Saturday, March 7, 2015

Continued Paring Interest Rate Risk: Sold 100 of the CEF JDD at $12.45-Roth IRA /Sold 50 of 100 GSPRC at $20.89/ADDED 50 LXP at $9.85-Fidelity Roth IRA-Completes Transition of that Position

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 295,000 jobs were added in February. Employment Situation Summary The unemployment rate fell to 5.5%. Average hourly earnings rose 3 cents to $24.78. Over the past year, average hourly earnings rose 2%. If one was inclined to accept the government's last annual Consumer Price Index number of -.1%, then that 2% rise in average wages is a 2.1% real increase. The U-6 number fell to 11% from 11.3%. Table A-15. Alternative measures of labor underutilization

This report sparked a selloff in bonds and bond substitutes last Friday:

TLT $123.5 -2.79 iShares 20+ Year Treasury Bond ETF
XLU $43.39 -1.34 SPDR Select Utilities ETF
VNQ: $80.37 -2.76% Vanguard REIT ETF

Over the past several weeks, I have pared my interest rate risk exposure.

The rise is rates since 2/2/15 is following the same pattern, so far, as the 2013 spike. The ten year treasury yield closed at 1.68% on 2/2/15 and at 2.24% on 3/6/15. This is what the lift off looked like in 2013:

The following charts contains data for the 7, 10, 20 and 30 year treasuries, moving from left to right, starting on 5/2/13 with the ten year at 1.66% through the 2.25% closing yield on 6/12/13. Rates then moved down slightly for a few days before turning back up again.

2013 Rate Spike Lift Off
Daily Treasury Yield Curve Rates

German industrial output rose for the 5th consecutive month. I would expect Europe's manufacturers to take market share away from their U.S. competitors due to the Euro's devaluation. Market estimates that Germany's GDP will grow .3% in the first quarter.

Eurostat confirmed that the euro area 4th quarter GDP rose .3% compared to the previous quarter and up .9% over the past year. Sweden's 4th quarter growth rate led the pack at 1.1%. The Euro area growth would have been stronger at .5% except for businesses drawing down inventories to meet demand. Replenishment of those goods may contribute to future growth.

1. Added 50 LXP at $9.85 at Roth IRA (see Disclaimer): This purchase is discussed in a recently published SA Instablog:

Added To LXP At $9.85-Roth IRA - South Gent | Seeking Alpha

2. Sold 100 JDD at $12.45 Roth IRA (See Disclaimer): This kind of security is primarily a dividend income vehicle. Whenever I can harvest the dividends and make a few bucks on the stock, I am content, particularly when both the income and capital gains are non-taxable.

Snapshot of Trade:

2015 Roth IRA Sold 100 JDD at $12.45

Snapshot of History:

Snapshot of Profit:

2015 Roth IRA Sold 100 JDD +$66.98
Bought 100 JDD at $11.64 in Roth IRA (4/12/14 Post)

Dividends: $78

Total Return: $144.98 or  12.38% (holding period 11 months)

Prior Trades: I have bought and sold this one several times.

I still own 100 shares in a taxable account. Increasing Cash Flow: Bought Back JDD At $11.65 - Nuveen Diversified Dividend&Income Fund (NYSE:JDD) | Seeking Alpha

Item # 4 Sold 150 JDD at $12.25 (7/19/14 Post)(profit snapshot=$66.25 + one quarterly dividend)-Item # 3 Bought 150 JDD at $11.7 in Taxable Account (4/12/14 Post)(contains snapshots of prior trading gains of $430.98)

Item # 4 Sold CEF JDD at $11.28 (July 22, 2011 Post)-Item # 6 Bought 100 JDD in Roth at $8.4 (August 2009 )and Item # 5 Added to CEF JDD at $9.45 (October 23, 2009 Post)

Item # 4 Sold 70 of 170 of JDD-Roth IRA (2/26/2010 Post)(part of 100 share lot bought at $8.4 August 2009)-Item # 6 Bought 100 JDD in Roth at $8.4

Sold 300 JDD at $11.44 (December 6, 2010 Post)-Bought 300 JDD at $10.95 (September 10, 2010 Post)

Total Trading Gains: $564.21  ($497.23 in prior trades)

Security Description: The Nuveen Diversified Dividend & Income Fund (JDD) is a leveraged closed end fund that invests relatively equal amounts in 4 asset classes:  (1) U.S. and foreign dividend paying stocks; (2) REITs; (3) emerging market sovereign debt and (4) adjustable rate senior loans. That last category will consist of junk rated securities.

During my periods of ownership, I have found that one or two of those four asset classes will be a drag during a calendar year. In 2014, REITs would have been the primary driver of total returns, with assists from dividend paying stocks and probably emerging market sovereign bonds.

I can not measure the performance of the fund's EM sovereign bond holdings. The foregoing statement about 2014 is based on the 9.14% total return of PowerShares Emerging Markets Sovereign Debt ETF ETF.

The fund's overall 2014 performance was probably dragged some by the senior loan component. The PowerShares Senior Loan ETF (BKLN) had a 2014 total return of .7% based on net asset value, which means that a share price decline offset most of the dividend income.

I would not hazard a guess which asset classes will contribute to or detract from total returns in 2015. That unpredictability is one reason for diversification, where the overall performance of the asset allocation is more important than any single component.

Oppenheimer provides quarterly a digital chart presentation of how various asset categories perform over time, along with other helpful information. The last report was dated 9/30/14: Capital Markets Chart Book Q4 2014 Several of those charts are relevant to JDD's asset allocation.

The taxable fixed income chart at page 25 shows that emerging market bonds had a bad year in 2013, falling 8.98%. That was due to the interest rate spurt in U.S. rates that year that caused declines in emerging market currencies and bonds. However, emerging market bonds were the best performing bond category for 4 years straight starting in 2004 and in 2010 and 2012. So these performance numbers come and go over time and are frequently unpredictable ahead of time. Who predicted that the price of crude oil would collapse in 2014 in 2013?

Another relevant chart for emerging market debt can be found at page 34. The chart shows that emerging market debt yields are higher than developed markets, which is not hard to do at the current time, even though their public debt levels as a percentage of their respective GDPs are more sustainable.

The chart at page 31 shows how senior junk loans and junk bonds fare in a rising rate environment.

Page 36 has a map showing sovereign "real yields". Since that chart has been compiled, the real yield numbers for developed countries has shrunk even more.

The box chart at page 45 shows the relative performance since 2004 of alternative asset classes including REITs, MLPs, gold and commodities. When I look at that kind of historical performance chart, I recognize right away that it is impossible to predict the performance order from year to year. Gold may be at the top or the bottom or somewhere near the middle. REITs have been the best and worst performing alternative asset category and so on.

CEFConnect Page for JDD

Last SEC Filed Shareholder Report Period Ending 6/30/14

Form N-Q: Holdings as of 9/30/14

Rationale: I am concerned about JDD's interest rate risk which is in two categories. First, the cost of leverage is likely to start going up this year. Second, JDD has a number of interest rate sensitive securities including the bond like REIT common stocks and emerging market sovereign debt which also has currency risk when the debt is denominated in local currencies. Even the senior floating rate junk loans have interest rate risks when they have 3 month Libor floors and a rise in that short term rate does not trigger an increase in the coupon until that floor amount is exceeded by the rate increase.

The market price and net asset per share declines between 5/1/2013 and 12/31/13 highlights what can go wrong when investors flee bond CEFs. JDD suffered a mild decline in net asset value when interest rates spiked in 2013. The ten year treasury went from 1.66% on 5/1/13 to 3.04% on 12/31/13. Daily Treasury Yield Curve Rates

The net asset decline in JDD was more than offset by its three quarterly dividend payments made during that period, producing a positive total return when computed on net asset value. The market price total return was deeply into negative territory.

Unadjusted for Dividends
May 1, 2013
Net Asset Value Per Share: $13.38
Market Price: $13.73
Premium to Net Asset Value +2.62%

December 31, 2013:
Net Asset Value Per Share: $12.84
Market Price: $11.27
Discount to Net Asset Value Per share: -12.23%

Unadjusted for the dividend payments, the net asset value per share declined by 4% while the market price declined by 17.92%. Rational or irrational?

It is what it is.

The net asset value per share has declined from $14.07 (2/3/15) to $13.74 (3/6/15) without any dividends being paid during that period.

Future Buys/Sells: For the time being, I am keeping the other 100 share lot at least until I see a longer term interest rate risk picture unfold. I may buy back the lot in the IRA, where I am more risk adverse, after a significant correction in price due in part to the discount expanding to a higher percentage than the historical 3 and 5 year levels.

3. Sold 50 of 100 GSPRC at $20.89 (see Disclaimer):

Snapshot of Trade: 

Snapshot of Profit: 

2015 GSPRC 50 Shares +$31.08

Item # 6 Bought: 50 GSPRC at $19.95 (11/6/13 Post)

Dividends: $63.2

Total Return: $94.28 or 9.38%

Prior Trades: I still own 50 GSPRC shares: Equity Preferred Floating Rate Stocks: Added 50 GSPRC At $19.63 - South Gent | Seeking Alpha

Security Description: The Goldman Sachs Group Preferred Series C (GS.PC) is an equity preferred stock issued by the Goldman Sachs Group Inc. (GS) that pays non-cumulative and qualified dividends at the greater of 4% or .75% above the 3 month Libor rate on a $25 par value. This security will be senior only to common stock.

The minimum coupon provides a measure of deflation/low inflation protection while the spread to the 3 month Libor rate addresses the problematic inflation scenario.


This security falls under my classification of floating rate equity preferred stocks. I discuss their advantages and many disadvantages in this Gateway Post: Stocks, Bonds & Politics: Advantages and Disadvantages of Equity Preferred Floating Rate Securities

3-Month London Interbank Offered Rate (LIBOR)

Rationale: I am paring my floaters for the reasons  set forth in two recent posts: Item # 3 Sold 50 BMLPRJ at $21.14 (3/5/15 Post) and Item # 2 Sold 100 of 200 MSPRA at $20.91 (3/2/15 Post)

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