Sunday, January 4, 2015

LINN Energy 2020 Senior Unsecured Bond/CHN Year End Dividend Received/Bought 100 of the ETF GYLD at $23.84/Sold Highest Cost NBB at 21.1 Roth IRA/Sold Highest Cost 150 FBF at $22.42 Roth IRA

Big Picture: No Change

Stable Vix Pattern (Bullish):

Recent Developments:

The ISM manufacturing PMI for December declined to 55.5% from 58.7% in November.

I received the shares purchased with the China Fund's distribution. The cost per share was $18.02+. The total distribution was $468.8. I only owned 124+shares when that distribution went ex dividend.

After the ex dividend date, I added 50 shares. Added 50 CHN at $17.79 (12/30/14 Post) This last distribution totaled $3.7651 per share. The China Fund, Inc. Confirms Distribution

CEFConnect Page for CHN

Bond investors responded positively to Linn Energy's announcement that it was slashing both the common unit distribution and CapEx for 2015. The company also announced that a letter of intent with a private equity firm, who agreed to fund certain drilling projects in return for a profit interest. LINN Energy Announces 2015 Oil and Gas Capital Budget; Reduces Annual Distribution to $1.25 Per Unit  The bond owners would not want to see Linn borrow money to partially fund a common unit distribution.

I bought during December 2 Linn Energy senior unsecured bonds at 81. Item # 3 Bought 2 LINN Energy LLC 8.625% Senior Unsecured Bonds at $81 (4/15/2020 Maturity)(12/13/14 Post)

Last Friday, those bonds closed at $94.15. Bonds Detail If I can sell those 2 bonds for that price, or higher, I may elect to do so. As noted in previous posts, I view all of the E & P senior bonds bought during December as either high risk or extreme high risk.

Jeffrey Gundlach believes that the ten year treasury may potentially decline below 1.38% during 2015, the modern era low hit back in July 2012. In his opinion, the deflationary forces are gaining power and momentum and will wash upon U.S. shores before year end. The parabolic rise in the USD will restrain U.S. corporate profits. His scenario would be a negative for stocks and positive for high quality, longer term bonds. It is not surprising that his economic scenario is good for his business.

I would have to agree with Gundlach that the prices for sovereign bonds is consistent with an unfolding deflation economic scenario.


1. Bought 100 GYLD at $23.84 (see Disclaimer): This ETF is bought primarily for income generation and diversification.

Snapshot of Trade:
2014 Bought 100 GYLD at $23.84

Security Description: The Arrow Dow Jones Global Yield ETF (GYLD) attempts to track, before fees and expenses, the Dow Jones Global Composite Yield Index.

That index is comprised of multi-asset classes across five global yield categories, as noted in the snapshot below.

Allocation and Yield Information as of 12/30/14:

The corporate and sovereign debt sub-indexes are rebalanced and reconstituted quarterly. The equity, real estate and energy sub-indexes are rebalanced and reconstituted annually in December. Each sub index has 30 securities. The combination of the 5 sub-indexes results in the underlying index to normally have 150 securities. Prospectus at page 8

The global sovereign debt exposure is in what I would call riskier sovereigns, either on a credit or currency risk basis or both. That can be observed by reviewing the list of holdings which includes debt issued by Turkey, Venezuela, South Africa, Panama, Hungary, and Columbia.

Those sovereigns at least pay more than the developed nations, whose ten year bonds are making a run toward zero.

Sovereign 10 Year Bond Yields as of 1/2/15:

Austria      .657%
Belgium    .768%
France       .78%
Germany   .50%
Japan         .33%
Spain       1.52%
U.K.        1.72%
Global Government

GYLD 2014 Monthly Dividend Payments:

I took a snapshot of some holdings with the weightings as of 12/30/14:

Holdings (equity=57.88%/fixed income 42.13% as of 12/30/14)

This sample list of GYLD's holdings points to the currency risk inherent in this ETF and explains part of the recent swoon in the share price.

Fact Sheet Data as of 9/30/14.pdf

The expense ratio is too high at .75%, which I view negatively for this kind of ETF.

Semi-Annual Report Period Ending July 31, 2014.pdf

The USD is showing no signs of becoming fatigued as a result of its steep climb up. The following charts highlight the declines in the currency referenced first against the USD.

EUR/USD Interactive Chart (Euro)
AUD/USD Interactive Chart (Australian Dollar)
GBP/USD Interactive Chart (British Pound)
ZAR/USD Interactive Chart (South Africa Rand)
NZD/USD Interactive Chart (New Zealand Dollar)
TRY/USD  Interactive Chart (Turkish Lira)

An article published at the WSJ noted that the USD just hit an 11 year high against a basket of 16 foreign currencies.

The fund also had a significant exposure to MLP E & P companies. In that semi-annual report, the fund shows a 11.8% weighting in "oil and gas" securities that include several MLP E & P companies (e.g. BreitBurn Energy Partners, Legacy Reserves, Linn Energy, and Memorial Production Partners). Those securities have already been crushed in price and may have recovery potential later in 2015.

BBEP Interactive Stock Chart
MEMP Interactive Stock Chart
LINE Interactive Stock Chart

As of 12/30/14, the weighting in Linn and BreitBurn common units was just .25% and .22% respectively.  In other words, a lot of the damage to net asset value occurred after I sold GYLD at over $28 per share and prior to buying back a 100 share lot at less than $24.

The MLP E & P companies rallied some last Friday after both LINN Energy and Breitburn Energy Partners cut their distributions and 2015 CapEx budgets.

GYLD Page at Morningstar

Prior Trades: I have two prior round trips.
2014 GYLD 100 Shares +$145.61

Item # 4 Sold  100 GYLD at $28.32 (8/9/14 Post)(total return +323.22 or 12.1%)-Item # 2 Bought 50 of the ETF GYLD at $27.03 (1/30/13 Post) and Item # 4 Added 50 GYLD at $26.73 (3/27/13 Post)

2014 Roth IRA 50 Shares +$33.97
Item # 6 Sold 50 GYLD at $28.09-Roth IRA (7/19/14 Post)(total return +$154.9)-Item # 2 Bought 50 of the ETF GYLD at $27.13 Roth IRA (1/30/13 Post)

Total Realized Gains: $179.58
Total Return: $657.7
Dividends as a % of Total Return=72.7%

Generally, a total return based 70% to 80% on dividends with the remainder in share capital gains is viewed as optimal for this kind of security, with a hoped for annualized total return of 10% before taxes and inflation.

Rationale and Risks: I view this ETF to be a potential total return vehicle. Most of an acceptable return can be generated by the dividend.

I also achieve diversification with this type of ETF. Except for several U.S. REITs owned by GYLD, there is no overlap with my individual security holdings. My current equity REIT holdings can be found here.

As with any investment generating a 7.5%+% or higher yield, there are risks that are illustrated by this ETF's recent performance:

GYLD Interactive Stock Chart (shares closed at $23.04 on 12/15/14 and at $28.34 on 7/24/14)

I can only manage those risks by limiting my exposure and trading the security to harvest capital gains in addition to income generation. That is easier said than done. I have been successful so far in managing the GYLD risk, but it remains to be seen whether my latest re-entry will result in positive total return in excess of the dividend or some lower amount.

GYLD would be successful from my perspective with a $1 per share net profit on the shares after collecting 12 monthly dividends. So add about $16 to a $100, and I would need to sell GYLD at $1.16 per share higher than $23.84 or $25. That would work out to be close to a 11.7+% total return, with the exact return depending on the dividends paid during 2015. I just used the sponsor's 7.51% SEC yield based on the 1/2/15 closing price, which was higher than my purchase price, to arrive at a ballpark number.

The sponsor describes the "principal investment risks" starting at page 3 of the Prospectus.

Currency risk and the decline in MLP E & P companies have contributed to the $4.48 per share decline (-28.16%), since I sold shares a few months ago at $28.32. Needless to say, that kind of share decline can wipe out several years of dividends.

The 10 year treasury closed at 2.12% yield on 1/2/15. At that rate, money takes about 33.04 years to double before taxes and inflation.  Estimate Compound Interest

Inflation is running low now, but the average historical rate is close to 3%. For most people, there are considerable long term risks in generating a compounded 2% return on investments. Except for the super rich, that kind of compounded rate of return will simply be substantially insufficient to meet the investor's needs, ranging from sending children to college or paying for expenses after retirement.

A 7.5% annualized total return is okay, but is hardly close to shooting the lights out. At that rate, money doubles in about 9.58 years before inflation and taxes.

My general goal is to grow my pile in excess of 10% per year. Some years will be substantially higher than 10%, even over 30% on occasion, and much lower on occasion too. At 11%, money doubles in 6.64 years. That will be an acceptable long term compounded rate of return for most folks who are not frivolous spenders and who start investing early enough to give the pile time to grow at a decent compounded rate.

I did a calculation, where I started with $10,000 and added only $100 per month. I assumed an 11% rate, 40 years to grow and compounding once a year. The end result was $1,348.199.95. Compound Interest Calculator | At a 2% rate, I ended up with $94,562.78.

Future Buys: I will consider buying back the 50 shares sold in the Roth IRA at $28.09 when and if the price falls below $24.

I do not have a price target. Generally, I am satisfied with this kind of investment when I can generate a 10% annualized total return.

Closing Price 1/2/15: GYLD: $24.08 +0.21 (+0.88%)

2. Sold 150 FPF at $22.42 Roth IRA (see Disclaimer):

Snapshot of Trade:

2014 Roth IRA Sold 150 FPF at $22.42
Snapshot of Profit:

Item # 1 Paired Trade Roth IRA to Increase Cash Flow: Sold 50 MSPRA at $20.22 and Bought 50 FPF at $22.07 (4/26/14 Post). I apparently did not discuss the 100 share add at $22.25, made on 7/25/14, which is shown in the following history snapshot.

Snapshot of ROTH IRA FPF History:

This history snapshot shows what I am attempting to do.

I sold my highest cost 150 shares.

When and if the shares decline below $21.7, I will consider buying back 50 of the 150 shares sold and then another 100 below $21.2.

The recent price action of this security shows price volatility between $21 to $22.5. FPF Interactive Stock Chart

By lowering my average cost per share, I increase my dividend yield while harvesting a few profits along the way.

FPF went ex dividend for its monthly distribution on 12/29/14, as well as a special distribution, so I will receive that dividend on the 150 shares sold which will be reinvested to buy more shares. FPF Dividend History-Sponsor's websitePress Release The total distribution was $.325 per share.

Security Description: The First Trust Intermediate Duration Preferred & Income Fund (FPF) is a leveraged CEF that invests in bonds and preferred stocks with the objective of generating current income and managing duration of between 3 to 8 years, excluding the duration adjustment for leverage which increases duration.

CEFConnect Page for FPF

Data From Date of Trade: 12/31/14
Closing Net Asset Value Per Share: $23.88
Closing Market Value: $22.71
Discount: -4.9%
Average 1 Year Discount: -9.2%
The fund started in May 2013.

CEFConnect Page for FPF

Sponsor's Website: First Trust Intermediate Duration Preferred & Income Fund (FPF)

Weighted Average Duration as of 11/28/14: 4.39 Years'

While the credit quality is weighted in investment grade bonds, there was  a significant exposure to junk rated securities as of 11/28/14 (BB+=20.37%; BB=10.05%; BB- 5.8%; B+ 1.23%)

Fact Sheet as of 11/2014

Sponsor's Website: 2014 Annual Report (period ending 10/31/14)

SEC Filings

Dividends: The fund is currently paying a monthly distribution of $.1625 per share. Distributions

Prior Trades: I flipped a 100 FPF share lot in a taxable account as part of a pared trade with the equity preferred floater MSPRA: Paired Trade: Sold 100 MSPRA at $20.21 and Bought 100 FPF at $22.12 (April 26. 2014 Post)($203.08 total return on MSPRA)-Item # 4 Sold 100 FPF at $22.83/Bought 100 MSPRA at $20.19-Roth IRA (7/5/14 Post)($87.05 total return for FPF-2 month holding period) The later paired trade worked in that FPF has fallen from its disposition price of $22.83 to $21.53 or a 5.69% decline, while MSPRA has declined slightly from its purchase price at $20.19 to $20.01 or down less than 1%.

Rationale: I am attempting to manage risk be selling higher cost shares when I can do so profitably, provided there is a significant narrowing of the discount. That narrowing occurred on 12/31/14, as noted above.

I now have the capacity to buy back some or all of those shares at lower prices, preferably when the discount is greater than 10% and the purchase lowers the average cost per share for the remaining shares.

FBF has the usual risks associated with leveraged bond CEFs that include interest rate, lost opportunity, credit and normal CEF risks.

The fund's exposure to foreign securities add currency and country risks to the mix. U.S.D. priced funds that own foreign securities will reflect the negative, unhedged foreign currency declines. Both the Euro and the British Pound have been weak against the USD for several weeks now.

USDEUR  Interactive Stock Chart

USDGBP Interactive Stock Chart

An owner of a U.S. bond fund that owns foreign securities priced in their respective local currencies would want the value of the USD to be falling rather than gaining against the applicable foreign currencies. Many of the U.S. bond funds that own investment grade foreign bonds have concentrations in Euro and British Pound priced securities.

Leverage, of course, adds risks in addition to potential benefits. The potential benefits are that the securities bought with borrowed money go up in value as the fund earns a spread that increases its funds available for distribution compared to an unleveraged fund investing in the same or similar securities. The downside risk is that the securities bought with borrowed money go down in price as interest rates rise, including the cost of short term borrowings, which can also cause the discount to widen as individual investors flee en masse.

Future Buys: I am targeting the confluence of a 10% or higher discount and a price below $21.75 before adding back shares. I would prefer to add when and if I can lower my average cost per share for the remaining shares.  

Closing Price 1/2/15: FPF: $22.34 -0.37 (-1.63%)

3. Sold 50 NBB at $21.1 (see Disclaimer):

Snapshot of Trade: 

2014 Roth IRA Sold 50 NBB at $21.1
Item # 1 Bought 50 NBB at $20.73-ROTH IRA (June 2012)

Snapshot of Roth IRA NBB History: 

This snapshot shows what I am attempting to do with NBB. I sold the highest cost shares bought first back in June 2012. Those shares generated a tax free yield of close to 7% and were sold for a small profit. I averaged down with a 100 share lot at $20.1. When and if I can buy that 50 share lot back below $20,  provided the discount is then 10% or higher, I will consider doing so. I will generally require both conditions.

I still own the shares bought in May 2014: Roth IRA: Added 100 NBB at $20.1 (6/14/14 Post)

The chart reveals price volatility in a wide range. NBB Interactive Stock Chart

When interest rates started to rise in May 2013 and continued to surge through year end, NBB went from $21.77 (5/2/13) to $17.87 in mid-December. As interest rates trended down during 2014, NBB rose in price steadily from $18.44 to $21.18 on 12/31/14.

Security Description: The Nuveen Build America Bond Fund (NBB) is a leveraged closed end fund that owns Build America Bonds which are taxable municipal bonds. The fund will terminate on or about 6/30/2020 and will then distribute the fund's assets to its shareholders. The effective leverage was at 27.68% as of 11/28/14 at an annualized cost of .79%.

While the 2020 term date for the fund gives NBB a feature of an individual bond, the payment of principal at a certain date, a liquidation date for a long bond fund could pose a risk if interest rates are rising later this decade in a troublesome manner, and this fund did not transition to shorter term instruments before that happens.

CEFConnect Page for NBB

Sponsor's Website: NBB - Nuveen Build America Bond Fund

Data as of 11/28/14:
Holdings: 102
Average Bond Price as a % of Par Value= $125.19
Effective Maturity: 26.03 Years
Leverage Adjusted Duration: 12.43 years (leverage increases duration)
Average Effective Duration: 10.85 years

Data from Date of Sell 12/31/14:
Closing Net Asset Value Per Share: $ $23.2
Closing Market Price: $21.18
Discount: - 9.10%
Average Discounts:
1 Year =  9.7%
3 Years= 7.37%%
5 Years= Not Available

NBB Page at Morningstar (rated 3 stars)

The fund is weighted in "A" or better rated bonds.

Credit Quality as of 11/28/14:

Last SEC Filed Shareholder Report for the Period Ending 9/30/14

Prior Trades: I have managed to exit my NBB positions profitably so far. Some of that history is linked in  Item # 1 Roth IRA: Added 100 NBB at $20.1

2014 Roth IRA 107 NBB +$91.33
2014 NBB 100 Shares +$40.62
2011 Roth IRA 100 Shares +$108.97
2011 NBB 100 Shares +$40.62

2010 Regular IRA 50 Shares +$25.58

NBB Realized Gains To Date= $311.6 ($307.12 per snapshots +$4.48 last Transaction)

Related Trades: I also currently own the functional equivalent Nuveen Build America Bond Opportunity Fund (NBD)

Bought Back 100 NBD at $21.35 (11/3/14 Post)

As of 11/28/14, NBD had a higher concentration than NBB in AA rated securities (67.2% vs. 60.29%). NBB had a greater weighting in A rated bonds (20.9% vs. 14.1%) and in BBB rated bonds (6.4% vs. 3.6%) NBB had a 9.9% weighting in AAA rated bonds, and NBD had a slightly higher percentage at 12%.

Based solely on the ratings, NBD had a slight edge in credit quality over NBB based on its higher weighting in AA and AAA rated bonds and its lower weighting in BBB .

Item # 3 Sold 100 NBD at $21.86-Roth IRA (5/29/13 Post)-Item # 2 Bought 100 of the Bond CEF NBD at $21.29-Roth IRA (6/21/12 Post)

2013 Roth IRA 100 NBD +$42.33
Item # 7 Sold 100 NBD at $22 (2/27/13 Post)(profit +$4.17, no snapshot)-Item # 2 Bought 100 NBD at $21.8 (9/11/12 Post)

Rationale: I am basically trading these long duration funds recognizing their considerable interest rate risk.

I own them to address a low probability scenario which I usually just call the Japan Scenario. In that low possibility scenario, rates remain range bound at abnormally low levels, possibly even moving lower, due to persistent low inflation with drifts into deflationary periods. The best security to own during a deflationary period would be high quality long term bonds. Since I assign a low probability to the Japan Scenario, I will address it with a limited number of securities, and NBB and NBD are just two of them.

To calculate how a fund will react to a change in interest rates, the rule of thumb is to multiply the duration by the percentage change in interest rates for similar maturities and bonds. Get to know your bond fund: Duration-Vanguard; Duration-FINRA.

Thus, a 2% rise in rate could generate almost a 25% loss in NBB's value. That kind of loss would wipe out about 3 1/2 years of dividend payments, so I tread softly with these long duration funds unless I significantly raise the odds of a Japan Scenario for the U.S.

This CEF has significant interest rate given its long duration number. The fund calculated the leveraged adjusted duration at 12.43 years.

I would be looking for a correction in long bond price later this year. When and if the NBB price sinks below $20 with a 10% or greater discount, I will consider adding back this 50 share lot.

Closing Price 1/2/15: NBB: $21.18 0.00 (0.00%)