Thursday, January 12, 2017

Observations and Sample of Recent Trades (SCM, CYS, WFCPRW): 1/12/17

Starting to see some minor backtracking in sectors and asset classes benefiting from TrumpEuphoria: 

KRE $55.19 -0.90 -1.60%: SPDR S&P Regional Banking ETF 
SPY $226.53 -0.57 -0.25%: SPDR S&P 500 ETF 
IWM $135.28 -1.05 -0.77%: iShares Russell 2000 ETF 
DX-Y.NYB 101.44 -0.34 -0.33%: US Dollar Index Futures Cash 

Sectors and asset classes that sold off after the election have been tentatively moving up: 

IEF $105.62 0.06 0.06% : iShares 7-10 Year Treasury Bond ETF (up from a $103.81 close on 12/27/16)

GLD $113.91 0.41 0.36% : SPDR Gold Trust (up from a $107.59 close on 12/22/16)

PPLT $93.68 0.31 0.33% : ETFS Physical Platinum Shares (up from a $85.6 on 12/23/16)

UDN $20.64 $0.06 0.30% : PowerShares DB USD Index Bearish (up from a $20.37 close on 1/3/17)

1. Short Term Bond/CD Ladder Strategy:

A. Bought 2 McKesson 1.4% Senior Unsecured Bonds Maturing on 3/15/18 


FINRA Page: Bond Detail (prospectus linked at FINRA page)

Credit Ratings: 

Moody's RatingBaa2 (06/28/2016)
Standard & Poor's RatingBBB+ (03/05/2014)
Fitch RatingBBB+ (12/16/2016)

YTM at Total Cost =  1.599% at 99.972 (bought at 99.692)

B. Bought 2 Verizon 1.1% Senior Unsecured Bonds Maturing on 11/1/17 


FINRA Page: Bond Detail (prospectus linked at Finra Page)

Credit Ratings: 

Moody's RatingBaa1 (02/05/2015)
Standard & Poor's RatingBBB+ (09/02/2013)
Fitch RatingA- (07/26/2016)

YTM at Total Cost = 1.223% at 99.904 (bought at 99.804)

2016 Third Quarter Report

As of today, $191K in cash has been used to buy securities in the Short Term Bond/CD Ladder strategy. 

2. Sold 100 of 200 SCM-A Small Cap BDC:

SCM Stock Quote - Stellus Capital Investment Corp. (SCM) 

100 SCM +$146.96

Reason: I do not view externally managed BDCs favorably. When trading income generating securities viewed with disfavor, the trading strategy is to harvest some dividends and then escape with a profit at some point.  In this case, I captured only one monthly dividend, viewing the profit harvest as more important when I still own 100 shares.   

Holding Period: 35 Days

The other 100 shares lot was bought using a commission free trade in my Fidelity taxable account. That lot was bought at $11.37 and discussed in Comment Blog # 7

SCM pays non-qualified dividends as a pass-through entity.  

3rd Quarter Report: Stellus Capital Investment Corporation Reports Results for its third fiscal quarter ended September

Weighted average yield on debt investments on accrual 11.1%
Net asset value per share $13.57
Discount to Company's Calculation of NAV Per Share at $11.37 = 16.21%
Net investment income per share $0.37
Realized gain (loss) per share ($0.07)
Net increase in net assets from operations $9.9
Net increase in net assets from operations per share $0.80
Net Asset Value Per Share as of 12/31/15 = $13.19

Note the realized loss and the net increase in net asset value of $.8 per share due to an upward valuation adjustment which is unrealized. I am naturally suspect of those two items coexisting in the same report.
The CEO says conditions are improving, including its equity participations, and that is why there was a bump up: CEO Rob Ladd on Q3 2016 Results - Earnings Call Transcript | Seeking Alpha

SCM is close to paying out all of its net investment income in dividends so far in 2016. The equity participation is a wild card in net investment income.
I am discussing this trade, rather than one of the ten or so other trades made today, to highlight the 3 month Libor based floating rate loans made by this BDC.
A list of these loans can be found starting at page 5 of the 3rd quarter 10-Q . For example, there is a loan to C.A.R.S. Protection Plus, Inc. at L +8.5% with a .5% Libor floor.

My second point is for beginners or a BDC investor who make investments without reviewing the summary of risks section in an Annual Report. I suspect that most BDC investors never have looked at the SEC filings and just theoretically understand the risks at best while being blinded by the yields.

SCM SEC Filings 

In the 2015 Annual Report, SEC Form 10-K, Stellus starts to summarize the risk factors at page 29 and winds up the discussion at page 55!

The last point is to look at historical net asset values per share using the 10-Qs. Are the managers destroying assets and at what rate? That is not an academic question given the histories of many externally managed BDCs.
Under Filing Type, I entered 10-Q which provides me with a list of those filings for Stellus which only go back to 2013.

So this BDC has not yet been tested by a recession which is an important consideration. The net asset value per share was $14.45 on 12/31/12:10-Q for Q/E 3/31/13.

So there is some decline over a four year period, but not as bad as several externally managed BDCs.
The IPO was in November 2012 at $15 per share.

I would not be surprised with more profit taking given the strong move off the lows hit earlier this year. The stock cratered to near $7.5 last February: SCM  Interactive Stock Chart 

As always, I do not intend to own BDCs for long and will attempt to earn a total return in excess of the dividend yield through trading.

3. Example of Non-Qualified Dividend Capture: Small Ball

Mortgage REIT: CYS Investments Inc (CYS) 

100 CYS Shares +$24.97
CYS Dividend =$25
Total Return = $49.97 

Annualized Return = 6.49%

Holding Period: 40 days

I still own a small 100+ CYS lot in a Roth IRA. The largest exposure is in the CYS cumulative equity preferred stocks CYSPRA and CYSPRB. 

CYS Investments Inc. 7.75% Cumulative Preferred Series A (CYS.PA) 

CYS Investments Inc. 7.5% Cumulative Preferred Series B (CYS.PB)

I will generally be only a short term holder in the common, mindful of the dividend cuts and the fact that I have sold out at higher prices. Item # 1 Sold 50 CYS at $13.33 (12/13/11 Post) 

I am willing to try a dividend capture only when I am okay holding the security longer term at the price paid. 

For dividend capture strategies that involve qualified dividends, there is holding period requirement: Publication 17 (2016), Your Federal Income Tax. ("Holding period. You must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. The ex-dividend date is the first date following the declaration of a dividend on which the buyer of a stock is not entitled to receive the next dividend payment. Instead, the seller will get the dividend.  When counting the number of days you held the stock, include the day you disposed of the stock, but not the day you acquired it.")

4. Selling into Bond/Preferred Stock Rally Example

Wells Fargo & Co.   5.7% Non-Cumulative Preferred Series W Stock (WFC.PW) 

WFCPRW 50 Shares +$48.97
Holding Period: 20 days

When exchange traded bonds and preferred stocks fell after the election, I bought about $40K in exchange traded bonds and preferred stocks in what I would call a temporary sector rotation out of cash and into higher yielding securities. Those buys were done with the intent of gradually selling most of those securities, particularly my highest cost lots, into the next bond and preferred stock rally which is now occurring. 

I am not enamored of a 5.7% potentially perpetual equity preferred stock that pays non-cumulative dividends and is issued by a bank holding company. During the last near Depression, I was buying WFC junior bonds at greater than 50% discounts to par value. (e.g. Buy  of JWF at $9.15 (3/6/09 Post)SOLD 50 of the TP JWF at 25.06 (6/23/2011 Post).

Prospectus Supplement

The equity preferred stocks issued by WFC are currently rated Baa2 by Moody's and BBB by S & P.

Debt Rating Summary — Investor Relations — Wells Fargo

I also bought 50 shares of WFCPRV on 11/28/16 and still own that lot.


Disclaimer: I am not a financial advisor but simply an individual investor who has been managing my own money since I was a teenager. In this post, I am acting solely as a financial journalist focusing on my own investments. The information contained in this post is not intended to be a complete description or summary of all available data relevant to making an investment decision. Instead, I am merely expressing some of the reasons underlying the purchase or sell of securities. Nothing in this post is intended to constitute investment or legal advice or a recommendation to buy or to sell. All investors need to perform their own due diligence before making any financial decision which requires at a minimum reading original source material available at the SEC and elsewhere. A failure to perform due diligence only increases what I call "error creep". Stocks, Bonds & Politics: ERROR CREEP and the INVESTING PROCESS. Each investor needs to assess a potential investment taking into account their personal risk tolerances, goals and situational risks. I can only make that kind of assessment for myself and family members.

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