Monday, May 8, 2017

Observations and Sample of Recent Trades (BTZ, OHI): 5/8/17

Leveraged Closed End Bond Funds

I have been paring my leveraged closed end bond funds and using the proceeds to buy individual intermediate term bonds. This is part of an overall portfolio reallocation intended to reduce risk and to preserve capital, with income generation being relevant but a secondary objective.   


I discussed the numerous risks inherent in leveraged bond CEFs in the Appendix section to this post: Update For Closed End Fund Basket Strategy As Of 8/14/15 - South Gent | Seeking Alpha (scroll to General Risk Discussion for Leveraged Bond CEFs)


The concern now is what I call the Triple Whammy: (1) cost of short term borrowing rises; (2) bond values go down including the bonds bought with borrowed money; and (3) the discount to net asset value expands due to (1) and (2) as individual investors sell and buyers want larger discounts and higher yields.  


An example is that I recently eliminated my position in the BlackRock Credit Allocation Income Trust (BTZ)-again.



2017 Roth IRA Sold 103+ BTZ +$34.37
I discussed buying the 100 shares in this October 20 comment. I had just eliminated my position (8/30/16) by selling 470+ shares at $13.62 in the same Roth IRA account, barely producing a profit.



I quit reinvesting the dividends after the January 2015 payment, as shown in the preceding snapshot.


The goal with CEFs like BTZ is simply to generate a return in excess of the dividend yield which I have managed to do over the years by trading this security:



2010 BTZ 200 Shares +$134.61


2012 BTZ 388+ Shares +$279.19
2014 BTZ 351+ Shares +$116.91


2014 IRA BTZ 210.213 Shares +$128.85
2015 BTZ 200 Shares +$3.1
2015 IRA BTZ 100 Shares +$23.77
2016 BTZ 101+ Shares $102.92
The last 100 share lot was bought on 10/20/16 when the discount to net asset value per share closed at 12.21% based on a net asset value per share of $14.74.  The discount had narrowed to 8.28%, based on a $14.62 net asset value per share, when I sold that lot on 5/1/17. The average three year discount was then at 11.72%.

Historical information can be found at CEF Connect. (click pricing information tab)


I am no longer updating my CEF Basket Strategy. The last update can be found here: Update For CEF Basket Strategy As Of 8/28/16 - South Gent | Seeking Alpha


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Economic Reports and Issues


S&P 500, Nasdaq eke out record closes as ‘fear index’ drops to lowest in decades - MarketWatch



VIX: 9.77 -.8 or -7.57% : Summary for VOLATILITY S&P 500 - Yahoo Finance


The VIX is in what I call a Phase 2 Stable Vix Pattern (SVP). Stocks, Bonds & Politics: Vix Asset Allocation Model Explained Simply With as Few Words as Possible (5/17/09 Post); Vix Asset Allocation Model - South Gent | Seeking Alpha In my Vix Asset Allocation Model, the SVP is classified as a cyclical bull market.  The SVP can only be terminated by a Trigger Event. Stocks, Bonds & Politics: VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern (5/2/09 Post)

Intermediate and long term rates have remained inconsistent with the robust future economic scenario predicted by the Stock Jocks. The ten year treasury closed today at a 2.39% yield: 2017 Daily Treasury Yield Curve Rates





10-Year Treasury Constant Maturity Rate-St. Louis Fed

Arguably, the abnormally low rates and inflation are in large part due to extremely abnormal monetary policies, including QE, NIRP and ZIRP, maintained by several central banks for an extended period of time which has had a deflationary impact rather than the expected inflationary one. Noahpinion: The Neo-Fisherite Rebellion ("If the Neo-Fisherites are right, holding interest rates at low levels for a long time will cause a long-term deflationary trend that will eventually push the price level lower than if interest rates had been kept at the old, higher level." and see Stephen Williamson: New Monetarist Economics)

While largely escaping any attention from the financial press, Canada has publicly stated the possible retaliatory steps that it may take in response to Trump's tariffs on Canadian softwood imports. I did find several reports published in the Canadian press: Canada weighing multiple trade actions against U.S. over softwood lumber dispute - Politics - CBC News One possible retaliation would be to deny U.S. thermal coal exports access to Canadian ports. Other possible actions are aimed at Oregon's exports to Canada, a major complainer about Canadian softwood imports. The possible duties include Oregon exports of wine, plywood, flooring and packaging goods that receive illegal subsidies from that state according to Canada. Canada considers retaliation for US tariff on softwood lumber - BBC News


China's April services PMI was reported at 51.2, a ten week low.


The Iron Ore price has been getting hammered even harder than oil - MarketWatchCrude and copper are getting hammered, but ‘not signaling a recession — yet’ - MarketWatch


Companies with the most untaxed, unrepatriated profits - Business Insider


Gundlach makes bearish call on stock market as S&P 500, Nasdaq hit records - MarketWatch

Researchers have answered a big question about the decline of the middle class - The Washington Post ("On average, workers born in 1942 earned as much or more over their careers than workers born in any year since . . . For instance, the typical 27-year-old man’s annual earnings in 2013 were 31 percent less than those of a typical 27-year-old man in 1969.")


The Masters of Disaster are still with us and are probably now more dangerous than ever given the sums being gambled in the casinos. This is a story about one person losing $456M back in 2009 trading currencies. Trader who lost $456 million says he was basically working in ‘nuclear reactor’ - MarketWatch 


The GOP basically wants to gut Dodd-Frank. House Republicans Move to Gut Bank Regulations - The New York Times Yes, turn the Masters of Disaster loose again and watch them incinerate again trillions in pursuit of their own greed. 


While most of the real causes of the Near Depression are never mentioned by the GOP, one of the major causes was Wild West Capitalism wh
ich does not exist in the GOP's universe, embodied in part by a 2004 SEC Rule change that allowed banks to assume more leverage since their risk models were so accurate as was their ability to understand and manage risk. (that sentence is dripping with sarcasm by the way).


Stocks, Bonds & Politics: Wild West Capitalism & Brooksley Born (2/25/2009 Post);


Stocks, Bonds & Politics: 2004 SEC Rule Change (12/22/2008)(one SEC Commissioner made the following comment at the time: "If anything goes wrong, it's going to be an awfully big mess")


Stocks, Bonds & Politics: Paul Wilmott & The Need for Nerd Therapy (6/3/2009 Post)


Recipe for Disaster: The Formula That Killed Wall Street | WIRED


The Masters of Disasters are the most overpaid doofuses in world history and probably all other worlds throughout the Universe from the Big Bang until the End of Days.

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Mostly Politics: 


Obama Warned Trump Against Hiring Mike Flynn, Say Officials - NBC NewsSally Yates says she warned White House that Flynn was a blackmail risk - CNN


Sally Yates, Acting Attorney General Fired by Trump, Testifies on Flynn Saga - NBC News

13 Men, and No Women, Are Writing New G.O.P. Health Bill in Senate - The New York Times

Deep Medicaid Cuts Drive Backlash to House Health Care Bill - NBC News  


Raul Labrador's (R-Idaho) claim that no one dies from lack of health care access: Pants on Fire | PolitiFact (in other words, just a lie from yet another pseudo-conservative)


Trump praises Australia’s universal health care as providing better care than the U.S. - MarketWatch


Pre-existing conditions: Pregnancy, sleep apnea could make you pay more - CNN.com


For opioid addicts, health care plan is a betrayal (opinion) - CNN.com


No U.S. President should express an opinion about a person's guilt or innocence before or during a trial. Trump routinely expresses opinions for political purposes. After White House contributed to rape case firestorm, charges dropped - CBS NewsDonald Trump’s unbelievable new statement about the Central Park 5


Jared Kushner's sister courting Chinese investors an "abuse of power"? - CBS News


Pruitt removes scientists from key EPA board - CNN (better to replace those scientists with those employed by the energy industry which is what Trump's EPA plans to do. Climate science is of course Fake News, possibly fomented by China to take away American jobs through some kind of Manchurian Candidate type scenario (i.e. climate scientists), if I understand Donald's "thinking" correctly which is always a challenge for me: Yes, Donald Trump did call climate change a Chinese hoax | PolitiFact. Perhaps one of Trump's True Believers can draw me a picture)



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1.  Intermediate Term Bond/CD Ladder Basket Strategy

A. Bought 2 Verizon 2.625% Senior Unsecured Bonds Maturing on 8/15/26


Finra Page: Bond Detail (prospectus linked)
Credit Ratings: 
Moody's at Baa1
S & P at BBB+


B. Bought 2 Hershey 2.625% Senior Unsecured Bonds Maturing on 5/1/23-ROTH IRA Account:





Issuer:  Hershey Co. (HSY:NYSE)
HSY The Hershey Co Page at Morningstar
Finra Page: Bond  Detail
Credit Ratings:
Moody's at A1
Moody's rates Hershey's notes at A1
S & P at A

YTM at Total Cost (99.818) =  2.658%


2017 First Quarter Report  HSY Analyst Estimates

HSY 2016 4th Quarter Earnings Report
HSY 2016 Annual Report SEC Form 10-K
HSY SEC Filings

C. Bought 1 National Rural Utilities Cooperative Finance 3% Unsecured Senior Bond Maturing on 1/15/26-Roth IRA Account:




Finra Page: Bond Detail (prospectus linked)

Credit Ratings:
Moody's at A2
S & P at A
Finra at A

National Rural Utilities Cooperative Finance Corporation (CFC) - Ratings & Research


This bond pays monthly interest:




YTM at Total Cost (99.076) = 3.121%


"National Rural Utilities Cooperative Finance Corporation (“CFC”) is a member-owned cooperative association incorporated under the laws of the District of Columbia in April 1969. CFC’s principal purpose is to provide its members with financing to supplement the loan programs of the Rural Utilities Service (“RUS”) of the United States Department of Agriculture (“USDA”). CFC makes loans to its rural electric members so they can acquire, construct and operate electric distribution, generation, transmission and related facilities. CFC also provides its members with credit enhancements in the form of letters of credit and guarantees of debt obligations. As a cooperative, CFC is owned by and exclusively serves its membership, which consists of not-for-profit entities or subsidiaries or affiliates of not-for-profit entities. CFC is exempt from federal income taxes under Section 501(c)(4) of the Internal Revenue Code. As a member-owned cooperative, CFC’s objective is not to maximize profit, but rather to offer its members cost-based financial products and services consistent with sound financial management." SEC Filed Annual for the F/Y Ending 5/31/16 


Link to SEC Filings

10-Q for the Q/E 2/28/17 
National Rural Utilities Cooperative Finance Corporation (CFC) - NRUCFC

D. Bought 1 Union Pacific 2.75% Senior Unsecured Bond Maturing on 3/1/26:




Issuer:  Union Pacific Corp. (UNP:NYSE)

UNP Union Pacific Corp Page at Morningstar
Finra Page: Bond Detail
Credit Ratings:
Moody's at A3
Moody's raises Union Pacific's senior unsecured debt rating to A3
S & P at A

YTM at Total Cost (98.428) = 2.952%


2017 First Quarter Earnings Report UNP Analyst Estimates

UNP SEC Filings
UNP 2016 Annual Report1 SEC Form 10-K
UNP 2016 4th Quarter Earnings Report

E. Bought 1 Dow Chemical 3.6% Senior Unsecured Bond Maturing on 6/15/24:




This bond is callable at par value now:




Issuer:

Finra Page: Bond Detail (prospectus is linked)
Credit Ratings:
Moody's at Baa2
Moody's affirms Dow's ratings following merger announcement; outlook stable
S & P at BBB

YTM at Total Cost (99.842) = 3.622%


2. Equity REIT Common and Preferred Stock Basket Strategy:


A. Sold 52+ OHI at $33.96-Eliminated Position in Roth IRA Account:


I still own 180+ shares in a taxable account.


Trade Snapshot:





Profit Snapshot: +$66.63





Item # 2. Added 50 OHI at $32.5 Roth IRA-Update For Equity REIT Basket Strategy As Of 11/16/15 - South Gent | Seeking Alpha


I will consider buying back this lot when and if the shares move back below $30 with no material adverse change in the business.


I last discussed OHI here: Stocks, Bonds & Politics: Omega Healthcare (OHI)


I also own 4 OHI senior unsecured bonds.


Item # 2. Bought 2 Omega Healthcare 4.5% Senior Unsecured Bonds Maturing on 1/15/2025 (11/16/15 Transaction)-Update For Exchange Traded Bond And Preferred Stock Basket Strategy As Of 6/24/16 - South Gent | Seeking Alpha


Item # 5. Bought in Roth IRA 2 Omega Healthcare 4.375% Senior Unsecured Bonds Maturing on 8/1/2023 at 100.995 (101.195 with commission)-Update For Exchange Traded Bond And Preferred Stock Basket Strategy As Of 7/19/16 - South Gent | Seeking Alpha


OHI Trading Profits: +$1,144.76  (snapshots in Stocks, Bonds & Politics: Gateway Post: Equity REIT Common and Preferred Stock Basket Strategy)


After selling this 50 share lot, OHI reported its 2017 first quarter results:  Omega Announces First Quarter 2017 Financial Results; Increased Dividend Rate for 19th Consecutive Quarter


As I have noted many times, OHI includes non-cash revenues in both its AFFO and FFO numbers. The non-cash revenue number, created by the accounting profession through a "straight-line" rent adjustment, was $18.129M for the Q/E 3/31/17. That number should not be included in an AFFO calculation. The better cash flow number provided by OHI is funds available for distribution:



Even with the FAD number, you will frequently see cash expenses excluded from the calculation that reoccur but in variable amounts. The most common of those cash expenses involve acquisition related costs, debt refinancing expenses, and uncollectible accounts. When investors decided long ago to value REITs based on cash flow numbers rather than GAAP earnings, they also decided to base multiples on cash flow numbers that were not true cash flow but massaged ones. Pretend revenues are not the same as cash revenues.

3. Short Term Bond/CD Ladder Basket Strategy:


A. Bought 2 USTs .625% Maturing on 7/31/17:




I now own 6. This bond is part of my 5/1 to 7/31/17 maturity cluster. This purchase brings the principal amount up to $80K in this cluster: See Item # 3.D in Observations and Sample of Recent Trades: 4/11/17 (CYSPRA, NKTR, NLYPRD )


Hopefully, the U.S. government will not default on its debt before paying off this bond.


4. Long Term Bond Basket Strategy: Moved from Immaterial to Underweighted:


A. Tennessee Municipal Bonds-Bought 5 Knoxville  2.5% Water Bonds Maturing in 2034:




YTM at Total Cost (87.525) = 3.483%

Current Yield: 2.86%
Optional Redemption: At Par on after 3/1/23 (which is fine with me)
Knoxville - Google Maps

EMMA Page


Credit Ratings

S & P at AA+

Security: 


Offering Statement.pdf


Apparently, a dealer bought from a customer at 86.96 on 5/2/17. The prior trades occurred shortly after issuance back in August 2016. While scrolling through the Tennessee municipal bonds available at Schwab, which is now a daily routine for me, I noticed this bond and just bought it since I had looked already at other bonds from the same issuer and this was the best price/yield, risk/reward.   


The funding for this purchase will be sourced from the proceeds that will be received from the following soon to mature securities: 


2 Peoples United .7% CDs 7/11/17

2 Synovus .75% CDs 7/19/17
1 of 2 Merchants Bank .8% CD Maturing 7/19/17

I am increasing my interest rate risk slightly in exchange for more current income. 


Intermediate bond purchases are sourced from my cash allocation. 


Long term bond purchases, mostly Tennessee municipal bonds, are being funded with the proceeds received and to be received from maturing short term bonds and CDs between 5/1/17 and 9/30/17.   


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.

8 comments:

  1. W.P. Carey (WPC): This REIT report $1.25 AFFO per share for the first quarter.

    http://www.prnewswire.com/news-releases/w-p-carey-inc-announces-first-quarter-2017-financial-results-300453688.html

    When I went to Yahoo Finance to look at the consensus estimate, the only numbers were GAAP estimates which was also the case for Marketwatch. This is a new practice.

    Those numbers are not helpful when looking at a REIT's report. The consensus estimates are based on FFO or AFFO (more frequent), depending on the company. Yahoo used to provide the cash flow consensus estimates.

    Seekingalpha claims that WPC beat the consensus cash flow number by $.13:

    https://seekingalpha.com/news/3265016-w-p-carey-beats-0_13

    I own the common stock and 2 WPC senior unsecured bonds maturing in 2024. I discussed buying the bonds in this comment:

    https://seekingalpha.com/instablog/434935-south-gent/4932974-south-gents-comment-blog-5-reits-preferred-stocks-bonds-regional-banks-healthcare-and#comment-73675675

    My only discussion of a common share purchase was a 30 share buy at $59.45:

    https://seekingalpha.com/instablog/434935-south-gent/4939799-south-gents-comment-blog-7-reits-preferred-stocks-bonds-regional-banks-healthcare-and#comment-73809391

    3/16/17 Press Release:
    W. P. Carey Inc. Increases Quarterly Dividend to $0.995 per Share

    http://www.prnewswire.com/news-releases/w-p-carey-inc-increases-quarterly-dividend-to-0995-per-share-300425160.html

    Xenia Hotels (XHR) also reported this morning:
    http://www.prnewswire.com/news-releases/xenia-hotels--resorts-reports-first-quarter-results-300453578.html

    SA claims that the $.44 cash flow number beat the consensus estimate by $.08:

    https://seekingalpha.com/news/3264925-xenia-hotels-beats-0_08-beats-revenue

    Last discussed here:

    Item 2.A. Bought 50 XHR at $16.61-Used Commission Free Trade:

    https://tennesseeindependent.blogspot.com/2017/04/observations-and-sample-of-recent_18.html

    ReplyDelete
  2. South Gent,

    I would not have thought of a VIX below 10, but it is here now.

    VIX, a "fear" gauge, is constructed using the implied volatilities of S&P 500 index options. So, is there no "fear" in the market? What about overvaluation, black swans, low oil price with an over-leveraged energy sector, rising interest rate with runaway inflation, .... etc.? Or, is it just complacency? With so many smart people in the market, could things still go awry?

    ReplyDelete
    Replies
    1. Y: There is a calm sea of complacency that is reflected in the low VIX readings.

      Buffett recently opined that stocks are cheap provided interest rates remain near current levels or rise slightly over the next ten years. The common forecast being made by the Stock Jocks and Bond Ghouls is that inflation and interest rates will remain well below historical numbers for over a decade. So a persistent rise in inflation, inflation expectations and interest rates could cause major bear markets in both stocks and bonds given the current stock valuation and interest rate levels.

      The other fundamental forecast is relevant to stocks and involves a zero or near zero chance being assigned to recessions or anything else that would upset the status quo of rising stock prices. That is typical late in a bull market run.

      Parabolic moves in markets generally collapse upon themselves eventually. The catalysts for a mean reversal may originate from external events or internal market dynamics. Examples of external event would be a recession, a major tightening of bank credit, and/or the onset of problematic inflation. Given the euphoria over Donald and the GOP now among investors, one possible catalyst would be the herd recognizing that the emperor has no cloths and the promised land was just another campaign promise that worked on the weak-minded.

      The internal market dynamics are more related to mass psychology, like mass selling generating more selling as people see large profits evaporate. That is a typical mean reversion type scenario. Another market dynamic would be a forced drawdown of margin credit which is at high levels down.

      https://www.advisorperspectives.com/dshort/updates/2017/05/02/a-look-at-nyse-margin-debt-and-the-market

      The possible catalysts are mostly identifiable and far too numerous to discuss. Whether they will mature into an actual cause is open to reasonable disagreements particularly on the timing issue.


      As I have mentioned here several times, there is nothing in the market internals that suggest that a correction is imminent IMO. The Stock Jocks still have faith that Donald will deliver major tax cuts and substantial decrease in business regulations. Europe is starting to add to GDP growth. The emerging problems in the U.S. economy are debatable (e.g. decline in consumer spending). All of that could change fairly rapidly however. Given my age and financial status, I prefer to sell into strong rallies rather than to wait for the Dark Side to appear and it will.

      Delete
    2. Excellent question, excellent answer, thank you both.

      Regarding consumer spending, I read an interesting article the other day about the troubles in retail, and how consumers aren't spending along traditional lines (clothing, etc.) Rather they are spending on experiences (travel, entertainment) and health care.
      http://www.cnbc.com/2017/05/05/its-more-than-amazon-why-retail-is-in-distress-now.html

      Delete
    3. HELLO SOUTHGENT,

      I read with interest your link to margin debt correlated with the rise in the S&P.

      I was a little confused by the end of the article however. I am not sure that I understand the term "free credit cash accounts"

      Does that refer to accounts that are not on margin?

      I understand that this is a lagging indicator, i.e. margin debt. But I wanted to know if you follow it in any fashion and how often it is available on the NYSE website?

      http://www.nyxdata.com/nysedata/asp/factbook/viewer_edition.asp?mode=tables&key=50&category=8


      I also would be curious as to your thoughts on the firing of the FBI director.

      Thanks for all your help, Sam

      Delete
    4. Sam: Definitions of Free Credit Balances:

      http://www.investopedia.com/terms/f/freecreditbalance.asp

      I believe that it includes all cash irrespective of whether the account is a cash or margin account.

      http://www.finra.org/investors/margin-statistics


      The charts near the end of that article combine available margin with available cash and then subtracts margin debt to arrive at net credit balance. The concept is that this number can be a forward indicator after hitting a peak number, with prior peaks hit in early 2000 and in June 2007. So when the net credit balance number hits a pick and starts moving back toward a positive credit balance, that could be an early warning sign of a sea change in the market's direction.

      Forced margin reduction is just one market dynamic factor that can produce a stock downdraft.

      Fear is another one. That would be both fear of losing unrealized gains and fear of buying during a major market event. Bids are withdrawn and sellers are motivated.

      Delete
  3. OKLA's share price is responding positively to its first quarter report:

    https://globenewswire.com/news-release/2017/05/09/980711/0/en/Orkla-ASA-Q1-2017-Growth-continues.html

    I own 150 shares of the USD priced ADR that trade on the U.S. pink sheet exchange (ORKLY)

    I generally play this ADR to capture the annual dividend and then to sell the shares profitably.

    Orkla ASA ADR (ORKLY)
    $9.4575
    +$0.2125 +2.30%
    Last Updated: May 10, 2017 1:18 p.m. EDT

    This stock went ex dividend on 4/20/17 for its annual distribution.

    http://www.marketwatch.com/investing/stock/orkly

    My unrealized gain is about $60.

    The USD priced ADR will be influenced by the NOK/USD conversion rate.

    Norwegian Krone (NOK)/U.S. Dollar 0.1159 =.74%
    http://www.marketwatch.com/investing/currency/nokusd

    The NOK is rising today based on the upward spike in energy prices. The NOK, like the CAD, is viewed by many as a commodity price influenced currency. So the rise in NOK/USD is causing the USD priced ADR to outperform the ordinary shares priced in NOKs. The NOK priced shares closed today up 1.24%. The USD priced ADR is up over 2%.

    Orkla is a conglomerate. While it is mainly a food and personal care company, it has significant businesses in non-related areas including paint, hydroelectric power, real estate and extrusion aluminum:

    http://www.orkla.com/About-Orkla/Orkla-Investments

    ReplyDelete
  4. I have published a new post:

    https://tennesseeindependent.blogspot.com/2017/05/observations-and-sample-of-recent_11.html

    ReplyDelete