Saturday, June 21, 2014

MDT, LXP/Added to PRPFX/SOLD Taxable Accounts: 100 CSX at $30.4, 100 FULL at $8.3, 200 XDV:CA at C$25.51, 100 MSF at $16.2, 50 WARFY at $14.82/Added 100 D_UN:CA at C$28.8


Stocks:

Stable Vix Pattern (bullish):
Short Term: Markets Needs a 15% Correction
Intermediate Term: Slightly Bullish (gain since August 2011 borrows from the future)
Long Term: Bullish

After computing that I had unintentionally increased my stock allocation by a net $31,000+ between February 2014 and early June, I am now embarked on reducing that allocation by an equivalent amount. Stock and Stock Fund Update 6/6/14  

Since I am no longer in an asset accumulation phase, preservation of capital and income generation have become paramount considerations. It is not necessary for me to squeeze every last dollar out of bull move. 

Bonds: 
Short to Long Term: Slightly Bearish Based on Interest Rate Normalization 

The bond forecast assumes an average annual CPI rate between 2% to 2.25%, consistent with the range predicted in the 10 year treasury TIP pricing.

There was a slight uptick in the break-even spread for the 10 year TIP last week. The break-even closed last Friday at 2.28%, the average annual CPI rate over the next 10 years for the 10 year TIP to break-even with the buyer of the non-inflation protected security. The close on the prior Friday (6/13/14) was at 2.19%.

The break-even spread is calculated by subtracting the real current yield, Daily Treasury Real Yield Curve Rates, from the nominal non-inflation protected yields for each maturity, Daily Treasury Yield Curve Rates.

Bill Gross believes that the new "neutral" federal funds rate will be 2% rather than the historic 4%. If that is the case, and assuming inflation remains around a long term 2% average going forward, then this would have material impacts on the relative prices and valuations of both bonds and stocks.

The Fed's lack of concern about inflation makes me even more nervous about my bond and equity preferred stock allocation. I am consequently reducing that allocation, virtually on a daily basis, and increasing my cash allocation. Some investors may want to wait until the worm clearly turns again against bonds, as it did in a mild way starting in May 2013. I am not one of those investors. I do not find the current yields to be sufficiently appetizing or enticing for the actual and potential risks. Sure, I would prefer to earn 4% in a MM fund rather than .01%, but I also place an emphasis on capital preservation ahead of income generation. That balance is shifting toward capital preservation for the bond/preferred stock side of the portfolio.
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Recent Developments:

CPI increased .4% in May on a seasonally adjusted basis. Over the last 12 months ending in May, CPI increased 2.1% before seasonal adjustment. Core CPI increased .3%, the largest increase since August 2011. Over the past three months, CPI has risen at a 3.3% annual rate. Core CPI has risen at a 2.8% annual rate over the last three months. Consumer Price Index Summary

The Atlanta Fed's flexible CPI, a weighted index of prices that frequently change, rose at a 7.5% annualized pace in May and was up 2.2% Y-O-Y in May. The sticky CPI, a weighted index of items that change price relatively slowly, increased at a 2.9% annualized rate in May. Sticky Price CPI - Federal Reserve Bank of Atlanta

As expected, the FED reduced its asset buying spree by another $10 billion per month starting in July. The new limits will be $20B in treasuries and $15B in mortgage backed securities. FRB: Press Release--Federal Reserve issues FOMC statement--June 18, 2014

Economic projections are released each quarter by the FED. The most recent projections decreased real GDP growth in 2014 and the ranges for unemployment in 2014-2016. The FED continues to forecast very subdued inflation:


federalreserve.gov.pdf 

In my opinion, the FEDs forecasts for PCE price inflation-ranging between 1.5% to 2% for the next 2 1/2 years-will probably be too low.

As noted by the Deutsche Bank economics team, the FED is basically saying that the inflation adjusted FF rate will be negative when the U.S. attains full employment. That is just bizarre. I would agree with the statement made by those economists that it "is highly unlikely that inflation will be as quiescent as the current FOMC forecasts suggests". Those economists believe, as I do, that there is a cyclical upswing in pricing power and inflation and that the vast improvements in consumer balance sheets is a "powerful tailwind" for consumer spending going forward. Barrons.com That balance sheet improvement is highlighted in stark terms by the FED's DSR Ratio: Household Debt Service Payments as a Percent of Disposable Personal Income- St. Louis Fed

Eleven FED members now anticipate that the FF rate will be 1% or higher by the end of 2015, and a clear majority expect the FF rate to end 2016 at 2% or higher:



Those consensus forecasts are particularly important for leveraged bond funds and Mortgage REITs, both of whom buy longer dated securities with short term borrowings.

The current FED prefers to use the PCE price index rather than CPI. The PCE price index has been running lower than CPI for several years now, as noted by the St. Louis FED President Bullard.  CPI vs. PCE Inflation: Choosing a Standard Measure The PCE price index number is released once a month as part of the "Personal Income and Outlays", with the next release scheduled for 6/26.

As I noted previously, the PCE price index has a about a 20.6% weighting in medical costs, compared to about 7.1% in the CPI Index. CPI and the PCE Giving Different Estimates of Inflation? -Federal Reserve Bank of Cleveland

Medical costs have started to accelerate.

A WSJ published last week noted that premiums for health plans offered by major insurers were going to rise anywhere from 8.5% to over 22% later this year.

The FED did not acknowledge the uptick in inflation when announcing its recent monetary policy decision. Yellen stated in the press conference last Wednesday that the recent rise in inflations is noise. WSJ

In last week's Barron's 2014 Midyear Roundtable, Abby Cohen noted that GS is predicting a 3.25% ten treasury yield by year-end with the S & P 500 at 1900. If the ten year treasury yield prediction proves to be accurate, there will be some pain endured by bond investors later this year. The ten year closed yesterday at 2.63% yield. Daily Treasury Yield Curve Rates

Industrial production rose .6% in May. Total capacity utilization increased .2% to 79.1%, one percentage below it long run average. Industrial Production and Capacity Utilization

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Medtronic (own):

In another proposed tax inversion merger, MDT announced last Monday an agreement to acquire Covidien PLC (COV), a company based in Ireland.

MDT expressly conditioned the consummation of this merger on no change in the IRS code provision that makes tax inversion deals possible. NYT

In addition to potentially securing Ireland's lower tax rate, MDT can use its overseas cash to fund the cash component of the deal, at least in part, and would acquire a diversified portfolio of medical supplies and devices that do not overlap with its own products. I would generally agree with the positive take given in this Barron's article.

It serves no useful purpose to discuss my personal opinions about U.S. corporations reducing their U.S. tax payments in this fashion. I would just note that MDT's recent effective tax rate was close to 18%, less than a large number of individual taxpayers.

And, the EU has launched an investigation into whether Ireland's tax code constitutes illegal state aid. Reuters; WSJ The abnormally low tax rates and favorable tax provisions offered by small countries like Ireland and Luxembourg slash corporate tax bills throughout the developed world, as corporations devise various shell games to eliminate or substantially reduce profits in any higher tax jurisdiction, even those with much lower marginal tax rates than the U.S.

A recent article in the International Business Times highlights how Amazon reduces its U.K. tax obligation to virtually nil by routing orders from its U.K. customers electronically through a Luxembourg corporation who then charges a fee to Amazon's U.K. to deliver the product.

These tax legerdemains are really quite elaborate, as shown in a Senate report from 2013 that focused just on some of Apple's maneuverings. (40 page report on Apple can be downloaded at Hearings| Homeland Security & Governmental Affairs Committee, exhibit 1A left side of page)

As I noted in a recent SA comment, my opinions on the wisdom of these tax dodges are irrelevant. The reality of those tax avoidance schemes, and any change in them, are simply factors to consider when making investment decisions.

As an owner of MDT stock, and focusing just on that ownership interest, I would like to see a lower effective tax rate.

MDT stock did gain over $3 per share last week:

Closing Price Last Friday : MDT: $63.86 -0.81 (-1.25%)
Closing Price 6/13/14: $60.7 MDT Historical Prices

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Lexington Realty (own):

Most REITs do not qualify for purchase under my dividend growth strategy. The dividend history of LXP illustrates some of the reasons.

Lexington Realty increased its quarterly dividend from $.165 to $.17 per share. That is about a 3% raise. While that is better than no increase, a dividend growth rate of 3% will take about 23.45 to double the dividend rate. Inflation has historically increased in the U.S. at about a 3% rate. While the future inflation rate may average 2.25% to 2.5% over the next 20 years, the real value of a 3% annual increase is minimal under either long term scenario.

Many REITs slashed their dividends in response to the last recession. LXP reduced its quarterly dividend rate in stages, going from a $.375 quarterly rate in 2007 to $.1 in 2010. Lexington Realty Trust (LXP) Dividend History

That kind of history is an automatic disqualification under a dividend growth strategy. Instead, I bought LXP shares based on valuation and current income considerations.

Since 2010, LXP has gradually been raising the quarterly rate. The last raise has not even returned the rate to 50% of its 2007 level. At a 3% annualized rate, it is unlikely, though conceivable, that I will live to see the dividend restored to its 2007 quarterly rate.

How does one measure a dividend increase? I would not call a rise from $.165 to $.17 a dividend increase when the firm was paying$.375 per share a few years ago.

When and if LXP returns to the $.375 rate, and assuming I am still among the living, I will call a raise above that amount a dividend raise, the first since LXP increased its rate from $.365 to $.375 back in the 2007 first quarter.

My first foray in an LXP security was during the Near Depression when I bought its equity preferred stocks. My first purchase of its common shares occurred late last year.

Bought:  100 LXP at $10.33 (12/3/13 Post)

Added 50 LXP at $9.95-ROTH IRA (1/31/14 Post)

So, I can be forgiving of LXP's past, as a new owner who did suffer financially for what happened to this REIT during the last recession. Both the share price and the dividend have a long, long way to go before being restored to their respective highs prior to 2008. LXP Interactive Chart

Given its dividend history, I will mostly likely be in a trading mode for this 150 share position.

Closing Price Last Friday: LXP: $11.50 +0.09 (+0.79%)

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Canadian Dollar Rising Against the USD:  

A higher than expected reading for inflation sent the CAD up in value yesterday. Bloomberg CPI rose 2.3% in May Y-O-Y. Yesterday, the CAD rose slightly above its 200 day SMA against the USD.

The recent rise in the CAD/USD provides a tailwind for Canadian securities that are traded in the U.S. and priced in USDs. That rise has given my Canadian energy stocks priced in USDs an added boost in price:

CNQ: $45.21 +1.05 (+2.38%) : Canadian Natural Resources

SU: $42.92 +0.49 (+1.15%) : Suncor Energy

When I last took a snapshot comparing the prices of CNQ and CA:CNQ, the ordinary shares were outperforming the U.S. listed shares by about 10%. That underperformance has shrunk to about 5% after the recent rise in the CAD:

One Year Chart Through 6/20/14
CNQ.TO: C$48.57 +0.76 (+1.59%)
SU.TO: C$46.07 +0.13 (+0.28%)
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1. Sold 100 CSX at $30.4 (see Disclaimer):

Snapshot of Trade:


Snapshot of Profit:

2014 CSX 100 Shares +$390.78

Company Description: CSX (CSX) has approximately 21,000 miles of track and access to 70 ports and nationwide transloading and warehouse services. Welcome to CSX.com - CSX One of those rail lines runs near my home in route from Nashville to Birmingham. I can affirm without any doubt that the conductor touts a very loud horn when a train approaches a nearby intersection. 



Rationale: As noted when I bought this stock, which has a snapshot of the intersection near my home, I wanted to earn some compensation for that horn honking waking me up at 3:00 A.M. in the morning. Since I was most unlikely to receive compensation from CSX for this public nuisance, even with a most persuasive letter written by our LB with many citations to appropriate authorities, I elected to receive compensation in a more indirect fashion by owning the stock With this $390 gain, I believe that I have been adequately compensated for the past three months of having my peace and solitude disrupted by that horn. 

The TTM P/E at my sale's price was over 17 which is high for a cyclical name struggling with earnings growth at the moment. 

Other more mundane reasons include valuation, a small dividend yield and the fact that I am reducing my stock allocation to erase the total additions made earlier this year. Something has to be sold to bring myself back into compliance with Headknocker's strong admonition that there shall be no stock net add additions under the current market conditions (LB has calculated that $55,000 has been added to the stock allocation since October 2013 notwithstanding HK's clear warning) 

Future buys: Depending on my big picture opinions, including the sustainability and acceleration of economic growth, I may come back to this name at or near the last buy price. I have no interest in CSX at the current market price.

Closing Price Last Friday: CSX: $31.00 +0.17 (+0.55%) 

2. Sold 100 FULL at $8.3 (see Disclaimer): 

Snapshot of Trade:



Snapshot of Profit:

2014 FULL 100 Shares +$34.6

Bought: 100 FULL at $7.8 (3/3/14 Post)

Company Description: Full Circle Capital Corp.  (FULL) is a small BDC.

Full Circle Capital Profile Page at Reuters

Rationale: This purchase was in part made due to the potential speculative appeal of FULL's investment in Advanced Cannabis Solutions (CANN). That investment does not appear likely to provide much upside to FULL's net asset value per share.

The net asset value per share was reported at $7.2 as of 3/31/14, down from $8.01 on 6/30/12, page 1 10-Q

This BDC's managers, like all others who are externally managed, do not deserve their generous pay in my opinion.

When discussing the purchase, I highlighted some negatives including a recent dividend cut and losses associated with two investments.

Given the many negatives and the only positive being the dividend yield, I elected to sell the position as part of my stock allocation pare.

Future Buys: Not likely. I view this BDC with more disfavor than the normal disfavor reserved for BDCs.

Closing Price Last Friday: FULL: $7.62 -0.11 (-1.42%)

3. Sold 200 shares of the Canadian Stock ETF XDV:CA at C$25.51 (Canadian Dollar (CAD) Strategy)(see Disclaimer):

Snapshot of Trade: 

2014 Sold 200 XDV:CA at C$25.51


Snapshot of Original Purchase:

2013 Bought 200 XDV:CA at C$22.21

I received in proceeds C$622 more than I used to buy this security. Since I am a U.S. taxpayer, my profit is calculated by converting CADs into USDs. Since the CAD declined against the USD after my purchase, my taxable profit was not C$622,  but USD$190.78.  

 This security was purchased pursuant to my Canadian Dollar Strategy. I increased my Canadian Dollar stash by C$622 plus dividends paid by this ETF.

Snapshot of Profit In USDs:

2014 XDV:CA 200 Shares +USD$190.78
Bought 200 XDV at C$22.21

Security Description: The iShares Dow Jones Canada Select Dividend Index Fund (TOR: XDV) is a Canadian stock ETF that owns the 30 stocks with the highest dividend yields in the Dow Jones Canada Total Stock Market Index. XDV Holdings - iShares ETFs

Distributions are paid monthly: iShares ETFs

Rationale: This security served its purpose in increasing my CAD stash. I still own another general Canadian stock ETF: iShares S&P/TSX Canadian Dividend Aristocrats Index (CDZ:TOR). I also own 200 shares of a Canadian stock CEF Canadian General Investments, and two other stock Canadian stock ETFs. So I have some duplication here, and I reduce my stock allocation some too.

The expense ratio is high at .55% for this kind of ETF. XDV Overview - iShares ETFs

Also, it is undesirable for to have a Canadian security priced in CADs remain constant in price, while the value of the CAD rises against the USD, assuming I want to sell the position for a profit. In that kind of scenario, I would be increasing my tax liability without receiving more CADs when I elected to sell the security.

Future Buys: I may buy this one back but only after a significant correction that takes the price at least 15% below C$25.

Closing Price Last Friday: XDV.TO: C$25.50 -0.04 (-0.16%)

4. Sold 100 MSF at $16.2 (see Disclaimer):

Snapshot of Trade:


Snapshot of Profit:

2014 MSF 100 Shares +$86.07
Bought: 100 MSF at $15.18 (12/3/13 Post)

Total Realized Gains: $630.95 ($86.07 plus prior gains noted below)

Prior Trades: Sold 201+ MSF at $15.62 (snapshot of profit: $109.64). In the preceding linked post, I also included a snapshot of two trades made in 2011 that netted $403.14 in profits. Sold 100 MSF at $17.02 (November 2010)-Added 100 MSF at $13.57 (July 2010)


Sold 100 of 200 MSF at 16.2 (April 2011)(realized gain $32.1)- Bought 100 MSF at $15.68 (January 2011)

2011 MSF 100 Shares +$32.1
Security Description: The Morgan Stanley Emerging Markets Fund (MSF) is a relatively high cost stock CEF that invests in EM stocks.

CEFConnect Page for MSF

Last SEC Filed Form N-Q (holdings as of 3/31/14)

Rationale: This fund was not producing any income. The last dividend payment was $.0526 per share paid on 7/15/13.

At the current time, I am in a stock allocation pare mode. A stock fund that fails to generate income is a candidate for disposition.

I will continue to add low cost EM ETFs that can be bought commission free in my brokerage accounts.

In my Vanguard brokerage account, I can buy VWO commission free which has a .15% expense ration: Vanguard - Vanguard FTSE Emerging Markets ETF I have bought and sold that one and currently have a small number of shares.

Fidelity currently offers a few on a commission free basis, including IEMG, EEMV, DVYE, EEMS, and EEME.  Of those, I currently own IEMG and EEMV:

iShares Core MSCI Emerging Markets ETF (IEMG)(expense ratio at .18% after a .02% waiver through 12/31/14)

iShares MSCI Emerging Markets Minimum Volatility ETF | EEMV (expense ratio at .25% after .42% waiver through 12/31/14)

I may dump EEMV when the waiver expires.

MSF: $16.03 -0.06 (-0.37%)

5. Sold 50 WARFY at $14.822 (The $500 to $1,000 Flyers Basket Strategy)(see Disclaimer): This is my third round trip for a 50 share lot. I did stick around long enough this time to collect a dividend.

Snapshot of Trade:

2014 Sold 50 WARFY at $14.822

Snapshot of Profit: 

2014 WARFY 50 Shares +$71.18
Bought:  50 WARFY at $13.08 (5/24/14 Post)

The foregoing snapshot includes two prior transactions, including one that was not discussed in this blog.

Total Realized Gain 2014: $187.94

 Prior Trades: Item # 6 Sold 50 WARFY at $14.51 (4/26/14 Post)-Bought 50 Wharf Holdings at $12.2 (4/1/14 Post)

Security Description: Wharf (Holdings) Ltd. (4:HKG) is a Hong Kong conglomerate operating in three business segments (1) property development in China, (2) investment properties and (3) logistics, hotels, communications, media and entertainment. The Wharf (Holdings) Limited

WARFY is an ADR traded on the U.S. pink sheet exchange (1 ADR=2 ordinary shares)

Rationale: I simply used this position as a source of funds in my ongoing stock allocation reduction.

Future Buys: I am apparently in a trading mode for this security. If the price falls back to where I have been nibbling, I will consider doing the same flip a fourth time.

Closing Price Last Friday: WARFY: $14.56 +0.08 (+0.55%)

6. Added 100  D_UN:CA at C$28.8 (Canadian Dollar (CAD) Strategy)(see Disclaimer): With this add to an existing position, I pick up about a 7.78% yield on my Canadian Dollars earning nothing otherwise.

Snapshot of Trade: 



Security Description: Dream Office Real Estate Investment Trust (D.UN:TOR) is a Canadian REIT that owns "high quality" office buildings in "key markets" across Canada with approximately 24.6M square feet of leasable space Dundee REIT - Portfolio - Portfolio Overview

Dream Office is currently paying a monthly dividend of C$.1866 per unit. Distribution History At that rate, the dividend yield at a total cost of C$28.8 per unit is about 7.78%. 

List of Properties in PDF Format:  Property List-12-31-2014.pdf

Major Tenants:



Prior Trade: This REIT was called Dundee REIT and recently changed its name to Dream Office REIT. Bought: 100 Dundee REIT at C$29.35 (3/3/14 Post)

Last Earnings Report: For the 2014 first quarter, Dream Office  reported AFFO per unit at C$.62 Diluted FFO increased C$.72. NOI from comparative properties increased .6%. Occupancy, included future commitments on vacant space, stood at 94.2%. Net debt-to-gross book value was 47.6%. The weighted average interest rate was 4.23%. The dividend payout ratio was 90% based on AFFO and 77% based on FFO. Q1-2014.pdf

The calculations of both FFO and AFFO can be found at page 30.

The company made C$4.9M in building improvements during the quarter, "substantially all of which are recoverable from tenants". (page 15)

Rationale and Risks: I discussed these items in the earlier post Bought: 100 Dundee REIT at C$29.35 The company discusses risks incident to its operations starting at page 43 of its 2012 Annual Report.pdf.

On the downside, recent same store NOI growth has been lackluster.

The AFFO payout ratio is at or near 90%. Unless that payout ratio falls significantly, I would not expect a dividend raise, or any raise would be insignificant (e.g. a fraction of a Canadian penny)

Closing Price Last Friday: D-UN.TO: 29.49 +0.15 (+0.51%)

7. Added $250 to PRPFX Last Thursday (see Disclaimer): 

PRPFX Position as of 6/19/14:

Unrealized Gain= $2,213.53 as of 6/19/14

I will add varying amounts to this fund annually, which I have owned since 2005 without selling any shares.  

This "moderate allocation" fund will maintain a relatively constant allocation among several asset classes. The fund will maintain a large position in gold and silver bullion which helped the fund between 2002 to about September 2011, but caused the fund to underperform over the past three years. Gold and silver prices perked up some last week.

Top 25 Holdings- MSN Money

PRPFX Page at Morningstar (currently rated 3 stars)

Last SEC Filed Shareholder Report: SEC Form N-CSR (holdings start at page 6; gold and silver bullion then at 25.73%; Swiss Government Bonds at 9.45%; REITs and Natural Resource Stocks at 16.76%; Growth Stocks at 16.95%; short term investment grade corporate bonds at 10.3%; U.S. treasuries at 20.39%)

I view this portfolio design as one tilted toward a disaster kind of scenario.

Normally, this fund pays only a small annual distribution. Last year was an exception with a $4.6 per share dividend, mostly sourced from long term capital gains.

I last discussed this fund when making another small add on 12/31/2013: Item # 6 Added to Vanguard Wellington (VWELX) and the Permanent Portfolio at $43.06 (PRPFX) That post has the snapshot of the shares purchased with the 2013 year end distribution: 20.849 shares at $43.07. 
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Saturday, June 14, 2014

Performance Numbers YTD/Intel/MBC Redeemed by Issuer/Pared MIN-Sold 300 at $5.42/Roth IRA: Added 100 NBB at $20.1 and Bought 50 BWG at $17.75 and Sold 50 EXL at $13.68/Sold Taxable Accounts: 100 MDIV at $22.17, 116 ADX at $13.61 (Lowers Average Cost to $10.02 per Share) and 50 MHNC at $25.5/Added 50 CCNE at $16.11


Stocks:
Stable Vix Pattern (Bullish)
Vix Asset Allocation Model Explained Simply
Short Term: Market in Dire Need of a 15% Correction
Intermediate Term: Slightly Bullish (rise since 3/2009 borrows from future gains)
Long Term Bullish

My energy stocks and ETFs hit new 52 week highs last week as oil prices surged due in large part to the escalating Iraq civil war.

The Canadian energy companies did particularly well last week with both CNQ and SU hitting new 52 week highs.

CNQ: $44.24 +0.88 (+2.03%)
SU: $42.69 +0.87 (+2.08%)

I own two ETFs that focus on the Canadian energy sector. If prices continue to surge next week, one of those, probably ENY, may be sold into the price spike, but I am in no hurry to do so:

ENY Position as of 6/13/14
Bonds:
Short to Long Term: Slightly Bearish Based on Interest Rate Normalization
The Difficult Path to Interest Rate Normalization

The bond forecast assumes that the market is pricing correctly the average annual inflation number in the 10 year TIP. Based on the TIP pricing, the nominal ten year treasury is estimated to have a negligible real yield before taxes over the next ten years.

The average junk bond fell to almost a 5% yield last week. Barrons.com Bond yields are way of whack with credit risks, inflation and inflation expectations.

Over the past week, a few bond gurus have started to argue that the FED is behind the curve in raising the federal funds rate to contain inflation. I would not regard that as a debatable point. With CPI currently at 2% Y-O-Y, and accelerating, a federal funds rate at zero is indisputably behind the curve.

According to Harvard economist Martin Feldstein, FED rhetoric suggests that it will not respond appropriately to inflation accelerating over 2%. {MarketWatch; Feldstein's Op-Ed Column in the WSJ} I agree with that assessment.

In order to keep the pedal to the metal, the FED will argue that any spurt inflation in the coming months will be temporary. Their abnormal monetary policies, including ZIRP, are intended in part to create inflation.

The potential danger is that the FED creates an inflation problem which requires quick and significant rises in the FF rate at some point. In that kind of scenario, the possibility of a FED induced recession increases compared to a far less disruptive gradual and incremental rise in the FF rate to more normal levels consistent with current and anticipated inflation.

A similar warning was given by Joe LaVorgna, the chief U.S. economist for Deutsche Bank who argues that the FED is behind the curve and on the verge of sparking another crisis by refusing to respond appropriately to the improving economy and rising inflation. MarketWatch

I would agree that the real economy would not be damaged at all by raising the FF incrementally and gradually from zero, an abnormally low rate in existence for almost 6 years now. Some positives to the economy would flow by providing some incremental and disposable income to those savers who have now over $10T in risk free accounts earning zilch.

I would recognize that this is just an academic debate since the current FED will keep the FF rate at zero well into 2015, even if the core PCE price index, its preferred inflation measure at the moment, accelerates over 2%. That index went from a Y-O-Y increase of 1.1% in March 2014 to 1.6% in April 2014. News Release: Personal Income and Outlays The FED will risk letting the inflation genie back out of the bottle rather than to risk a relapse in the economy by raising the FF rate by just .25% every few months starting sooner rather than later. 

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Recent Developments:

The Mortgage Bankers Association composite index for mortgage applications increased 10.3% for the week ending 6/6/14 compared to the prior week.

The odds of another budget limit increase debacle probably increased with Eric Cantor's defeat last week, as Greg Valliere has already noted in a Barron's article. The next showdown is scheduled to occur early next year.

Cantor will soon step down as the House Majority Leader.  Cantor was in the right wing of a party that is becoming more reactionary by the day. Cantor's lifetime rating from the "American Conservative Union" was 95%. MarketWatch He was not "conservative" enough. He was defeated by Brat who received backing from Laura Ingraham, one of those Fox "news" personalities, noteworthy only for her endless series of reality creations easily proven to be false. Laura Ingraham's file

I noted last week that those who were responsible for our $2+ trillion invasion of Iraq and the deaths of over a half-million Iraqis were blaming Obama for what is now happening in Iraq. There is no need to identify the perpetrators by name. If I understand their latest effort at formulating a thought, the U.S. needed to remain in Iraq another few decades "until the job was done" and to do the fighting for Iraqi army until the end of days whenever some bad guys show up in pickup trucks.

Four Divisions of the Iraqi army abandoned their posts and weapons at the first sign of trouble, and that is Obama's fault too. And Obama is responsible for Maliki's many failures as a leader. The Washington Post

Reuter's Story: "Iraq war to cost U.S. more than $2 trillion"

The Iraqi Army Collapse- NYT (4 divisions abandoned posts and left weapons)

"The Iraqi Army Left Weapons Like These in the Hands of Terrorists Today" - ABC News

FP Group: "Iraqis Stream Out of Mosul as Army Flees Islamist Advance"

It is reminiscent of what happened in Vietnam after the U.S. withdrew its military forces. Tens of millions are simply incapable of learning anything from history and are easily manipulated with cliches and false information. 

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Apple Stock Split 7 for 1:

I received my stock split shares last week:


Item # 2 Bought: 5 AAPL at $524.5 (11/12/14 Post)

I now own 35 shares.

On the first trading day after the distribution, the shares rose some:

6/9/14 Closing Price: AAPL: $93.70 +1.48 (+1.60%)

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Performance Numbers Year-To-Date  Through May 31, 2014 Calculated by Fidelity:



The first two numbers are large taxable accounts. The first taxable account shown in this snapshot has more cash earning zilch than the second one. The bottom two are IRAs.

Market Numbers YTD:


The Vanguard Roth IRA is up 8.9% from 1/1/14 through 5/31/14.

I have to compute that percentage gain. It is managed in the same way as the two IRAs at Fidelity and the performance of all three accounts are similar.

I am not publishing other account performance information including mutual funds held outside of brokerage accounts and smaller taxable satellite brokerage accounts. Some of those later accounts hold common stocks that have performed well this year including OHI, HCP and NVS.

Prior Performance Updates:

Stocks, Bonds & Politics: Performance Numbers YTD (5/17/14 Post)

Portfolio Management Goals-Snapshots of Performance Numbers (April 18, 2014)

Main Taxable and Regular IRA Accounts Performance Numbers Calculated by Broker (12/13/11 Post)

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Intel (own):

Needless to say, my recent pares of my Intel position were premature. Headknocker wanted to know which staff member here at HQ was responsible for leaving almost a $1,000 on the table. LB and RB quickly pointed to the Old Geezer who was taking a nap at the time, preparing to stay up late on Saturday in order to watch the Vanderbilt College World Series baseball game which starts at 7:00 P.M. C.S.T.

Intel Raises Second-Quarter and Full-Year Revenue and Gross Margin Expectations

I still own 110+ shares:

Intel Position as of 6/13/14 Average Cost Per Share=$15.52

Last Friday's Close: INTC: $29.87 +1.91 (+6.83%)

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1. Pared MIN-Sold 300 at $5.42 (see Disclaimer):

Snapshot of Trade:



Snapshot of Profit: 

2014 MIN 300 Shares +$38.87
The profit number will likely be increased early next year when the fund reports 2014 ROC. 


Security Description: MFS Intermediate Income Trust MIN)

CEFConnect Page for MIN

Data as of 5/29/14:
Closing Net Asset Value Per Share: $5.61
Closing Market Price: $5.42
Discount: -3.39%
Average Discounts:
1 Year = -7.46%
3 Years= -1%
5 Years= -1.27%

The fund had an unrealized gain of about $20.325+M as of 1/31/14. MFS INTERMEDIATE INCOME TRUST N-Q

However, there was $33.184+M in loss carryforwards as of 10/31/13, as shown at page 36 of the last SEC Filed Shareholder report. MFS INTERMEDIATE INCOME TRUST N-CSR)

Prior Trade: I still own shares bought in a Roth IRA where I am reinvesting the dividends.

Rationale: This CEF has been supporting its dividend will a significant amount of ROC. And, the monthly dividend rate has been cut several times since topping out at $.04838 in November 2010: MFS Intermediate Income Trust (MIN) Dividend History The monthly rate is now at .03974. Even at that reduced rate the dividend is being supported significantly by a return of capital. According to CEFConnect, only $.0127 of the June dividend of $.0397 was earned by the fund. The remaining $.027 was a return of capital. (click "distributions" tab at CEFConnect)

The fund is rated at 2 stars by Morningstar which seems fair to me.

I regard the loss carryforward to be inconsistent with good portfolio management for an investment grade bond fund, given the very strong tailwind and long term secular bull market for that asset class.

Future Buys/Sells: I will simply continue owning the shares purchased in the ROTH IRA, where ROC is irrelevant, until I can realize a profit on the shares, or I become more concerned about net asset value per share trends. The general idea in the Roth is simply to harvest the dividends without losing anything on the shares.

Last Friday's Close: MIN: $5.33 -0.02 (-0.37%)

2. Added 100 NBB at $20.1 Roth IRA (see Disclaimer):

Snapshot of Trade:

2014 Roth IRA Bought 100 NBB at $20.1
Recent History:


NBB went ex dividend for its monthly dividend shortly after my purchase. NBB Historical Prices

Security Description: The Nuveen Build America Bond Fund (NBB) owns Build America Bonds which are taxable municipal bonds. The fund will terminate on or about 6/30/2020 and will then distribute the fund's assets to its shareholders. NBB uses leverage.

CEFConnect Page for NBB

Data from Date of Purchase 5/30/14:
Closing Net Asset Value Per Share: $22.18
Closing Market Price: $20.12
Discount: -9.29%
Average Discounts:
1 Year = 9.31%
3 Years= 6.52%
5 Years= Not Available

NBB Page at Morningstar (rated 3 stars)



Last SEC Filed Shareholder Report (period ending 3/31/14)

This fund is currently paying monthly distributions at $.116 per share. Nuveen Closed-End Funds Declare Monthly Distributions The last ex dividend date was last Wednesday.

Prior Trades: My last discussion was in this post: Item # 6 Added 50 of the Bond CEF NBB at $17.76 (November 2013 Post)

Other trades are linked in this post: Item # 2 Added 50 NBB at $18.55 (6/29/13 Post) Some flips have realized to date $184.16 in profits: Sold 100 NBB at $20.13-ROTH IRA November 2011; Sold 100 NBB at $20.07 November 2011; Sold 50 NBB @ 19.24 in the Regular IRA December 2010.

Related Trades: I have also bought and sold NBD, a similar fund from the same sponsor. Sold 100 of the Bond CEF NBD at $21.86-Roth IRA (May 2013)

Rationale: The usual reasons are behind this purchase. I turn this taxable bond fund into a tax free one by buying it in the Roth IRA. Taxable municipal bonds will have higher yields than tax free ones. The Build America Bonds represent a way to own municipal bonds in a retirement account. I would never buy a tax free municipal bond in a retirement account.

As noted above, the fund is tilted toward "A" or better rated bonds.

At the current monthly distribution rate, the dividend yield at a total cost of $20.1 is about 6.93%.

I am basically trading these long duration funds. I also own them to address a low probability scenario which I usually just call the Japan Scenario. In that low possibility scenario, rates remain range bound at abnormally low levels, possibly even moving lower, due to persistent low inflation with drifts into deflationary periods. The best security to own during a deflationary period would be high quality long term bonds. Since I assign a very low probability to the Japan Scenario, I will address it with a limited number of securities and NBB is just one of them.

Risks: This CEF has significant interest rate given its long duration number. As of 4/30/14, the fund calculated the leveraged adjusted duration at 12.2 years. NBB - Holdings and Detail Tab

To calculate how a fund will react to a change in interest rates, the rule of thumb is to multiply the duration by the percentage change in interest rates for similar maturities and bonds. Get to know your bond fund: Duration | Vanguard Thus, a 2% rise in rate could generate almost a 25% loss in NBB's value. That kind of loss would wipe out about 3 1/2 years of dividend payments, so I tread softly with these long duration funds unless I significantly raise the odds of a Japan Scenario for the U.S.

The timing of the liquidation could be disadvantageous to shareholders, which would be the case with interest rates spiking near the liquidation date in 2024 that causes significant price deterioration in the securities just before they are sold by the fund.

Last Friday's closing price: NBB: $20.05 +0.05 (+0.25%)

3. Sold 50 MHNC at $25.5 (see Disclaimer):

Snapshot of Trade:

2014 Sold 50 MHNC at $25.5
Snapshot of Profit:

2014 MHNC 50 Shares $119.07
Item # 3 Bought: 50 MHNC at $22.8 (2/10/14 Post)

Interest Paid=$50.05
Total Return= $169.12 or 14.72%

Security Description: The Maiden Holdings Ltd. 7.75% Notes 2043 (MHNC) is a senior unsecured note issued by Maiden Holdings North America and guaranteed as provided in the Prospectus by Maiden Holdings Ltd. (MHLD), a Bermuda based company that provides reinsurance solutions.

Maiden Holdings does significant business with AmTrust. Barry Ziskind is a large shareholder in both companies. Profile

Rationale: When I purchased 50 MHNC shares, I cited a series of articles that raised questions about AmTrust's accounting. Barron's was one of the publications that discussed these issues, Barrons, along with several published at SeekingAlpha by a short seller known as the "Geo Team". The GeoTeam's Articles on AFSI at Seeking Alpha I reluctantly bought this 50 share lot of a Maiden Holding's senior bond, even at a 8.5% yield, after reviewing those articles.

More accounting issues were raised in another Barron's article that focused on both AmTrust and Maiden. I simply have no training in accounting and consequently can not offer a worthwhile opinion on the issues raised by Barron's. My response, an admittedly knee jerk one, is just to take my profit and exit the position at a premium to par value.

Last Friday's Closing Price: MHNC: $25.99 +0.05 (+0.19%)

4. Sold 116 of the Highest Cost ADX Shares Held for More than 1 Year at $13.61 (see Disclaimer):

Snapshot of Trade:

2014 Sold 116 ADX at $13.61
Snapshot of Profit:

2014 Realized LT Gain ADX 116 Shares=$319.38
This snapshot includes the profit realized from selling 200 of the highest cost shares, purchased in 2008, earlier this year.

Of those shares, only one lot, the 50 shares bought on 6/03/11, was an open market purchase. Added 50 ADX at $10.95 (6/6/11 Post) The remaining shares were purchased with dividends including the 33.737 shares bought on 12/27/12 and 20.02 shares purchased on 12/28/10.

By focusing on selling shares bought with dividends profitably, I increase the dividend yield of those payments.

By choosing the highest cost shares purchased more than one year ago, I lessen my tax liability and improve the dividend yield on the remaining shares.

ADX does not pay dividends supported by a ROC.

Position After Trade:

610.274 Shares Average Cost Per Share=$10.02
I did not sell the 42.071 shares purchased on 12/27/2013 with the year-end dividend distributions (mostly long term capital gains; snapshot in introduction under Adams Express) Those shares were bought at $12.61. I will consider selling those next year, along with the 100 share lot purchased 11/16/12 at a total cost of $10.22, provided the S & P 500 is near or preferably over 2100. Bought 100 ADX at $10.14 (11/21/12 Post)

Prior Trades: In addition to those linked above, some of the earlier discussions include the following: Added 50 of the Stock CEF ADX at $9.77; Added 50 ADX at 10.95; Bough 200 ADX @ $9.99; Added 50 ADX at $9.7; Added To CEF ADX at $9.98; Bought  ADX at $8.34

Security Description: Adams Express Co.  (ADX) is a closed end stock fund that was formed shortly before the 1929 crash.

ADX page at CEFConnect
ADX Page at Morningstar

Last SEC Filed Annual Report: ADAMS EXPRESS COMPANY - FORM N-CSR - DECEMBER 31, 2013

ADAMS EXPRESS COMPANY - FORM N-Q - MARCH 31, 2014 (list of holdings)

Adams Express Company | Quarterly Changes in Portfolio Securities

This fund will typically trade a 14% to 15% discount to net asset value per share.

ADX committed in September 2011 to an annual distribution rate "of at least 6%". Adams Express Company Historically, ADX has not supported its dividends with a ROC. Most of the dividends are sourced from long term capital gains distributed in December. Adams Express Company Dividend History

Average Discount to Net Asset Value Per Share as of 6/6/14:
1 Year:  14.1%
3 Years: 14.16%
5 Years: 14.61%

This persistent large discount range takes away a profit opportunity for a CEF representing a significant narrowing of the discount after a purchase, when the net asset value is climbing as the the discount shrinks.

Rationale: I am slightly reducing my stock allocation in ways that make sense to me.

Last Friday's Closing Price: ADX: $13.59 +0.03 (+0.26%)

5. Bough 50 of the Bond CEF BWG at $17.75-Roth IRA (see Disclaimer):

Snapshot of Trade:

2014 Roth IRA Bought 50 BWG at $17.75
Security Description: Legg Mason BW Global Income Opportunities Fund (BWG) is a leveraged world bond CEF with significant exposure to junk rated securities.


Data from Date of Trade:
Closing Net Asset Value Per Share: $20.67
Closing Market Price: $17.76
Discount: -14.08%
Average 1 Year Discount: -12.54%
Fund Is Less than 3 Years Old

CEFConnect Page for BWG

Sponsor's Website: Overview (effective duration 9.4 years)

Full Holdings

Credit Quality and Currency Exposure as of 3/31/14:

Credit Quality as of 3/31/14

Currency Exposure Including Hedging

BWG Page at Morningstar

Last SEC Filed Form N-Q: Legg Mason BW Global Income Opportunities Fund (period ending 1/31/14)

Last SEC Filed Shareholder Report: LM BW Global Income Opportunities Fund (period ending 10/31/13)(average interest rate cost for year at .85%, see page 33, item # 5)

Prior Trades: I am slightly in the hold for shares held in a taxable account after averaging down:

BWG TAXABLE ACCOUNT  As of 6/13/14
My most recent purchases are discussed in these posts: Bought: 50 BWG at $16.43 (November 2013); Bought 50 BWG at $16.68 (10/3/13 Post)

Rationale: This fund is currently paying a monthly dividend of $.125 per share. Assuming a continuation of that rate, which is in no way assured, the yield at a total cost of $17.75 per share would be about 8.45%.  In the Roth IRA, that taxable dividend is transformed into a tax free one. Money will double in about 8.54 years at 8.45% compounded annually. Estimate Compound Interest

 The fund is also selling at a large discount to net asset value and hopefully that discount will narrow some with the net asset value going up hereafter.

Since inception through 6/10/14, the total annualized return based on market price was 3.17% but the fund's annualized return based on net asset value was 12.45%. That is a significant disconnect in my opinion.

Those numbers are calculated by CEFConnect and are available by clicking the "performance" tab.

BWG is a new fund that started in March 2012. On the first day of trading (3/28/12), this fund closed with a net asset value of $19.06 per share. The net asset value per share as of 6/10/14 was $20.98, or a 10% increase, unadjusted for monthly dividend payments. The market price was $20.05 on 3/28/12, declining 11.47% until I purchased shares at $17.75.

The general idea is to collect several monthly dividends and then to exit the position without losing money on the shares before interest rates turn up significantly. Any profit on the share will be viewed as acceptable and as a bonus to the monthly dividend.

Risks: This kind of fund has an abundance of risks attached to it, including credit, interest rate, currency, country and normal CEF risks. One of the normal CEF risks is that the percentage decline in the market price can far exceed the percentage drop in net asset value per share.

Last Friday's Closing Price: BWG: $18.10 +0.11 (+0.61%)

6. Added 50 CCNE at $16.11 (REGIONAL BANK BASKET STRATEGY)(see Disclaimer):

Snapshot of Trade:



Company Description: CNB Financial (CCNE) is the parent company of CNB bank, its principal subsidiary. CNB bank has 28 full service banking offices in Pennsylvania. CCNE recently acquired FCBank, now a division of CNB Bank, that has 8 full service offices in central Ohio.

The bank owns 25 offices and leases the remainder from independent owners. Page 27, Form 10-K.

Bank CNB - Locations

Divisions of CNB

CCNE's market capitalization at my purchase price is less than $250M. Trading volumes are normally thin with a significant bid/ask spread.

CCNE is currently paying a quarterly dividend of $.165 per share. CNB Financial Corporation

CCNE did not cut its dividend during the last recession. The quarterly dividend rate has gone from $.037 per share in 1991 to $.165. However, the dividend has been stuck at $.165 since the 2008 4th quarter.

Prior Trade: I currently own 50 shares bought in 2010:  Bought 50 CCNE at $11.06 (6/30/2010 Post)

Prior Earnings Report: 

2014 First Quarter vs. 2013 First Quarter:

E.P.S.: $. 36 / $.34
Net Income: $5.2M / $4.3M
Net Interest Margin: 3.79% / 3.41% (a notable increase)
ROA= .97% (okay, prefer over 1% or higher)
ROE: 11.97% (fine)
Net Charge Offs-Total Loans: .18% / .47% (good to go down)
NPA Ratio: .62% / .93% (better)
Total Risk Based Capital Ratio: 14% / 15.53%
Tangible Common Equity/Tangible Assets: 6.7% / 7.51% (a negative)

SEC Filed Press Release

Form 10-Q

Rationale: Overall, the financial metrics point to a well run bank with solid capital ratios. At a total cost of $16.11 per share, the dividend yield is decent at 4.1%. While the dividend rate has been stagnant for several years, there are rational reasons to postulate a return to dividend growth in the coming years, though the current abnormal FED monetary policies are negatively impacting net interest margins, the key variable component of earnings for small banks.

The current TTM P/E is reasonable. CCNE Key Statistics

Only one analyst provides estimates. That "consensus" E.P.S. estimate is for $1.4 in 2014 and $1.5 in 2015. CCNE Analyst Estimates At a $16.11 price, the forward P/E based on the 2015 estimate is 10.74. The dividend yield as noted above at that total cost per share number is 4.1%.

Risks: Bank stocks perform poorly during recessions which is far from a pithy observation. CCNE's stock price did better than most regional banks during the last big nasty. The price was hovering around $14 back in 2007 and bottomed near $9 during early 2009.  CCNE Interactive Chart

There are also disadvantages associated with the small size. There is just not much interest in this bank. Trading volume is extremely light.  CCNE Historical Prices

The abnormal FED monetary policies are contributing to net interest margin compression. Due to the last financial crisis, costs associated with new regulations have increased.

CCNE discusses risks incident to its operations starting at page 17 of its 2013 Annual Report. Form 10-K Many of these risks are just generic to banks and simply need to be identified and understood.

Last Friday's Closing Price: CCNE: $16.34 -0.11 (-0.67%)

7. Sold 50 EXL at $13.68-Roth IRA (See Disclaimer):

Snapshot of Trade:



Snapshot of Recent Roth IRA History:



Snapshot of Profit:

2014 Roth IRA EXL 50 Shares +$82.98
Roth IRA: Bought 50 EXL at $11.75 (12/3/13 Post)

Total Return: $100.48 or 16.92%

Security Description: Excel Trust  (EXL) is a self-administered REIT that owns "value oriented community and power centers, grocery anchored neighborhood centers and freestanding retail properties". Page 13 FORM 10-Q

Excel Trust Profile Page at Reuters

Key Developments Page at Reuters

Excel does have an equity preferred stock outstanding: Final Prospectus Supplement; Excel Trust Inc. 8.125% Cum. Redeem. Pfd. Series B Stock (EXL.PB)

SEC Filed Earnings Report for Q/E 3/31/14 (FFO at $.23, up from $.22 as of 3/31/12)

Rationale: A number of insiders recently sold stock (see page 8: S-3) That development triggered this disposition taking into account the good annualized total return over about a six month period. I was not exactly enthusiastic with this REIT as evidenced by just a 50 share purchase.

Last Friday's Closing Price: EXL: $13.40 +0.05 (+0.37%)

8. Sold 100 MDIV at $22.17 (see Disclaimer): After I completed last Sunday an analysis of stock additions, pares and deletions, and discovered that I had unintentionally added $31,000 to my stock allocation, I started on Monday selecting securities to sell to take that number down to February 2014 levels.

This security was the third one sold last Monday, and will be the only one of those three discussed in this post. The other two will be mentioned in the next post. I selected MDIV to discuss now since I sold 100 shares in a ROTH IRA last week, and have nothing to add to that recent discussion: Sold 100 MDIV at $21.81.

Multi-Asset Diversified Income ETF Chart

Snapshot of Trade:
2014 Sold 100 MDIV at $22.17
Snapshot of Profit:

2014 MDIV 100 Shares +$157.32 
Item # 2 Bought 100 MDIV at $20.51 (September 2012)

Snapshot of History:

MDIV History-Taxable Account
Dividends Received: $210.01 

Total Return: $367.33 or 17.85%

Security Description: The First Trust ETF VI Multi-Asset Diversified Income Index Fund (MDIV) is an ETF that attempts to track, before fees and expenses, the Nasdaq Multi-Asset Diversified Income Index:

Multi-Asset Diversified Income Index Fund (MDIV) Holdings

Last Friday's Closing Price: MDIV: $22.11 +0.11 (+0.50%)

9. MBC Redeemed at its $10 Par Value: 

MBC was a principal protected note whose coupon was the greater of 3% or a percentage gain in the Russell 2000. I am leaving out some important details since they no longer matter.

In an earlier post, I mentioned that this note would be redeemed by the issuer on 6/9/14. The redemption proceeds would consist of the final annual coupon payment and the $10 par value. MBC Ends Its Final Annual Period with about a 13.03% Coupon Payment on a $10 Par Value I noted that this one provided some excitement in its 2013 coupon period, when it came down to the wire whether I would receive almost $600 or $60 in interest payments. I received $60 due to a Maximum Level Violation three days before the End Date.

I owned 200 shares. Those shares were held in two separate accounts in 100 share lots. Bought 100 MBC at $9.84; Bought 100 MBC at $9.78

I received  redemption proceeds of $1,130.27 for each 100 share lot, consisting of $1,000 in principal and $130.27 in interest.




I realized a negligible profit on the bonds in addition to their interest payments.  

The next owned Citigroup Funding PPN to mature will be MKZ which will likely pay more than the 3% coupon. 
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