Saturday, January 31, 2015

Added 50 MET at $48.89/Sold 100 SRC at $12.78 Roth IRA/Sold 80 APO: 50 at $25.05 (taxable account) and 30 at $25.16 in Roth IRA

Stable Vix Pattern (Bullish):
Links to SeekingAlpha Instablog, Articles and Comments:

South Gent's Instablog | Seeking Alpha

South Gent's Articles | Seeking Alpha

South Gent's Comments | Seeking Alpha


Recent Developments: 

The 30-year treasury hit another all time low yield last week. The 30 year treasury closed with a 2.25% yield last Friday. Daily Treasury Yield Curve Rates That long bond is hitting record lows regularly now.

The government reported that real GDP increased 2.6% in the 4th quarter. News Release: Gross Domestic Product This is the first estimate for that quarter. Real personal consumption expenditures increased by 4.3%, up from 3.2% in the third quarter. Services increased by 3.7% compared to 2.5% in the prior quarter. Real disposable increased by 3.8% vs. +2%. The deceleration was mostly due to a strong upturn in imports (subtracted from GDP), a decrease in federal government spending, and lower nonresidential fixed investment.

Excluding government spending and net exports, real GDP grew 3.9% (real private domestic final purchases).

Preferred Apartment Communities (APTS) is MLV's top 2015 pick in the multifamily Apartment REIT sector. Item # 3 Added 100 APTS at $8.29 (10/21/14 Post)Bought Regular IRA 100 APTS at $8.75 (8/29/14 Post)

HCP raised its quarterly dividend to $.565 per share from $.545 or 3.7% on an annualized basis.

Item # 1 Bought 50 HCP at $36.31 (12/31/13 Post)

At a total cost of $36.31, the yield becomes 6.22% at the new quarterly rate.

Eurostat estimated that annual inflation decreased .6% in January. Energy costs decreased almost 9%.

Svenska Cellulosa AB (SVCBY) rose 8.21% last Friday after reporting 4th quarter results and raising its dividend by 10.5%.  Year-end Report Q4 2014 - SCA Corporate

Bought Svenska Cellulosa - A Swedish Personal Care And Tissue Company - Svenska Cellulosa AB ADR (OTCMKTS:SVCBY) | Seeking Alpha


1. Sold 100 SRC at $12.78 Roth IRA (Equity REIT Common and Preferred Stock Basket)(see Disclaimer):

Snapshot of History:

SRC Roth IRA History
Snapshot of Profit:

2015 Roth IRA 100 SRC +$193.98
Item # 1 Bought 100 SRC at $10.7 Roth IRA (2/25/14 Post)

Dividends: $66.89

Total Return: $260.87 (or 24.22%-holding period 11+ months)

Company Description: Spirit Realty is an equity REIT that owns 2,100 properties across 48 states that are leased to 383 tenants operating in 18 different industries. The properties are "primarily" single tenant and are subject to triple net leases.

The Yahoo Finance chart uses the adjusted price retroactive to the original IPO: SRC Interactive Stock Chart As shown in that chart, the share price as adjusted rose from $7.88 on 9/20/12 to $11.95 in May 2013, when there was a correction in REIT stocks that took the SRC price back down to $8.44 (mid-August). Since bottoming in August 2013, the shares have been in a general uptrend, with the last major dip occurring in September 2014.

Over the past year through 1/28/15, SRC had outperformed SPY on a price basis, rising 20.36% vs. 13.35% for SPY, as shown in a 1 year comparison chart, Interactive Stock Chart.

Rationale: I view this REIT stock to be slightly overvalued at $12.78 per share. It would be undervalued based on a 10 year treasury yield remaining near 1.7% or lower. The stock would be more overvalued with the ten year yield moving back over 3%. There has been a tight correlation between REIT prices and the then year treasury yields. REITs plummeted in value when the ten year treasury went from 1.66% (5/1/13) to 3.04% (12/31/13). When rates steadily moved down last year, REITs had a robust up year with the Vanguard REIT ETF posting a total  return of 30.29% based on net asset value.

SRC closed at $9.83 on 12/31/13: SRC Historical Prices

The consensus at the time of my purchase was for $.83 in 2015, which translated into a forward P/FFO of 12.9 at my $10.7 per share purchase price. The current consensus FFO estimate for 2015 is $.85 per share. SRC Analyst Estimates The forward P/E at a $12.78 price is about 15.04 which is a tad expensive for me.

I am also becoming increasingly concerned about stretched valuations in the U.S. REIT sector that is reminiscent of the peak P/FFO ratios hit back in May 2013 before a substantial correction occurred in the space. That correction was due to both valuations and a spike in the 10 year treasury rate from 1.66% (5/1/13) to 3.04% at year end.

I am not ruling out a repeat of that correction this year or in 2016, simply because the talking heads are calling for deflation everywhere until the end of days, with the ten year treasury falling to 1% or so. I call that type of low probability forecast the Japan Scenario.  The surprise this year may be to the upside in rates.

The triple net lease to a single tenant does provide more stability than other real estate business models. Bankruptcy of one of the larger tenants is always a matter of concern.

A quick spike in rates can cause REITs to decline in price. Some investors will sell since they bought these securities as bond substitutes and other securities become more attractive to them. A rapid rise in rates can also pinch FFO, at least temporarily, particularly when the rise in rates is not caused by inflation.

Rent increases will be frequently tied to CPI. In a rate rise caused by interest rate normalization, rather than an increase in inflation or inflation expectations, the REITs may ultimately suffer significant increases in financing costs that would not be offset by rises in property values and rents. The rise in rates in 2013 occurred due to the rate normalization process. Inflation and inflation expectations were drifting down.

Closing Price Last Friday: $12.86

2. Sold 50 APO at $25.05 (taxable account) and 30 shares at $25.16 in Roth IRA (see Disclaimer):

Snapshot of Taxable Account Trade:

Snapshot of Profit:

2015 APO 50 Shares +$63.57
Bought Taxable Accounts: 50 APO AT $23.46


Total Return: $100.07 (or 8.47%-holding period 4+ months)

Snapshot of Roth IRA Trade:

2015 Roth IRA Sold 30 APO $39.08

Snapshot of Roth IRA Profit:

2015 Roth IRA 30 Shares +$39.08
Bought 30 APO at $23.39-Roth IRA

Dividend Received: $21.9 on 11/21/14

Total Return: $60.98 (or 8.6%-holding period 4+ months)

Company Description: Apollo Global Management LLC Cl A (APO) is a global alternative asset manager. Operations are divided into several segments including private equity and credit segments.

List of Private Equity Holdings as of 12/31/13: Page 12 APO-12.31.2013-10-K

APO Page at Morningstar (currently rated 4 stars)

APO Page at Bloomberg (15.91 P/E based on estimated 2014 E.P.S. and $25.21 price, as of 1/28/15)

Apollo Global Management, LLC (APO) Dividend History

SEC Filings for APO

APO-9/30/2014 10-Q

Rationale: The Old Geezer started to get the shakes about a potential market correction in the offing and relieved the stress and anxiety a smidgen by selling out of APO. Besides, Masters of Disaster and overpaid Wall Street Wizards make the OG nervous.

The OG felt more comfortable buying the following stock, which has that nice dog snoopy as the brand ambassador for the company. The OG has always been a dog person.

Closing Price Last Friday: $24.87

3. Added 50 MET at $48.89 (see Disclaimer):

This purchase was made pursuant to the Large Cap Valuation Strategy. (see also Large Cap Valuations (7/7/2010 Post)

Snapshot of Trade:

On the next trading day, MET fell $1.29 to close at $46.84, near its 52 week low of $46.15. Volume was heavier than normal at 10.9+M shares compared to a three month daily average of 6.6+M.

Company Description: MetLife Inc. (MET ) is a well known provider of insurance and financial services. It is the largest life insurer in the U.S by total assets and provides group life insurance to 90 of the Fortune 100. In recent years, the company has been expanding to international markets and expanding its business lines beyond life insurance. Earnings from international market have risen to about 35% of the total. Morningstar estimates that income from retirement and asset management businesses will rise at a combined 8% compound annual growth rate in the "front end" of its projection period and at 6% in the "back end".

This stock does not qualify under my dividend growth strategy. Item # 6 Stocks, Bonds & Politics Common Stock Dividend Growth vs. Long Term Investment Grade Bonds The dividend yield at my purchase price is below 3%, and dividend growth is slow and spotty. Prior to reverting to a quarterly dividend, MET paid out $.74 per share annually starting in 2007 and ending in 2012.

It does qualify under my Large Cap Valuation Strategy based on the data cited below. I view it to be better for a stock to qualify under both.

Barrons published an article on Saturday 5/8/14 titled "MetLife on Sale for Peanuts". MET closed at $53.14 the previous Friday. MET Historical Prices I would agree with the observations made by Andrew Bary in that article, but Mr. Market has nonetheless reached a different opinion judging by the subsequent share price action.

Key Statistics Based on Price and Data as of 1/27/15 (price at $48.13):

Forward P/E 2015: 8.13
Five Year Estimated P.E.G.: 1.25
Price to Book: ..77
Price to Sales: .76
Projected E.P.S. Growth Rate 2014-2015: $5.71 to $5.92

MetLife-Investor Relations Website

MetLife SEC Filings

S & P currently has a 4 star rating on MET's stock, with a $60 twelve month price target.

For the reasons discussed in the risk section, I seriously doubt MET's stock price will hit that level until interest rates move back up to more historically normal levels.

Prior Trades: This last purchase was an average down and brings my position up to 100 MET shares. Item # 7 Bought 50 MET at $51.76 (3/24/14 Post)

Related Trades: I have bought and sold METPRA several times. Snapshots of the profits can be found in Advantages and Disadvantages of Equity Preferred Floating Rate Securities. METPRA is an equity preferred stock that pays non-cumulative and qualified dividends at the greater of 4% or 1% above the 3 month Libor rate on a $25 par value. Prospectus

Chart: Potential risks and benefits are displayed by MET's long term stock chart. MET Interactive Stock Chart

From September 2002 to October 2007, the stock rose around $21 to over $70, which works for me. Then the nasty happened and the price cascaded down to around $12.25 (3/09). Now, that had to hurt for a long time holder.

Dividends: MET is currently paying a quarterly dividend of $.35 per share which was raised last year from $.275 per share. MetLife-Investor Relations-Dividend History

At a total cost of $48.89 per share, the dividend yield is currently about 2.86%.

Recent Earnings Report: For the 2014 third quarter, MET reported operating earnings available to common shareholders of $1.8B or $1.6 per share, up from $1.34 per share in the 2013 third quarter. Book value per share was reported at $61.44. The tangible common shareholders book value was $39.95 per share. Operating earnings in the Americas rose 14%. Operating earnings in Asia ($306M) increased 19%. Operating earnings for Latin Americas were $152M, up 14% on a reported basis and 22% on a constant currency basis. Total operating revenues increased to $17.918B from $16.814B. Return on equity was 12.1%.

The revenues and operating earnings by segment were as follows:

SEC Filed Earnings Press Release

Earnings Call Transcript | Seeking Alpha

MET: 10-Q

Rationale: The dividend yield provides some support for the share price and is above the current yield of 1.68% for the ten year treasury. The dividend yield at last Friday's closing price ($46.5) was about 3%. The stock would not qualify for purchase under my dividend growth strategy, even at a 3+% yield, due to MET keeping the dividend static at a $.74 annual rate for 6 years.

Given the current TTM P/E and the forward P/E based on the consensus 2015 estimate, MET shares did not appear to me to have limited downside risk (possibly as much as $8 per share), barring a currently unforeseen development like a repeat of the Near Depression period. The TTM P/E multiple was about 9.51 based on last Friday's closing price, which is less than 1/2 of the current TTM P/E of 19.79 for the S & P 500 as calculated by Birinyi Associates, P/Es and Yields on Major

I arrived at that downside price by looking at the 5/1/13 close when the U.S. 10 year treasury was at 1.66%, which is about where the yield is now.

The one year stock chart supported this view that $48 was a price point where the shares found support for a bounce, though the previous share rallies have petered out around $56.

That snapshot was taken on the day of purchase. The shares closed last Friday (1/30/15) at $46.5. So much for the $48 support.

MET Historical Prices

I have started to reinvest the dividend as a means to average down. I will likely continue doing so until the price exceeds $60 per share. I will then reconsider based on the then existing circumstances.

Risks: The company describes risks incident to its operations starting at page 34 of its 2013 Annual Report: MET-10K

MetLife has expanded its international operations through the $15.5 billion purchase of AIG's Alico back in 2010. This exposes MET to currency and country risks. At the time of closing, Japan accounted for about 70% pre-tax operating income. Reuters

With low interest rates trending lower, that has led to investment gains for securities owned by a life insurance company. The downside is premiums being collected are invested in securities that provide lower yields than the existing ones in the portfolio, unless the insurer takes on more risk for the same income generation. The situation is aggravated by higher yielding securities maturing.

Interest rate risk exposure increases significantly, and unhedged losses from the investment portfolio would be large, just by a return to normal rates.

A long term low interest rate cycle could result in losses or lower returns for vintage products that guarantee a particular investment return much higher than the insurance company can earn currently. (see general CIPR NewsletterInsurance Whitepaper.pdfEconomic Impact of Prolonged Low Interest Rates on Insurance Companies.pdf)

When interest rates were rising between May 1, 2013 and December 31, 2013, sectors viewed as beneficiaries of higher rates performed better than the S & P 500 which had a robust up year.

For example, many investors believe that regional banks will be net beneficiaries from rising rates, due to an expansion of their net interest margins.

The SPDR S&P Regional Banking ETF (KRE) had a total return, based on net asset value, of 47.34% in 2013.

I am not aware of an ETF that focuses just on life insurance stocks.

The PowerShares KBW Insurance ETF (KBWI), which includes property and casualty insurance companies,  had a 2013 total return of 55.64% based on NAV.

MET closed at $38.14 on 5/1/13 and at $53.92 on 12/31/13, or about a 41.37% price again. The ten year treasury rose from a 1.66% to a 3.04% yield during that time period. Daily Treasury Yield Curve Rates That would confirm that investors view this company as a beneficiary in a rising interest rate scenario.

The perception now, generated by the Bond Ghouls, is that abnormally low interest rates will remain until the end of days, as reflected in their pricing of a 30 year treasury bond to generate a 2.25% yield, as of 1/30/15.

Based on the historical U.S. inflation of around 3%, that yield would produce a negative real rate of return of .75% per year for 30 years. That is before taxes. The 20 year treasury yield was 2.04% last Friday. If anyone wants to lend Uncle Sam money at those rates, then I am grateful as a U.S. citizen. I thank them for their gifts. A return to normal interest rates could take the annual interest costs based on the accelerating debt load to over $1 trillion per year, which was more than the total U.S. government debt in 1979.  Government-Interest Expense on the Debt OutstandingDebt to the Penny (Daily History Search Application)

While it is just my opinion, the Bond Ghouls have lost their marbles.

What we are seeing now is the bond market equivalent of stocks in 1999. The absurdity of the long term yields may not become apparent this year or even next year. It will become clear. Inflation is not dead, but just taking a bit of a nap.

Time will tell whether those long term current yields will be worthwhile investments. To work out, they would require prolonged periods of deflation punctuated by periods of abnormally to generate a real return, or possibly a long period of serious Great Depression type deflation numbers followed by normal inflation numbers.

The current inflation and interest rate forecasts are having an adverse impact now on MET's stock price, and it remains to be seen whether the Bond Ghouls have managed to be more or less correct with their dire predictions. They were after all forecasting problematic inflation for over a decade when those forecasts were just nutty, delusional would not be too strong of a description, as I noted in this SA article. Generating Tax Free Income In The Roth IRA: Bought Back AllianceBernstein Income Fund - AllianceBernstein Income Fund (NYSE:ACG) | Seeking Alpha

At the moment, the herd believes in the predictions being made in the bond market and by a large number of talking heads who are bond managers and want to convince investors to swap out of stocks for those "juicy" bond yields. If their ominous predictions prove prescient, for a change, then MET's stock will likely remain under downside pressure, which is why I am putting this discussion in the risk section.

Another risk is the dispute with the government involving MET's designation as a non-bank systemically important financial institution. MET is appealing that designation. MetLife to Ask Federal Court to Review SIFI Designation I do not view this issue as significant. AIG accepted the designation as did Prudential. Designations

A number of recent SA articles discuss this issue and I have nothing further to add to the discussions made by those authors: MET-Seeking Alpha

MetLife may even be hurting the current share price some by making a big stink on the designation, making some investors believe it is some kind of disaster to future profitability. I agree with MET's position, but doubt that the courts will second guess the government's designation.

MET is simply being penalized for the bad behavior of AIG outside of its standard insurance operations which remained sound throughout the Near Depression period.

AIG's problems originated from the cowboys in its London special products unit. The actions of those individuals are described in some detail in a 2008 article published by the NYT and titled "Behind Insurer’s Crisis, Blind Eye to a Web of Risk".

The future direction of interest rates is far more important than this issue.

Future Buys and Sells: I may buy up to another 100 shares, possibly in smaller lots than 50 shares. I would only average down when a subsequent buy lowers my average cost per share. I may buy 30 shares in an IRA. I have currently a $10,000 limit on my out-of-pocket exposure to the securities from one company. That is a risk mitigation rule.

I may elect to sell my highest costs shares bought first when and if the price returns to $55, provided I have bought another 30 to 60 shares at a lower price than the close last Friday.  

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