Saturday, February 28, 2015

Added 150 AEG at $7.79/Sold: 50 CBLPRD at $26.06 in Roth IRA and 50 FPOPRA at $26.2 in Taxable Account/Bought 1000 Asaleo Care at AUD$1.86

I discuss last Friday's purchase of Aegon (AEG) in a SA Instablog:  

Added To AEGON (AEG) - South Gent | Seeking Alpha

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 American Trucking Associations reported that truck tonnage increased 1.2% in January. The ATA's Truck Tonnage Index hit an all time high at 135.7 last month.

Seasonally adjusted CPI declined by .7% in January. Energy costs declined by 9.7% and 19.6% over the past 12 months. On a non-adjusted basis, CPI fell .1% over the twelve month period ending in January. Core consumer prices rose .2% in January. Core CPI has risen 1.6% over the past year before seasonal adjustments. Consumer Price Index Summary The Cleveland Fed's Median CPI Index rose .2% in January, a 1.9% annualized rate, and is up 2.2% over the past year. Current Median CPI

The government revised 4th quarter real GDP growth to 2.2% from its 2.6% original estimate. Growth in consumer spending was left unchanged at a rapid 4.2%. The PCE price index fell at a .4% annualized pace due to energy price declines. Excluding food and energy, the core PCE price index rose at a 1.1% rate. News Release: Gross Domestic Product

First Trust Take on the GDP Report

The following snapshot contains treasury yield data starting 2/2/15 and ending on 2/27/15:

Daily Treasury Yield Curve Rates

1. Sold 50 CBLPRD at $26.06 in Roth IRA (Equity REIT Common and Preferred Stock Basket Strategy)(see Disclaimer):

Snapshot of Trade:

2015 Roth IRA Sold 50 CBLPRD at $26.06

Snapshot of Roth IRA History:

Dividends: $138.3

Snapshot of Profit:

2015 CBLPRD 50 Shares +$58.98

Item # 6 Bought 50 CBLPRD at $24.6 (9/14/13 Post)

Total Return: $197.28 or 15.94% (holding period 17+ months)

Security Description:  CBL & Associates Properties Inc. 7.375% Cumulative Preferred Series D stock (CBL.PD) is a cumulative equity preferred stock issued by mall REIT CBL & Associates Properties Inc that will pay mostly or entirely non-qualified dividends at the fixed coupon rate of 7.375% on a $25 par value. Prospectus

CBLPRD can be called now at the issuer's option. It is possible that CBL will call the security provided it can refinance at a sufficiently lower rate to make it worthwhile.  

CBLPRC, which had a 7.75% coupon. was redeemed in November 2012. CBL Announces Redemption of 7.75% Series C Cumulative Redeemable Preferred Stock My first buy of that one was near $10. I am pleased that I have not lost money on any of those preferred stocks yet, and I would like to keep that way.

Total Realized Gains to Date CBL Equity Preferred Stocks: +$522.39

Prior Trades: As noted in the post discussing this trade, I have nibbled on CBL preferred stocks for several years (snapshots at Item # 5 Bought 50 CBLPRE at $22.7). I have also bought and sold the functionally equivalent CBLPRE as part of my equity REIT basket strategy. Sold:  50 CBLPRE at $23.81

Rationale: I see more downside risk than upside potential at a $26.06 price, which represents a 4.24% premium to the $25 par value.

This preferred stock traded down to $23.75 during the 2013 interest rate spike, falling from a April 2013 high near $25.5. CBL.PD Stock Chart

Future Buys: I will consider buying this preferred stock back in an IRA when its current yield exceeds 8%.

2. Sold 50 FPOPRA at $26.2 (Equity REIT Common and Preferred Stock Basket Strategy)(see Disclaimer):

Snapshot of Trade:

2015 Sold 50 FPOPRA at $26.2

Snapshot of Profit:

2015 FPOPRA 50 Shares +$81.58

Item # 1 Bought: 50 FPOPRA at $24.25 (1/6/14 Post)

Dividends: $121.09 (5 quarterly dividends)

Total Return: $202.67 or 16.6% (holding period 13 + months)

Security Description: The First Potomac Realty Trust Cumulative Preferred Stock Series A. FPO.PA) is an equity preferred stock issued by the REIT First Potomac Realty Trust (FPO:NYSE). This preferred stock pays cumulative and non-qualified dividends at the fixed coupon rate of 7.75% on a $25 par value. Distributions are paid quarterly. FPO has the option to redeem this security on or after 1/18/2016. There is a typical dividend stopper clause contained in the prospectus at page S-18.

There is also a change of control provision (pages S-19 to S-23)


SEC Filings for FPO

FPO 2014 10-K

Rationale: I see more downside risk than upside potential at a $26.2 price, which represents a 4.8% premium to par value.

During the interest rate rise in 2013, this preferred stock fell to about $24 after trading over $26.6 in May 2013. FPO.PA Stock Chart

Future Buys/Sells: I will consider repurchasing this preferred stock when and if the price falls below my last purchase price.

3. Bought 1000 Asaleo Care Limited at AUD$1.8576 (Australian Dollar Strategy)(see Disclaimer):

This stock went ex dividend for a AUD$.054 distribution three days after my purchase. Asaleo Care Ltd - Bloomberg The company currently intends to pay out 70% to 80% of statutory net profits after tax (NPAT). I can not link the reference, but I am referring to page 11 of 115 in the "Appendix 4E for 2014 Financial Year", which can be downloaded for review at Asaleo Care.

Snapshot of Trade:

Conversion USDs into AUDS:

Currency Exchange Without Broker's Fee-Approximate Value:

When I placed the trade at approximately 10:00 P.M. CST, the rate was 1.2764 or about 1.35%. The fee is supposed to be 1% which is built into the exchange rate.

Company Description: Asaleo Care Ltd (AHY:ASX) is an Australian based personal care products company. I took a snapshot of the products rather than describing them in words:

Asaleo's products are distributed in Australia, New Zealand and Fiji.

For 2015, the company is currently projecting low to mid single digit growth in net profit before taxes, and it does not anticipate paying Australian income taxes until F/Y 2016. The company did pay $2.5M in tax to New Zealand in F/Y 2014 and $.4M to Fiji.

Svenska Cellulosa AB (SCAB:STO) owned 32.5% of Asaleo's shares as of 12/31/14. I own 50 shares of Svenska's ADR which has performed well since my purchase: Bought Svenska Cellulosa (SVCBY)-A Swedish Personal Care And Tissue Company - South Gent | Seeking Alpha I mentioned Asaleo when discussing that purchase.

The company claims that EBITDA is growing:

Last Earnings Report: All amounts are expressed in Australian Dollars.

F/Y 14 Financials vs. F/Y 13:

The fiscal 2014 results were adversely impacted by significant non-recurring costs connected to the firm's IPO. Those items are described at page 26 of the Appendix referenced above.

The company provides pro-forma adjustments to its reported profits:

The company has drawn $271M on its $350M credit facility as of 12/31/14 at an "all up" cost of 4.4%.

Rationale:  The primary reasons are diversification, valuation and dividend support.

Bloomberg has the P/E at 13.74 based on estimated 2015 E.P.S and a AUD$1.8 share price. That is cheaper than other personal care product companies. I also was able to acquire shares at a discount due to using my USDs to make the purchase. I will soon receive a dividend paid in AUDs. While that dividend will not be franked, future dividends starting in F/Y 2016 may be partially or entirely franked depending on the company's tax rate.

Risks: The company summarizes risks incident to its operations starting at page 35 of the previously referenced Appendix 4E available for download at Asaleo Care.

This company is a small minnow in a highly competitive industry.

The company's history as a public company is of recent vintage.

Needless to say, an investor who is not a long term owner of AUDs is exposed to currency risk when buying a foreign stock after converting their native currency into the foreign local currency in order to complete the purchase.

I also bought some AUDs in excess of what I needed to pay for this purchase:

AUD/USD Chart 

SA Instablog Published Discussing Aegon (AEG) Add

I published an SA Instablog earlier today discussing yesterday's purchase of 150 AEG shares. 

I was concerned that a SA commenter, who goes by the name SDS, might report me again to the SA police. Just kidding here. 

His troll like nonsensical assertions, made without an iota of factual justification,  included a claim that I was falsely categorizing a discussion of a dividend paying stock in SA's "Income Investing" category and that my posts were "spam" and some kind of "push scheme" since I was discussing "obscure dividend stocks", which was a reference to two of the largest banks in the world whose dividend yields were far higher than the S & P 500 average.  

Actually, I believe that it is SA that put that category on my Instablogs when they made the decision to publish one as an article. 

I am sporadically writing another post for publication here but I am spending more time watching House of Cards released yesterday by Netflix.

Link to my Response to SDS:

Wednesday, February 25, 2015

Bought 100 Holcim (HCMLY) at $15.41/Bought 50 ANZBY at $27.24/Sold 100 ARCC Roth IRA at $17.05

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:

According to data compiled by Wells Capital, the median P/E for NYSE listed stocks with positive earnings was substantially higher in 2014 than in 2000. The excessive valuations for large capitalization stocks caused the overall P/E numbers to be higher in 2000.

I left a comment to a SA article that referenced that report: Don't Kid Yourself: Stocks Are Just As Overvalued Today As They Were In 2000 | Seeking Alpha


1. Bought 50 ANZBY at $27.24 (see Disclaimer):

Snapshot of Trade:

Ordinary Shares/ADR: I bought the ADR that trades on the U.S. pink sheet exchange. Australia & New Zealand Banking Group Ltd. (ANZBY)

1 ADR = 1 Ordinary Share

The Australian stock market had closed when I placed my order. I converted the AUD$35.04 closing price in Australia to arrive at the USD equivalent ADR price:

Ordinary Shares Quote:  Australia & New Zealand Banking Group Ltd. (ANZ:ASX)

AUD=Australian Dollar

AUD/USD Interactive Chart

Five Year Chart-Ordinary Share: ANZ:AU Stock Chart

Company Description: The Australia & New Zealand Banking Group Ltd.  (ANZBY) is one of the top four banks based in Australia and is within the top 25 banks globally based on market capitalization.

ANZ is expanding its presence in Asian markets. The compounded annual earnings growth rate in Asia was 37% over the six year period ending 9/30/14: Media Release.pdf The goal is to have Asian sourced revenue to generate 25% to 30% of the group's profit by 2017 (page 22 of Annual Report)

I took a snapshot of the annual reported financial information starting in 2010 through 2014 that shows improving results.

All amounts are expressed in Australian Dollars:

Sourced: Page 196 from the 2014 ANZ Annual Report.pdf

Basic earnings per share increased from $1.789 to $2.671. The dividend increased from $1.26 to $1.78. Tangible book value per share increased by 41.13%. The 2014 tangible book value per share was reported at $14.65. At at AUD$35.05 price, the shares were selling at 2.39 times tangible book.

2014 ROE: 15.8%
2014 ROA:   1%

Net Interest Margin: 2.13% Down 9bps from 2013 (page 16)
2014 Operating Expenses to Operating Income: 44.7% (page 18)
Basel III Common Equity TIER 1: 12.7% (page 20)

ANZ's senior debt is rated AA- by S & P and Aa2 by Moody's. Corporate Overview

Comparison Chart ANZBY vs. ANZ:AU: The following chart highlights both the currency risk and opportunity inherent whenever an investor buys a USD priced ADR. The price of the ADR will reflect the ordinary share price in its local currency converted into USDs.

Over the past year, the AUD has fallen significantly in value against the USD and that decline will flow through into the performance of the USD priced ANZBY causing the ADR to underperform the ordinary shares priced in AUDs.

The AUD/USD hit a high around 1.1035 on 7/28/11. If the ordinary shares had closed at AUD$35.04 that day, the closing price from 2/23/15, the equivalent USD price for the ADR would be $38.6665, or a 42.54% gain in the ADR price just from that increase in the AUD's conversion value into USDs.

By buying the ADR on 2/23/15, I can only say with certainty that the currency risk between 1.1035 and .7846 has been removed from the ADR purchase. I now have the downside risk below .7846 and the upside potential above that number.

Dividends: The dividend growth history is good for a bank, except for the Near Depression period when the dividend was cut. Dividends are paid semi-annually with the first payment made in July with a May record date and the larger amount paid in December.

The dividend growth rate is shown in the following table.

The 2003 annual rate was AUD$.98 which had grown to AUD$1.78 in 2014.

The dividend was cut in the Near Depression period, going from AUD$1.36 in 2007-2008 to AUD$1.02 in 2009. The bank then started to raise the rates in 2010 to the present. The 2011 rate of AUD$1.4 surpassed the annual rate in existence before the slash.

A dividend cut within the past 25 years automatically disqualifies a stock for purchase under my dividend growth strategy. Under the circumstances, the dividend cut was understandable and the dividend rate remained relatively high and considerably better than the 1 cent quarterly rate paid by Citigroup and Bank of America between 2009-2011:

Citigroup Inc. (C): $.01
Bank of America Corporation (BAC): $.01

The annual rate was AUD$.21 in 1994. Using an online calculator, I computed the percentage growth from that annual rate to the 2014 rate as 747.62%. Dividends | ANZ Shareholder Centre

If I assumed a AUD$1.78 dividend rate, with no dividend raises or cuts, and used the conversion value as of 2/15/15, the USD equivalent would be $1.4048 per ADR share or 5.15% based on a total cost per share  $27.24. If I assumed a conversion rate of 1.1035, the average for 7/28/11, the USD equivalent would be $1.9642 or 7.21% based on the same assumption except for the currency exchange rate.  I do not anticipate a return to a 1 for 1 parity anytime soon. The AUD is viewed by many as a commodity currency, and commodity prices are depressed now. Iron ore, one of Australia's major exports to China, has been smashed in price due to lower demand and more supply. Iron Ore - Monthly Price

The actual amount per ADR share will vary based on the dividend paid in AUDs and the conversion rate from AUDs into USDs. The foregoing just gives me a ballpark kind of guess. The dividend yield would be higher based on the AUD/USD gaining in value above .7892 used for purposes of the preceding hypothetical and will also change based on an increase in the dividend rate above what was paid in 2014.

Foreign Withholding Tax-None As Long as Dividend is "Fully Franked": The snapshot also shows that the dividend payments since 1993 have been "fully franked" which simply means that Australia will not withhold a tax on the dividend payment. Once an Australian corporation pays 30% at the corporate level, there is no tax on the dividend distribution. Australian Taxation OfficeAustralian taxation of dividends

Recent Earnings Report: Australian banks provide detailed earnings information twice per year. The last detailed report was for the F/Y ending September 30, 2014. The interim report for the Q/E 12/31/14, which is simply called a "trading update", was released in February 2015 and caused a 2% price decline in the shares. Reuters

For the first quarter of the 2015 F/Y, the bank reported an unaudited cash profit of AUD$1.79B,  up slightly from AUD$1.73B in the 2014 F/Y first quarter.

Comparison 2014 4th Quarter with 2013 4th Quarter:

More detail is provided in the Investor Presentation. The internationally comparable Tier 1 and total capital ratio were 13.8% and 16.1% as of 12/31/14 (page 4)

The Australian Prudential Regulation Authority apparently has a different formula than Basel III for calculating capital ratios. The following snapshot discloses the differences:

Rationale: I am treading cautiously given the risks discussed below.

The core reasons for this purchase are simply stated as follows:

1. The current dividend yield is close to 5.15%, based on the assumptions outlined in the dividend section above, and ANZ has a long history of dividend raises and one modern era dividend cut.

2. A lot of the currency risk has been eliminated with the AUD/USD at .78. While the AUD could continue to decline, I simply view the balance of the currency risk/reward to tilt in favor of reward at that level. A substantial price gain could be realized by a return to parity assuming no change in the AUD priced ordinary shares.

3. The expansion outside of Australia and New Zealand gives the bank exposure to Asia's growth markets.

4. The bank appears to be adequately capitalized and prudently managed as shown by its performance in the Near Depression period compared to similar sized institutions in the U.S. and Europe. The 2011 Annual-Report shows a decline in profitability from AUD$ 4.18B (2007) to AUD$2.943B (2009) but the profit then accelerated back to AUD$4.401B in 2010 (page 84). Overall, I view that decline and rebound positively under the circumstances and particularly compared to other large banking institutions in developed markets outside of Canada and Australia.

Risks: I would classify the currency risk and a possible meltdown in Australian property values to be among the primary risks. The currency risk is highlighted by the one year comparison chart shown above.

The concerns about Australian and Canadian banks are similar. The concern involves a potentially dangerous mix of rapidly increasing home prices outpacing growth in real disposable incomes in the context of abnormally high consumer debt levels to disposable income. In Australia, the problem is being aggravated now by banks increasing the number of interest only loans that are more susceptible to defaults. I suspect that is being done to make the payments affordable to some families but that practice needs to stop altogether. It helps to catapult prices higher in an unsustainable manner.

I am not going to summarize those risks in detail and will simply point anyone interested to some recent data:

A number of important charts about household income, debt and net worth can be found in the 2014 Trends in Household Debt published by the Australian Bureau of Statistics. Australian Social Trends, 2014

I took a snapshot of two charts:

That last chart is not similar to the FED's DSR ratio which includes all debt service payments (principal and interest). Household Debt Service Payments as a Percent of Disposable Personal Income -St. Louis Fed

Real household wealth hit $323,000 at the end of 2013.  The average real price of residential dwellings was reported at $539,400 as of 12/31/13, up from $500,700 in September 2012.

The biggest increase Y-O-Y  in residential home prices was a 12.2% rise in Sydney's. 6416.0 - Residential Property Price Indexes: Eight Capital Cities, Dec 2014

The 2014 household savings rate in Australia was reported at 9.5965%, almost twice as high as the 4.65% for Canadian households, which is one mitigating factor in favor of Australia compared to both Canada and the U.S. Economic Outlook No 96 - November 2014 - OECD Annual Projections : Household saving rates - forecasts

"Australian Bank Risks Have Risen with House Prices" – Fitch 

"Don’t lose sleep over mortgage debts" - QV Equities Ltd.

Charts on Australia's Economy Presented by Australia's Central Bank February 2015  (see page 6)

A recent stress test conducted by the Australian regulatory authority highlighted the ability of the Australian banks to weather a significant downturn.

Link to APRA's Stress Test Article: Seeking strength in adversity: Lessons from APRA's 2014 stress test on Australia's largest banks

An ongoing regulatory review may require Australian banks to increase their capital. Bloomberg BusinessMurray Financial System Inquiry recommends raising capital requirements for Australian ADIs There are securities other than common stock that meet the equity capital qualifications.

ANZ recently floated a hybrid security that qualifies as Additional Tier 1 capital: ANZ Capital Notes 3 Prospectus.pdfANZ-first hybrid of 2015

The company describes risks incident to its operations starting at page 197 of its 2014 Annual Report.pdf.

I do not have a target price. I may average down, but not up. Given my assessment of the risks, I doubt that I will accumulate more than 100 shares. I also currently own National Bank of Australia. If I see more prudent home lending practices, and a much needed slowdown in the currently hot property markets, I will consider buying more than that current limit. I also currently own National Bank of Australia, and have traded that stock in the past successfully so far.

2. Bought 100 Holcim (HCMLY) at $15.41 (see Disclaimer):

Snapshot of Trade: I bought the ADR using USDs on the U.S. pink sheet exchange: Holcim Ltd. (HCMLY)

Ordinary Shares/ADR: 1 ADR= .2 Ordinary Shares

HOLN:SIX Swiss Stock Quote-Holcim Ltd

$77.2639 ÷ 5= $15.45 equivalent ADR price

1 Year Chart Ordinary Share vs. ADR
The ADR has gone nowhere over the past five years: HCMLY Interactive Stock Chart The current price is about where the stock was trading back in April 2010. Since that time, the shares have traded down to near $10 and as high as $18.50+ last year.

The shares certainly do not qualify as a momentum play. The stock does not qualify under my dividend growth strategy or my large cap valuation strategy. This stock is basically an outlier to all strategies except the one based on feel. The OG feels that the next five years will be better than the last five for this company. The last five years has not been an optimal period for cement and aggregate companies, particularly one with significant operations in Europe.

Company Description:  Holcim Ltd. ADS  (HCMLY) is one of the world's largest suppliers of cement and aggregates (crushed stone, gravel and sand.). The company is based in Switzerland and the primary market for the ordinary shares is the Swiss Stock Exchange.

On April 7, 2014, Holcim and Lafarge announced an agreement to merge. The terms of the agreement is for Lafarge shareholders to receive 1 Holcim share for each Lafarge share. Both parties are still working on acquiring all necessary government approvals. Some operations will need to be sold in order to satisfy regulators. ReutersWSJ,European Commission Press release: Commission approves acquisition of Lafarge by Holcim, subject to conditions

The following snapshots summarize Holcim's worldwide operations:

Holcim does have a significant presence in several emerging markets including significant operations in both China and India.

Page 78: Map of Plants in India and, Asia-Pacific
Page 82: Map of Plants in Mexico, Central and South America
Page 86: Map of European Plant Locations
Page 90: Map of U.S. and Canada Plant Locations

The ownership interests in foreign subsidiaries is detailed starting at page 219 of the Annual Report.

2014 Annual Report.pdf

Dividends: Holcim's policy is to distribute one third of consolidated profit attributable to its shareholders as an annual dividend. Given the uneven profit amounts since 2007, the dividend rate was reduced three out of four years before bottoming at CHF 1 per ordinary share or CHF .2 for the ADR.  

Holcim Ltd - Dividend policy

Recent Earnings Report: For the Q/E 12/31/14, Holcim reported a net profit of 355 million francs, significantly better than the consensus estimate of 324M, and up from 233M during the 2013 4th quarter.  Net sales increased to 4.87 million francs from 4.78M in the year ago quarter. Cost cutting contributed 748M francs to the 2014 operating profit.

2014 Annual Report .pdf

Holcim Earnings Press Release

Rationale: I can not justify this purchase using my standard criteria. The erratic dividend, the dividend cuts, and the low dividend yield obviously disqualify this purchase under a dividend growth strategy.

The TTM P/E and estimated P/E based on 2015 E.P.S. estimates are too high for the large cap valuation strategy. Bloomberg has the TTM P/E for the ordinary shares at 18.65 and 17.86 based on the estimated 2015 E.P.S. of CHF4.123, both based on a closing stock price of CHF 73.65.

Instead, besides increasing my exposure to assets priced in Swiss Francs, which I generally view as desirable long term, I am playing mostly my relatively upbeat opinions about worldwide demand for this company's products over the next decade. It either happens or it falls flat. The shares have certainly been a disappointment to someone purchasing a position five years ago.

Risks: With worldwide operations, including plants in several developing countries, the company is exposed to a variety of currency and country risks.

It is hard to say when there will be a worldwide, sustained pick up in demand for cement and aggregates.

For 2015, Holcim sees flat demand in Europe. The U.S., India, Indonesia, Mexico, Colombia, the U.K. are expected to be the "main growth drivers". The company expects Asia-Pacific to grow but continuing at a "modest" pace. Excluding merger costs and without including Lafarge, the company expects operating profit to be in the CHF 2.7B to 2.9B range in 2015.  If achieved, that range would be an improvement over the 2014 adjusted operating profit of 2.466B francs. The company will need to string together several years of profit growth for the shares to significantly rise in value, in my opinion. By significant, I would mean a $20+ ADR price that is solely due to a rise in the CHF priced shares (i.e. excluding currency impact on the ADR price)

The company has a lot of debt with the amounts and maturity schedules shown starting at page 199 of its 2014 Annual Report.pdf

The company discusses risks incident to its operations starting at page 167 of the 2014 Annual Report.

There is also currency risks, and potential currency benefits, to the owner of the USD priced ADR. Generally speaking, a rise in the CHF's value against the USD after my purchase will cause the USD priced ADR to outperform the ordinary shares traded in Switzerland and priced in CHFs. The converse is also true. A decline in the CHF flows through into the price of the ADR.

The worst scenario is for both the ordinary shares and the CHF to decline after purchase-the Double Whammy. The best scenario is for the ordinary shares and the CHF to rise after purchase-the Twofer.

Future Buys and Sells: I am not likely to buy more. I do not have a target price. I am hoping for a gradual and persistent improvement in worldwide demand for concrete and aggregates that will lead to consistently higher profits and dividends and consequently a much higher share price. That hope is based in large part on my relatively upbeat views about world GDP growth over the next decade. Demand conditions are been poor for cement companies starting with the Near Depression and continuing with its aftershocks that have restrained government spending for infrastructure projects (outside of China) and new residential construction.

New residential construction in the U.S. remains near the low points in prior recessions, which is not surprising given the role of that sector in the near collapse of the world's financial system: New One Family Houses Sold: United States-St. Louis Fed

3. Sold 100 ARCC at $17.05 (see Disclaimer):

Snapshot of Trade:

2015 Sold 100 ARCC at $17.05

Roth IRA History:

Dividends: $157


2015 Roth IRA ARCC 100 Shares +$19.97
Total Return: $176.97

Remaining ARCC Position-Taxable Account Only:

The 50 share lot purchase discussed in an  October 2014 SA Instablog is included in the remaining 100 shares. Bought 50 ARCC At $15.41-A Typical Small Lot Purchase Of An Externally Managed BDC Stock - South Gent | Seeking Alpha The other 50 share lot was purchased in 2011: Bought: 50 of the BDC ARCC at $16.17 (1/21/11 Post)

Rationale: I have decided to gradually eliminate BDCs from my IRAs, now viewing their many disadvantages to be inconsistent with the capital preservation emphasis in those accounts.

My tipping point was reached when both FSC and PSEC slashed their dividends and continued to report significant declines in their respective net asset value per share as the external managers feasted on more income for themselves. These two BDCs and several others exist to enrich the external managers. Their relatively high dividend yields are the honey to attract individual investors, desperate for yield, to buy shares, a necessary precondition to the wealth generation for the external managers. Many of those mom and pop investors fail to notice that assets are being incinerated over time that results in a lower share price gradually working its way to zero.

I previously sold a 70 ARCC share lot in another ROTH IRA account. Sold Roth IRA: 100 PNNT at $9.53 and 70 ARCC at $16.87-Balancing Risks and Rewards (2/17/15 Post)

I have no ARCC position in an IRA account now and will not initiate one again.

I realized my general goal for a BDC stock. I harvested several dividends and exited the position at a profit.

While I view ARCC to be the best externally managed BDC, that is faint praise. I have been very critical of externally managed BDCs in this blog, and I am now just fed up with them.

I will be looking to sell the few remaining BDC positions held in IRAs when I can do so at a profit. Once a position is eliminated, I will not buy the shares back.  

Saturday, February 21, 2015

Continued Paring Interest Rate Risk: Sold 100 of the ETF GYLD at $25.49/Bought 50 Shares of Svenska Handelsbanken (SVNLY) at $23.65/Tiptoed Back into the Exchange Traded Synthetic Floater GYB

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:

Coca Cola (own) increased its quarterly dividend by 8% to $.33 per share. The Board of Directors of The Coca-Cola Company Announces 53rd Consecutive Annual Dividend Increase

I currently own 265 shares at an average cost per share of $25.41 (snapshot in the introduction section to this post: KO). I quit reinvesting the dividend several years ago based on my opinions about KO's valuation at the reinvestment prices. The dividend raise brings me up to a 5.195% yield based on my constant cost number. I re-initiated KO at a split adjusted price of $19.36 in March 2009 and later added shares in 2010 at the split adjusted prices of $27.13 and $26.885. The blogs discussing those purchases mention prices that are not adjusted for the subsequent 2 for 1 stock split paid in 2012: Buy of KO at $38.72 (March 10, 2009 Post)

The Coca-Cola Company Stock Split History: The Coca-Cola Company

I own 500 units of the Canadian REIT Dream Industrial who reported results for the 2014 4th quarter last Tuesday: Dream Industrial Reports 6.5% Growth in AFFO Per Unit Over Prior Year

Equity REIT Basket Strategy: Added 200 Of The Canadian REIT Dream Industrial At C$9.03-South Gent | Seeking Alpha

The market reacted positively to this report, taking DIR-UN.TO up C$.28 or 3.13% to close at C$9.23. This Canadian REIT is currently paying a monthly distribution of C$.05833 or C$.7 per unit annually.

I also own 500 units of the Canadian REIT Dream Global which owns primarily office buildings in Germany. That REIT reported a 5% Y-O-Y increase in AFFO to $.83 per unit. Dream Global REIT Reports Strong 2014 Year End Results and Closes Millerntorplatz Acquisition in Hamburg for $136 Million

Added 200 DRG:CA At C$8.92 - South Gent | Seeking Alpha

I also own Dream Office units that reported AFFO per share of C$2.52 for 2014. Dream Office REIT Reports Strong Leasing Activity and 2014 Year-End Results


1. Sold 100 GYLD at $25.59 (see Disclaimer):

Snapshot of Trade:

2015 Sold 100 of the ETF GYLD at $25.49

Snapshot of Profit:

2015 GYLD 100 Shares +$149.05 
Bought 100 of the ETF GYLD at $23.84 (1/4/15 Post)

GYLD Quote:

Sold on Ex Dividend Date
Dividends Paid or To Be Paid: $23.38
Total Return:  $172.43   (or 7.21% in 1+ months)

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

Sponsor's website

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 2/18/14:


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 2/19/15:

Belgium    .578%
France       .625%
Germany   .38%
Japan         .38%
Netherlands: .434%
Switzerland  .03%
Global Government
Government Bond Yields - Bloomberg

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

Fact Sheet.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)

The parabolic up move in the dollar is also reflected in the Bloomberg Dollar Spot Index chart (expand to one year)

GYLD Page at Morningstar

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

Currency risks contributed to the net asset value per share decline since I sold shares at $28.32, as described in the "Prior Trades" section.

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 to Date: +$328.58
Total Return: +$830.13 ($657.7 prior trades)
Dividends as a % of Total Return= 39.58%

Rationale: Given the significant rise in the ten year treasury yield since 2/2/15, I decided to eliminate this position due to interest rate risk concerns.

When buying this ETF, I made the following statement. 

"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."

I did not make to that 10% annualized return but my holding period was just 1+ months.

Future Buys: With a lower price and a higher yield, I will consider a repurchase. My last purchase was at $23.84. I will probably buy back the 100 share lot in two 50 share lots given my risk assessment, with the first lot possibly purchased at less than $22

2: Bought 50 SVNLY at $23.65 (see Disclaimer):

Snapshot of Trade:

Company Description: Svenska Handelsbanken AB ADS (SVNLY) is a large European bank based in Sweden with operations throughout the Nordic region and in Great Britain. Based on a 2013 analysis by Bloomberg, Handelsbanken was rated the strongest bank in Europe and the eleventh worldwide. Toronto Dominion, another recent purchase, was ranked at #8.

As of 12/31/14, this bank had 832 branches located in the following countries:

Sweden:    463
U.K:          178
Denmark:    57
Norway:      51
Finland:       46
Netherlands 20
Other:          17

When announcing 4th quarter results, the Board proposed a 3 for 1 stock split subject to shareholder approval. The Board further proposed an annual dividend of Swedish Krone (hereinafter SEK) 12.5 per share and a special dividend of SEK 5 per share.

Operating profit for 2014 was up 6% to 19,212 million SEKs. Profit after tax was also up 6% to SEK15,184M.

I translated the 2014 after tax SEK profit into USDs as of 12/31/14:

2014 Profit after Tax=$2.0399+B

Return on equity was 13.4% for the year. For comparison, the average ROE for U.S. banks was 8.91% for the 2014 4th quarter: Return on Average Equity for all U.S. Banks-St. Louis Fed

Earnings per share increased 6% to SEK 23.89  compared to 2013.

Investor Relations: Handelsbanken

February 2015 Investor Presentation .pdf

2014 Fact Book/pdf

Link to a positive Seeking Alpha article on Handelsbanken published last January. I will not be repeating the factual statements about this bank made in that article.

Share Description: I bought the ADR shares traded on the pink sheet exchange using USDs. Svenska Handelsbanken (SVNLY)

Ordinary Share Quotes:

Marketwatch: Svenska Handelsbanken Series A Stock Price Today (SHBA:STO)

Bloomberg: Svenska Handelsbanken AB

On the date of my trade, the ordinary shares had closed at SEK 399, up .4 or .1%.

I converted that closing price into USDs:

1 ADR = .5 Ordinary Shares

I consequently needed to divide the $47.3672 number shown in the preceding snapshot by two, which gave me $23.686  for the ADR share.

Currency Risk and Opportunity:

This is a ten year SEK/USD chart, which shows the SEK is near a ten year low vs. the USD.

The following one year chart highlights the negative currency impact on the USD priced ADR that has declined close to 5% even as the ordinary shares have risen close to 20%.

That substantial differential in performance highlights both the risks and potential benefits that are inherent whenever a U.S. investor buys a foreign stock. Currency risk is not avoided by buying a USD priced ADR. The ADR price will reflect the ordinary share price in the local currency (SEKs for this stock) converted into USDs. After an investor purchases an ADR, the general rule is a rise in the foreign currency against the USD is a positive event, which results in a higher dividend yield and a better performance for the ADR compared to the ordinary shares, while a decline in the foreign currency is a negative event for the same reasons.

There are also other currency issues that are more indirect, such as the impact on earnings, revenues and overall competitiveness due to currency movements which can impact the ordinary share price and consequently the ADR price. An example occurred in mid-January when the Swiss National Bank ended its  €1.2 peg. The Swiss Franc rose in value against both the Euro and the USD, making Swiss ADRs rise in price and increasing the value of their dividends paid in CHFs when converted into USDs. However, the rise in the CHF also caused the Swiss stock market to fall precipitously for a variety of reasons, including the impact of a higher CHF on earnings and revenues. The net impact was slightly positive for the U.S.D. priced Swiss ADRs. Long term, I see that currency impact on earnings and revenues diminishing, except for a few Swiss firms that mostly manufacture in Switzerland and export their product into weaker currency nations.

Dividends: In my years of research, Handelsbanken is the only major company where I have not been able to find historical dividend information at the company's website. I found that omission by the bank to be extremely annoying and inexcusable.

I found some annual dividend information at Morningstar for the U.S. traded ordinary shares: (SVNLF) A symbol ending in "F" denotes ordinary shares. ADR shares have "Y" as the last letter.

SEKs Ordinary Shares

2010   8
2011   9
2012   9.75
2013  10.75
2014  16.5 (SEK  5 Special)
2015  17.5 (SEK  5 Special)

For U.S. citizens, it is my understanding that Sweden will withhold 15% under its tax treaty with the U.S. Article 10Treaty Rates | Deloitte International Tax Source. I will not buy any foreign dividend paying stock in an IRA where a tax is collected, since there is no way to recover that tax through a foreign tax credit, as explained in this Schwab publication.

Recent Earnings Report:

The following table contains relevant data. As noted earlier, the capital ratios are superior, with a 2014 year end Tier 1 ratio of 20.4%. The 2014 return on equity of 13.4% (13.3% from continuing operations) is superior to U.S. banks of a similar size.

The bank explained the earnings drop off in 4th quarter compared to the 3rd to "seasonal effects and increasing loan losses".

For 2014, loans losses to total loans was .1% and impaired loans was at .25%:

Highlights 2014 Annual Report/pdf

Rationale: I try to keep this relatively simple for my own sake. Sometimes, it pays just to reduce these investment decisions to a few, easily understandable core reasons.

1. This bank appears to be rock solid.

2. The dividend provides some support to the current stock price and has been increased in recent years.

3. The ADR share price has been negatively impacted by over 20% due to the SEK's decline in value against the USD. That fact removes the currency risk that is already reflected in the ADR price.

4. Recent periods of USD strength have been relatively short lived, as shown in the currency charts, including this ten year chart of the EUR/USD: EUR/USD Chart If the SEK/USD returned to its 4/10/14 value as of .1543, and the ordinary shares remained at SEK 399, the ADR would rise to about $30.77 or 30.13%, just on the currency conversion. The annual dividend would also become more valuable at an exchange rate for the SEK higher than the one prevailing at the time of my purchase.

1 ADR= .5 Ordinary Shares

Risks: The abnormal interest rate environment is squeezing bank net interest margin's throughout the developed world.

Currency risk is major as highlighted above. And, without question, there are a lot of games being played now by central banks that are substantially impacting currency exchange rates. Who really knows when continuous central bank manipulations will end?

The bank summarizes risks started at page 50 of its Annual Report linked above.

3. Bought 50 of the Synthetic Floater GYB at $20.72-Roth IRA (see Disclaimer): This one has some quirky tax issues so I buy it in the ROTH IRA.

Snapshot of Trade: 

2015 Roth IRA Bought 50 GYB at $20.72

Security Description:   The Corporate Asset Backed Corp. CABCO Series 2004-101 Trust Goldman Sachs Capital I Floating Rate Certificates (GYB) is a Synthetic Floater in the Trust Certificate form of ownership, a category of Exchange Traded Bonds.

GYB makes quarterly interest payments at the greater of 3.25% or .85% above the three month Libor rate on a $25 par value. As with other exchange traded synthetic floaters, there is a maximum coupon. For GYB, the maximum is 8.25%: Prospectus Interest payments are made quarterly. The last ex interest date was 2/11/15.

SEC Filings for GYB

The underlying bond owned by the trust is a trust preferred issue from Goldman Sachs Capital I maturing on 2/15/2034 with a 6.345% fixed rate coupon. In effect, the underlying security is a junior bond from GS. That rate will not be received by the owners of GYB unless the swap agreement terminates. There was one swap termination due to Lehman's bankruptcy,  where the owners of the synthetic floater started to be paid the higher coupon amount of the underlying security (the TC JBK).

It is the swap agreement with a brokerage company that creates the rate paid by this security. The trustee receives the interest payments from Goldman Sachs for the 6.345% fixed coupon securities owned by it and then swaps that amount with the brokerage firm for the amount due the owners of GYB. Trustee's Last Distribution Report

The owners of GYB will be entitled to receive $25 per trust certificate on 2/15/2034, assuming GS survives of course. If GS goes bankrupt, I would expect this security to be worthless.

Due to the Fed's Ongoing Jihad Against the Saving Class,  now in its 7th year, the 3 month LIBOR rate is currently close to .25%. Chart: 3 Month London Interbank Offered Rate (LIBOR)

This short term rate would have to rise above 2.4% during the relevant computation period to trigger an increase in the 3.25% minimum coupon. Based on current Federal Reserve monetary policy, a reasonable forecast would be a continuation of the minimum 3.25% for at least another 2 years. By buying GYB at a discount to par value, I am able to juice the yield some.

At at total cost of $20.72, the effective yield rises some to 3.92%.

The current yield would rise to 7.06% at a 5% three month Libor rate during the relevant coupon period (5.85% with the .85% spread x. $25 par value=$1.4624 ÷ $20.72=7.06%)

The maximum current yield would be 9.95% (8.25% x. $25= $2.0625 ÷ $20.72=9.95%)

Assuming GS survives to redeem the trust preferred at par in 2034, the owner of GYB would receive $25 plus accrued interest realizing a profit of $4.28 per trust certificate based on that $20.72 total cost per certificate (or about another 20.65% in addition to whatever interest payments are made prior to maturity)

Whatever the yield turns out to be, I at least transform it into a tax free one by placing this purchase in the Roth IRA.

I discuss some of the risks relating to GYB in several posts written in connection with previous purchases. I discussed the differences in GYB and GJN in several posts after Wells Fargo redeemed GJN and paid itself an egregious swap termination fee. The Egregious Swap Termination Fee Paid to the GJN Swap Counterparty

One notable difference between GYB and GJN is that the underlying security in GYB, a 2034 trust preferred issue, does not contain an escape hatch for a "capital treatment event" that would allow Goldman Sachs to avoid a make whole payment for an optional redemption. Sold 50 JBK at $22.75/Reassessment of Current Synthetic Floater Positions; Item # 3 GJN Redemption (near the end of that post) I discuss this issue in more detail in those linked posts.

The underlying trust preferred security can not be found at FINRA anymore. The CUSIP number is 38143VAA7. It is currently rated at Baa3 by Moody's and BB by S & P according to Fidelity's bond page. That junior bond was selling at around 120 when I purchased GYB. That price indicates that bond investors view the standard make whole provision contained in the bond's prospectus to be enforceable for an optional redemption. Consequently, it is highly unlikely that GS would elect to redeem this bond for the foreseeable future since the make whole payment would be punitive (sum of all interest payments and the principal amount discounted to present value using the equivalent treasury rate for the same maturity plus .2%, page S-15 of the  Prospectus for GS 2034 TP)

A NYT article was written about WFC's behavior in redeeming GJN. A Wells Fargo Security Goes Wrong for Investors - NYT

It needs to be remembered that large financial firms will screw their own customers to make a buck for themselves. That has happened repeatedly over the years. It would take a very large book to describe all of the gory details. And, it will continue to happen for as long as individuals elect to do any business with them.

Prior Trades: My next to last trade was to sell 150 GYB and to use the proceeds to buy 100 DPG: Swap Trade Roth IRA: Sold 100 of 150 GYB at $18.03 & Bought 100 DPG at $17.31 (12/12/12 Post). Those GYB shares were bought at $17.2. The swap trade worked. After reinvesting the quarterly dividends paid by the CEF DPG, which were significantly higher than GYB's interest yield, I sold 113+ DPG shares held in the Roth IRA for a total return of $662.61 or 38.15%:  Item # 8 Sold 113+ DPG at $21.19-Roth IRA (8/19/14 Post)

I have flipped this security so many times that it is just one big blur to the OG. I never have had much exposure to it, mostly 50 to 150 shares at any given time.

Bought 100 GYB at 10.95 /Will Hold Synthetic Floaters In Retirement AccountAdded another 100 GYB in Regular IRA at $11 (April 2009 Post)Sold 50 GYB at $15 (September 2009); Sold 100 GYB at 18.09Bought 70 GYB at 18.49 in Regular IRA (March 2010); Added 30 GYB in IRA at 17.97Sold:  100 GYB @ 19.9 (October 2010); Bought 50 GYB @19.07 (October 2010); Bought 50 GYB at 18.63 in the Roth IRASold 100 GYB at 19.7 in Roth IRA (May 2011); Bought 50 GYB at 16.95 in Roth IRA (August 2011); Added 50 of the Synthetic Floater GYB at $15.56  Sold 100 GYB at $17.07 (January 2012); Bought Back 100 of GYB at 17.2-Roth IRA (March 2012); Added 50 of the Synthetic Floater GYB at $16.5-Roth IRA (May 2012 Post) 

The sell last transaction was 100 shares at $19.75:  Sold Roth IRA: 100 GYB at $19.75 (5/10/14 Post):

2014 Roth IRA 100 GYB +$149.01

My largest realized gain was a $691.71 gain on 100 shares bought in a regular IRA at $11 in April 2009 and sold about one year later. A 50 share lot was also flipped that year:

2010 Regular IRA +$774.42

This last 100 share trade netted a realized gain of $64.98, bringing my 2012 ROTH IRA realized profit total for GYB to $130.28 plus interest payments:

2011 ROTH IRA GYB +$130.28

Two fifty share lots bought and sold in 2011 yielded a $68.97 profit:

2010 ROTH IRA +$68.97
A 2009 round trip on a 50 share lot yielded a $183.98:

2009 ROTH IRA +$183.98

Total Realized Gains: $1,382.72

Rationale and Risks: I have described some of the risks above. The prospectus has a detailed summary of the risks starting at page S-15. Prospectus

A major disadvantage is that the minimum coupon will likely be payable for at least another two years unless there is a currently unexpected rise in inflation that causes the FED to raise the Federal Funds rate at a faster pace than currently anticipated by the market.

A major advantage is that the security provides a measure of inflation/deflation protection in the same security. I would anticipate that this security will likely rise in value when the short term rates start to increase provided the expectation is for an activation of the Libor float provision and no material adverse change in Goldman's creditworthiness.

Long Term Chart: GYB Stock Chart

In the current low short term rate environment, a price rise to $22 or so has stalled and went into reverse. The price was closer to $24 in 2006 and of course cratered in a big way during the Near Depression, which highlight the credit risk issue. As noted in the "prior trades" section, I may my first purchases at $10.95 and $11 back in 2009.

Assuming all goes well with the credit risk and other risks, there is some potential for capital appreciation by holding the security to maturity or possibly selling at or near par value earlier when the merits of the .85% spread to the 3 month Libor rate is more apparent than now.