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.