Sunday, January 18, 2015

Sold 2 Oasis Petroleum 7.25% Senior Unsecured Bonds at 95.25-Bought at $89.347/Added to Vanguard Capital Opportunity Mutual Fund (VHCOX)/Bought 100 SWZ at $11.3-Roth IRA

Stable Vix Pattern (Bullish):

Recent Developments: 

The government reported a .4% decline in CPI during December. The energy price decline, particularly the much lower gasoline cost, caused that decrease. CPI declined .3% in November for the same reasons. On a non-seasonally adjusted basis, CPI rose .8% Y-O-Y. Consumer Price Index Summary On a non-seasonally adjusted annual basis, food prices rose 3.4%; the cost of shelter increased 2.9%; the rent index rose 3.4%; the medical care index accelerated at 3% and the the food category that includes meat, poultry, fish and eggs rose 9.2% (veal and beef rose 18.7%). My Blue Cross insurance premium rose 18%. I am curious why so many are seeing deflation based on these numbers, taking into proper context the strong and probably temporary downward pressure resulting from the dramatic decline in crude oil prices.

Since 1955, the U.S. has had one year of negative inflation. That was a in 2009, which was understandable, at a -.4%. Consumer Price Index, 1913- | Federal Reserve Bank of Minneapolis The problem has been historically problematic inflation rather than deflation getting planted in the U.S. economic system for a prolonged period.

The pricing of European sovereign bonds by the Bond Ghouls implies a consensus opinion among those investors that Europe is in an inescapable vise of alternating deflation and abnormally low inflation for well over the next decade. Those investors or their kindred spirits were forecasting greater than 10% inflation for thirty years in the early 1980s. They have considerable difficulty seeing beyond the tips of their noses.

As I have noted in several recent comments at SA, stock investors came to the realization in August 1982 that problematic inflation, the primary cause of an 18 year stock bear market, was dying and would soon enough be dead. Bond investors, on the other hand, continued to mis-price long term bonds for more than a decade, assuming that problematic inflation would return with a vengeance and were not convinced by the contrary information until they had about 15 years of data pointing out that inflation was not running hot anymore and it did not make much sense to price a 30 year treasury bond at 13.8% (1984), or at 9.3% in 1998. It is possible to look at the subsequent data and see the absurdity of the inflation predictions embodied in those yields.

There are many reasons why Europe slipped into a slightly negative inflation number last month. The decline in crude prices is one. The strength of the Euro against the USD and other currencies until recently is another. The negative crude price influence on Europe's recent CPI numbers is probably at or near its nadir. Crude prices may not go up much this year from the current prices, but the direction starting in the late Spring will be up as more demand is created and some production starts to decline.

The negative impact of the strong Euro has already been corrected over the past few months. Europeans will have to pay more for imported foreign goods (oil being a temporary exception); and the export Euro based economies will be a better position to compete abroad and will consequently start to generate more sales and jobs.

Needless to say, it will not take much inflation to make the buyer of a ten year German government bond at a .4% yield or one from France at .63% look like the biggest sucker in the history of mankind.  Global Government As the noted philosopher and financial commentator W.C. Fields once noted, when he was sober enough to form a sentence, "never give a sucker an even break".  Never Give a Sucker an Even Break (1941) - IMDb


1. Sold 2 Oasis Petroleum 7.25% Senior Bonds Maturing in 2019 at $95.25-Bought at $89.347 (see Disclaimer):

Snapshot of Trade:

Snapshot of Profit:

2015 Oasis Petroleum 2 Bonds +$98.38

High Risk Junk Bond Strategy: Bought 2 Oasis Petroleum 7.25% Senior Unsecured Bonds Maturing on 2/1/19 at 89.347

The net interest was $11.68.


As noted in my prior post, I decided to harvest my profits in the recently purchased junk E & P bonds. Sold 2 LINN 2020 Bonds at $88.5-Bought at $81/Sold 2 Northern Oil & Gas 8% Senior Unsecured Bonds Maturing in 2020 at $81.75-Bought at 73.9

When I bought this bond at 89+, WTI closed at $56.43. The WTI spot price had declined by 17.83% to $46.37 when I sold the Oasis bond at $95.25. That $95.25 price represented a 6.6% increase from my purchase price.

I am aware that the EIA and other sources are predicting that the supply glut will grow during the remaining months, and further downside pressure on crude oil prices is certainly possible. U.S. Energy Information Administration (EIA)

I am keeping only the two highest risk one bond lots issued by the  Sandridge and Petroquest. Bought 1 Extremely High Risk Sandridge Energy 8.75% Senior Bond Maturing 1/15/2020 at 65 (12/17/14 Post)Extreme High Risk Junk Bond Strategy: Bought 1 Petroquest Energy 10% Senior Unsecured Bond at $91.638 Maturing 9/1/17 (12/24/14 Post)

I do not have profits in those two bonds with both near breakeven, nor do I have much monetary exposure. The Sandridge bond has the highest potential total return of the ones that I bought in December 2014 and my monetary exposure is only $650. I just received the semi-annual interest payment:

Future Buys and Sells: I may buy the three E & P bonds back sold in a few weeks or months, assuming there is another panic selloff that takes the price below my last purchase.

2. Bought 100 SWZ at $11.3 in Roth IRA (see Disclaimer):

The Swiss Helvetia Fund Inc (SWZ) is an unleveraged closed end investment fund that owns primarily equity and equity-linked securities of Swiss companies.

CEFConnect shows the expense ratio at 1.29%.

I have not sold any shares of this closed end stock fund held in a taxable account since I reinitiated a position in 2008. I currently own over 900 shares in that taxable account, where I have been reinvesting the dividend.

The last annual distribution was $2.235 per share, of which $2.195 was characterized as a long term capital gain. The ex dividend date was in December, but the payment date is delayed until 1/23/15: Swiss Helvetia Fund

The total dividend will be over $2,000. I will have a snapshot of the reinvestment in the first blog post published after receipt of those shares.

I did liquidate a 200 SWZ position in 2006:

2006 SWZ +$166.87
I have no memory of those transactions, which is not unusual for me now, but apparently it was just a trade rather than a long term investment. I will try to generate some income through trading, but most of my investment assets have been held for more than a year.

Snapshot of Trade:

2015 Bought Back SWZ at $11.3
I have previously traded this stock CEF in the Roth IRA. (e.g. Sold SWZ in Roth IRA at $10.75 (8/5/2009 Post)

Swiss National Bank and the Swiss Franc: 

The Swiss stock market has been in turmoil since the Swiss National Bank (hereinafter SNB) abandoned its three year policy of capping the Swiss Franc at €1.2 last week.

The cap was maintained by the creation of Swiss Francs (hereinafter CHF) that would then be sold to buy Euros, a Q/E type program aimed at torpedoing the CHF against the Euro and in effect all other major currencies including the USD.

That money creation led to a huge expansion in the SNB balance sheet.

This policy started in the 2011. Prior to starting this intervention, 1 CHF would buy 1.3+ USDs.

On the day prior to abandoning this intervention, 1 CHF would buy about .98 USDs. CHFUSD Interactive  Chart In other words, a strong currency was turned into a weak one through central bank intervention.

The weakness in the CHF helped Swiss manufacturers who were exporting to other European countries and the U.S. The policy was instituted during a period when the CHF was rapidly increasing in value against both the EUR and the USD.

The policy had a negative impact, as I have pointed out in previous posts, on Swiss ADRs priced in USDs. The CHF/USD currency decline flows through into the USD pricing and has resulted in the U.S. Swiss ADRs substantially underperforming their ordinary share counterparts priced in CHFs and traded in Switzerland.

The SNB's decision to abandon its peg resulted in an instantaneous rise in the Swiss Franc against the Euro, USD, GBP and other currencies, and created chaotic conditions in the Swiss stock market, generating large losses in stocks traded in Switzerland and priced in CHFs.

Even with low double digit losses in CHFs, USD priced Swiss stocks went up in value as the CHF's rise in value more than offset the decline in the ordinary shares prices.

NVS Interactive Stock Chart

NSRGY Interactive Stock Chart

Sponsor's Website: Swiss Helvetia Fund

Data on Date of Trade Thursday 1/15/15:
Closing Net Asset Value Per Share: $13.16
Closing Market Price: $11.53
Discount: -12.39%
Discount at $11.3 Purchase Price: -14.13%
Average Historical Discounts:
1 Year: -11.78%
3 Years: -12.08%
5 Years: -12.05%

Sourced from SWZ Page at CEFConnect

The most important holdings are Novartis, Roche and Nestle which accounted for 37.93% weighting as of 12/31/14.

Top Ten Holdings as of 12/31/14:

Of those top ten companies, Swatch is notable in having most of their costs in Swiss Francs and deriving most of their revenues through exporting their products made in Switzerland. Swatch has to manufacture most of its watches in Switzerland to keep the Made in Switzerland label. Those type of companies would be hurt more by the rise in the Swiss Franc than multinationals like Nestle, Novartis and Roche whose costs and revenues are mostly in the same currencies. Those multinationals have factories and employees worldwide and consequently have most of their costs sourced in local foreign currencies (USD, EUR, etc.).

An article published in Reuters noted that Nestle only has less than 5% of its cost sourced in Swiss Francs. Novartis has 12% of its costs in CHFs, but NVS also reports in USDs rather than CHFs. 2014 Third Quarter Earnings Report.pdfPage 169 2013 Annual Report .pdf

Last SEC Filed Form N-Q for the Period Ending 9/30/14:  THE SWISS HELVETIA FUND, INC.

As of 9/30/14, the fund's investments had a total cost of $243+M and a market value of $$374M.

Most of the unrealized gain was concentrated in Nestle, Novartis and Roche.

The Novartis shares had a total cost of $10.4+M and a market value at that time of $50+M. The Nestle shares had a cost of $6.4+M and a market value of $36+M. The Roche position had a cost of $13+M and a market value then of $52+M. Those returns, just on price, highlight the benefits of long term investing.

One of the nice unrealized gains as of 9/30/14 was in the chocolate make Lindt & Sprungli, with a share cost of $9+M and a market value of close to $19M. That company's stock took a  hit in reaction to the SNB's decision. Chocoladefabriken Lindt & Spruengli AG Interactive Stock Chart I believe that company has nine factories outside Switzerland.

Last SEC Filed Shareholder Report: The Swiss Helvetia Fund, Inc.

Distributions Since 2007: 

2008-2014 Per Share:
Long Term Capital: $5.622
Short Term Capita; $.412
Income: $1.292
Total: $7.326 per share

A good chunk of the dividend income is eaten up by the fund's expenses.

Rationale and Risks: I view this fund as an attractive long term holding at its current discount to net asset value per share, the overall quality of the holdings, the fund's exposure to Swiss Franc priced assets after the SNB ended its currency manipulation, and its dividends.

Since most of my assets are priced in USDs, I want more assets priced in Swiss Francs, Canadian and Australian Dollars and a few other currencies for diversification purposes.

I am concerned about our government's long term fiscal situation and recognize that the current USD strength is most likely a transitory phenomenon.

In case anyone has been comatose for the past decade or so, I would just highlight that the U.S. government's debt has expanded from less than $1 trillion in 1979 to over $18 trillion as of 1/14/15: Government - The Debt to the Penny

And being a member of the baby boom generation, I have paid attention to those rumors that the government has not exactly planned that far ahead in meeting its future Medicare obligations and other long term unfunded entitlements.

Even with abnormally low interest rates, hitting an all time low for the 30 year treasury recently, the federal government paid $430+ billion in interest for the F/Y ending last September, up from $415+ in the prior fiscal year.  Government - Interest Expense on the Debt Outstanding

So, what happens when interest rates rise to say a 5% average rate on $18 trillion in debt, assuming for ease of calculation the ludicrous proposition that the debt will not keep growing in worrisome amounts. That works out to a whopping $900 billion per year, which will most likely be borrowed and added to the debt number.

At some point, possibly before I meet my maker, there is going to be a failed series of treasury auctions, as the world tires of sending the U.S. their savings to spend.

Switzerland, and the Swiss Franc, impress me as decent alternatives for diversification.

While I have traded this security in my IRAs, I am now likely to keep this position long term and add to it on occasion.

I may downsize my taxable account position by 200 to 300 shares when and if I can sell my highest cost shares profitably. That becomes difficult to do when the fund pays a large year end distribution such as the last one that knocks the price back down.

I also own Novartis, Nestle and Zurich Financial.

I have two SA Instablogs discussing Novartis and Nestle: Dividend Growth Strategy: Novartis - South Gent | Seeking AlphaAdded To Nestle (NSRGY) At $68.8 - South Gent | Seeking Alpha

My longest recent discussion involving a NVS purchase was when I added 50 shares in 2013 Item # 1 Bought: 50 NVS at $76.72 (12/23/13 Post)(contains snapshot of pre-existing position)

I only own 100 shares of Zurich with an average cost per share of $19.13.

The risks currently include the somewhat chaotic conditions in the Swiss stock market resulting from the SNB's decision to cease supporting the 1.2 Euro floor. The strong rise in the Swiss Franc after that decision will make it harder for Swiss exporters to compete in Europe, particularly if the Euro continues to weaken.

And, repatriation of foreign earnings will result in less CHFs being purchased with the weaker currencies and earnings will be negatively impacted by the accounting conversion from the weaker foreign currencies into CHFs. I am only aware of Novartis reporting in a currency other than CHFs.

My general belief, call it a guess, is that investors are now selling Swiss stocks to capture the huge currency gain in the Swiss Franc versus the Euro primarily and secondarily against the USD and GBP.

CHFUSD Interactive Chart

CHFGBP  Interactive Chart

CHFEUR Interactive Chart

Once those traders finish doing what comes naturally to them, investors will look at the Swiss multinationals who have worldwide operations and will start buying, even if that means biting the bullet on the currency exchange.

The ordinary shares of those multinationals, priced in CHFs, were shellacked in the Swiss market's selloff in response to the SNB decision:

Nestle: NESN.VX Interactive Stock Chart

Roche: ROG.VX Interactive Stock Chart

Novartis: NOVN Stock Chart

Zurich Financial: ZURN

Syngenta: SYNN Stock Chart

Swiss Re: SREN Stock Chart

Credit Suisse: CSGN Stock Chart

Over time, the Swiss Franc could reasonably be expected to be a strong currency, and there will be an opportunity in the future to harvest a currency gain in Swiss shares even after converting from Euros or USDs into CHFs after the big spurt in CHF's value.

The problem faced by the SNB is that Switzerland is just too small to be so safe.

It will take time for companies to recover who manufacturer in Switzerland and are primarily dependent on export sales to Europe and the USD. Stocks of those companies may be treading water for awhile after their recent large declines, as adjustments are made.

As of 1/16/15, SWZ closed at $11.36 and had a net asset value per share that day of $13.29, creating a discount to net asset value based on those numbers of -14.52%.

Future Adds in the Roth IRA: Generally, I will be looking for a correction in the Swiss stock market coinciding with a discount above the 1, 3 and 5 year averages. I may elect to add a 50 share lot after a large year end distribution goes ex dividend provided the discount is then over 12%.

3. Added to Vanguard Capital Opportunity Fund (VHCOX) (see Disclaimer):

Snapshot of Trade:

Prior Trade: I initially bought share in 2013 when the fund opened for new investors and removed the initial $25,000 investment requirement. Initiated Position in VHCOX (4/9/13 Post) Prior to that reopening, the fund has been closed to new investors since March 2004.

As I explained in the post discussing my initial purchase at the then minimum amount of $3,000, I just wanted to stick my toe in the door and then decide how much to invest later. I have periodically added to the fund thereafter.

The fund has closed again to new investors.

Security Description: The Vanguard Capital Opportunity Fund is offered through Vanguard, but the fund is managed by Primecap.

At the time of my purchase, the Vanguard Capital Opportunity Investors Fund had a "Gold" designation from Morningstar and a 5 star rating.

Sponsor's Website: Vanguard - Vanguard Capital Opportunity Fund Investor Shares (total holdings as of 12/31/14=138; foreign holdings at 11.8%; expense ratio at .48%)

The sponsor calls this fund an "aggressive growth fund", which of course scares the Old Geezer since there is not a cell in his body that fits into that mode of investing.

After reading that statement about aggressive growth, I expected to see companies like Priceline, Netflix, Amazon and Facebook.

Instead, the top ten holdings included stocks like Novartis, which I own, Roche, Lilly, Biogen and Amgen. I would call those companies "growth" blue chips and possibly my 92 year mother would use the term "aggressive" to describe their risk nature. The turnover is low.

Top Ten Holdings as of 12/31/14: 

Rationale and Risks: This fund has performed well in bull stock markets, as shown in its historical total return numbers.

The total returns were 48.91% in 2009; 42.61% in 2013 and 18.88% last year.  That works for me.

The risk is summarized by the 2008 return of -39.08%, slightly worse than the S & P 500 -37% total return that year.

The fund pays dividends annually. Given the nature of the holdings, most of the dividend will be sourced from capital gains rather than income.

In 2013, I received a $1.736 per share distribution, of which $1.548 was a long term capital gain and most of the remainder were short term capital gains.

The per share distribution last year was $2.185 and $1.836 of that amount was classified as long term capital gains.
In the 2014 Annual period, which covers the 12 month period ending in September 2014, the total cost for common stocks owned by the fund was $5.885+B and the then market value was $12.233+B. So, there are currently a large unrealized appreciation in the shares owned by the fund.

The reports and prospectuses can be viewed at the sponsor's website or downloaded at Morningstar.

Future Buys: I will buy more shares when the spirit moves me.

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