Sunday, February 8, 2015

Bought Back 300 of the Canadian ETF FIE:CA at C$6.91/Sold 100 CSG at $8.76-Highest Cost Shares

This is the second of two weekend posts

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 government reported that 257,000 jobs were created in January 2015. Employment Situation Summary The average weekly earnings increased by 12 cents to $24.75. Over the past year, hourly earnings have risen by 2.2%. Employment gains for November and December were revised higher by a total of 147,000. The unemployment rate was 5.7%.

None of those numbers are consistent with a continuation of a zero federal funds rate, introduced by the FED over 6 years ago.

I asked recently in a SeekingAlpha comment what is the factual basis for the dire economic growth and inflation forecasts that are required to justify a 10 year treasury at 1.68% and a 30 year at 2.25%, which were the yields in existence on 1/30/15. Daily Treasury Yield Curve Rates That 30 year treasury rate would produce a 1.07% negative real rate of return per year-before taxes- using the long term historical U.S. inflation rate of 3.32%. United States Inflation Rate | 1914-2015

Is that dire long term U.S. inflation and growth forecasts embedded in those historically abnormal yields justified by the 5% real Gross Domestic Product growth in the 3rd quarter perhaps slowing to 3% in the 2014 4th quarter with personal consumption expenditures accelerating; the lowest readings on record in the debt service payments to disposable income ratio (DSR); the decline in the unemployment rate to 5.7% with 257,000 jobs added in January with a 12 cent rise in average hourly earnings and a 147,000 upward revision for the prior two months; a decline in the 4-week moving of initial unemployment claims to the historical lows over the past four decades; the long term forecasts of benign inflation; the consistent and long term movement in the ISM PMI indexes in expansion territory; capacity utilization returning to its long term average where business investment has traditionally increased by 8%, or perhaps some other "negative" data set. That kind of data has to be negative rather than positive, right?

The January Markit services index increased to 54.2 from 53.3 in December.

ADP reported that 213,000 jobs were added in January. The December number was revised to 253,000 from 241K. The report noted that the energy sector had of course already started to shed jobs.

Markit's European composite PMI hit a six month high based on faster growth in Germany, Spain and Italy.

AAR reported that the combined U.S. carload and intermodal originations rose 3.4% in January Y-O-Y.  Excluding coal, carloads were up 6.4%.

The S&P/Experian Consumer Credit Default Composite Index continues to trend down. In December 2009, the index was at 4.78 and had fallen to 1.1 as of December 2014.

China's dismal import and export numbers for January support the bear case.

Albert Edwards, the perma bear strategist for the French bank Societe Generale, believes that deflation in the U.S. will rip the U.S. stock market to "smithereens". If investors start to believe that deflation will become the persistent economic scenario, stock prices will decline in my opinion substantially. I simply do not believe that persistent deflation is a rational forecast based on the currently available or reasonably foreseeable facts.

Omega Healthcare sold 9.5M shares in a public offering at $42 per share, with the normal over allotment option granted to the underwriters.

Boston Private Financial (own) rose 14.07% last Thursday based on a WSJ report that Canadian banks may have looked or are looking now to acquire it. I thought the story was just too nebulous to be actionable.

PennantPark Investment (PNNT) rose 7.23% last Friday to close at $9.49. The stock was upgraded by the Baird firm after PNNT reported earnings basically in line with the company's recent guidance. I last discussed an add at $8.2:   Problematic Exposure To Energy Sector Loans: Added To PNNT At $8.2 - South Gent | Seeking Alpha


1. Bought Back 300 FIE:CA at C$6.91 (Canadian Dollar Strategy)(see Disclaimer): As with other securities bought with my CAD stash, I am trying to generate a return on a currency position that would otherwise earn zero. I attempt to increase my CAD position through dividend payments in CADs and profits realized in CADs.

Snapshot of Trade:

2014 BOUGHT 300 FIE:CA at CAD$6.91
Security Description: The iShares Canadian Financial Monthly Income ETF (FIE:TOR) is a Canadian ETF that owns two other Canadian income ETFs and individual Canadian financial stocks.

Holdings as of 1/30/15 (most holdings captured, but not all):

iShares Canadian Financial Monthly Income ETF | FIE 

The top two holdings are two other Canadian ETFs: iShares 1-5 Year Laddered Corporate Bond Index ETF | CBO (corporate bonds rated "A" or better, staggered equal weightings, expense ratio .27%); iShares S&P/TSX Canadian Preferred Share Index ETF | CPD (198 holdings as of 12/31/14; expense ratio .47%)

The other holdings are a smattering of Canadian REITs, banks and insurance companies.

The 3-8 largest weightings are in the Canadian banks, and I do not have a position in any of them. They appear to be reasonably priced now after correcting in price due largely to factors discussed in the risk section below.

I will just provide links to Marketwatch's Canadian quotes for those banks, which show P/E ratios and yields and has charts showing the recent price declines.

Bank of Montreal Stock (BMO:TOR)
Toronto-Dominion Bank  (TD:TOR)
Royal Bank of Canada  (RY:TOR)
Bank of Nova Scotia (BNS:TOR)
Canadian Imperial Bank of Commerce (CM:TOR)
National Bank of Canada (NA:TOR)

This ETF also owns several of the Canadian REITs that I have discussed in my blog, including the following:

Dream Global Real Estate Investment Trust  (DRG.UN:TOR)
Cominar Real Estate Investment Trust (CUF.UN:TOR)
Canadian Apartment Properties Real Estate Investment Trust  (CAR.UN:TOR)

I currently own 500 Dream Global and 300 Cominar. I have bought and sold Canadian Apartments twice and currently do not have a position.

My most recent discussion of Dream Global can be found in this SA Instablog: Added 200 DRG:CA At C$8.92 - South Gent | Seeking Alpha I last discussed adding to Cominar in Item # 2: Bought 50 100 Cominar REIT at C$18.14

My second purchase of Canadian Apartments was discussed in item #1: Bought 200 Canadian Apartments at C$20.67

In the life insurance sector, the fund owns both Power Financial and Power Corporation. I have bought and sold Power Corporation twice within the past year.

I discussed my last purchase of Power Corporation, which was quickly sold at $28.07, in a SA Instablog: Bought Back Power Corporation Of Canada At $25.81 (PWCDF) - South Gent | Seeking Alpha

The current monthly dividend is C$.04 per share.

I took this snapshot when I purchased shares that shows the sponsor's calculation on some relevant metrics.

Prior Trade: I decided to buy back the 300 shares sold last August: Item # 3 Sold Taxable Account: 300 FIE:CA at C$7.59 (8/16/14 Post)(profit snapshot in USDs=$58.07)-Item # 4 Bought 300 of the Canadian ETF FIE:CA at C$7.26 (3/31/14 Post) The holding period was just 2+ months. I also clipped $33.04 in dividends.

I sold it as part of an ongoing stock allocation reduction that started in June 2014. I had drained close to $70,000 in my REIT sector rotation starting in September 2013. I first explained that rotation in a March 2014 blog.  Equity REIT Common and Preferred Stock Table as of 3/5/14 I then replaced that cash used buying REIT common and preferred stocks by selling mostly underperforming ETFs and CEFs.

In order words, this Canadian ETF was dumped as part of a cash raising cycle. I did buy back the shares at C$6.91, lower than my March 2014 entry price of C$7.26 and managed to clip $91.11 in a total return over 2+ months. Those factors taken in tandem are viewed as a victory here at HQ when playing small ball.

Rationale: I gain exposure to a diversified list of Canadian banks and insurance companies that appear to reasonably valued provided the Canadian housing sector does not collapse and crude prices recover. Those issues are discussed in the risk section.

According to Marketwatch, the P/E ratios based on last Friday's closing prices were as follows for the USD priced shares:

Bank of Montreal (BMO:NYSE) 9.64
Sun Life Financial (SLF:NYSE) 11.7
Toronto-Dominion Bank (TD:NYSE) 10.41
Manulife Financial  (MFC:NYSE) 7.96
Bank of Nova Scotia  (BNS:NYSE) 9.14

Canadian securities priced in USDs  have been negatively impacted by the decline in the CADs value.

The dividend yield is good at about 7% based on a total cost of C$6.91 per share.

Risks:  Prior to the abrupt decline in energy prices starting last summer, investors were mostly concerned about the Canadian banks' exposure to the overheated housing market. There are numerous articles discussing the issues relating to what many analyst believe is an overvalued housing market. An article published at The Motley Fool Canada correctly points out that a large number of home mortgages are guaranteed by a governmental agency called About Canada Mortgage and Housing Corporation or just CMHC; and the loan to value ratio for the uninsured portion is really low. The article has a chart of the insured loan percentage and the average loan to value ratios for the large Canadian banks. TD had 63% insured and a LTV ratio of 61% for the uninsured mortgages. I have trouble getting worked up above this issue, given those facts and some others, unless prices go parabolic from here.

Canadians have a different view about paying their mortgage obligations compared to many Americans. Home mortgages in arrears trend at less than .5%. The latest statistic that I could find is .28% as of October 2014 or 12,959 mortgages out of 4,652,471: .pdf The average home equity is 66% of the value.

For comparison purposes, the U.S. S&P/Experian First Mortgage Default Index was at 4.76 in December 2009 and at 1.02 last December. A number of U.S. states encourage strategic defaults by allowing the borrower to avoid a deficiency judgment or by requiring court approval before a foreclosure which can take years allowing the defaulted borrower to live rent free in a home. In 2011, the NYT that it would take "49 years" to clear the court foreclosure backlog at the then current pace.

About 70% of Canadians pay off their credit card balances every month. Household Borrowing in Canada

The hand wringing usually starts with some negative statistics including the increases in home prices (particularly in Vancouver and Toronto) and household debt to disposable income ratio which is high. The 2014 third quarter ratio was at 162.6%, Financial Post. The U.S. ratio hit a high slightly over 130% in 2007. Households and Nonprofit Organizations; Credit Market Instruments; Liability, Level/Disposable Personal Income - St. Louis Fed An article published in April 2014 contains the bear case in 11 charts.

There was a barrage of article in the Canadian press over the past week about a McKinsey and Company report that singled out Canada and six other countries as potentially vulnerable due to household debt. (e.g. article at Toronto Star and BNN News)

A pop in home prices can happen due to a number of events. The most important now is that home prices have risen so much that they become unaffordable and a price correction ensues that allows for around 50% of median income families to afford a median price home. Low borrowing costs is also encouraging an accumulation of debt and a rise in interest rates could cause debt servicing problems for highly indebted households, a scenario that could be exacerbated by an economic downturn and job losses. The loss of several thousand high paying energy jobs in a particular locality could be the spark to cause a major price correction in that locality.

The decline in crude prices just added another layer of risks and concerns. The WSJ published an article last January that summarized existing loan exposure and potential undrawn exposure. I will just summarize those statistics here, with all numbers being approximate amounts:

TD: Oil, Gas and Pipeline C$3.6B or .7% of total loans; Undrawn exposure C$5.7B
BOM: Oil and Gas at C$5.9B or 1.9% of total loans; Undrawn exposure C$6.9B
Bank Nova Scotia: Oil and Gas at C$12.9B or 2.9% of total loans; Undrawn exposure C$10B
RBC: C$6.9B or 2.1% of total loans; Undrawn Exposure at C$22.2B

Without knowing more about the loans, the covenants required for drawdowns, and the identity of the debtors, I can only say that those numbers present concerns worth monitoring, but would not impact a decision now for me to invest in Toronto-Dominion or Bank of Montreal. With a fund, I am already diversified and consequently have less reasons for serious concerns unless oil tumbles further and remains at the current prices or lower for more than 12 or 18 months.

The WSJ is correct to note that the banks could suffer from indirect exposure, particularly in regions where oil production is a major part of the local economy.

A summary of BMO Capital's take on energy loans can be found in this January article published by the Financial Post.

An investor, who is not a long term holder of CADs, would have to exchange their USDs into CADs to buy this ETF.  The currency exchange rates during the ownership period will have either a positive or negative impact on the total return. As shown in the following chart, the CAD has been falling in value against the U.SD steadily over the past few years with intermittent rallies that ultimately failed as the CAD returned to its bearish movement.

10 Year CAD/USD Chart Up Means CAD Rising in Value=Buying More USDs 

The sponsor summarizes risks starting at page 33 of the prospectus.

Future Sells: I am most likely to trade this ETF, but have not made a decision yet.

There are two reasons to hold the ETF long term.

The dividend yield is good, and I acquire some exposure to Canadian banks and insurance companies which I do not otherwise have.

2. Sold Highest Cost CSG Shares at $8.76 (Equity REIT Common and Preferred Stock Basket)(see Disclaimer)

Well, I had another brain malfunction, some sort of chemical synapse misfire. I looked at the following share cost breakdown  and decided to sell 150 of my highest cost shares:

The highest cost lot was the 150 shares purchased first with a total $8.43 cost per share. A few minutes later, I entered a limit order to sell 100 shares.

Bought: 150 CSG at $8.4 (11/15/Post)

How can my total cost be lower than the original purchase price at $8.4 plus Fidelity's commission?

The broker is making ROC adjustments to the cost basis, reducing the cost basis, as explained below.

That is now required by the IRS. Prior to that new reporting requirement, individual investors were notorious for receiving the benefit of a ROC dividend (no current taxation) and then failing to make the necessary cost basis reduction to reflect the ROC. The ROC was tax deferred, not tax forgiven.

I always did it, but I suspect strongly that I was in a minority. It certainly created a lot of extra work at tax time that no longer exists since the broker's computers are making the necessary cost basis adjustments.

Snapshot of Trade: 

2015 Sold  100 CSG at $8.76

The preceding snapshot taken from a Fidelity account looks different than previous snapshot since the website has been redesigned to make the overall result worse.

So, due to brain turning to mush, I still own 50 of the highest cost shares and only succeeded in reducing my average cost per share to $7.98 from $8.1.

I was just about full with my CSG position prior to this 100 share sell. I now can buy those shares back when the total cost would reduce the current number rather than increase it. That price would need to be below $7.8.

It is important to keep in mind that the total cost numbers shown by a broker may include downward adjustments in the cost basis due to returns of capital (ROC). That is fairly common for REIT dividends since their GAAP net income is far lower than their distributable net income from free cash flow.  The difference is largely created by the non-cash depreciation charges.

For 2013, CSG reported that $.36+ out of the $.659 total was ROC. Fidelity probably has made the 2014 ROC adjustment.

The 2014 dividend characterizations had a much lower ROC component.  Chambers Street Properties Announces 2014 Tax Treatment of Distributions

Chambers is currently paying a monthly dividend of $.042 per share. Dividends | Investor Relations | Chambers Street Properties

Snapshot of Profit:

2015 CSG 100 Shares +$37.32
Item # 2 Bought: 150 CSG at $8.4 (11/19/13 Post)

Security Description: Chambers Street Properties (CSG) is a self-administered and internally managed REIT that focuses on acquiring, owning and operating net-leased industrial and office properties. A net lease requires the tenant to pay rent and expenses normally paid by the property owner including real estate taxes, insurance, maintenance, repairs and/or utilities. A single net lease will require the tenant to pay property taxes. A double net lease adds insurance costs to the tenant's obligations. In the triple net lease, the tenant is responsible for all costs normally paid by the owner. The rent would of course be lower than in a standard lease agreement for the same property.

Chambers owned or had a majority interest in 129 properties, including those owned in joint ventures, containing 36.3M rentable square feet. Our Portfolio-Chambers Street Properties Those industrial and office properties are located in 20 states, Germany, the U.K. and France.

2014 Third Quarter Earnings Press Release: 8-K PR

Link to recent  Seeking Alpha article on CSG

SEC Filings

Prior Trades: In addition to the shares owned in a taxable account, I also have a position in the Roth IRA. Item # 3 Roth IRA:  50 CSG at $7.65 (12/17/13 Post). I can not find a reference to the other 50 share open market purchase.

I am reinvesting the dividend in both accounts.

Links to post discussing purchases of remaining shares held in a taxable account: Item # 5 Added 100 CSG at $7.85-Average Down (8/29/14 Post)Item # 3 Bought  100 CSG at $7.73 (April 2014)

Rationale: I am just doing what I normally do with stocks in a basket. I averaged down at lower prices after the initial buy at $8.4. If and when the price declines to below $7.7, I will consider buying back that 100 share lot.

I will consider selling the remaining 50 shares of that highest cost lot when and if the price goes over $9.

The general idea in this trading strategy is to generate income, to gradually lower the average cost per share by playing the natural volatility of a stock and to increase the dividend yield over time by lowering the average cost per share.

The CSG chart reveals that natural volatility. The shares closed at $7.37 as recently as September 26, 2014. The 52 week price range was between $7.31 and $8.82 as of 2/5/14. CSG Interactive Stock Chart

A downdraft in the stock price could occur with an increase in intermediate interest rates. Equity REIT stocks corrected in price between May 1, 2013 and December 31, 2013, when the ten year treasury went from a 1.66% to 3.04%. Those stocks rallied strongly in 2014 as the ten year sank to a closing year end yield of 2.17%. Daily Treasury Yield Curve Rates REITs continued to rally in January 2015, and to maintain their strong correlation with the ten year treasury which continued to decline in yield, closing January at 1.68%.

In February so far, however, the ten year has been trending up in yield, and had risen to a 1.95% yield as of 2/6/14.  Daily Treasury Yield Curve Rates The ETF for the 20+ year treasury, TLT, closed at $138.28 on 1/30/15 and at $130.96 last Friday (2/6/15).

I took a snapshot of the 10, 20 and 30 year treasury yields starting last Monday and ending last Friday:

Just for comparison purposes, this is how the lift off looked back in May 2013. The snapshot covers the period starting on 5/2/13 and ends when the 10 year hit 1.95% on 5/17/13:

5/2/13 through 5/17/13
Daily Treasury Yield Curve Rates

It is too early to tell whether that blip up in yields is a trend. I am seeing enough data to raise the odds of a greater than currently expected increase in intermediate and longer term rates.

If it is the start of a gradual uptick in intermediate and longer term rates, then REITs may start to experience some selling pressure, particularly those that are at elevated P/FFO ratios.

The CSG P/FFO ratio is within a normal valuation range, so this pare was not justified by a move outside of a reasonable valuation range.

The 2015 FFO per share is currently estimated at $.72 or about a 12.17 P/FFO at a $7.86 share price.