Stock Basket) In my next update, I will have the 2014 dividend total for this basket. 

Profits from Canadian REIT sells are reported here in USDs, which is the 1099 tax reporting requirement even though I am using CADs to buy and receiving CADs when I sell. So far, my CAD profit from those sales have been higher. The decline in the CAD vs. the USD results in a lower reported taxable profit.   

I have purchased the following securities since the last update: 

Added 100 Northwest Healthcare Properties REIT at C$8.3 (12/21/14 Post) 

Bought 50 ARESF at $12-REIT Basket Strategy (12/13/14 Post)

Elevated CORR from LT Basket to REIT Basket: Added 100 at $6.5 (12/3/14 Post)

Bought 100 BRG at $12.85-Satellite Taxable Account (11/29/14 Post) 

Added 200 of the Canadian REIT DIR_UN:CA at C$9.03 (11/26/14 Post)

I also added 5 shares of an international real estate ETF, which I can buy commission free at Fidelity:

I have sold two positions since the last update: 

Item # 1 Sold 206+ IRC at $10.945 (12/11/14 Post) 

Sold 101+ LXP at $10.65 (10/28/14 Post)

The 100 share position in LXP, previously held in a taxable account, was sold due solely to moving that position to the ROTH IRA. I discussed in an SA Instablog the reasons for buying 100 more shares in the Fidelity Roth IRA and selling 101+ shares held in a taxable account. Lexington REIT (LXP) - South Gent | Seeking Alpha  

I am not tracking reinvested dividend in the following table. 

Click to Enlarge:

REIT Basket as of 12/26/14

Closing Price 12/26/14: VNQ: $82.00 +0.29 (+0.35%) : Vanguard REIT ETF  

I have a few problems in this basket. The unrealized losses on my Canadian REITs would more than offset my realized gains this year. Most have 9%+ yields at their current prices or slightly under that level. ARCP proved to be a mistake due to the accounting fraud that occurred after my purchase. 

Yields Calculated by MarketWatch as of Last Closing Price (12/24/14): 

9.05%     Dream Office Real Estate Investment Trust  (D.UN:TOR) 

9.31%     Dream Global Real Estate Investment (DRG.UN:TOR) 

13.27%   Temple Hotels Inc. (TPH)(exposure in the oil patch) 

8.95%     Northwest Healthcare Properties Real Estate Investment Trust (NWH.UN:TOR) 

8.84%     American Hotel Income Properties REIT LP (HOT.UN:TOR) 

8.43%     Dream Industrial Real Estate Investment Trust (DIR.UN:TOR) 

The Toronto stock exchange was closed today, so the quotes for the Canadian REITs are from last Wednesday. 

I have published several articles at SA discussing REIT purchases that are basically reprints of my my posts here, except for the introduction section in those articles. 

Bought Back 100 NRBAY at $11.56/Extreme High Risk Junk Bond Strategy: Bought 1 Petroquest Energy 10% Senior Unsecured Bond at $91.638 Maturing 9/1/17

Big Picture: No Change

Stable Vix Pattern (Bullish):

Vix Asset Allocation Model - South Gent | Seeking Alpha

Vix Asset Allocation Model Explained Simply

Use of the VIX as a Timing Model

Trading Strategy Under The Vix Asset Allocation Model: Part 1 - South Gent | Seeking Alpha

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

Recent Developments:

The government estimated that real GDP grew at a 5% annualized rate in the third quarter, up from its second estimate of 3.9%. News Release: Gross Domestic Product Real personal consumption expenditures increased by 3.2%. Durable goods increased by 9.2%.

Real disposable income increased .5% in November. Real personal consumption expenditures increased by .7%. The price index for PCE decreased by .2%. The PCE price increase 1.2% Y-O-Y through November. The personal savings rate declined to 4.4% compared to 4.6% in October. News Release: Personal Income and Outlays

Stephen Roach believes that the Federal Reserve is leading the U.S. into another catastrophe with its abnormal monetary policies.

There is a tribe of economists who believe that the abnormally low short term rates manufactured by central banks around the world is actually contributing to deflationary forces. They call themselves Neo-Fisherites. Fisher Effect; Theories of Inflation.

Unfortunately, 2014 continues to be a banner year for large year end fund dividend distributions. I received several year end capital gains distributions from my Vanguard mutual funds including their Equity Income (VEIPX) and Health (VGHCX) mutual funds:

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1. Extreme High Risk Junk Bond Strategy: Bought 1 Petroquest Energy 10% Senior Unsecured Bond Maturing 9/1/17 at $91.638 (see Disclaimer):

Snapshot of Trade:

Since I was unwilling to buy more than 1 bond, I had to pay a price that was about $60 over a per bond price for a 10 bond offer. I am more worried about Petroquest surviving to pay off the bond in 2017 than that $60.

Snapshot of Confirmation:

Security and Company Description: PetroQuest Energy (PQ) is an independent oil and gas company with operations in Oklahoma, Texas and the Gulf Coast Basin.

PetroQuest Energy Key Developments Page at Reuters

I bought a 10% senior unsecured bond maturing on 9/1/2017: Prospectus 2017 Note (risk summary starts at page S-14)

In 2010, the 2017 senior unsecured notes were issued in the principal amount of $150M. The company later sold another $200M that was used to purchase assets in the Gulf of Mexico shallow waters, including 16 gross wells located on 7 platforms.

Production and Proved Reserves from the Gulf of Mexico Acquisition  

The confirmation excerpt shows that my current yield is 10.818% and the yield to maturity is 13.435%. The bond is rated Caa1 by Moody's and B by S & P.

Petroquest has the option to redeem this bond at the following prices:

Optional Redemption Prices Page S-39 Prospectus

An optional redemption is not going to happen anytime soon. PQ can not refinance this bond at a lower rate. It would have to pay a higher coupon now based on the market's pricing of this 10% coupon bond.

There is a "change of control" provision in the prospectus that requires the repurchase of this bond at 101% plus accrued interest in accordance with its terms, see pages S-43 to S-46. If PQ was acquired by a Chevron or Exxon, the change of control provision would not matter. Both of those companies would exercise the optional redemption right. The change of control provision would be relevant when the acquiring company was not investment grade, particularly when the bond was selling at a discount to par value prior to the acquisition announcement and/or would not likely be called early due to the credit quality of the acquirer.

PQ 2017 Bond FINRA Page: Bond Detail

A recent investor presentation summarizes the then existing hedges:

Page 26: December 2014 Investor Presentation

A recent important oil discovery is discussed in this article: PetroQuest’s Thunder Bayou Well

2013 SEC Filed Annual Report: PQ 12.31.13 10K

Prior Trades: None

Recent Earnings Report:

PQ 9.30.14 10-Q

Rationale and Risks: There is only one reason for this buy: Yield in a World Without Yield

The risk is obvious. The risk of default is high under the current circumstances. It was not viewed as high by the market before crude oil collapsed in price. The FINRA page for this bond has a chart of its price history. For most of the period since its original issuance in 2010, this bond was trading over 104 and traded over 107 as recently as May 21, 2014. Starting in October 2014, the bond just cratered in price in response to OPEC's decision to maintain production.

The hedge book will help for awhile. It does not solve the liquidity concerns that will result from a prolonged period of relatively low crude and natural gas prices. The current price of this bond and the common stock reflect a current market consensus that this company has a dangerous road ahead of it.

PQ Interactive Stock Chart

The company discusses risks incident to its operations starting at page 19 of its 2013 Annual Report. PQ 12.31.13 10-K

Future Buys/Sells: In my extreme high risk category for junk bonds, I will buy no more than 1 bond at a discount to par value. If I am unable to buy 1, I will not buy any. I have no idea now for how long I will hold this bond. If crude remains weak into the summer, I may be looking for an exit.

2. Bought Back 100 NRBAY at $11.56 (see Disclaimer):

Snapshot of Trade:

Currency Conversion: Nordea's ordinary shares are priced in Swedish Krone. The ADR's are available on the pink sheet exchange in the U.S. where shares are purchased in USDs. NRBAY Nordea Bank AB

1 ADR=1 Ordinary Share

To know whether the ADR shares are being priced correctly, I need to know the closing price on the Stockholm exchange and then convert that price from Swedish Krone into U.S. Dollars:

I did a currency conversion based on the ordinary shares priced in Swedish Krona. The shares closed at SEK90.6, but were trading slightly lower when I made my purchase.

NDA:Stockholm-Nordea Bank AB - Bloomberg

I set my limit price slightly below the then existing USD equivalent for the ordinary shares priced in SEKs.

Prior Trade:

2013 NRBAY Sold 100 +$175.06

Item # 6 Sold 100 NRBAY at $11.265 (2/6/13 Post)-Item # 2 BOUGHT 100 of the ADR NRBAY at $9.36 (10/10/12 Post)

I regretted selling those shares, particularly since they continued to rise after I exited the position, topping out near $15 last June: NRBAY Interactive Stock Chart

Company Description: Nordea Bank is the largest financial services group in Northern Europe operating through approximately 800 branches primarily in Denmark, Finland, Norway, and Sweden. Some branches are in Russia, the three Baltic countries.

Nordea is currently rated Aa3 by Moody's and AA- by S & P. Ratings | Nordea.com

Company Website: Nordea

At the time of my purchase, the P/E at the SEK90.6 price, based on estimated 2014 earnings, was 11.32 with a P/B ratio of 1.29.  (Bloomberg Page for SEK Priced Shares)

I took a snapshot of the income and balance sheet items comparing 2013 with 2012:

The return on equity numbers remained over 8% during the recent Near Depression:

Page 2 Nordea_2013 Annual_Report_2013

Last Earnings Report: This snapshot contains the basic financial metrics:

Third Quarter Results 2014 | Nordea

Earnings per share, ex items, increased to €.30 from €.19 in the 2013 third quarter and to €.68 from €.58 for the ninth month period ending 9/30/14. The capital ratios are good in my opinion. The Nordea efficiency ratio, defined as costs to income excluding extraordinary items, is shown at 49%. That would be significantly lower than big U.S. banks and consequently much better.

Loan losses declined to €112M or .12% of total loans and have been trending down: Page 12, Media_analyst_presentation_Q314.pdf

Tier 1 Capital Ratio Chart:

Compare to ROE Averages for U.S. Banks: Statistic; Return on Average Equity for all U.S. Banks-St. Louis Fed


Dividends: The current dividend policy is to pay out more than 40% of the net profit for each year. That policy will result in some variation in the dividend rate. The dividend is paid annually. The last ex dividend date was March 21, 2014.

The dividend paid in 2014 was for 2013 and amounted to SEK3.84, up from SEK2.93 for 2012 and SEK2.32 for 2011.  Dividend | Nordea.com There was a lower than normal payout ratio in 2008 with a SEK2.17 dividend, down from SEK4.7 for 2007.

The dividend for the ADR will depend on the exchange rate at the time of conversion. If the dividend for 2014 was SEK4, and that amount was converted at the same exchange rate as prevailing on 12/23/14, the USD equivalent would be about $.5135 per ADR share or a 4.44% dividend yield at a total cost of $11.56 per share.

I can not compute the dividend yield until Nordea declares the dividend for 2015 early next year and then I would need to have the conversion rate too.

If I went to a high point in the SEKs value against the USD, say April 26, 2011, 4SEKs would be worth about $.6563 and then the dividend yield would be higher at about 5.68%.

The SEK is already near a the 5 year low set around 5/30/10. SEK/USD Interactive Chart

If I took the exchange rate for 5/25/10, which looks like the low point over the past 5 years just eyeballing the five year chart, a 4SEK per share dividend payment would buy $.505, which would be a slight dividend cut through currency exchange from the exchange rate on 12/23/14.

I go through this exercise to demonstrate that the price of the ADR and the value of the dividend are both impacted by the currency exchange factor.

Rationale and Risks: Nordea appears to me, sitting at a desk in Tennessee, to be one of the best European banks, probably the best large bank in Europe. Notwithstanding stagnation in its primary markets, Nordea is still generating good numbers. There is also decent dividend support and the valuation is reasonable at slightly over 11 times 2014 estimated earnings.

Economic conditions in Nordea's home markets are stagnating. It remains to be seen whether those Nordic countries will tip over into recessionary conditions. Economic downturns are unfavorable for banks which is an obvious point.

The currency conversion issue has been a major negative recently for owners of the Nordea ADR priced in USDs as reflected in the chart below.

Comparison Chart: This is a one year comparison chart featuring the ordinary shares priced in SEKs (blue line) and the ADR priced in USDs (brown line). When looking at this chart, I see a significant price divergence, starting in the 2014 summer, that would be caused by the SEK losing value against the USD.

NDA-SEK.ST Interactive Stock Chart

SEK/USD Interactive Stock Chart

The USD may continue its parabolic upside move which would be bad news for me now as an owner of NRBAY.

I am willing to accept the currency risk. I prefer to buy a foreign security when my USDs are strong relative to the ordinary shares foreign currency. And, it is a bonus from my viewpoint when I have the tailwind of the strong currency and a decline in the ordinary shares for non-fundamental reasons. The ordinary shares have declined almost 10% since 6/9/14: NDA-SEK.ST Interactive Stock  Chart

An investor needs to understand the currency risk thoroughly before an intelligent decision can be made on whether to accept or reject that risk. The risk can be a benefit too when the SEK rises in value against the USD after my purchase. If the SEK gains in value at the same time as a rise in the ordinary shares price in SEKs, then an owner of NRBAY will outperform the owner of the ordinary shares priced in SEKs. The worst possible scenario, the infamous double whammy, is a continued decline in the foreign currency occurring with a decline in the ordinary shares priced in SEKs.