Sunday, March 22, 2015

Bought Back 50 of the Synthetic Floater GYC at $21.67/Bought 50 DPG at $19.54/Averaged Down: Added 50 CIZN at $17.62/Bought 100 CSH_UN:CA at C$12.125

I have published an Instablog that has excerpted the following discussion of the DPG purchase (Item # 4). The difference is that there is a long introduction prior to that excerpt in the Instablog. 

Duff & Phelps Global Utility Income Fund: Bought Back Of 50 Of 100 Shares Recently Sold - 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:

For the week ending 3/19/15, the 30 year mortgage rate averaged 3.78% with an average .6 point. The 15 year mortgage average was 3.06% with an average .6 point. Freddie Mac - Mortgage Rates

CoreLogic estimates that 1.2M borrowers moved into positive home equity in 2014.

The Federal Housing Finance Agency (FHFA) estimated in February that 652,000 homeowners were eligible to refinance through the HARP program and had a "strong financial reason to refinance". Starting in 2009 through the 2014 4th quarter, Fannie and Freddie have refinanced 20,409,043 mortgages. 4Q14-Refi-Report.pdf That total does not include privately owned mortgages.

The refinancing tsunami at historically abnormal rates has led to a substantial decline in the DSR ratio led by the decline in the mortgage payment to disposable income ratio:

Mortgage Debt Service Payments as a Percent of Disposable Personal Income-St. Louis Fed

Mortgage debt is by far the largest component of household liabilities.

DSR Ratio Chart: Household Debt Service Payments as a Percent of Disposable Personal Income

U.S. Household Debt to GDP

Washington Trust Bancorp (WASH) increased its quarterly dividend to $.34 per share from $.32. At the new rate, my current dividend yield is about 8.87% based on a total cost of $15.34 per share:


1. Bought Back 50 GYC at $21.67 (see Disclaimer):

Snapshot of Trade:

Security Description: The Corporate Asset Backed Corp. CABCO Series 2004-102 Trust SBC Communication Inc. Floating Rate Certificates (GYC) is an Exchange Traded Bond. GYC is a Synthetic Floater in the Trust Certificate form of legal ownership.

For this security, UBS created a grantor trust, administered by an independent trustee, and sold to that trust senior unsecured SBC Communication bonds (now AT & T). Those bonds are commonly referred to as the underlying security. The AT & T bonds mature on 6/15/2034 and have a 6.45% coupon.

The grantor trust raised the funds to pay UBS through the public sale of trust certificates, each with a $25 par value. The owners of the trust certificates are the beneficial owners of those bonds.

UBS also entered into a swap agreement with the trustee. As a result of that agreement, the trustee delivers to the swap counterparty, originally identified in the GYC prospectus as UBS, the interest paid by AT & T, and the swap counterparty delivers to the trustee the amount owed to the GYC owners.

For as long as the swap agreement remains in effect, the owners of GYC are entitled to receive quarterly interest payments at the greater of 3.25% or .65% over the 3 month Libor rate, with a 8% per annum cap, on a $25 par value. GYC Prospectus

Assuming no early termination of the swap agreement and/or the trust, GYC matures at the same time as the underlying bond which is 6/15/34.

Prior Trades:

Item # 2 Bought GYC at $15.5: Synthetic Floating Rate Bond (May 2009 Post)Item # 3 Added 50 GYC at $21.60 in Roth IRA (2/10/11 Post)Sold 100 GYC at $22.22: Ongoing Reassessment of Synthetic Floaters (7/28/12 Post)(profit snapshot $357.45)

I also had a 40 share flip in the regular IRA: Item # 4 Sold GYC at $22.3 in regular IRA (11/22/2010 Post)-Bought TC GYC at $21

I have flipped more flipped some shares in the Roth IRA:Item # 8 Sold 50 of 100 GYC at $20.8 (10/31/13 Post) and Item # 5 Sold Roth IRA: 50 GYC at $22.3 (12/31/13 Post)(snapshot of profit on 100 shares, two 500 share lot positions=$167.98)-Item # 1 Bought Roth IRA: 50 GYC at $20 (9/7/13 Post) and Added 50 GYC at $18.66 (10/24/13 Post)

Total Prior Trading Profits GYC: $587.54

Rational: This type of security does contain some deflation/low inflation and problematic inflation protection in the same security. It consequently provides some interest risk protection that the underlying fixed coupon AT & T bond does not provide.

I suspect that the FED is underestimating inflation pressures building in the economy now. The strong USD and the dramatic decline in energy prices have masked a buildup of inflationary pressures elsewhere. Businesses are finding it increasingly difficult to find employees to fill job openings. The NFIB's last survey showed that 29% of small businesses could not fill job openings, with the unfilled job openings near 40 year highs. Over the past several weeks, there are been a number of news stories about retailers voluntarily hiking their wage levels. On the day of Yellen's news conference, where she stated that "we may not see wage growth pick up" and there was no "broad" based wage pressure, the WSJ ran a story that Target was going to raise the pay for all workers to at least $9 per hour next month and to $10 next year, "as competition heats up for lower wage workers, and following on the foot steps of pay raises announced by Wal-Mart and many other companies. The WSJ story was originally published last Wednesday.

The last reported median CPI was at a 2.2% annual rate. Current Median CPI

I know now my minimum and maximum interest yield. The minimum coupon assumes the continued payment of the 3.25% minimum coupon while the maximum coupon is 8%. Since those coupons are paid on a $25 par value, my effective yield will be higher at both the minimum and maximum levels:

Assuming $21.67 Total Cost Per TC:
Minimum 3.25% Coupon=  3.75%
Maximum 8.00% Coupon=  9.23%

Depending on the future 3 month Libor rate, the yield will fluctuate between the minimum 3.75% to the maximum of 9.23% based on a total cost per share of $21.67.

An increase in the coupon will occur when the 3 month Libor rate exceeds 2.6% during the relevant computation period.

At a 5% Libor rate, the coupon becomes 5.65% and the effective current yield at a total cost of $21.67 per TC would be about 6.52%. The effective yield at a 4% 3 month LIBOR, with the same assumptions, would be about 5.36% (.0465% x. $25 par value=$1.1625 annually dividend by $20 cost per share=5.36%)

Assuming no redemption prior to maturity, there would be a $3.33 profit per TC on 6/15/34. It is certainly possible that most or all of the current discount could be harvested before maturity.

The owner of the trust certificate is exposed to the credit risk of the underlying bond. I am currently comfortable with the credit risk. The underlying bond is currently rated Baa1 by Moody's and BBB+ by S & P, Bonds Detail. The underlying bond prospectus can be found at the SEC website: Final Prospectus Supplement

{There has been one example where the swap counterparty declared bankruptcy. That entity was Lehman. The trustee took the position that the bankruptcy filing was a swap termination event, not a trust termination event, and consequently started to pay the owners of JBK the payments made by the underlying security whether then the synthetic floating rate, see Item # 2 Bought 50 of the TC JBK at $16  (7/9/09 Post); Item # 5 Bought 100 JBK at $16.15 (7/20/09 Post)}

Risks: This security has a low minimum coupon that is not likely to increase, as intermediate and long term rates rise due to interest rate normalization. The recent decline in the share price is probably due to that rise in rates.

GYC hit $25 in May 2013 before hitting the skids, again, and falling to near $19 per share. Over the past year, GYC has traded mostly in the $21 to $23 price range. The price plummeted to $11 during the Near Depression. GYC Interactive Stock Chart A long term chart will frequently highlight the risks.

At some future time, the 3 month Libor rate may rise sufficiently to trigger an increase in the coupon. The increase will occur when the 3 month LIBOR rate rises above 2.85% during the relevant computation period.

A 4.5% to 5% 3 month LIBOR has historically been an average range, sometimes higher or much higher, and substantially lower now and for at least the next several years

Daily Data-Federal Funds Rate Since 7/1/1954
Daily Data-3 Month Libor Since 1/2/1986

A rise in the coupon above the minimum 3.25% level will not happen for as long as the FED continues ZIRP and for an uncertain period thereafter. A lot depends on future inflation numbers that will impact both the size and the pace of Fed tightening. The 3 month Libor rate will be linked to the federal funds rate.

In the prior tightening cycle, the federal reserve raised the federal funds rate from 1% to 5.25% between June 2004 to July 2006. The 3 month Libor rate followed in tandem the increases in the federal funds rate.

Currently, I do not anticipate that the FED will start a tightening cycle by raising the federal funds rate prior to 2015. Unless there is a significant pick up in inflation and inflation expectations, I would further anticipate a much slower rise in the federal funds rate compared to the prior tightening cycle.

(2) The second risk involves what I will generally call the GJN problem. There is a NYT article describing what Wells Fargo did to the mops and pops who owned GJN. NYTimes.comStocks, Bonds & Politics: GJN-Wells Fargo-New York Times I brought this matter to the attention of Floyd Norris at the NYT.

In a prior post, I discussed this potential risk in great detail. Stocks, Bonds & Politics: Sold 100 GYC at 22.22: Ongoing Reassessment of Synthetic Floaters

I am not going to copy or repeat that lengthy and frequently complicated discussion. Instead I will just briefly summarize this complicated issue and emphasize the importance of both reading and understanding the prospectus prior to making an investment.

There is an important difference between GYC and GJN.

AT & T can not redeem the underlying senior bond and avoid a make whole payment.

In the now infamous GJN situation, J P Morgan relied on an escape hatch that purportedly allowed it to avoid a make whole payment. I am surprised that no one has challenged JPM on whether or not it invoked that escape clause in a timely manner. Stocks, Bonds & Politics: District Court Decision in Turkle Trust v. Wells Fargo (N.D. Cal)/Summary of Argument: JPM Potential Obligation to Pay Make Whole for its Recent 2035 TP Redemption/Other JPM Capital Trust Preferred Securities: Language on Make Whole Payment and Capital Treatment Event (July 2012).

A make whole payment made by AT & T could be used to pay the swap termination fee triggered by an early redemption of the AT & T senior bond.

Another possibility is that the owner of the call warrant will redeem the certificates at par value plus accrued interest when and if AT & T redeems the bonds. That would occur when the make whole payment would exceed the swap termination fee.

The swap termination fee is payable after certain trust termination events that do not involve a redemption of the underlying bonds by AT & T, Prospectus at pp. S-7, S-32-33. Those events include the bankruptcy of AT & T; an AT & T payment default without a bankruptcy; a legal change that makes it unlawful for the trust to perform; and a SEC reporting failure by AT & T. Any of those occurrences listed in the prospectus, while unlikely, would be disastrous for the owners of GYC, since any such event would trigger a swap termination fee without a make whole payment being received from AT & T. At the present time and for the foreseeable future, I am not simply not concerned about AT & T filing for bankruptcy or defaulting on its debt,  and I can not reasonably foresee a law change that would cause the trust to default. Those are black swan type of events/risks.

While I can not say with certainty that a make whole payment for an early redemption would be sufficient to cover the swap termination fee, both amounts would be calculated by taking the principal amount and all future interest payments and then discounting to present value. The major difference is that there is a specific provision in the AT & T bond prospectus that specifies exactly how that calculation has to be done.

The existence of a make whole payment would also make it highly unlikely that AT & T would redeem the underlying bond for the foreseeable future. It was the redemption of the underlying bond that triggered the swap termination fee payment in the GJN situation.

While it is just my opinion, nobody in their right mind would redeem a long term bond with a 6.45% coupon when the optional redemption requires a make whole payment.

The make whole payment would just be huge, at least until shortly before the maturity of this bond. It would consist of the principal amount of the bond ($1,000) and all interest payments from the time of redemption until the scheduled maturity date on 6/15/34, discounted to present value using the rate of a comparable maturity treasury security plus .2%. A low discount (3%) rate juices the make whole payment, compared to a higher rate. (see underlying security prospectus at page S-11 to S-12).

Still, the GJN situation has put a damper on my enthusiasm for these currently low yielding securities. I will tread cautiously with 50 share nibbles here and there.

Future Buys: Given the risks and current low yield, I am not likely to buy more. I will likely sell the 50 shares at a price north of $23. This security has a limited purpose in my IRA, which involves an effort to create some balance and interest rate sensitivity to the heavier weighted fixed coupon bonds and bond funds that are owned in those accounts.

2. Averaged Down: Bought 50 CIZN at $17.62 (REGIONAL BANK BASKET STRATEGY GATEWAY POST)(see Disclaimer):

Snapshot of Trade:

Prior Trade: This is an average down from a 50 share lot purchase made shortly before the quarterly ex dividend date. Item # 2 Bought Back 50 CIZN at $18.76-Regional Bank Strategy (3/12/15 Post) I did mention that I would not buy more. However, I thought the price drop to $17.62 was too tempting to pass up and so I added 50 more shares. If and when I can sell the higher cost lot at a profit now, I will consider doing so and then keep the lower priced shares using FIFO accounting.

At a total cost per share of $17.62, the current dividend yield is about 5.22%, and the TTM P/E is about 11.52.

I have nothing else to add to that recently published post.

3. Bought 100 CSH_UN:CA at C$12.125 (Equity REIT Common and Preferred Stock Basket Strategy) and (Canadian Dollar (CAD) Strategy)(see Disclaimer)

Snapshot of Trade:

Prior Trades: None

Company Description: Chartwell Retirement Residences (CSH.UN:TOR) is an unincorporated trust which owns and manages a portfolio of senior housing communities. It is the largest participant in the senior housing segment in Canada.

Two Canadian brokers, GMP and Scotia, lowered Chartwell to neutral from outperform/buy after the company announced a definitive agreement to sell its U.S. properties to HCP and Brookdale Senior Living for $849M (capitalization rate at about 6.6%). Chartwell Announces Sale of Its U.S. Business

Chartwell owned 33 properties, with 4,792 suites, and leased two others (91% assisted living; 5% "memory care" and 4% skilling nursing) Those properties are encumbered by US$439M, which Chartwell will be netted with the purchase, along with about $24M in repayment penalties, at closing. Chartwell expects to net C$410 after costs and taxes at the then current exchange rates. The transaction is currently expected to close during the third quarter.

The U.S. properties were about 20% of the total portfolio as of 12/31/14:

The proceeds will be used in part to fund Canadian expansion projects.

Photos of Some Properties: Chartwell Cité-Jardin résidence pour retraitésChartwell Robert Speck Retirement ResidenceChartwell Cedarbrooke Retirement ResidenceChartwell Deerview Crossing Retirement Residence

Chartwell Seniors Housing REIT-Financial Documents

Chart: At the time of my purchase, the units were selling at above their 50 and 200 day SMA lines: CSH-UN.TO Interactive Stock Chart

The long term chart highlights risks. The units were selling at one time over C$17 back in 2007 and then cratered to near C$3 during November 2008. Since smashing into that low, the units have been rising in a fairly steady 45º angle with some chop.

Distributions: Distributions are paid monthly in Canadian Dollars.

Chartwell's distribution history is viewed by me as entirely unsatisfactory and a major drawback to any meaningful investment.

Chartwell cut is monthly distribution from C$.0875 to $.06167 effective for the March 2008 payment.

The distribution was slashed again to $.045 effective for the August 2009 payment. The monthly rate was unchanged at $.045 until the company raised it $.0459 effective for the March 2015 distribution

Chartwell Seniors Housing REIT - Distribution History

Recent Earnings Report: I will simply include a snapshot of the results:

For a Canadian REIT, the 2014 AFFO payout ratio of 78.9% is low. Many of them are over 90%, with some close to a 100%.

The occupancy levels need to improve some IMO:

Interest Coverage Ratio=2.37

Mortgage Debt:

A chunk of that debt will be removed when the U.S. operations are sold, as noted above.  It is possible that mortgage debt maturing in 2015-2017 may be refinanced at lower interest rates.

Chartwell Earnings Release
Chartwell Financial Statements

Rationale and Risks: The primary reason for purchasing this security is diversification in my REIT basket. Chartwell is the largest owner of senior housing in Canada. I view the dividend yield as barely satisfactory and the dividend history to be unsatisfactory.  It remains to be seen whether Chartwell will be better off after selling its U.S. properties and reinvesting the proceeds into new Canadian properties. There is a lot of debt on the balance sheet, even after adjusting for the liquidation of the U.S. related debt.

For a U.S. buyer, there is significant currency risk. That risk is not avoided at all by using USDs to buy a Canadian security. The USD price will reflect the ordinary share price in CADs converted into USDs. The decline in the CAD/USD has been a major negative for USD priced Canadian securities for a year or so.

CADUSD Interactive Chart

The ordinary shares do trade in the U.S. "Grey Market" where bid and ask prices are not displayed and liquidity is practically non-existent. CWSRF Chartwell Retirement Residences The last trade was a 100 share lot on 5/6/13. Some brokers add a significant fee to trades in that market over and above their regular commission rates. I would not fool with it.

The company describes risks starting at page 51 of its last earnings report: Chartwell.Pdf.

4. Bought 50 DPG at $19.54-Roth IRA (see Disclaimer):

Snapshot of Trade:

Security Description: The Duff & Phelps Global Utility Income Fund  (DPG) is a leveraged closed end stock fund that invests in electric, gas and water utilities, telecommunication companies and MLPs.

DPG Page at Morningstar (currently rated 3 stars; leveraged at 22.5%; ROC support for the dividend originating mostly from ROC MLP distributions)

Data Date of Trade (5/19/15):

Closing Net Asset Value Per Share: $22.05
Closing Market Price: $19.45
Discount: -11.79%

Average Discounts:
One Year: -11.44%
Three Years: -8.9%

Sourced: CEFConnect

Last SEC Filed Shareholder Report: Duff & Phelps Global Utility Income Fund (period ending 10/31/14/cost of common stock and MLP assets at $906.535+M with the then market value at $1.175+B)

Note 8 of that shareholder report contains details about the fund's borrowing costs. For the F/Y ending in October 2014, the average daily borrowings and the weighted average interest rate were $260M and .95%. respectively. The rate was at .89% as of 10/31/14.

Sponsor's Website: Duff & Phelps Global Utility Income Fund

I took a snapshot of the top five holdings in each "utility" sector:

The largest weighting in the oil and gas infrastructure sector was Kinder Morgan (KMI) at 5.1$ as of 1/31/15.

Prior Trades: I sold earlier this year 100 of the 200 DPG shares owned in a taxable account. Item # 1 Sold 100 of 200 DPG at $20.74 (2/17/15 Post)(realized gain snapshot= $200.07). I sold my highest cost shares bought at $18.58 and kept the lower cost lot purchased at $17.3.

I have several other trades in the Roth IRA: Item # 1 SOLD 50 DPG at $22.42-Roth IRA (11/29/14 Post)(snapshot profit $124.99)-Item # 2 Bought Roth IRA: 50 DPG at $19.64 (10/20/14 Post)Item # 8 Sold 113+ DPG at $21.19-Roth IRA (8/19/14 Post)(snapshot of profit=$403.07; total return $662.61 or 38.15%)-Item # 3 Swap Trade Roth IRA: Sold 100 of 150 GYB at $18.03 & Bought 100 DPG at $17.31 (12/12/14 Post)

Total Realizing Share Profits (excluding dividends)= $728.13

Snapshot of Recent Roth IRA DPG History:

Dividend History: The fund has been paying a $.35 per share quarterly dividend since its IPO in 2011. Dividend & Distribution

Due to the ownership of MLPs, the fund's distribution has been supported by a return of capital:

Rationale: The recent corrections in the MLP, telecommunications and utility sectors have made this leveraged CEF slightly more palatable on a risk/adjusted basis. I only nibbled with a 50 share purchase, however.

Net Asset Values/Market Price:
2/3/15: $24.04/$20.95
3/11/15: $21.85/$19.38 (day prior to ex dividend date for the quarterly distribution)

Without an ex-dividend, the net asset value per share declined 9.11%.

The dividend yield is currently about 7.16% based on a total cost per share of $19.54. That income is tax free in the Roth IRA.

I have managed, so far at least, in creating decent total return numbers trading this fund.

While I view the U.S. electric utility stocks to be overvalued, and have no opinion about the foreign ones, their overall weighting in the portfolio is not large. The MLP infrastructure companies have been weak over the past several weeks due in part to fears that energy prices and/or future decreased production will adversely impact them.

U.S. crude production continues to increase even as the rig count plummets:

Weekly U.S. Field Production of Crude Oil (Thousand Barrels per Day)

North America Rig

EIA Natural Gas Weekly Update

Risks: The risks are fairly typical for a leveraged closed end sector fund that buys securities worldwide. There will be some currency risks, the normal CEF risks (e.g. expansion of discount after purchase), price risk due to valuations of owned securities, interest rate risks to the prices of bond substitute securities, and the risks associated with leverage (e.g. borrowing costs, buying assets which decline in price with borrowed money adding to the woes, etc.) The sponsor discusses risks at its website and in the Prospectus starting at page 46.

As of 3/19/15, the Utilities Select Sector SPDR ETF (XLU) had a forward estimated P/E of 16.68 and a dividend yield of only 3.35%. The estimated 3 to 5 year E.P.S. growth rate was 5.64%. The P.E.G. ratio is elevated due to the low growth rate and high P/E.

This sector is vulnerable to a correction precipitated by even a modest rise in rates that diminishes the allure of a 3.32% yield and further calls into question such a high P/E for a sector growing earnings only in the low single digits.

A P.E.G. of 2  to 2.5 would be closer to a fair value range with rates rising, an estimated 3 to 5 year E.P.S. growth rate of 4% to 5%, provided the rise in rates ebbs below the average historical norms.

I go into more detail about the rationale in a recent SA Instablog: A Word Of Caution About New Purchases In The Utility Sector - South Gent | Seeking Alpha

The Vanguard Utilities ETF (VPU) has another set of data that is even more concerning than the XLU valuation information:

As of 2/28/15,  this Vanguard fund owned 78 stocks, with a P/E of 18.4.8 times and a 2.5% earnings growth rate. Portfolio & Management That P/E and growth rate simply does not compute for my Left Brain who views it to be at best irrational, a description used whenever it decides to be pleasant about something viewed as nutty.