Sunday, January 11, 2015

Sold 315+ TRST at $6.92/Added to MACSX at $17.71/ Added to Permanent Portfolio (PRPFX)

Big Picture: No Change

Stable Vix Pattern (Bullish):

Recent Developments: 

The economy added  252,000 jobs in December, better than the consensus estimate of 230,000. The unemployment rate fell to 5.6%. Employment Situation News Release The government revised the job gains up by 50,000 for October and November. Average hourly earnings decreased by $.05 per hour in December after rising .6% in November. I am suspicious about those numbers.  Average hourly earnings increased 1.7% Y-O-Y which is anemic though slightly higher than the government's Y-O-Y CPI increase. The U-6 number declined to 11.2% from 11.4%. Table A-15. Alternative measures of labor underutilization

CoreLogic Report on 2014 Third Quarter Home Equity

With crude oil falling by more than 50% over a few months, pundits are now trying to gain a place as forecasters par excellence by predicting that the price  "Could Fall to $20" - Barron's. I predict that the price "could" fall as low as  $20 or to $30, or it "could" find a bottom near its current level.


1. Sold 315+ TRST at $6.92 (REGIONAL BANK BASKET STRATEGY)(see Disclaimer):

Snapshot of Trade:

2015 Sold 315+ TRST at $6.92
Snapshot of Profit:

2015 TRST 315+ Shares +$549.57
Item # 2 Bought 50 TRST at $4.01 (8/23/11 Post)Item # 2 Added 50 TRST at $5.1 (6/6/12 Post); Item C Added 150 TRST at $5.17 (1/28/13 Post)

Unlike my other brokers, Fidelity does not include the fractional shares in the profit/loss calculation until the day after those fractional shares are liquidated on the settlement date, which will be on Tuesday.

Company Description: Trustco Bank Corp. (TRST) is the holding company for TrustCo Bank that operates 143 offices in N.Y., N.J., FL., Massachusetts, and Vermont. Most of the branches are in New York and Florida.

Earnings Press Release for the 2014 3rd Quarter 

Prior Trades: Sold 50 TRST at $7.29 (11/25/13 Post)(profit snapshot=+$32.67)-Bought 50 TRST at $6.3 (12/17/09 Post)

Sold 308 TRST at $6.64 (10/28/13 Post)(profit snapshot=$238.38)-Added 70 TRST at $5.9 (February 2010); Bought 50 TRST at $5.45 (August 2010); Added 50 TRST @ $5.48 (October 2010)Added 100 TRST at $5.94 (February 2011)

Total Realized Gains= $819.33  ($548.28 last transaction + $271.05 prior transactions)

Rationale: I was looking for a regional bank stock to sell based on my previously discussed concerns about net interest margin compression. It looks like the FED is intent on raising short term rates later this year, which will raise the deposit costs for banks. Intermediate and longer term interest rates continue to drift down. If that trend persists, banks will earn less on a variety of loans and investments, placing additional downside pressure on an already compressed net interest margin.

Bank stocks hit an air pocket last week, possibly due to growing concerns about their net interest margins under the current consensus views about short to long term interest rates.

I selected TRST to sell due to the unrealized gain and its dividend history, which I regarded unfavorably when I fist bought shares a few years ago and view more unfavorably now given the time period without a meaningful dividend raise after TRST deeply slashed the rate.

TrustCo is currently paying a quarterly dividend of $.065625 per share, an insignificant raise from the prior rate of $.0625. The quarterly rate was $.16 per share until the 2008 first quarter when it was reduced to $.11 per share. That reduced rate was kept for 5 quarters before it was reduced to the $.0625 quarterly rate, where it stayed for 5 quarters. The current quarterly rate has been in effect since the 2010 third quarter. TrustCo Bank Dividend History

Overall, the dividend is currently about 59% below the 2007 level. When I couple the dividend slashes with the failure to meaningfully raise the quarterly rate since the slashes, those factors contributed to the decision to harvest the profit in the shares rather than waiting for meaningful improvements in the dividend stream.

Lastly, the share price has gone down since I sold some shares in November 2013, so my patience with this stock ran its course. The current price is near 1997 levels, hardly a testament to the Board and managers of this bank. TRST Interactive Stock Chart

Notwithstanding my concerns about net interest margin, there are several bank stocks, who do not share TRST's dismal dividend history, that I have bought and sold several times since I launched this basket strategy in 2009. Some of those stocks are declining in price and are near or already below my last purchase price. I may use the proceeds from TRST to fund the purchase of one of those stocks.

2. Added to MACSX at $17.71 (see Disclaimer):

Snapshot of Trade:

Security Description: The Matthews Asian Growth & Income Fund (MACSX)

Sponsor's website: Overview - Matthews Asian Growth and Income Fund

I took a snapshot of the top ten holdings as of 12/31/14:

I took a snapshots of the distributions made by this fund since I first bought shares:

Total Distributions: $7.4745 per share

Distributions - Matthews Asian Growth and Income Fund

MACSX Page at Morningstar (currently rated 4 stars)

This fund was favorably mentioned in a 2014 Barron's article.

The fund is one of 5 Fund Picks for 2015 (and Beyond) made by a Morningstar analyst.

Prospectus (risks discussed starting at page 2)

2014SemiAnnualReport.pdf (starts at page 12 for this fund; unrealized appreciation $967+M as of 6/30/14)

Prior Trades: My initial investment was made in September 2009. Item # 1 Bought Matthews Asian Growth and Income (MACSX) I have periodically added to this fund, when the spirit moves me, and have also been reinvesting the dividends. Item # 3 Added to MACSX (10/10/2010 Post); Item # 3 Added to MACSX (1/12/12 Post)Item # 8 Added to MACSX at $18.59 (12/17/13 Post)

I have not sold any shares.

This last add brings my total position up to 559+ shares.

Rationale: I have a favorable view of this fund's income focus derived from common stocks as well as some preferred stocks and convertible bonds. The fund also gives me a broad exposure to both developed and emerging market Asian countries. Outside of Japan, those countries will probably have more than 50% of the incremental worldwide GDP growth in the coming decades.

As of 2013, China and India had a 21.23% share of worldwide GDP compared to 6.94% twenty five years earlier. The U.S. has gone from a 24.44% share to 19.31%. Germany has declined from 5.96% to 3.72%.

The following references discuss the parabolic increases in middle class consumers.

Reuters Infographic

Middle class growth in emerging markets" - EY - Global

Publication on Growth of Emerging Market Middle Class Consumers.pdf

KPMG Publication on Rise of Middle Class in Asia from 2012.pdf


3. Added to the Permanent Portfolio at $39.97 (see Disclaimer): 

Snapshot of Trade:

2015 Added to Permanent Portfolio (PRPFX)
This brings my position up to 251+ shares. I have reinvested the dividends since initiating a position. I have not sold any shares.

My first purchase was made in 2006 at $32:

Initial Purchase 11/3/2006
The Permanent Portfolio was the only mutual fund owned prior to 2008 that was not liquidated or pared down to 100 or 150 shares during 2007.

Snapshots of those pares and eliminations can be found in this post near the end.

In August 2007, my VIX Asset Allocation Model flashed a sell signal. VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern

Security Description: The Permanent Portfolio (PRPFX) is a mutual fund that maintains a relatively constant allocation to gold and silver bullion, Swiss and U.S. government bonds, investment grade U.S. corporate bonds, REITs, natural resource stocks and what the fund calls "aggressive growth" stocks.

Fact Sheet 9/30/14.pdf

The inspiration for this asset allocation is derived from the Talmud and Harry Browne's book published many years ago titled Fail-Safe Investing.

Quote from the Talmud (a record of debates among Jewish rabbis starting as early as 1200 B.C.: "Let every man divide his money into three parts, and invest a third in land, a third in business, and a third let him keep in reserve." That advice appears to be relatively simple, but is open to some interpretation and an innate human desire to change it, for better or worse.

The essence of this allocation is diversification in assets that are not highly correlated with one another and is ultimately based on the recognition that humans really can not predict the future even though many believe they have that power.

If I applied this advice literally, I would include the equity in my home as part of the investment in land, along with the equity in any other real estate including real estate stocks.

The "business" component would include the equity in a business including the present value of common stocks.

A modern interpretation of  "reserves" would be treasury bills, FDIC insured savings accounts and short term certificates of deposit.  I believe that the reference in historical context meant silver or precious metals.

If I was going to construct this allocation from scratch, and desired to keep it really simple with a modern interpretation, I would use gold and silver sparingly and rely on "safe" money as the reserve component.

For the "business" part , a low cost and broad stock ETF would be my substitute for business. That could be the Vanguard Total Stock Market ETF (VTI) or the Vanguard Total World Stock ETF (VT).  If I wanted say a 80% weighting in the U.S. and 20% international, I could then go with VTI for the U.S. stock weighting and the Vanguard FTSE All-World ex-US ETF (VEU) for the international stock allocation.

The literal interpretation of land would include the equity in my home and other real estate holdings including REITs and other real estate companies. There are several real estate companies that are not organized as REITs.

The Permanent Portfolio does not follow a literal interpretation, similar in some respects to what Roger Gibson did in a 1989 paper that refined the Talmud's asset allocation plan. Gibson divided the asset allocation into 6 categories: foreign and U.S. stocks, hard assets, foreign and U.S. bonds, and short term safe money. The hard assets would include natural resource stocks, precious metals, and REITs. He later refined the allocation into 4 asset categories, Forbes.

If I was going to fit the Permanent Portfolio allocation into the Talmud's allocation plan, I would classify its gold and silver bullion along with its Swiss Franc assets as the "reserves". Coins made of precious metals were probably what the rabbis were talking about in that category. That is close to one-third.

The fund's stock allocation would be close to the Talmud's allocation for business.

I view the major departure to be in the land component. While there is a small allocation to real estate stocks, that is part of the "business allocation". In effect, this fund has substituted treasuries and investment corporate bonds for the "land" component in my opinion.  

I took some snapshots showing some of this fund's holdings as of 10/31/14 which were taken from the SEC Filed Form N-Q:

Gold and Silver Bullion Allocation: 

The fund had a 25.27% allocation to gold and silver bullion:

This significant allocation to precious metals would have been a drag on performance since September 2011 when gold topped out at slightly over $1900 per ounce. Silver went back over $40 per ounce in September 2011 for the first time since the Hunt brothers attempted to corner the silver market in the 1970s which ended badly for them.

I sold for the first time some gold and silver in September 2011 and again in January 2012. (snapshots at The Road to Political Power: Lying Works/Recent Gold and Silver Sales (9/15/11 Post) and Snapshots of Coin Sales In January 2012)

While the September 2011 sales just about hit the all time high to the hour or day, that was due simply to a promise that I made to myself back in 1980, when I decided to wait for a higher silver price before selling my junk silver coins that I had took out of circulation in the mid-1960s when the government removed the silver content from U.S. coins (dimes, quarters and half dollars were 90% silver prior to 1965) I wanted a higher price and had to wait 31 years for the price offered by a dealer in 1979 or 1980. I give myself an "A" for taking those coins out of circulation at their face value during the mid-1960s and an "F" for the greed decision made in 1980.

My last purchase of American silver eagles was in 1995, when I could buy a roll (20 coins) for $140 or $7 per coin. When and if silver returns to close to $10-$13 per ounce, I will use the proceeds from selling the junk silver when the price was over $40 per ounce to buy more of those pretty silver eagles that use the Walking Liberty design originally on the front of half dollars minted between between 1916 and 1947.

The refusal to engage in timing can be to the investors benefit or to their detriment. Some timing is exercised simply by keeping the allocation percentages roughly the same with some kind of periodic rebalancing.

Rebalancing according to a predefined schedule can have negative impacts when the asset being trimmed is in a long term secular bull market and the asset being bought is in a long term secular bear market. Gold and silver have experienced long secular bear markets. Anyone buying gold or silver in the early 1970s needed to sell in 1980, and then using the proceeds to buy back when the price fell below $300 per ounce for gold and $7 for silver.

The gold price went from over $800 in 1980 to less than $300 in 2002. My timing, outlined above, has had mixed results.  I did not buy any gold coins after the price went over $400, and I sold some at over $1,900 per ounce. Most of my silver holdings were in junk silver coins taken out of circulation at face value (junk silver coins are defined to mean than any numismatic value was lower than the value of their silver content). However, I destroyed a superior total return by refusing to sell when silver crossed over $40 in 1980 and realizing that price several decades thereafter.

Gold and silver would have contributed to this fund's performance between 2002 and September 2011, a period when the gold price rose from less than $300 per ounce to more than $1,900. Historical data for both gold and silver prices can be found at Kitco. A 100 year interactive gold and silver chart, adjusted for inflation is available at MacroTrends. The inflation adjusted high from 1980 was not exceeded by the high hit in 2011 according to that chart.

Still, I would not argue too much with the gold bugs when the gold price per ounce has gone from around $35 in the early 1970s to over $1,200 now.

I do not profess to know the "fair value" of gold and silver, and I doubt that anyone really has a clue. There is certainly no shortage of pundits who have charts and theories about the future direction in prices.

I really only know that human beings have placed a value on these metals for centuries and will likely continue doing so, even though the price will be unpredictable and is not moored by any tangible criteria such as earnings, interest, revenues, free cash flow, etc. What is Gold's "Fair Value"? (4/23/13 Post) Gold and silver has a place in my opinion in an asset allocation. My allocation is less than 1% overall.

U.S. Treasuries and Swiss Government Bonds: 

As of 10/31/14, this fund had a 19.04% allocation to U.S. treasuries and 9.82% to Swiss government bonds which included some funds held in Swiss Franc deposits:

U.S. Treasuries
Swiss Franc Assets
Those assets would have been a good buffer during the cataclysm after Lehman's failure in September 2008.

Intermediate and long term U.S. treasuries have been in a long term bull market since 1982, with occasional downdrafts such as the one experienced in 2013. Many pundits have been calling for the demise of that bull for several years, but it just keeps chugging along. I would remind the younger investors, who only remember the current long bullish cycle, that there is such an animal as a long term secular BOND BEAR market. The last one lasted roughly from 1949 to 1982, as shown in a long term 10-Year US Treasury chart.

The Swiss Franc assets would have been a positive until the 2011 summer when the Swiss National Bank started a Jihad against the CHF designed to drive down its value.

Basically, the SNB launched a QE program that resulted in the creation of Swiss Francs that were sold by the SNB to buy Euros. Consequently, before that intervention, the USD/CHF exchange rate was around 1.31 in August 2011 and is now below 1. CHFUSD  Interactive Chart

The loss in the value of the CHF against the USD will negatively flow through into the net asset value of a USD priced fund that owns Swiss government bonds. While I have not done a computation, I suspect that the currency loss would have more than offset the interest payments made by those Swiss government bonds and any increase in their value denominated in CHFs.

The important point about the permanent portfolio allocation is that prices change, frequently in a major and unpredictable way, so the allocation percentages are maintained at relatively constant levels.

Real Estate and Natural Resource Stocks: 

As of 10/31/14, the fund had an allocation of 16.53% to these two stock sectors (Talmud's recommendation is 1/3rd in business, so the fund has close to that percentage invested in stocks when I add the 17.75% allocation to "aggressive growth" stocks noted below)

Natural Resource Stocks 8.19%
I personally would not have much of an allocation to stocks like Vale, Freeport-McMoran, BHP, Peabody, and Rio Tinto now. If those stocks have to be owned now, I would much prefer seeing them with far lower weightings.  I see no catalyst for mining stocks.

VALE Interactive Stock Chart
BHP Interactive Stock Chart
BTU Interactive Stock Chart
RIO Interactive Stock Chart
FCX Interactive Stock Chart

The position in Halcon Resources (HK) is just indefensible in my opinion.

HK Interactive Stock Chart

This entire natural resource allocation would have been a negative for several months now and longer for the mining stocks.

Overall, I would give the managers a "D-" for security selection in this sector. Things change and maybe they are better at predicting the future than I am.

The real estate allocation is mostly in REITs which would have had a positive contribution to total returns for several years. That may change too.

Real Estate 8.14%
Remaining Stock Allocation: "Aggressive Growth"

Over the years, I would characterize this part of the portfolio, weighted at 17.75% of net assets, as following more of a value tilt. Some of the recent additions, like Facebook, would be in the aggressive growth category.

Remaining Bond Allocation: Investment Grade Corporates

The fund had a 10.11% weighting in investment grade corporate bonds. All of those bonds mature prior to 2017, so the yields would be paltry. One benefit of a short duration is that the fund will start to capture higher interest rates when and if rates starts to rise again.

PRPFX is rated three stars by Morningstar. The performance has been disappointing since 2011. The fund did much better when gold and silver prices were in a bull market.

Dividends: In my blog, I have taken snapshots of the distributions paid to me by this fund. The last two annual dividends payments have been large. (Item # 6 Added to Permanent Portfolio (PRPFX) for the 2013 distribution and introduction section of 12/13/14 for the 2014 annual distribution)

Prior to the annual payments made in 2013 and 2014, the fund had been tax efficient with relatively modest year end distributions.

Total Distributions Per Share:
2014: $3.17
2013: $4.60
2012: $  .63
2011: $  .72
2010: $  .32

Historical Dividends.pdf

Rationale: I view this fund to have a small place in my overall asset allocation. I view it as a disaster type portfolio with its strong emphasis on gold, silver and high quality bonds. I have serious problems with some of the stock selections and the weightings given to certain stocks.

I increase my weighting in gold and silver bullion through this fund without having to buy the stuff.

Since I do not currently own U.S. treasuries due to their low yields and risks associated with their durations, I nonetheless gain some exposure indirectly in this fund. I simply have a preference for receiving a fair yield when investing in bonds. I can take the abnormally low yields provided by treasuries now only in small doses through funds.

I am not about to directly lend the U.S. money for ten years at less than 2%. It takes 35 years for money to double at 2% before taxes and inflation. Estimate Compound Interest

If and when this fund returns to a high $40 per share price, I may elect to sell some of my higher cost shares, including the share purchased at $43.07 with the 2013 annual distribution of $4.6 per share.

The Permanent Portfolio is not a stock bull market fund, as shown by its dismal total return numbers in 2013 and 2014, both in negative territory according to Morningstar.

The fund declined 8.36% in 2008 and had decent total returns for a moderate allocation fund in 2004 (+12.04%); 2006 (+13.82%); 2007 (+12.43%); 2009 (+19.08%); 2010 (+19.31%) and slightly outperformed the SPY's negligible and positive total return in 2011.  SPY, an ETF for the S & P 500, had a negative total return of -36.97% in 2008, and sometimes the investor wins by losing a lot less. 

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