Big Picture Synopsis:
Stocks
Stable Vix Pattern (Bullish)
Short Term: Hoping for a 10%+ Correction
Intermediate and Long Term: Bullish
Bonds
Short Term to Long Term: Slightly Bearish Based on Interest Rate Normalization
I will become more bearish on bonds when and if I see a material up move in inflation expectations.
Inflation expectations have been moving up based on the pricing of the ten year TIP. Last month, I did one calculation where the forecast was for an average 1.93% rate of inflation over the next ten years.
Last Friday, the break-even closed at 2.21% for the 10 Year TIP:
Daily Treasury Yield Curve Rates: 2.5%
Daily Treasury Real Yield Curve Rates: .29%
Inflation expectations have been moving up based on the pricing of the ten year TIP. Last month, I did one calculation where the forecast was for an average 1.93% rate of inflation over the next ten years.
Last Friday, the break-even closed at 2.21% for the 10 Year TIP:
Daily Treasury Yield Curve Rates: 2.5%
Daily Treasury Real Yield Curve Rates: .29%
*****************
Recent Economic Reports:
CPI increased .5% in June on a seasonally adjusted basis with the core up .2%. The annual increase on a non-seasonally adjusted basis was reported at 1.8%. The Y-O-Y core inflation number was 1.6%. Consumer Price Index Summary Gasoline accounted for about two-thirds of the June increase. The median price index calculated by the Cleveland Fed was up .2% in June or a 2.1% annualized rate. Current Median CPI :: Federal Reserve Bank of Cleveland
China reported that its second quarter GDP grew 7.5% from the 2012 second quarter, the slowest growth since 1990. Industrial output rose 8.9% in June, down from May's 9.2%. Consumer spending rose 13.3% in June, up from 12.9% growth in May.
The Commerce Department reported that retail sales increased .4% in June from the previous month, less than the consensus forecast of .8%. The May number was revised down to .5% from .6%. Core retail sales, which excludes gasoline, building materials and automobiles, rose .1%, compared to .2% in May. Total sales for April-June 2013 were up 4.6% from the 2012 second quarter. census.gov.pdf
Empire State Manufacturing Survey for July showed modest improvement, rising two points to 9.5, with the new orders component increasing 10 points to 3.8.
The Philadelphia Fed Manufacturing Survey rose to a two year high, surging to 19.8 in July from 12.5 in June, higher than the 10 consensus estimate. Shipments rose 14.3 from 4.1, but the new orders component declined to 10.2 from 16.6.
***************
Royce Value Trust (RVT)
Subject to approval by its shareholders, Royce Value Trust will contribute approximately $100M of its cash and securities to a new CEF called the Royce Global Value Trust. I see no reason for this kind of maneuver so I voted against the proposal.
I will sell my shares in the event the prosal passes.
I see no advantage to RVT shareholders from this transaction. This kind of transaction simply appears to be a cheaper way for the sponsor to launch a new fund, bypassing the underwriter's take.
There is one clear advantage to the sponsor The expense ratio for the Royce Global Value Trust "is expected to be higher" than the RVT expense ratio. sec.gov
I did not care for the complicated tax issue summarized in this missive:
I will sell my shares in the event the proposal passes.
***************
General Electric (own):
I thought that the title of the press release was more important than the actual E.P.S. number for the second quarter.
GE Reports 2Q’13 Operating EPS $0.36, Revenues $35.1B; Infrastructure orders +4%, U.S. orders +20%, record backlog of $223B; Industrial segment margins +50 basis points
The results for the second quarter were not that impressive, but the outlook was more positive for the U.S.
Immelt noted that U.S. orders "were the strongest in some time". Orders for new equipment and services in the U.S. rose 20% in the second quarter and grew 2% in Europe after declining 17% in the prior quarter.
The market reacted positively to this report: GE: $24.72 +1.09 (+4.61%)
The upbeat news about orders had a positive impact on other industrials last Friday:
HON: $83.57 +0.60 (+0.72%)
UTX: $102.48 +1.14 (+1.12%)
EMR: $58.80 +1.06 (+1.84%)
XLI: $45.41 +0.46 (+1.02%) : SPDR Select Sector ETF - Industrials
VIS: $87.04 +0.86 (+1.00%) : Vanguard Industrials ETF
GE Earnings Call Transcript - Seeking Alpha
I am still reinvesting the dividend to buy more shares. My plan at the moment is to sell my highest cost shares at some point after the shares cross above $30 and then keep longer term the shares bought after Lehman's failure with an average cost per share near $15. (Introduction Section: Stocks, Bonds & Politics: GE)
***************
Regional Banks:
I decided to pare my regional bank basket further by selling four 50 share positions.
Needless to say, those stocks continued to rise after I sold them.
There were two primary reasons for selling these four positions discussed below.
The first was profit taking, coupled with realizing some decent percentage gains quickly. When that happens, which was the case with TRMK, UMPQ and SYBT discussed below, then the funds devoted to those investments have done their work for a year or two.
Percentage Returns/Approximate Time Period (Excludes Dividends):
SYBT= 16.86%/ 3+ Months
TRMK= 21.8%/ 7+ Months
UMPQ= 30.73%/ 8+ Months
UVSP=33% / 16+ Months
The second was valuation. In two of the four, SYBT and TRMK, the consensus E.P.S. estimate for 2014 is actually lower than 2013.
In the following discussion, I will note for each stock the trailing 12 month P/E (TTM P/E), the consensus E.P.S. forecasts for both 2013 and 2014, and the forward P/E on the 2014 estimate.
A forward P/E of 15 would be viewed as expensive for a stock experiencing negative or low single digit E.P.S. year-over-year.
While I anticipate that higher intermediate and long term interest rates will have a positive impact on net interest margin, particularly when rates paid to depositors remain near zero, the improvement in net interest margin will take time to develop. As noted previously, the bank will suffer more immediate negative impacts resulting from lower profits, or even losses, realized from their available for sale investments.
I follow a large number of regional banks. A couple of weeks ago, I looked at my monitor list and could not find any to buy. That was another signal to me at least to lighten up.
I became somewhat more concerned after Comerica, one of the larger and stronger regional banks, reported earnings last Tuesday. I have no position at the current time.
Comerica is headquartered in Texas and has branches in California, Arizona, Michigan and Florida with 484 offices and total assets of $62.9 billion as of 6/30/13. Investor Relations | Comerica Bank The bank has locations in 7 of the largest ten U.S. cities.
For the 2013 second quarter, operating revenues declined 2% from a year ago; the net interest margin declined to 2.83% from 3.1% as of 6/30/12 and 2.88% sequentially; total deposits increased 1.49% and loan growth was up less than 1% sequentially; and the efficiency ratio was reported at 66.43% down minimally from 67.53% reported as of 6/30/12. The loan and deposit growth are both anemic and the net interest margin continued to decline.
Non-performing loans declined to 1.18% from 1.78% with the NPA ratio declining from 1.85% to 1.1%. SEC Filed News Release
While declines in NPLs is positive of course, most of that favorable trend has already been realized by Comerica. Growth in earnings going forward will be more dependent on net interest margin expansion coupled with increased loan growth funded by low cost deposits, with an assist to profits coming from an improvement in the bank's efficiency ratio. Prior to this earnings release, the consensus E.P.S. estimate was $2.87 in 2013 and $2.91 in 2014: CMA Analyst Estimates The stock closed down in response to this report: CMA: $40.86 -0.70 (-1.68%)
I have avoided this one for several reasons, including valuation, price and the dividend history in particular. Dividend History (CMA) | Comerica Bank
I sold one other position last week that I will discuss in the next post. Snapshots of the trades can be found at the Gateway Post for this subject.
***
Recent Economic Reports:
CPI increased .5% in June on a seasonally adjusted basis with the core up .2%. The annual increase on a non-seasonally adjusted basis was reported at 1.8%. The Y-O-Y core inflation number was 1.6%. Consumer Price Index Summary Gasoline accounted for about two-thirds of the June increase. The median price index calculated by the Cleveland Fed was up .2% in June or a 2.1% annualized rate. Current Median CPI :: Federal Reserve Bank of Cleveland
China reported that its second quarter GDP grew 7.5% from the 2012 second quarter, the slowest growth since 1990. Industrial output rose 8.9% in June, down from May's 9.2%. Consumer spending rose 13.3% in June, up from 12.9% growth in May.
The Commerce Department reported that retail sales increased .4% in June from the previous month, less than the consensus forecast of .8%. The May number was revised down to .5% from .6%. Core retail sales, which excludes gasoline, building materials and automobiles, rose .1%, compared to .2% in May. Total sales for April-June 2013 were up 4.6% from the 2012 second quarter. census.gov.pdf
Empire State Manufacturing Survey for July showed modest improvement, rising two points to 9.5, with the new orders component increasing 10 points to 3.8.
The Philadelphia Fed Manufacturing Survey rose to a two year high, surging to 19.8 in July from 12.5 in June, higher than the 10 consensus estimate. Shipments rose 14.3 from 4.1, but the new orders component declined to 10.2 from 16.6.
***************
Royce Value Trust (RVT)
Subject to approval by its shareholders, Royce Value Trust will contribute approximately $100M of its cash and securities to a new CEF called the Royce Global Value Trust. I see no reason for this kind of maneuver so I voted against the proposal.
I will sell my shares in the event the prosal passes.
I see no advantage to RVT shareholders from this transaction. This kind of transaction simply appears to be a cheaper way for the sponsor to launch a new fund, bypassing the underwriter's take.
There is one clear advantage to the sponsor The expense ratio for the Royce Global Value Trust "is expected to be higher" than the RVT expense ratio. sec.gov
I did not care for the complicated tax issue summarized in this missive:
I will sell my shares in the event the proposal passes.
***************
General Electric (own):
I thought that the title of the press release was more important than the actual E.P.S. number for the second quarter.
GE Reports 2Q’13 Operating EPS $0.36, Revenues $35.1B; Infrastructure orders +4%, U.S. orders +20%, record backlog of $223B; Industrial segment margins +50 basis points
The results for the second quarter were not that impressive, but the outlook was more positive for the U.S.
Immelt noted that U.S. orders "were the strongest in some time". Orders for new equipment and services in the U.S. rose 20% in the second quarter and grew 2% in Europe after declining 17% in the prior quarter.
The market reacted positively to this report: GE: $24.72 +1.09 (+4.61%)
The upbeat news about orders had a positive impact on other industrials last Friday:
HON: $83.57 +0.60 (+0.72%)
UTX: $102.48 +1.14 (+1.12%)
EMR: $58.80 +1.06 (+1.84%)
XLI: $45.41 +0.46 (+1.02%) : SPDR Select Sector ETF - Industrials
VIS: $87.04 +0.86 (+1.00%) : Vanguard Industrials ETF
GE Earnings Call Transcript - Seeking Alpha
I am still reinvesting the dividend to buy more shares. My plan at the moment is to sell my highest cost shares at some point after the shares cross above $30 and then keep longer term the shares bought after Lehman's failure with an average cost per share near $15. (Introduction Section: Stocks, Bonds & Politics: GE)
***************
Regional Banks:
I decided to pare my regional bank basket further by selling four 50 share positions.
Needless to say, those stocks continued to rise after I sold them.
There were two primary reasons for selling these four positions discussed below.
The first was profit taking, coupled with realizing some decent percentage gains quickly. When that happens, which was the case with TRMK, UMPQ and SYBT discussed below, then the funds devoted to those investments have done their work for a year or two.
Percentage Returns/Approximate Time Period (Excludes Dividends):
SYBT= 16.86%/ 3+ Months
TRMK= 21.8%/ 7+ Months
UMPQ= 30.73%/ 8+ Months
UVSP=33% / 16+ Months
The second was valuation. In two of the four, SYBT and TRMK, the consensus E.P.S. estimate for 2014 is actually lower than 2013.
In the following discussion, I will note for each stock the trailing 12 month P/E (TTM P/E), the consensus E.P.S. forecasts for both 2013 and 2014, and the forward P/E on the 2014 estimate.
A forward P/E of 15 would be viewed as expensive for a stock experiencing negative or low single digit E.P.S. year-over-year.
While I anticipate that higher intermediate and long term interest rates will have a positive impact on net interest margin, particularly when rates paid to depositors remain near zero, the improvement in net interest margin will take time to develop. As noted previously, the bank will suffer more immediate negative impacts resulting from lower profits, or even losses, realized from their available for sale investments.
I follow a large number of regional banks. A couple of weeks ago, I looked at my monitor list and could not find any to buy. That was another signal to me at least to lighten up.
I became somewhat more concerned after Comerica, one of the larger and stronger regional banks, reported earnings last Tuesday. I have no position at the current time.
Comerica is headquartered in Texas and has branches in California, Arizona, Michigan and Florida with 484 offices and total assets of $62.9 billion as of 6/30/13. Investor Relations | Comerica Bank The bank has locations in 7 of the largest ten U.S. cities.
For the 2013 second quarter, operating revenues declined 2% from a year ago; the net interest margin declined to 2.83% from 3.1% as of 6/30/12 and 2.88% sequentially; total deposits increased 1.49% and loan growth was up less than 1% sequentially; and the efficiency ratio was reported at 66.43% down minimally from 67.53% reported as of 6/30/12. The loan and deposit growth are both anemic and the net interest margin continued to decline.
Non-performing loans declined to 1.18% from 1.78% with the NPA ratio declining from 1.85% to 1.1%. SEC Filed News Release
While declines in NPLs is positive of course, most of that favorable trend has already been realized by Comerica. Growth in earnings going forward will be more dependent on net interest margin expansion coupled with increased loan growth funded by low cost deposits, with an assist to profits coming from an improvement in the bank's efficiency ratio. Prior to this earnings release, the consensus E.P.S. estimate was $2.87 in 2013 and $2.91 in 2014: CMA Analyst Estimates The stock closed down in response to this report: CMA: $40.86 -0.70 (-1.68%)
I have avoided this one for several reasons, including valuation, price and the dividend history in particular. Dividend History (CMA) | Comerica Bank
I sold one other position last week that I will discuss in the next post. Snapshots of the trades can be found at the Gateway Post for this subject.
***
Snapshot of Trade:
 |
| 2013 Sold 50 TRMK at $26.52 |
Snapshot of Profit:
 |
| 2013 TRMK 50 Shares +$233.07 |
Prior Trade: Item# 3 Bought 50 TRMK at $19.57 August 2010- Item # 3 Sold 50 TRMK at $24.7 January 2012
 |
| 2012 TRMK 50 Shares +$240.57 |
Rationale: At $26.52, Trustmark was selling at a rich multiple for a stock currently anticipated to experience negative Y-O-Y E.P.S. growth from 2013 to 2014. Possibly, the market believes that TRMK will do better than the current forecasts discussed below.
Closing Price 7/10/13 TRMK: $26.41 -0.14 (-0.53%). At $26.51, the TTM P/E is 15.37 and the P/E on the consensus 2014 estimate of $1.78 is 14.83. The consensus E.P.S. forecast is for $1.82 in 2013 and $1.78 in 2014. TRMK Analyst Estimates
Trustmark was one of the banks identified by J P Morgan as being hurt by rising rates due to the size of its bond portfolio and relative size. The JPM report is summarized at Barrons.com. I currently own 4 out of the 6 banks recommended by JPM. Those four banks on JPM's recommended list are FHN and KEY as value picks and PBCT and FMER as "special situations". FHN is owned as a LT, while the other three are included in the regional bank basket.
Future Buys: If there is no material adverse development, and the 2014 consensus E.P.S. estimate is no lower than $1.78, I would consider buying back this 50 share lot at less than $21.5.
For all of the bank stocks mentioned in this post, I would move the potential re-entry price up or down based on future earnings and changes to the forward year's E.P.S. estimates.
Last Friday's Close: TRMK: $27.55 +0.10 (+0.36%)
For all of the bank stocks mentioned in this post, I would move the potential re-entry price up or down based on future earnings and changes to the forward year's E.P.S. estimates.
Last Friday's Close: TRMK: $27.55 +0.10 (+0.36%)
Snapshot of Trade:
 |
| 2013 Sold 50 UMPQ at $16.12 |
Snapshot of Profit:
 |
| 2013 UMPQ 50 Shares +$187.58 |
Prior Trade: The only prior trade was when Umpqua was classified as a Lottery Ticket: SOLD 30 UMPQ at $13.33 (snapshot of gain=$38.09)- Bought 30 UMPQ as LT at 11.53
Total Realized Gain 50 and 30 share Trades=$225.67
Rationale: This stock had the highest TTM P/E of the four sold:
Closing Price 7/10/13: UMPQ: $15.93 -0.19 (-1.18%). At $15.93, the TTM P/E is 18.1 and the P/E on the consensus 2014 estimate is 15.47. The consensus E.P.S. forecast for 2013 is $.93 and $1.03 in 2014: UMPQ Analyst Estimates
Future Buys: To buy back the 50 shares sold, Umpqua would need to fall to less than $13 with no significant adverse developments, with a 2014 E.P.S. consensus estimate being no worse than $1.
Last Friday's Close: UMPQ: $16.55 +0.22 (+1.35%)
3. Sold 50 UVSP at $20.5 (REGIONAL BANK BASKET STRATEGY GATEWAY POST)(see Disclaimer):
Snapshot of Trade:
 |
| UVSP EMAIL Confirmation |
 |
| 2013 UVSP 50 Shares +$253.1 |
Item # 3 Bought 50 UVSP at $15.1 March 2012
Rationale: Both the TTM P/E and the future P/E is high for a company estimate to grow earnings 5.26% from 2013 to 2014.
Closing Price 7/10/13: UVSP: $20.60 +0.17 (+0.83%). At $20.6, the TTM P.E is 16.48 and the P/E on the consensus 2014 earnings is 14.71. The consensus estimate for 2013 is for an E.P.S. of $1.33 and $1.4 for 2014. UVSP Analyst Estimates
Last Friday's close: UVSP: $20.48 -0.02 (-0.10%)
4. Sold 50 SYBT at $26.2 (REGIONAL BANK BASKET STRATEGY)(see Disclaimer):
Snapshot of Trade:
Snapshot of Profit:
 |
| 2013 SYBT 50 Shares +$189.97 |
Prior Trade:
 |
| 2012 SYBT 50 Shares +$107.58 |
Total Realized Gains Two 50 Share Trades (Excluding Dividends)= $297.55
Rationale: The SYBT E.P.S. is expected to decline in 2014 compared to 2013.
Closing Price 7/10/13: SYBT: $26.37 0.00 (0.00%). At $26.37, the TTM P/E is 14.01, and the P/E on the consensus estimate for 2014 is also 14.1. The consensus forecast is for $1.9 in 2013 and $1.87 in 2014. SYBT Analyst Estimates
Future Buys: If there are no material adverse developments and the 2014 consensus E.P.S. forecast is no worse than $1.87, I would consider buying back this 50 share lot at less than $22.
Last Friday's close: SYBT: $26.98 -0.01 (-0.04%)
5. Added 100 PFLT at $14 (see Disclaimer):
Snapshot of Purchase:
Security Description: PennantPark Floating Rate Capital is a BDC that invests mostly in floating rate, first lien secured notes issued by private companies.
A list of those investments can be found, starting at page 6, in the last filed SEC Form 10-Q.
I recently discussed this BDC after purchasing just 50 shares in an IRA: Pared Trade Roth IRA: Sold 50 GJR at $20.48-Bought 50 PFLT at $14.24
After the close last Monday, PennantPark Floating Rate Capital announced its intention to sell 4.7M shares plus an over-allotment option of up to another 705,000 shares. Prospectus The net asset value per share was $14.1 as of 3/31/13. The shares were priced at $14.2. Prospectus In that prospectus, the firm estimated its book value at between $13.95 to $14 as of 6/30/13 (page S-6)
The company previously sold 3M shares back in April at $14 per share plus an additional 450,000 shares purchased under the over allotment option.
PennantPark Floating Rate Capital declared its regular monthly dividend of $.0875 per share payable on 8/1/13, SEC Filed Press Release The ex dividend date was 7/17/13, the day after my purchase.
The weighting in first lien floating rate debt will cause this BDC to have a lower dividend yield than other BDCs that have more significant exposure to subordinated debt. A second lien note will frequently attach to nothing but air around a firm's HQ, a fact that is brought home during a BK.
I was actually looking for an income security to buy last Tuesday morning after I received two email notices from Fidelity that two of my GMAC bonds were about to be redeemed by the issuer:
Both of those bonds make monthly interest payments, and I will make a couple of bucks at maturity on the bonds plus those interest payments.Bought 1 GMAC 7.125% Bond Maturing 10/15/2017 at 98.072 (April 2011); Bought 1 GMAC 7.25% Bond Maturing 4/15/2018 at 98.396 (April 2011)
There is one recent comprehensive research article on this BDC published at Seeking Alpha. The author of that article is knowledgeable about BDCs.
I discussed this purchase in a comment left at a Seeking Alpha Instablog.
Recent Earnings Report: PFLT reported core net investment income for the first quarter of 31 cents per share. During the first three months, this BDC invested in 12 new portfolio companies with an average weighted yield on debt investments of 8.9%.
The yield on the debt portfolio was 8.8%, up from 8.6% as of 3/31/12. I took a snapshot of the relevant general summary of the loans:
SEC Filed Press Release
Rationale: I am simply replacing two income securities that are about to be redeemed with another. Both the GMAC bonds and PFLT make monthly interest payments. The current yield for the PFLT, assuming a continuation of the monthly $.0875 per share dividend and a total cost of $14, would be about 7.5%, slightly higher than the two GMAC bonds.
As with all BDC purchases, my goal is to achieve a total annualized return of 10%. Most of that return will likely be generated by the dividend. For some BDCs (e.g. PSEC), I can realize that objective with the dividend and even a small loss on the shares. For PFLT, I will need slightly more than a 2.5% annualized appreciation in the shares adjusted up or down based on future dividend increases or decreases.
The floating rate feature of the loans provides benefits when short term rates start to rise, but I do not anticipate a meaningful rise in those rates for at least another two years. I would assign a low probability to significant increases within three years. With all future probability estimates, I have to acknowledge that I may be wrong, and consequently I will play to some degree the alternative scenario. The low probability alternative scenario is that inflation will accelerate within the next two to three years to such an extent that the FED will be forced to raise the federal funds rate; both more rapidly and significantly than currently expected or foreseeably foreseeable based on current data which shows inflation at less than 2%.
In the prior tightening cycle, which occurred from June 2004 to July 2006, the FED raised the federal funds rate from 1% to 5.25%. (Data: research.stlouisfed.org) I do not expect that to happen this time.
Risks: The loans made by BDC would probably be rated junk in the event any of them were rated by S & P and/or Moody's. Credit risk is mitigated, not eliminated, in part by first lien secured loans. The number of loans and their diversity provide another measure of credit risk protection. The likelihood of one loan going sour is high but the BDC had 63 loans as of 3/31/13.
A good summary of risks can be found in the risk section of each Annual Report. (see discussion starting at page 20: Form 10-K)
Last Friday's close: PFLT: $14.01 -0.09 (-0.64%)
6. Bought Back 50 SANPRB at $19.35 Roth IRA (see Disclaimer): I have bought and sold this security several times.
Snapshot of Trade:
 |
| 2013 Roth IRA Bought 50 SANPRB at $19.35 |
The prospectus does contain a stopper clause that prevents Santander from paying common stock cash dividends after eliminating the cumulative preferred stock dividend.
 |
| Stopper Clause Page 47 |
Prior Trades: I sold earlier this year 50 shares of SANPRB in the ROTH IRA and another 50 shares in a taxable account:
 |
| 2013 Roth IRA 50 Shares SANPRB +$225.47 |
 |
| 2013 Taxable 50 Shares SANPRB +$124.58 |
Item # 4 Bought 50 STDPRB at $17.96 January 2011-Item # 4 Sold 50 SANPRB at $20.77 February 2013
 |
| 2010 STDPRB 100 Shares +$265.01 |
 |
| 2011 STDPRB +$143.16 (two 50 share lots) |
 |
| 2010 STDPRB 50 Shares +$37.03 |
Bought STDPRB at $18.6 March 2010 Roth IRA-Sold 50 STDPRB at $19.64 in the Roth IRA February 2011
Bought 50 STDPRB at $18.54 March 2010-Sold 50 STDPRB at $20.2 March 2011
Bought 50 SANPRB at $18.5 March 2010-Sold 50 STDPRD at $20.34 May 2011
Total Realized Gains (Excluding Dividends): =$795.25
I also have an unrealized gain on 80 shares, held in a satellite taxable account, that I have decided to hold long term, or until I develop serious concerns about Santander's ability to pay the dividend. I have a low cost basis for those shares: Bought: STDPRB at $13 (August 2011); Added 50 STDPRB at $15.44 (November 2011)
Rationale: The main advantage of this security is that it provides a measure of problematic inflation and low inflation/deflation protection in the same security. The low inflation/deflation protection is provided through the 4% minimum coupon, while the problematic inflation problem is addressed by the 3 month Libor float provision.
By buying this security at a discount to its $25 par value, I juice the yield for both scenarios. At a total cost of $19.35, with the 4% coupon in effect, the yield becomes about 5.17%. When and if the 3 month LIBOR rises to 5%, the yield would then become about 7.13%.
While Santander has no obligation to call this security, it has the right to redeem it on or after 3/15/17. I doubt that this right would be exercised unless there was problematic inflation that would cause a serious spike in the coupon rate, reasonably estimated to last for a prolonged period of time, when SAN could refinance at much better rates using senior bonds or even a fixed coupon equity preferred stock. I would give that scenario a very low possibility rating for the next five years.
SANPRB is much more favorably priced than two similar equity preferred floater issued by Suntrust and Zions, both of which have 4% minimum coupons and similar floating rate provisions:
SunTrust Banks Inc. Dep. Pfd. (Rep 1/4000th Interest in a share of Perp. Pfd. Series A)(STI.PA)
Zions Bancorp Dep. Pfd. (Rep. 1/40th Interest in a Share of Fltg. Rate Non-Cum. Perp. Pfd. Series A) (ZB.PA)
According to quantumonline, the current ratings for those three securities are as follows:
MOODY'S / S & P
SANPRB: Ba3 / BB
ZBPRA: B1 / BB
STIPRA: Baa3/BB+
S & P does not see any difference in the credit quality between ZBPRA and SANPRB but there was a market price difference on 7/17/13 of 18.5% in favor of ZBPRA (i.e. ZBPRA is selling at a much higher price than SANPRA, closing last Friday at $23.77 +0.07 (+0.32%), while the Suntrust floater closed at STI-PA: $24.18 -0.07)
I discuss the disadvantages and advantages of equity preferred floating rate stocks in this 2009 post: Stocks, Bonds & Politics: Advantages and Disadvantages of Equity Preferred Floating Rate Securities That post also contains snapshots of my trades in this niche sector.
Risks: I discuss risks for this type of security in the preceding linked post. I have also discussed the risks in a previous discussions of this security linked above.
Equity preferred securities issued by financial institutions would become worthless in a bankruptcy just like the issuer's common stock. Senior bond owners would likely be paid at most pennies on the dollar. The fear of a security going to zero, which is the ultimate downside risk, will create volatility due to both real and imagined concerns about the issuer's ability to pay.
As late as August 2011, I was able to buy this security at $13 per share after selling it at $20.34 a few months earlier. That kind of volatility creates both risks and opportunities.
For the Santander preferred, volatility can simply be created by some negative story coming out of Spain. Santander of course has operations worldwide including significant operations in the U.S. and in Latin America. 2012 Annual Report.PDF Total customers totaled 101.9 million for the Group with 44 million in Latin America, 30 million in Continental Europe, 1.7 million in the U.S. and 26.2 million in the UK. The total number of branches stood at 14,392. (page 32 Annual Report)
I last discussed Santander in detail when buying 50 shares of the common: Item # 3 Added 40 SAN at $6.8
The issuer discusses risks starting a page 15 of the Prospectus.
SAN-PB: $19.20 -0.05 (-0.26%)
The shares trades as low as $18.86 last Friday.
7. Added 50 SGL at $9.33 Roth IRA (see Disclaimer):
Snapshot of Trade:
Security Description: Strategic Global Income Fund is an unleveraged world bond closed end fund.
SGL Page at CEFConnect
SGL Page at Morningstar
Last SEC Filed Shareholder Report: Strategic Global Income Fund (period ending 11/30/12)
Last SEC Filed Form N-Q: Strategic Global Income Fund (holdings as of 2/28/13)
Data Day of Purchase 7/17/13:
Closing Net Asset Value= $10.58
Closing Market Price= $9.32
Discount= -11.91%
Last Friday, 7/19/13, SGL closed at a $10.62 net asset value per share and at a -12.05% discount.
Average Discounts as of 7/17/13:
1 Year: -7.25%
3 Years: -5.75%
5 Years: 8.25%
Rate of Decline Since 5/1/2013 Unadjusted for Monthly Dividends:
Net Asset Value 7/17/13: $10.58
Net Asset Value 5/1/13: $11.52
Decline: -8.16%
Market Value 7/17/13: $9.32
Market Value 5/1/13: $10.61
Decline: -12.16%
Total of Two Dividends=$.1128
Adjusted for Dividends= -11%
The five year discount data still includes those extreme discounts from October 2008. The discount hit -36.25% on 10/10/2008.
As of 6/30/13, the credit quality of the fund's holdings were listed as follows:
Strategic Global Income Fund, Inc. – Distribution Declaration and Portfolio Statistics
The fund has adopted a managed distribution policy whereby it pays monthly dividends at annualized rate equal to 6% of the fund's net asset value. The next dividend is $.0523 per share and goes ex dividend on 7/23/13. Distribution Declaration and Portfolio Statistics Since the net asset value has been declining recently, the monthly dividend has fallen too.
Rationale: (1) Income: The goal with this kind of bond CEF purchase is simply to generate tax free income in the Roth IRA. If I can successfully exit the position at any profit after collecting several dividends, then I will view this investment as successful, given its limited purpose.
Unfortunately, after successfully trading this bond CEF for small profits, I started to buy back shares in the ROTH before the recent bond swoon. Item # 2 Bought Back 100 SGL at $10.57-Roth IRA (5/6/13 Post). One purchase was made after the recent carnage was already well underway: Item # 7 Bought Roth IRA 50 SGL at $9.89 (6/8/13). As noted in that June post, the net asset value per share was then $11.09 and the closing discount was at -10.73.
I have decided to reinvest the dividend which is a way to average down and to lower my average cost per share. I am also buying shares at a significant discount to net asset value at the present time with those monthly dividends.
While the monthly dividend rate will move slightly up and down based on the managed distribution policy, and capital gain distributions are possible, I calculated the yield at a total cost of $9.33 per share at about 6.73% using the last $.0523 monthly distribution rate. As noted, the annualized yield will go up or down based on the fund's net asset value.
I would not be buying this security with money market rates at or above 3%. Investors have to be realistic and to play the hand that is dealt to them. I am not going to receive a 3%+ yield in a money market for several more years, probably not before 2016-2017.
(2) Expense Ratio: Compared to other world bond funds that I own or have owned, the expense ratio for SGL at 1.17% after waivers is lower than other funds.
(3) Capital Gains: Recently, SGL has returned significant capital gains distributions to its shareholders, at least for a bond fund.
As of 2/29/13, the fund had unrealized capital gains of $10.919+M
Risks: (1) Credit Risks (e.g. Argentina and Venezuela Government Debt): As previously discussed, I would prefer that a fund just say no to Argentina's debt. As of 2/28/13, SGL had a 3.99% overall weighting in several bonds issued by Argentina. I am not a fan of Venezuela's debt either. The fund had a 1.59% weighting in one Venezuelan government bond maturing in 2024. This fund has other credit risks, including several junk rated corporate bonds.
(2) Currency Risks and Hedging Issues: This fund has bought a large number of bonds whose value is based in a foreign currency. Interest payments for non-dollar foreign bonds will be paid in a foreign currency and the value of those distributions after conversion into USDs will impact the fund's interest income for better or worse.
While there is an ongoing effort to hedge that risk, the hedging may only be partially successful when foreign currencies are losing value against the dollar and may cause the fund to lose money. There are also costs associated with hedging.
(3) Interest Rate Risks: The value of a bond will go down as interest rates increase. Rates are abnormally low at the present time so there is not much room for further appreciation and plenty of room to the downside.
I am still adding up to $1,000 per week in a bond CEF. The 50 shares SGL add was on the anemic side.
Last Friday's Close: SGL: $9.34 0.00 (0.00%)
