I discuss buying the China Fund (CHN), a closed end stock fund, in a recently published SA Instablog:
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
South Gent's Instablog | Seeking Alpha
South Gent's Articles | Seeking Alpha
South Gent's Comments | Seeking Alpha
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Recent Developments:
China's central lowered its benchmark one year rate to 5.35% from 5.6%. WSJ
The government reported that personal income rose $50.8B or .3% in January. Disposable personal income increased by .4%. Real DPI increased .9% in January (inflation was negative). Personal consumption expenditures declined by .2% influenced by lower energy costs. Personal savings increased to $728.5B in January. The savings rate was reported at 5.5%, up from 5% in December. News Release: Personal Income and Outlays
The government reported that personal income rose $50.8B or .3% in January. Disposable personal income increased by .4%. Real DPI increased .9% in January (inflation was negative). Personal consumption expenditures declined by .2% influenced by lower energy costs. Personal savings increased to $728.5B in January. The savings rate was reported at 5.5%, up from 5% in December. News Release: Personal Income and Outlays
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1. Sold 100 JPI at $23.54 and 100 at $23.55 Roth IRAs (see Disclaimer): I sold this leveraged bond CEF in order hopefully to establish a lower cost basis later in the year.
Snapshot of Trades:
Fidelity Roth Account:
Fidelity Roth Account:
Snapshot of Profit:
 |
| 2015 Roth IRA JPI 100 Shares +$4.06 |
Dividends: $144.99
I will receive the distribution that went ex dividend on 2/11/15.
Total Return Fidelity Roth IRA 100 JPI: $149.05
Vanguard Roth IRA:
Snapshot of History:
Dividends: $144.99 (including one monthly dividend to be paid)
Snapshot of Profit: I am taking snapshots of these minuscule profits just to highlight the rationale for the trades:
Item # 7 Bought 100 JPI at $23.34 (6/7/14 Post)
Total Return Vanguard Roth IRA-100 JPI: $147.05
Total Return 200 JPI= $296.1
Security Description: The Nuveen Preferred & Income Term Fund (JPI) is a leveraged closed end fund that owns bonds and preferred stocks.
JPI has a defined term. On or about 8/31/24, the fund will liquidate and distribute its assets to its shareholders. IPO Prospectus Nuveen Preferred and Income Term Fund
Data as of 2/26/15:
Closing Net Asset Value Per Share: $25.31
Closing Market Price: $23.5
Discount: -7.15%
1 Year Average Discount: -8.38%
Fund Commenced July 2012
Sourced: CEFConnect
The fund did pay out a short term capital gain of $.4879 per share last December.
The monthly rate was cut from $.169 to $.158 in March 2014. The rate was raised slightly to $.1595 effective for the February 2015 distribution.
So far, CEFConnect does not show any ROC.
The liquidation data in 2024 could be a positive, provided rates have not risen substantially between now and then. By buying this CEF at a greater than 8% discount to the current net asset value per share, an investor desiring to hold long term has some cushion insulating them from a rise in rates over the next decade, while collecting almost ten years of monthly dividends and possibly more capital gain distributions. That cushion may prove to be nowhere near enough, however, depending on credit and interest rate risk issues.
The fund summarizes risks at its website and starting at page 17 of its last SEC filed shareholder report.
The liquidation feature, which turns JPI into a term bond fund, may be good, bad or indifferent. It would be bad for a long term holder with interest rates spiking near the liquidation data, causing the fund to sell bonds at a loss in preparation for the liquidation. The positive side is that the term bond fund mimics in some ways the purchase of a bond with a maturity date. The term funds that own only bonds maturing in a particular year, such as the Guggenheim term junk and investment grade ETFs, have less interest rate risk than a term bond fund like GDO, IGI or JPI which owns many bonds maturing after the liquidation date. That difference may be an advantage or a disadvantage depending on what prices are doing before the liquidation date.
SEC Form N-Q: Holdings as of 10/31/14
Last SEC Filed Shareholder Report: SEC
The fund recently adopted a change in its investment criteria that allowed it to reduce its investment grade bond weighting from 60% to 50%. Nuveen Preferred and Income Term Fund Announces Policy Change I view that as a negative.
Rationale: I am paring my interest rate exposure, hoping to buy back securities with interest rate duration risk at lower prices later this year. I am willing to forego income generation from those securities for at least a few months.
JPI responded badly to the last interest rate spike.
The market price went from $26.38 on 5/8/13 to $21.77 on 12/12/13: JPI Interactive Stock Chart The net asset value per share went from $26.29 to $24.51 during that same period. Unadjusted for dividends, the market price declined 17.48%, while the net asset value per share went down 6.8%.
Future Buys: I am hoping for a price correction that will give me a much better entry point than my last two buys. I am now in a position to buy back up to 200 JPI shares using the proceeds from the recent sales.
2. Sold 100 of 200 MSPRA at $20.91 (see Disclaimer):
Snapshot of Trade:
Snapshot of History:
MSPRA is an equity preferred stock that pays qualified dividends. Vanguard incorrectly labels the dividend payments as interest.
Dividends: $51.12
Snapshot of Profit:
Item # 3 Bought Back 100 MSPRA at $20.24 (10/4/14 Post)
Prior Trades: I still own 100 shares in a Fidelity taxable account. Item # 1 Bought 50 MSPRA at $16.6 (9/27/11 Post); Equity Preferred Floating Rate Stocks: Added To MSPRA At $19.87 - South Gent | Seeking Alpha;
I have been in a trading mode for this security for about five years now.
Total Trading Gains to Date: $1,256.11 (snapshots in Advantages and Disadvantages of Equity Preferred Floating Rate Securities)
However, most of that realized gain total originates from a single 100 share trade. Item # 1 Bought 100 MSPRA at $12.88 (5/26/2009 Post)-Item # 4 Sold 100 MSPRA at 21.43 (1/22/2010 Post)
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Security Description: The Morgan Stanley Non-Cumulative Preferred Series A (MS.PA) is an equity preferred stock that pays qualified and non-cumulative dividends at the greater of 4% or .7% above the 3 month LIBOR rate on a $25 par value. Prospectus
This security will be senior only to common stock. The prospectus does contain a standard "stopper" provision that would prevent Morgan Stanley from paying a cash dividend to the common shareholders and eliminating the MSPRA dividend. (see pages S-2 to S-3; S-14 to S-15). Once the common dividend is eliminated, there would be nothing legally that could stop MS from eliminating the MSPRA dividend.
The stopper clause is the legal mechanism that assures the preferred stock owner that their dividend will be paid in full for as long as a cash dividend is paid on the common shares. As soon as that common share cash dividend is eliminated, however, there is no remaining legal impediment to prevent the elimination of the non-cumulative preferred dividend.
However, as a practical matter, it would be unwise for MS to eliminate the MSPRA dividend to preserve capital. If you were an institutional client, what kind of message would such an elimination send to you?
For an investment bank, dependent on customer confidence in its financial viability, the only practical course would be to pay the preferred stock dividend until the company does a Lehman Brothers. A failure to pay prior to a bankruptcy filing could easily cause that result.
Stocks, Bonds & Politics: Advantages and Disadvantages of Equity Preferred Floating Rate Securities
Rationale: I am in a trading mode for this security given its relatively low yield and the likelihood that it will be several years before the Libor float triggers an increase in the 4% minimum coupon.
The primary reason for buying this security is that it provides a measure of protection against both the low inflation/deflation scenario with its minimum coupon and the problematic inflation scenario with its Libor float. The problem now is that problematic inflation is not on the horizon, and consequently it is unlikely that the Libor float provision will trigger an increase in the coupon prior to 2017 at the minimum. The three month Libor would have to rise above 3.3% to provide a higher rate than the 4% minimum, and it would not be reasonable to predict that rate for at least two more years.
Chart: 3-Month London Interbank Offered Rate (LIBOR)
I am inclined to keep the 100 shares which have a lower cost basis.
Future Buys: I sold shares bought at $20.24 and would consider buying the shares back at below $19.75. The five year chart shows a lot of volatility. This preferred stock last cratered in price during the last stock market correction back in 2011, falling below $15 with one spike down below $14. MS.PA Stock Chart
3. Bought 50 FITB at $19.36 (REGIONAL BANK BASKET STRATEGY) (see Disclaimer):
Snapshot of Trade:
Prior Trades: None
Company Description: The Fifth Third Bancorp (FITB) is a bank holding company that owns Fifth Third Bancorp, a large regional bank with 1,302 branches located in 12 states. The bank is headquartered in Cincinnati, Ohio. FITB is one of the "largest money managers in the Midwest and, as of December 31, 2014, had $308 billion in assets under care". Investor Relations Home
The company has a 22.8% interest in Vantiv Holding, LLC. Affiliated Companies Vantiv is a publicly traded company that offers electronic payment processing services to merchants and financial institutions. As of last Friday's closing price of $36.99, Vantiv had a market capitalization of about $5.33B, or approximately $1.215+B for FITB's ownership interest. VNTV Stock Quote FITB's market cap, based on last Friday's closing price of $19.36, was about $15.95B.
In January 2011, FITB sold 121,428,572 shares at a public offering price at $14 per share. The underwriters paid FITB $13.58 per share. Final Prospectus Supplement As noted in the prospectus at page S-23, the proceeds were going to be used to buy back the 136,320 shares of preferred stock ($25,000 par value) sold to the government under the TARP program.
FITB SEC Filings
Chart: This stock would have been a nice one to ride from around $3.3 (August 1990) to its all time high hit near $69 back in 2002. FITB Interactive Stock Chart Using an online calculator, I found that the percentage increase from $3 to $69 was 2,200%. The total return would have been higher with reinvestment of the dividends. This stock has not been a decent long term hold for a buyer between 2002 and March 2009. With the exception of a sideways movement mostly in 2006, the price cascaded down from around $59 (December 2003) to $1.29 (3/6/09 closing price). A buyer at the March 2009 low would look smart, at least for the time being.
It is a pity that so many receive so much for failure. The bank reported a $2.18B loss in 2008 after earnings $1.075 in 2007 (page 14, 2008 Annual Report, Form 10-K) Peak net income was hit in 2004 at $1.524B and peak E.P.S. was $2.87 in 2003.
Notwithstanding all of that drama, FITB has produced an annualized total return of 8.42% between 3/26/1990 and 2/27/15. Calculator If an investor had bought shares on March 9, 2009, and reinvested the dividends, the total annualized return would be 58.18% which highlights the devastation to the stock price resulting from the Near Depression.
Dividend History: FITB was doing good in this department until 2008. Prior to slashing its dividend, the quarterly rate had risen from a split adjusted $.01 per share in 1985 to $.44 in 2008. The rate had gone from $.16 per share in 2000 to that $.44 rate in 2008. Who could complain about that rate of growth?
Then, the bottom fell out:
Dividend/Split History
I do not view the dividend increases after that slash from the $.44 as increases. The dividend will not be increased in my lexicon until FITB raises the quarterly rate above $.44 per share. Then whenever that happens, that raise will be called by me a dividend increase, assuming I am still alive to see it happen which is questionable given my current age.
Recent Earnings Report:
Snapshot of Earnings Highlights:
The capital ratios are good:
Charge Off Ratio: .83%
NPL Ratio: .64%
NPA Ratio: .82%
NPL Coverage Ratio: 228%
Book Value Per Share: 17.35
Tangible Book Value Per Share: 14.4
SEC Filed Press Release
Rationale: I will make this really short. I am placing a small bet that FITB has its act together and will avoid self immolation in the future. With an improving U.S. economy, more jobs, lower loan losses and more loans, there is room for an upside run, provided those conditions remain positive. Then, it becomes a question of when will net interest margins improve and whether or not this large regional bank can execute.
I may give this bank more of a write up when and if I take a meaningful position. I am just nibbling now.
Risks: The company discusses risks incident to its operations starting at page 27 of its recently filed 2014 annual report. Form 10-K
Risks are amply demonstrated by the long term chart and the dividend slash.
Net interest margin is low for one of my regional banks. Hopefully, that problem will start to improve this year.
Future Buys: I may average down to buy another 50 shares. One criteria that will influence that decision is whether the purchase price will give me a starting yield of over 3%, not for that 50 share lot, but for the entire 100 share lot.
Vanguard Roth IRA:
 |
| 2015 Roth IRA Sold 100 JPI at $23.55 |
Snapshot of History:
Dividends: $144.99 (including one monthly dividend to be paid)
Snapshot of Profit: I am taking snapshots of these minuscule profits just to highlight the rationale for the trades:
 |
| 2015 Roth IRA 100 Shares +$2.06 |
Total Return Vanguard Roth IRA-100 JPI: $147.05
Total Return 200 JPI= $296.1
Security Description: The Nuveen Preferred & Income Term Fund (JPI) is a leveraged closed end fund that owns bonds and preferred stocks.
JPI has a defined term. On or about 8/31/24, the fund will liquidate and distribute its assets to its shareholders. IPO Prospectus Nuveen Preferred and Income Term Fund
Data as of 2/26/15:
Closing Net Asset Value Per Share: $25.31
Closing Market Price: $23.5
Discount: -7.15%
1 Year Average Discount: -8.38%
Fund Commenced July 2012
Sourced: CEFConnect
The fund did pay out a short term capital gain of $.4879 per share last December.
The monthly rate was cut from $.169 to $.158 in March 2014. The rate was raised slightly to $.1595 effective for the February 2015 distribution.
So far, CEFConnect does not show any ROC.
The liquidation data in 2024 could be a positive, provided rates have not risen substantially between now and then. By buying this CEF at a greater than 8% discount to the current net asset value per share, an investor desiring to hold long term has some cushion insulating them from a rise in rates over the next decade, while collecting almost ten years of monthly dividends and possibly more capital gain distributions. That cushion may prove to be nowhere near enough, however, depending on credit and interest rate risk issues.
The fund summarizes risks at its website and starting at page 17 of its last SEC filed shareholder report.
The liquidation feature, which turns JPI into a term bond fund, may be good, bad or indifferent. It would be bad for a long term holder with interest rates spiking near the liquidation data, causing the fund to sell bonds at a loss in preparation for the liquidation. The positive side is that the term bond fund mimics in some ways the purchase of a bond with a maturity date. The term funds that own only bonds maturing in a particular year, such as the Guggenheim term junk and investment grade ETFs, have less interest rate risk than a term bond fund like GDO, IGI or JPI which owns many bonds maturing after the liquidation date. That difference may be an advantage or a disadvantage depending on what prices are doing before the liquidation date.
SEC Form N-Q: Holdings as of 10/31/14
Last SEC Filed Shareholder Report: SEC
The fund recently adopted a change in its investment criteria that allowed it to reduce its investment grade bond weighting from 60% to 50%. Nuveen Preferred and Income Term Fund Announces Policy Change I view that as a negative.
JPI responded badly to the last interest rate spike.
The market price went from $26.38 on 5/8/13 to $21.77 on 12/12/13: JPI Interactive Stock Chart The net asset value per share went from $26.29 to $24.51 during that same period. Unadjusted for dividends, the market price declined 17.48%, while the net asset value per share went down 6.8%.
Future Buys: I am hoping for a price correction that will give me a much better entry point than my last two buys. I am now in a position to buy back up to 200 JPI shares using the proceeds from the recent sales.
2. Sold 100 of 200 MSPRA at $20.91 (see Disclaimer):
Snapshot of Trade:
 |
| 2015 Sold 100 MSPRA at $20.91 |
Snapshot of History:
MSPRA is an equity preferred stock that pays qualified dividends. Vanguard incorrectly labels the dividend payments as interest.
Dividends: $51.12
Snapshot of Profit:
 |
| 2015 MSPRA 100 Shares +$53.03 |
Prior Trades: I still own 100 shares in a Fidelity taxable account. Item # 1 Bought 50 MSPRA at $16.6 (9/27/11 Post); Equity Preferred Floating Rate Stocks: Added To MSPRA At $19.87 - South Gent | Seeking Alpha;
I have been in a trading mode for this security for about five years now.
Total Trading Gains to Date: $1,256.11 (snapshots in Advantages and Disadvantages of Equity Preferred Floating Rate Securities)
However, most of that realized gain total originates from a single 100 share trade. Item # 1 Bought 100 MSPRA at $12.88 (5/26/2009 Post)-Item # 4 Sold 100 MSPRA at 21.43 (1/22/2010 Post)
Security Description: The Morgan Stanley Non-Cumulative Preferred Series A (MS.PA) is an equity preferred stock that pays qualified and non-cumulative dividends at the greater of 4% or .7% above the 3 month LIBOR rate on a $25 par value. Prospectus
This security will be senior only to common stock. The prospectus does contain a standard "stopper" provision that would prevent Morgan Stanley from paying a cash dividend to the common shareholders and eliminating the MSPRA dividend. (see pages S-2 to S-3; S-14 to S-15). Once the common dividend is eliminated, there would be nothing legally that could stop MS from eliminating the MSPRA dividend.
The stopper clause is the legal mechanism that assures the preferred stock owner that their dividend will be paid in full for as long as a cash dividend is paid on the common shares. As soon as that common share cash dividend is eliminated, however, there is no remaining legal impediment to prevent the elimination of the non-cumulative preferred dividend.
However, as a practical matter, it would be unwise for MS to eliminate the MSPRA dividend to preserve capital. If you were an institutional client, what kind of message would such an elimination send to you?
For an investment bank, dependent on customer confidence in its financial viability, the only practical course would be to pay the preferred stock dividend until the company does a Lehman Brothers. A failure to pay prior to a bankruptcy filing could easily cause that result.
Stocks, Bonds & Politics: Advantages and Disadvantages of Equity Preferred Floating Rate Securities
Rationale: I am in a trading mode for this security given its relatively low yield and the likelihood that it will be several years before the Libor float triggers an increase in the 4% minimum coupon.
The primary reason for buying this security is that it provides a measure of protection against both the low inflation/deflation scenario with its minimum coupon and the problematic inflation scenario with its Libor float. The problem now is that problematic inflation is not on the horizon, and consequently it is unlikely that the Libor float provision will trigger an increase in the coupon prior to 2017 at the minimum. The three month Libor would have to rise above 3.3% to provide a higher rate than the 4% minimum, and it would not be reasonable to predict that rate for at least two more years.
Chart: 3-Month London Interbank Offered Rate (LIBOR)
I am inclined to keep the 100 shares which have a lower cost basis.
Future Buys: I sold shares bought at $20.24 and would consider buying the shares back at below $19.75. The five year chart shows a lot of volatility. This preferred stock last cratered in price during the last stock market correction back in 2011, falling below $15 with one spike down below $14. MS.PA Stock Chart
3. Bought 50 FITB at $19.36 (REGIONAL BANK BASKET STRATEGY) (see Disclaimer):
Snapshot of Trade:
Prior Trades: None
Company Description: The Fifth Third Bancorp (FITB) is a bank holding company that owns Fifth Third Bancorp, a large regional bank with 1,302 branches located in 12 states. The bank is headquartered in Cincinnati, Ohio. FITB is one of the "largest money managers in the Midwest and, as of December 31, 2014, had $308 billion in assets under care". Investor Relations Home
The company has a 22.8% interest in Vantiv Holding, LLC. Affiliated Companies Vantiv is a publicly traded company that offers electronic payment processing services to merchants and financial institutions. As of last Friday's closing price of $36.99, Vantiv had a market capitalization of about $5.33B, or approximately $1.215+B for FITB's ownership interest. VNTV Stock Quote FITB's market cap, based on last Friday's closing price of $19.36, was about $15.95B.
In January 2011, FITB sold 121,428,572 shares at a public offering price at $14 per share. The underwriters paid FITB $13.58 per share. Final Prospectus Supplement As noted in the prospectus at page S-23, the proceeds were going to be used to buy back the 136,320 shares of preferred stock ($25,000 par value) sold to the government under the TARP program.
FITB SEC Filings
Chart: This stock would have been a nice one to ride from around $3.3 (August 1990) to its all time high hit near $69 back in 2002. FITB Interactive Stock Chart Using an online calculator, I found that the percentage increase from $3 to $69 was 2,200%. The total return would have been higher with reinvestment of the dividends. This stock has not been a decent long term hold for a buyer between 2002 and March 2009. With the exception of a sideways movement mostly in 2006, the price cascaded down from around $59 (December 2003) to $1.29 (3/6/09 closing price). A buyer at the March 2009 low would look smart, at least for the time being.
It is a pity that so many receive so much for failure. The bank reported a $2.18B loss in 2008 after earnings $1.075 in 2007 (page 14, 2008 Annual Report, Form 10-K) Peak net income was hit in 2004 at $1.524B and peak E.P.S. was $2.87 in 2003.
Notwithstanding all of that drama, FITB has produced an annualized total return of 8.42% between 3/26/1990 and 2/27/15. Calculator If an investor had bought shares on March 9, 2009, and reinvested the dividends, the total annualized return would be 58.18% which highlights the devastation to the stock price resulting from the Near Depression.
Dividend History: FITB was doing good in this department until 2008. Prior to slashing its dividend, the quarterly rate had risen from a split adjusted $.01 per share in 1985 to $.44 in 2008. The rate had gone from $.16 per share in 2000 to that $.44 rate in 2008. Who could complain about that rate of growth?
Then, the bottom fell out:
Dividend/Split History
I do not view the dividend increases after that slash from the $.44 as increases. The dividend will not be increased in my lexicon until FITB raises the quarterly rate above $.44 per share. Then whenever that happens, that raise will be called by me a dividend increase, assuming I am still alive to see it happen which is questionable given my current age.
Recent Earnings Report:
Snapshot of Earnings Highlights:
The capital ratios are good:
Charge Off Ratio: .83%
NPL Ratio: .64%
NPA Ratio: .82%
NPL Coverage Ratio: 228%
Book Value Per Share: 17.35
Tangible Book Value Per Share: 14.4
SEC Filed Press Release
Rationale: I will make this really short. I am placing a small bet that FITB has its act together and will avoid self immolation in the future. With an improving U.S. economy, more jobs, lower loan losses and more loans, there is room for an upside run, provided those conditions remain positive. Then, it becomes a question of when will net interest margins improve and whether or not this large regional bank can execute.
I may give this bank more of a write up when and if I take a meaningful position. I am just nibbling now.
Risks: The company discusses risks incident to its operations starting at page 27 of its recently filed 2014 annual report. Form 10-K
Risks are amply demonstrated by the long term chart and the dividend slash.
Net interest margin is low for one of my regional banks. Hopefully, that problem will start to improve this year.
Future Buys: I may average down to buy another 50 shares. One criteria that will influence that decision is whether the purchase price will give me a starting yield of over 3%, not for that 50 share lot, but for the entire 100 share lot.
