Tuesday, December 30, 2014

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):

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 EconomistForbes; Barron's; FortuneSidney 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 & CompanyEY - GlobalPBS NewsHourMcKinseyChina

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.  

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