Wednesday, April 1, 2015

Sold 221+ CSQ at $11.17 and Bought 200 ZTR at $13.72

When publishing a blog now, I will excerpt one purchase and republish the blog discussion at SeekingAlpha. I will generally have a long introduction that goes into more detail about my thinking. The SA Instablog will be published shortly after the blog. Today I selected the ZTR discussion made below to include in a SA Instablog:  

Bought Back Zweig Total Return Fund-A Balanced Closed End Fund - South Gent | Seeking Alpha

I have granted SA permission, free of charge, to republish my Instablogs as articles.

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 personal income increased by $58.6B in February or +.4% and disposable personal income also increased by .4% to  $54.2B. News Release: Personal Income and Outlays The personal savings rate increased to 5.8% from 5.2% in January. Consumers saved more and spent less in February, which is not surprising given the weather conditions. Real personal consumption expenditures decreased by .1%. I would not be concerned about the consumer spending numbers unless the anemic trend over the past two months extended into March and April.

For the 2014 first quarter, the DJIA lost .3% while the S & P 500 eked out a .4% gain, the ninth consecutive quarter of gains for that index.

According to the ADP Employment Report for March, the economy added 189,000 private sector jobs. The expectation was for 230,000. ADP revised its previously reported numbers for December to +276K from +241K and November to 284K from 208K.

Another below expectations report was the March ISM PMI for manufacturing which fell to 51.5% from 52.9 in February. I anticipate that U.S. manufacturing will continue to weaken some due in part to the USD's strength that provides a tailwind for weaker currency competitors.

Markit's Eurozone manufacturing PMI hit a 10 month high in March. The weaker "euro leads to improved new export order inflows".  German manufacturing PMI rose to 52.8 from 51.1 in February with new orders received "at an accelerated rate".

1. Sold 221+ CSQ at $11.1659 (see Disclaimer):

Snapshot of Trade:

Position Before Trade:

Since part of the dividend payments have been supported by a return of capital (ROC), the cost basis for the CSQ shares have been adjusted down to reflect the ROC adjustments.

The 100 share lot bought in November 2010 was purchased at $8.94, with the cost basis at $8.32 as shown above. The 50 share lot purchased in August 2011 was bought at $9.2, revised to a $8.73 cost basis due to ROC.  The 50 shares bought in December 2011 were purchased at $8.28, with the cost basis reduced to $7.86.

Snapshot of Profit:

2015 CSQ 221 Shares (excludes fractional share): +$630.79 
I may substitute a snapshot which includes the fractional share disposition when it becomes available tomorrow.

Prior Trades: I pared this position in 2014: Item # 8 Sold Taxable Accounts: 180 CSQ at $12.19 (9/6/14 Post)(snapshot of 2014 profits=$685.68, which includes earlier 2014 trade); Item # 7 Sold 100 CSQ at $12 (7/12/14 Post)

Total 2014-2015 Trading Profit (excluding dividends): $1,316.47

Company Description The Calamos Strategic Total Return Fund  (CSQ) is a leveraged balanced CEF.

As of 2/28/15, the fund's portfolio had the following weightings:

Common Stock: 56.2%
Corporate Bonds:  17.7% (weighted in BB and B)
Convertible Bonds: 13.1%
Convertible Preferred Stock: 6.8%
Cash: 6%
Warrants: .2%

Sourced: Fact Sheet

Sponsor's website: Calamos Investments - Strategic Total Return Fund

The debt duration was 4.33 years as of 2/28/15.

The leverage ratio is close to 28%. As of 1/31/15, the fund was paying .83% based on the overnight Libor rate plus .8%. Borrowing costs will rise when the FED starts to lift the FF rate off zero.

CSQ has a two star rating by Morningstar.

Data as of Date of Trade (3/27/15)
Closing Market Price: $ 12.13
Closing Net Asset Value Per Share: $11.18
Discount: - 7.83%
Average Discounts:
1 Year = - 6.64%
3 Years= - 7.15%
5 Years= - 9.34%

N-Q SEC Filing: Holdings as of 1/31/15

N-CSR: Last SEC Filed Shareholder Report (period ending 10/31/14)

Based on that last report, the fund only had $22.8+M in unrealized appreciation out of 2.651+B in assets. The dividends paid during the 2013 and 2014 fiscal years, which end in October, were supported by $38.+M and $34.259+M in ROC, respectively.

Rationale: Given the bull move in stocks and bonds, I view the lack of unrealized appreciation and the ROC support for the dividend payments to be sufficient justification to jettison this CEF.

The five and ten year total annualized returns at 11.02% and 6.13, based on net asset value, were not bad for a moderate allocation fund overall.

I prefer that a fund earned its dividend. The CEF discussed below has a similar yield and has supported its dividend payments over the past two years with earnings.

I have a simpleton's view of ROC. A return of my capital, which is not due to a long term capital loss carryforward, is not a dividend and should not be included in a dividend yield calculation.

For a fund with significant non-tax favored income, and assuming the investor holds the fund in a taxable account and sells the share for a long term capital gain taxable at a 15% maximum rate for most taxpayers, the ROC classification does result in that scenario in what amounts to a qualified dividend rate through the long term capital gains tax rate.

I am wary of junk bonds given my opinion that their current yields do not compensate for their credit risks.

Chart US Junk Effective Yield-St. Louis Fed

2. Bought 200 ZTR at $13.72 (see Disclaimer):

Snapshot of Trade:

Security Description: The Zweig Total Return Fund Inc (ZTR) is currently an unleveraged balanced closed end fund. The fund may use margin and will generally short a few stocks.

As of 12/31/14, the asset allocation had the following weightings:

The entire "U.S. government securities" allocation was invested in TIPs, and one of those matured on 1/15/15:

Those bonds have minimal, if any, appreciation potential.

There was a 6.2% allocation to investment grade corporate bonds with maturities between 3/15/18 and 9/15/23. I would anticipate that the fund will simply hold those bonds until maturity.

The common stock allocation was at 70.4% as of 12/31/14. I would categorize the portfolio selections as mostly falling into what I would label large cap value.  

In recent years, the monthly dividend has not been supported by a return of capital ("ROC").

Dividend Sourcing 2014 and 2013: 

Page 23: The Zweig Total Return Fund, Inc

In order to avoid ROC, however, the fund has to support the dividend with realized capital gains, as shown in the preceding snapshot.

Unrealized Appreciation: As of 12/31/14, the fund had net unrealized appreciation of $89.19M.

This fund at least has the capability of earning its dividend by harvesting unrealized capital gains, but that sourcing may not survive the next correction.

Data as of Date of Trade 3/30/15: 

Closing Net Asset Value Per Share: $15.36
Closing Market Price: $13.71
Discount: -10.74%
Average Discounts:
1   Year: -9.58%
3 Years: -10.67%
5 Years: -9.94%

Sourced: CEFConnect (expense ratio .92%)

Sponsor's website: Zweig Total Return (ZTR)

ZTR Page at Morningstar (currently rated 2 stars with no analyst report)

ZTR SEC Filings

Prior Trades: I have had two prior round trip:

2014 ZTR 209+ Shares +$198.52
Item # 1 SOLD: 209+ ZTR at $13.88 (1/20/14 Post)-Item # 2 Bought 200 ZTR at $12.835 (3/12/13 Post)

2014 Roth IRA 100 Shares +$147.08

Item # 1 Sold Roth IRA: 100 ZTR at $14.43 (7/26/14 Post)-Item # 4 Bought 100 ZTR at $12.82-ROTH IRA (7/6/13 Post)

When I sold that 100 share lot at $14.43, the net asset value per share was then $15.82, creating at that time a 8.99% discount based on the closing price of $14.4.

Total Trading Gains=$345.06 plus dividends

Dividends: The Zweig Total Return fund is currently paying a variable monthly dividend pursuant to a managed distribution plan. Over the past 12 months through January,  the monthly distributions have ranged from $.088 to $.092 per share:

ZTR 2014 Tax Information.pdf

If I took the 2014 total of $1.085 per share, and assumed that 2015 will have the same penny rates which may not be the case, then the dividend yield would be about 7.91% at a total cost per share of $13.72.

Rationale: I decided to sell my remaining shares in the Calamos Strategic Total Return Fund (CSQ) and to use the proceeds to buy ZTR for several reasons.

The Zweig Total Return fund has been earning its dividend over the past two years, whereas the Calamos fund has significantly supported its dividends with ROC.

The ZTR bond allocation has a short duration and consists of investment grade bonds concentrated in two soon to mature TIPs, whereas CSQ's bond allocation is concentrated in BB and B rated junk bonds.

At the time of my purchase, ZTR's discount to net asset value was higher than the 1, 3 and 5 year averages and was larger than the discount then prevailing for CSQ.

The FED will likely start raising the federal funds rate later this year, which will raise the borrowing costs of leveraged CEFs. ZTR is not currently using leverage, whereas CSQ had a leverage ratio of 26.98% as of 2/28/15, Calamos Investments - Strategic Total Return Fund That kind of leverage adds significant risks that I am reluctant to take now given current stock valuations and bond yields on top of a likely increase in borrowing costs.

ZTR has been repurchasing its shares. In 2014, the fund repurchased 845,400 shares at an average discount to net asset value per share of -10.12%. Note 6 at page 21, The Zweig Total Return Fund 2014 Annual Report.

I was able to exit the CSQ position at a good total return.

Risks/Issues: With any CEF, the price and the price in relation to net asset value is determined by market participants. Consequently, the market price may decline even when the net asset value per share goes up and vice versa.

By buying shares when the discount exceeds the 1, 3 and 5 year averages, I mitigate the risk some that the discount will expand after my purchase.

The fund changed its distribution from quarterly to monthly in 2012 and reduced the annual managed distribution rate. The quarterly dividend amount was then a destructive return of capital. Another 2012 change was to reduce the amount of cash in the portfolio which had been large.

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