Big Picture Synopsis
Stocks:
Stable Vix Pattern (bullish):
Vix Asset Allocation Model Explained Simply
Use of the VIX as a Timing Model
Short Term: Expecting a 10%+ Correction
Intermediate and Long Term: Bullish
The elevator always goes down faster than it went up.
Professor Shiller says that the housing market and stocks are looking a "little bubbly". Bloomberg
Bonds:
Short to Long Term: Slightly Bearish Based on Interest Rate Normalization: The Difficult Path to Interest Rate Normalization
The bond forecast is based solely on the ongoing interest rate normalization process and assumes that the anticipated average annual inflation rate remains in the 2% to 2.25% range over the next ten years as reflected in the break-even yield for the 10 year TIPs. J.P. Morgan | Tips on TIPS
***************
Recent Economic Reports and News:
In a recent Reuters poll, only 27% of adult Americans were able to correctly choose the definition of QE out of five possible answers. MarketWatch About 12% believed QE was a computer assisted program that the Fed used to manipulate the dollar, while another 11% thought that QE had something to do with the Dodd-Frank law. LB was quick to note that 1 out of 5 correct answers could be achieved by Alex the Parrot who has unfortunately passed away. Alex the smart parrot passes away - YouTube
Whatever it is, the market apparently wants the FED to continue it judging by the robust one day rally in bonds and stocks after the FED refused to reduce its asset buying binge. FRB: Press Release--Federal Reserve issues FOMC statement--September 18, 2013
Is the continuation of $85B in asset purchases going to create jobs? Why is GDP growth so anemic with government running large budget surpluses as the FED engages in extraordinarily loose monetary policies? Job growth has been anemic even with QE in full gear. A recent study by the SF Fed showed that QE2 caused negligible GDP growth. Federal Reserve Bank San Francisco | Research, Economic Research, short-term interest rates, Large-Scale Asset Purchases, economic growth, inflation,
The virtual total loss of income from almost $10 trillion in "risk free" savings causes substantial reductions in consumer spending, a loss of jobs, and lowers GDP growth. (study summarized in The Big Picture blog).
The refinancing wave has allowed the large Indebted Class members to dramatically lower their debt service payments to disposable income which will enable them to spend and/or save more for many years to come. The long term benefit for future U.S. economic growth, which is derived from refinancing the main debt obligation at abnormally low rates, has already mostly been achieved as shown by the current DSR and FOR Ratios: Household Debt Service Payments as a Percent of Disposable Personal Income- St. Louis Fed; Household Financial Obligations as a percent of Disposable Personal Income- St. Louis Fed The refinancing wave is now in a diminishing return mode, involving primarily those households who do not qualify for refinancing under HARP and whose homes are only now moving into positive equity.
The main increase to aggregate disposable income going forward would be increased earnings from savings, particularly by those members of the Saving Class who own their homes free and clear (about 1/3rd) and those who rely mostly on savings accounts, certificates of deposit, treasury bills and money market funds as investments. I view the continuation of these asset purchases, without any reduction, to be a policy mistake. The market was ready for a $10B reduction and now it can undergo-again-the same readjustment process in a few more months.
BB is also concerned about the tightening in fiscal policy and the possibility of a government shutdown. WSJ It is difficult for the OG to view $85B in annual spending cuts through sequestration as fiscal restraint after budget deficits exceeded $1 trillion per year for four straight fiscal years US Federal Deficit (fiscal years ending in September: FY 2009 $1.413T; FY 2010 1.294T; FY 2011 $1.3T; FY 2013 $1.087T)
The FED also revised its prediction on inflation, real GDP growth and unemployment. The 2014 PCE inflation estimate was reduced from a range between 1.3 to 1.8 from June's forecast of 1.4% to 2%:
federalreserve.gov.pdf
I would agree with most of Brian Wesbury's take on this announcement. "yellen takes over".PDF He notes correctly in my opinion that "QE3 is not boosting growth" and is simply adding to the already bloated excess reserves in the banking system. If the FED does not start to taper until December, then I would not agree with his statement that QE will end in June 2014. A more likely scenario now is an end to QE in September rather than June 2014.
One of the most successful hedge fund managers in history, Stanley Druckenmiller, wryly noted that the billionaires were in favor of the FED's monetary policies since it shifted wealth from the middle class and poor to them. NBC News.com That is hyperbole. Any household that has refinanced their main debt obligation at absurdly low rates has benefited from QE. For the most part, those households are in the middle class. This subsidy has been paid by other members of the middle class, primarily older folks, who own their homes free and clear and whose risk free savings have been earning almost nothing since late 2008.
The market started to react negatively to the announcement last Thursday with bonds rising in yield and stocks falling.
On Friday, the St Louis Fed President James Bullard called the decision a close call and a small tapering was possible in October. Bloomberg This created some confusion and contributed to the market taking back all of Wednesday's gains and then some. Another contributing factor to Friday's swoon involved the House republicans conditioning their temporary approval of a debt limit increase to the Democrats' willingness to defund Obamacare.
With the exception of regional banks, my portfolio responded extremely well to the FED's announcement for one day. The rally in regional banks since early May was predicated on the FED ending soon its abnormal monetary policies which would gradually increase the banks' net interest margin. That trade went into reverse last Thursday after the regional banks failed to participate in Wednesday's rally. After Bullard's statement, however, the banks rallied on Friday with my regional bank basket rising .69% as the S & P 500 declined .72%.
Inflation is tame. The government reported that CPI increased a seasonally adjusted .1% in August. Over the past 12 months, CPI increased just 1.5% before seasonal adjustments. Consumer Price Index Summary Core CPI increased .1% after increasing .2% for the prior three months.
Industrial production rose .4%, "broadly based", in August. Manufacturing production rose .4%. Total industrial production has now returned to 99.4% of its 2007 average. Capacity utilization increased .2% to 77.8% which is 2.4% below its long run average. Industrial Production and Capacity Utilization
Industrial Production Index - St. Louis Fed
I am always interested in trends and super cycles. I doubt that anyone would disagree that online sales are in an uptrend and a long term super cycle:
E-Commerce Retail Sales- St. Louis Fed Maybe I need to buy one share of Amazon in my LT basket strategy, notwithstanding my firm unfavorable opinion about its valuation.
In August, privately owned housing starts were at a seasonally adjusted 891,000 annualized, up .9 from July and 19% above the annualized rate for August 2012. Single family housing starts were at a 628,000 annualized rate which was 7% above the revised July annualized rate. census.gov/pdf
Mortgage applications increased 11.2% for the week ending 9/13, with the refinance index increasing 18%. MBA Weekly Survey
The National Association of Realtors reported that existing home sales rose to the highest level in 6 1/2 years in August. realtor.org Those sales rose 1.7% over the July number and were up 13.2% Y-O-Y.
The Philadelphia FED manufacturing index rose to 22.3 in September, much better than the consensus estimate of 11. Any reading over zero indicates expansion. The employment index increased by 7 points to 10.3, the highest reading since April 2012. New orders increased 16 points to 21.2. philadelphiafed.org .pdf
****************
Miscellaneous:
During my years playing baseball, I fortunately never had a slide like the one shown here. MLB News
With the recent rise in PSEC's stock price, I elected to take my last monthly dividend, paid by the shares owned in a taxable account, in cash. I did reinvest a few recent monthly dividends when the share price was near book value:
I also own 100 shares in the ROTH IRA. Bought 100 PSEC @ $10.2-Roth IRA (11/16/12 Post).
My most recent adds in the taxable account are discussed in these posts: Item # 2 Added 50 PSEC at $10.15 June 2013; Item # 6 Added 100 PSEC at $10.85 (8/10/13 Post)
General Mills (own) slid last Thursday in a delayed reaction to its earnings report released early Wednesday.
Closing Price Thursday 9/19/13: GIS: $48.83 -1.32 (-2.63%)
The earnings report is discussed in this Seeking Alpha article. This is a link to the SEC press release announcing the earnings: SEC
I thought that the report was just okay. The guidance for fiscal 2014 is for an adjusted E.P.S. between $2.87 to $2.9. The F/Y ends in May 2014. I always like that kind of tight guidance rather than something like $2.6 to $3.1 which gives me far less comfort. The tight guidance range is indicative of a stable relatively low growth business. Assuming a $49 price and a $2.9 E.P.S. for the 2014 F/Y, the forward P/E would be about 16.9 which is neither cheap nor expensive. I am neither a buyer nor a seller at that multiple and price.
Jack Hough argues in this week's Barrons that GE shares "could rise more than 30% over two years to $32". That is a realistic target provided the world economy cooperates. I plan to sell my highest cost shares at some point over $30 which will lower my average cost per share to near $15. Stocks, Bonds & Politics: GE (introduction)
***********
1. Bought 200 Canadian Apartments at C$20.67 (See Disclaimer)
Snapshot of Trade:
Security Description: Canadian Apartment Properties Real Estate Investment Trust (CAR.UN:TOR) is a Canadian REIT that owns apartment complexes in 6 Canadian provinces.
I viewed many of them at the REIT's website: CAPREIT This is a link to more information about one of them, Somerset Place Apartments in Mississauga ON. Somerset Place Apartments
The REIT calls itself a "growth-oriented investment trust owning interests in 38,164 residential units, comprised of 34,794 residential suites and 14 manufactured home communities comprising 3,370 land lease sites located in or near major urban centers across Canada". About CAPREIT
I acquired the following information from the 2012 Annual Report .pdf. NFFO per unit rose 9.5% "showing strong accretive growth". The monthly cash distribution increased by 3.7%. Occupancies "remained at near-full levels, with stable increases in average monthly rents". The overall occupancy rate was at 97.9%. FFO for the year was $1.448 per unit, up from $1.322 in 2011. NFFO was $1.486 in 2012, up from $1.357 in 2011.
The REIT did have two share offerings in 2012. One was 7.705M shares offered at C$24 and the other was 7.75M shares at C$22.75. CAPREIT | Investor Relations
Compared to the cost of housing in Canada, apartment rents at least look affordable to the average household.
Due to the high cost of housing, debt has increased to 163.4% of disposable income in Canada. Bloomberg The average cost of a home in Canada is about C$387,147 or about 33% higher than in the U.S. The average cost in Vancouver is C$780.500, higher than NYC and London. Toronto's average home price is about C$523,147. It would be tempting for me to sell a home in Toronto, locking in that tremendous rise in price, and move into a nice apartment.
Prior Trades:
Item # 1 Bought: 100 CAR-UN.TO @ C$17.35 November 2010)
Recent Earnings Report: The REIT will provide three funds from operation numbers (FFO, NFFO, and AFFO). The adjusted funds from operations (AFFO) reduces FFO by the provision for property maintenance. That kind of capital expenditure is recurring for REITs. Those with older properties may have a larger recurring capital expenditures. It is important for the AFFO to be comfortably above the dividend payout. An investor does not want to see cash needed for maintenance flying out the door to shareholders. When that starts to occur, a dividend cut will likely be forthcoming. A slim margin between the AFFO per share and the dividend rate will or should restrain dividend growth.
In the 2013 second quarter, CAR reported a AFFO of C$39.546M and paid out to shareholders C$28.996 or 73.3%. That is fine.
The REIT reported normalized FFO at C$.4225 per unit, up from C$.358 per unit in the 2012 second quarter. Portfolio occupancy was reported at a strong 98.4%. The average monthly rent increased by 2.8% Y-O-Y to C$1,044 per month.
Financial Report For Q/E 6/30/2013
Rationale: (1) Sitting in a chair located at some geographical distance from this REIT's properties, the company appears to be well managed, and it is in a acquisition mode.
One of the benefits of a Canadian REITs from my perspective is that they pay monthly dividends. As noted in the preceding link, CAR raised its dividend in June to an annual run rate of C$1.15 per unit. The overall rate of distribution increases is not impressive however: CAPREIT | Investor Relations
The current monthly rate is C$.0958 per share.
At that rate and a total cost per share of C$20.67, the current dividend yield is about 5.56%. I will be paid in Canadian Dollars after a 15% withholding tax.
I maintain a position in Canadian Dollars which had risen to almost C$10,000 prior to this purchase. That stash earns nothing. One purpose of the Canadian Dollar strategy is to receive income in Canadian dollars and hopefully make something on the shares. Canadian Dollar (CAD) Strategy
I used some of those CADs to settle this trade made on the Toronto exchange.
Risks: The Canadian REITs have gone done in price just like their American cousins during the recent interest rate rise. As the ten year treasury moves up in yield, there are some investors who will find low single digit yields offered by REITs and electric utilities, prior to their recent correction in prices, to be relatively unattractive or less attractive. CAR shares have fallen from C$26.04 on 4/30/13: CAR-UN.TO Interactive Chart At that price, the yield was 4.41% based on the current dividend rate.
This process of readjustment may continue with further rises in "risk free" yields.
I would view the long term dividend growth history to be unimpressive. Recently, the REIT has been increasing the dividend but there have been prolonged periods where the dividend remain unchanged. A more robust dividend growth would be a positive, while another long period of dividend stagnation would place downward pressure on the stock units when interest rates are rising.
Like most REITs, the share price tanked during the Near Depression period falling to C$12. If that kind of event happens again, and hopefully it is more like a 50 year flood type of happening, I would at least like the option of reinvesting the dividend which I do not have now at Fidelity. I can only trade round 100 share lots. Hopefully, I will see the next Dark Period coming and will lighten up before my portfolio suffers too much damage which I did manage to do before the last one.
Currency risk is important, irrespective of whether an investor buys a ADR using USDs on the NYSE or converts their USDs into a foreign currency to buy ordinary shares on the local stock exchange. Stocks, Bonds & Politics: International Trading and Currency Risks; Stocks, Bonds & Politics: Strong U.S. Dollar + Weak Market=Time to Start Looking Overseas
I am a long term holder of Canadian Dollars and do not consider the currency risk as important for me. In the event one CAD buys $1.25 I may convert some of my CADs back to USDs. For someone trading foreign securities, the currency conversion rate can have a significant positive or negative impact on your total return.
The recent decline in the CAD vs. the USD would have been sufficient to wipe out the value of CAR's dividends for almost two years. The CAD has recently been gaining some of those losses back. USD/CAD Currency Conversion Chart
Future Buys/Sells: I am not likely to buy more and would consider selling at over C$24.
I bought 300 shares of another Canadian REIT, using my existing CADs, last Thursday which will be discussed in the next post.
2. Bought 100 Unilever (UN) at $38.1055 (see Disclaimer): I mentioned in my last post, at the bottom, that I bought this stock.
Snapshot of Trade:
Security Description: The Unilever group, Unilever PLC and Unilever NV, is a large consumer staples company operating in 190 countries.
Unilever has two sets of common shareholders that originate from its history. Unilever PLC is based in the UK and Unilever NV is from the Netherlands. A concise history can be found at Wikipedia.
{A similar type of situation and history exists for Royal Dutch Shell with its RDS/A and RDS/B shares Difference between A and B shares - Shell Global}
I bought the Unilever NV shares.
Unilever NV (UN) Profile at Reuters
There is a unity of shareholder's rights agreement that makes the Unilever PLC and Unilever NV shares equivalent.
Understanding NV & PLC shares | Unilever Global
unilever.com/ Governance_of_Unilever/.pdf
Some of Unilever's major acquisitions include Chesebrough-Pond's in 1987 for $3.1B (Vaseline, Ragu and Pond's skin care products); Helene Curtis in 1996; Slim Fast and Ben & Jerry's in 2000; and Alberto-Culver for $3.7B in 2010.
Unilever will frequently sell parts of a business it acquires, either soon after an acquisition or years later and will then focus on what it really wanted from the acquisition.
I recall the Chesebrough acquisition in 1987. Unilever quickly sold Stauffer Chemical, a subsidiary of Chesebrough, for $1.69B to the U.K.s Imperial Chemicals. Chesebrough also owned Bass Shoes which was sold to Phillips Van Heusen for $79M. Chesebrough also owned Prince Tennis which was also sold after Unilever's acquisition. There has been some speculation that Unilever may want to find a buyer for the Ragu line of products. The Unilever CFO recently referred to Ragu as an important generator of cash and that management needed to turn around the business. Reuters That article in Reuters also refers to a recent Deutsche Bank upgrade to buy from hold.
In July 2013, Unilever increased its ownership interest in Hindustan Unilever to 67.2% from 52.5% for €2.5B. Unilever generates about 57% of its sales in emerging and developing markets. Reuters
Unilever is also an active seller of brands. Last month, it sold Wish-Bone and Western dressings to Pinnacle Foods for $580M or about 3.1 times sales. Unilever Agrees to Sell Wish-Bone and Western Brands to Pinnacle Foods Earlier this year, it sold Skippy peanut butter to Hormel for approximately $700M. Last year, the company sold its frozen meals business (Bertolli and P.F. Chang) to Conagra for $265M. ConAgra Foods
2012 Unilever Annual Report: Form 20-F
Morningstar has UN rated at 4 stars with a fair value estimate of $44, and has assigned the company a "wide moat".
Prior Trades: I went back to 2006 in my main taxable account looking for prior trades. I have flipped UN twice, but have not owned it since 2007:
In this first trade, I held 100 shares for slightly more than 1 month:
I was starting to become nervous in November 2006.
The next trade was in 2007 and I was hyper nervous then, holding the shares only for four days:
There is something to be learned about those trades. I sold both lots at over $26 per share.
If I had held the shares until March 2009, I would have had a loss of about $800 or so for each 100 share lot. I would now have a $1,200+ profit per 100 share lot by keeping those shares until now.
Reinvesting the dividend, moreover, would have captured some of those low prices in late 2008 and 2009, which would have reduced my average cost per share for the lots originally bought in 2006 and 2007 provided I had held onto them.
Clearly, in retrospect, I would have been better off just holding those shares and then reinvesting the dividend.
However, if I had more nerve, I could have bought 300 shares at $18 in March 2009, spending about the same amount of money as the proceeds realized from the 100 share sales in 2006 and 2007. I would now have over a $6000 profit before taking into consideration shares purchased with dividends.
Then again, if the world had slipped into another Great Depression in 2008, which was certainly a possibility in October 2008 (maybe 50/50), then I could have ended up with significant losses in those shares purchased in 2006-2007 by holding them into 2008 and beyond.
I found two prior trades of the functionally equivalent UL.
I still own 70 shares bought in March 2009:
Added to UL at $18 (3/23/09 Post). I mentioned in that post that the stock was then at less than 10 times 2008 earnings.
I flipped a 30 share lot in 2009:
Buy of UL at $18.22 (3/13/09 Post)
Why did I do that? I had to check the trading log of HQ's operation: Stocks, Bonds & Politics: Evening Comments 5/21/2009/Pared 30 Unilever at $23.38. I did not give a reason and merely expressed a hope that I could buy the shares back at $18.
Realized Gains: $326.5
Unrealized Gain on 70 Share Lot Bought in March 2009 as of 9/20/13: $1,620.9
Recent Earnings Report: During the first six months of 2013, Unilever reported a 4% increase in core earnings to €.76 on underlying sales growth of 5% and 10.3% in emerging markets. Fully diluted earnings per share was €.83 for the six month period, which included the profit on the disposal of the Skippy brand. Developed markets declined by 1.3%. "Turnover" in the first quarter was €13.3B and €25.5 for the first half. 2013 Second Quarter Earnings Release
Free cash flow was reported at €1.3B for the first half with core operating margin at 14% versus 13.6% in the 2012 first half.
EUR/USD Chart
If I converted €.76 into USDs on 9/13/13, the result would be about $1.0107. Currency Converter
Rationale: (1) Unilever is a large, financially stable consumer products company with a growing presence in emerging markets. The senior debt is rated A1 by Moodys and A+ by S & P. FINRA I have no concerns about Unilever surviving for the remainder of my life.
Unilever is the European version of Proctor & Gamble, which I have owned more often and in larger quantities.
Some of the well known brands in the U.S. include Lipton Tea, Ben & Jerry's ice cream, Hellmann's, Ponds skin products, Knorr, Dove and Vaseline. View brands | Unilever Global
A number of the major brands are known primarily outside the U.S.
Unilever is the third largest packaged food firm behind Nestle and Mondelez. Fourteen of its household and personal products generate more the €1B in revenue.
The dividend yield at a total cost of $38.1 is about 3.7%. Unilever N.V. ADS Stock Price MarketWatch
The dividend rate has been increasing. For the 4th quarter of 2009, the quarterly dividend for the ordinary shares was €.195 per share and had been increased to €.269 for the 2013 first quarter or 37.95%. NV share dividend history | Unilever Global
The dividend for the UN ADR shares would be impacted by the exchange rate between the Euro and the USD. Generally, an owner of the UN ADR would want the Euro to rise against the USD for two reasons. NV New York share dividend history | Unilever Global The dividend paid in Euros and then converted into USDs would be worth more when the Euro is gaining in value. More importantly, the ADR share price will reflect the price of the ordinary shares priced in Euros as converted into USDs during the course of the trading day.
The main reason for buying Unilever is its significant and growing presence in emerging markets. The growth in sales is coming from those markets.
Recently, the UN shares have pulled back from a recent closing high of $42.78, UN Historical Prices-May 3, 2013 The decline in consumer staples coincided with the rise in interest rates. I discussed some possible reasons for the price correction in a recent post (Stocks, Bonds & Politics-Introduction under the heading "Weakness in Consumer Staples"). I viewed the main reason for the decline as a correction to the slight excesses in valuations.
The current consensus E.P.S. estimate for 2013 is $2.19 and $2.4 for 2014. UN Analyst Estimates Assuming $2.4 proves prescient, the forward P/E multiple at a total cost of $38.1 is about 15.875 which is fine for a consumer staple company. The growth rate Y-O-Y with both the 2013 and 2014 estimates proving to be accurate would be okay at 9.58%.
UN Key Statistics
Yahoo Finance will also display a UN chart going back to 1985 which is interesting for those interested in long term investing and possible entry points for consumer staple stocks. UN Interactive Chart If that chart does not display, just click "max". The price was $1.67, adjusted for 3 stock splits, in early 1985. (if stock splits do not display, click the "events" tab and then click "splits") The splits were 5 for 1, 4 for 1 and 3 for 1. For anyone desiring to start a position, the period between 1999-2000 and 2008-2009 would have provided attractive entry points. I have previously noted that consumer staple stocks are on my buy list whenever there is a cataclysmic stock market decline (one greater than 45%) Lastly, another interesting point revealed by this chart is that Unilever topped out in December 1998 and had experienced a serious decline before the major averages started to decline. Coca Cola hit a higher price in 1998 than the current price. Just something to keep in mind. The Nasdaq Composite continued to move skyward, hitting a high of 5,046.86 on 3/9/2000 (Historical Prices) While it is hard to believe now, that average was hovering just over 2000 in December 1998. Historical Prices
Risks: Recessions and bear markets will knock down the stocks of consumer staple stocks, but generally not by the same percentage amount as the overall market. I mentioned above selling Unilever stock at over $26 in 2007 and then buying shares back at $18 in March 2009. Few stocks will buck the downtrend during a bear market and far fewer will even maintain their value during the catastrophic bear markets such as the ones experienced between 1929-1932, 1974 or September 2008-March 2009. Consumer product stocks will be hit during those types of down markets.
Even at the depth of the recent cataclysm, I was only able to buy PG and PEP below $50 for a relatively brief period. PEP Interactive Chart (max); PG Interactive Chart
A brand product company like Unilever is subject to competition from store brands and cheaper brands. The large competitors of Unilever have financial heft and are competent competitors.
A rise in commodity costs can squeeze margins.
As a buyer of Unilever's ADS shares using USDs, I am still subject to currency conversion risk. The price of the Unilever NV ADS shares will be governed by the ordinary share price traded in Euros. I would now want the Euro to gain in value against the USD, at least when focused solely on my positions in ADR/ADS shares of European companies.
The chart is showing technical weakness. The shares are currently selling below their 50 and 200 day SMAs. UN Interactive Chart; PG Interactive Chart (Max).
Unilever is one of the large companies that have benefited from the abnormally low rates. Unilever recently sold $750B of senior notes, maturing in 2019, at a 2.2% yield. Prospectus When that note comes due, I would expect that Unilever will have to pay significantly more.
Some of the negatives, including the recent emerging market currency problems, are discussed by Zacks when that firm downgraded Unilever to underperform.
Future Buys and Sells: I am going to reinvest the dividend on this last 100 share purchase. I may add to it some on a decline below $35. I would consider selling the shares within 18 months at a price over $42.
3. Bought 50 AFPRC at $21.75 Roth IRA (see Disclaimer):
Snapshot of Trade:
Security Description: Astoria Financial 6.5% Series C Perpetual Preferred (AF.PC) is an equity preferred stock that pays non-cumulative and qualified dividends at the fixed coupon rate of 6.5% on a $25 par value.
Astoria Financial is the largest thrift in NY. Astoria (AF) is the holding company for Astoria Federal Savings & Loan. As of 6/30/13, the bank had $16.1B in assets and 85 branches.
Profile Page at Reuters.com
Website: Astoria Federal Savings
2012 Annual Report
Prior Trades: AFPRC is a new issue, and this is my first purchase. I have bought and sold the common stocks: Bought: 100 AF @ $13.08; Bought 50 AF @ $12.08; Sold 50 AF at $14.09; Sold 101 AF at $14.89 (snapshots at Stocks, Bonds & Politics: REGIONAL BANK BASKET STRATEGY GATEWAY POST: Total Realized Gain=$244.97)
I am not likely to buy back the common stock due to a substantial cut in the common share dividend and the lackluster recent earnings reports. Thrifts have been hit hard by the FED's extremely abnormal monetary policy that has resulted in net interest margin compression. Thrifts depend primarily on mortgage loans.
Recent Earnings Report: Please note that there are two new line items in the following table relevant to the ownership of an equity preferred stock:
2013 2nd Quarter vs. 2012 2nd
SEC Filed Press Release
SEC Form 10-Q for Q/E 6/30/13
Net Income: $15.664M / $12.824M
Preferred Stock Dividends: $2.827M / None
Net Income Available To Common Shareholders: $12.838M/ $12.824M
E.P.S.: $.13 / $.13
Net Interest Margin: 2.22% / 2.14%
Efficiency Ratio: 71.89% / 70.6%
ROTE: 4.47%/ 4.7%
Net Charge Offs to Average Loans Annualized: .15%/ .35%
NPL Ratio as of 6/30: 2.82%
NPA Ratio as of 6/30: 2.22%
Coverage Ratio as of 6/30: 40.32%
Total Risk Based Capital Ratio: 16.82%/15.69%
The only numbers above viewed as good are the low charge-offs and the capital ratio. While these numbers would turn me off as a potential common shareholder, at least until many of them improve substantially, I am comfortable with Astoria's ability to pay the preferred stock dividend given the net income number.
Rationale: I am attempting to generate cash flow in the ROTH IRA. The aggregate amount of cash flow will be used to purchase more income generating securities.
The dividend yield at a total cost of $21.75 is about 7.47%. I lost the tax advantage by buying this security in the ROTH IRA.
Assuming the market is correctly forecasting the average annual inflation rate over the next ten years at 2.1%, I would have a 5.37% real rate of return with no tax obligation given my ownership in the Roth IRA. That is one reason to nibble at the security rather than keeping the funds in a MM fund earnings .01% or a significant negative real rate of return.
I am attempting to balance the current yield differential between this type of security and a money market fund yielding .01% (the source for payment) against what I view as a more probable than not future decline in the market price. Note that I did not say that the market price will materially decline. I am dealing in possible and probable scenarios, with varying ranges, when making security purchases.
The market price could decline almost another 7.5% below $21.75 before offsetting a year's worth of that yield differential. That militates in favor of at least a small purchase after the recent decline in price rather than keeping those funds invested at .01%.
In the event the security does decline more than 7.5%, I will consider adding another 50 shares. A 7.5% decline would amount to $1.63 per share or a $20.12 market price. I view that decline as probable within the next year and having a 20%-50% possibility before the end of 2013. As mentioned below in the Future Buy section, the automatic trigger for another 50 share purchase is less than $19.5 with two conditions.
In the 2012 second quarter, Astoria cut its quarterly common share dividend from 13 cents to 4 cents per share. Investor Relations Dividend History | Astoria The bank had no choice in my opinion given its recent earnings history. While a dividend cut is viewed unfavorably, and signals weakness, it does mean that there is more money available for paying the preferred stock owners.
Risks: I would classify interest rate risk as the most important, but credit risk is present and worthy of future monitoring. Since Astoria is on my regional bank monitor list, and I have previously owned the common shares, I will be reading earnings releases anyway. Given the recent dividend cut and earnings history, I would need a significant drop in price before repurchasing the common. When my ownership is limited to a preferred stock or bond, it is important to read earnings releases and material information in order to detect any potential problem that would create rational credit risk concerns.
A perpetual preferred stock will be sensitive to material changes in long term interest rates.
This security was recently sold to the public in mid-March at $25, hit a high of $25.69 on 5/9 and then proceeded to fall off a cliff as intermediate and long term interest rates started to rise. Interactive Stock Chart - MarketWatch From the closing high price on 5/9 to my purchase at $21.75 on 9/16, this preferred stock had declined $3.94 per share or 15.34%. That decline is all about interest rate risk.
Future Buys and Sells: I discussed in a recent SA comment that a 50 share add would be triggered by a decline below $19.5, provided there was no material adverse change in Astoria's credit risk profile and the average annual forecasted inflation rate remained embodied in the 10 year TIP pricing remained below 2.25%. Seeking Alpha I would not add to this fixed coupon security with that inflation expectation in a rising mode above 2.5%.
4. Sold 100 PBCT at $14.612 (REGIONAL BANK BASKET STRATEGY)(see Disclaimer):
Snapshot of Trade:
Snapshot of Profit:
ITEM # 1 Bought 100 PBCT at $11.47
Rationale: PBCT was sold based primarily on valuation considerations. The secondary reasons include the high dividend payout ratio and profit taking.
The 12 month trailing P.E. was about 20.32 at the $14.61 price. The consensus E.P.S. estimate for 2014 is currently $.9. PBCT Analyst Estimates The forward P/E on that estimate would be 16.23 at the $14.61 price. That is high for a regional bank. The 5 year estimated P.E.G. is also high at 2.52. PBCT Key Statistics
While the current dividend yield is good, the payout ratio is high. Based on the estimated E.P.S. of $.78 in 2013 and a $.1625 quarterly dividend (Dividend History), the payout ratio is 83.3%. While PBCT has been raising the dividend some, that kind of payout ratio will restrain dividend growth going forward and deprives the bank of capital derived from earnings as a funding source for growth.
Future Buys: I would consider buying back the shares at less than $13 provided the $.9 E.P.S. estimate for 2014 looks doable. At $13 the P/E would still be high at 14.44 particularly given the operating metrics discussed in Item 2 A of the July Update: Stocks, Bonds & Politics: Updated Tables for Regional Bank and Lottery Ticket Basket Strategies The main positive feature is the dividend yield, but that needs to be offset with the high payout ratio.
I referred to PBCT as a "marginal hold" in the preceding linked post.
5. Sold 100 EWM at $16.01 (see Disclaimer):
Snapshot of Trade:
Snapshot of Profit:
The foregoing snapshot also includes an earlier 100 shares round trip. The 2013 total is now at +$172.64
Item # 4 Bought Back 100 EWM at $15.28 (8/17/13 Post)
Rationale: The OG sometimes needs positive reinforcement. It is not soothing, nor conducive to a positive feedback loop, to have a security decline from $15.28 on 8/13, the day of my purchase, to a $13.91 close on 8/28 or a 8.96% descent. EWM Historical Prices Such occurrences increases anxiety and self doubt which are already at elevated levels for such a specimen way past his prime.
I intend to try again when and if this ETF declines to $14. The emerging market currencies, stocks and bonds took a hit in August on tapering concerns. And, last Wednesday, emerging market securities had a robust up day, as shown in the closing price for the Vanguard Emerging Markets ETF (VWO) which is owned by me:
Closing Prices Wednesday 9/18/13
VWO: $42.97 +1.67 (+4.04%)
The emerging market local debt ETFs also had a good day last Wednesday, as those currencies strengthened against the USD:
ELD: $48.36 +1.11 (+2.35%) : WisdomTree Emerging Markets Local Debt ETF
LEMB: 50.46 +1.07 (+2.17%) : iShares Emerging Markets Local Currency Bond ETF
The Brazilian Reel rose 3.25% against the USD as an example.
***************
Politics and Etc:
1. The GOP's Anarchist Tendencies: The GOP House members are attempting to link a temporary extension of the debt ceiling to the Democrats' agreement to defund Obamacare. MarketWatch; WSJ.com That kind of linkage is just exceedingly irresponsible, juvenile, and reckless. It is of course red meat to the GOP's core voters, but will be viewed as irresponsible by independents who are needed in Presidential elections and in several close Senate races.
A government shutdown triggered by such posturing could lead to a significant loss in republican House seats, even in some of those gerrymandered congressional districts that have been carved out to insure the election of GOP representatives. My congressional district is one of those. My Know Nothing reactionary congresswoman, Michele Bachmann's soul sister, is safe.
The GOP has already forgotten the historical precedent following their last successful effort to shut down the government.
Bill Clinton looked like a one term President until the GOP gave him the gift of a government shutdown, Bloomberg; The Atlantic. Maybe the GOP secretly desires to have Bill's wife as President for 8 years after Obama's second term ends, just to give them something to gripe about for another eight years.
Several GOP politicians are talking about impeaching Obama, another potential tactic for them to aid Hilary's election and a continuing Democrat senate majority.
The GOP will find a way to improve the Democrats chances to win back the House and to reach that magical 60 number in the Senate again. Did they not learn anything from some of the recent senate elections in states that lean in their direction? Those who routinely create their own reality are incapable of learning anything from current history, let alone the past.
In Missouri for example, Obama lost to Romney 53.9% to 44.2%. The reactionary Tea Party's candidate, Todd Akin, lost to the Democrat securing only 39.2% of the vote. 2012 Election Results Map by State Akin was one of the many recent gifts given by the GOP to the Democrats.
I voted for the current GOP governor in Tennessee and both GOP senators (Corker and Alexander).
Stocks:
Stable Vix Pattern (bullish):
Vix Asset Allocation Model Explained Simply
Use of the VIX as a Timing Model
Short Term: Expecting a 10%+ Correction
Intermediate and Long Term: Bullish
The elevator always goes down faster than it went up.
Professor Shiller says that the housing market and stocks are looking a "little bubbly". Bloomberg
Bonds:
Short to Long Term: Slightly Bearish Based on Interest Rate Normalization: The Difficult Path to Interest Rate Normalization
The bond forecast is based solely on the ongoing interest rate normalization process and assumes that the anticipated average annual inflation rate remains in the 2% to 2.25% range over the next ten years as reflected in the break-even yield for the 10 year TIPs. J.P. Morgan | Tips on TIPS
***************
Recent Economic Reports and News:
In a recent Reuters poll, only 27% of adult Americans were able to correctly choose the definition of QE out of five possible answers. MarketWatch About 12% believed QE was a computer assisted program that the Fed used to manipulate the dollar, while another 11% thought that QE had something to do with the Dodd-Frank law. LB was quick to note that 1 out of 5 correct answers could be achieved by Alex the Parrot who has unfortunately passed away. Alex the smart parrot passes away - YouTube
Whatever it is, the market apparently wants the FED to continue it judging by the robust one day rally in bonds and stocks after the FED refused to reduce its asset buying binge. FRB: Press Release--Federal Reserve issues FOMC statement--September 18, 2013
Is the continuation of $85B in asset purchases going to create jobs? Why is GDP growth so anemic with government running large budget surpluses as the FED engages in extraordinarily loose monetary policies? Job growth has been anemic even with QE in full gear. A recent study by the SF Fed showed that QE2 caused negligible GDP growth. Federal Reserve Bank San Francisco | Research, Economic Research, short-term interest rates, Large-Scale Asset Purchases, economic growth, inflation,
The virtual total loss of income from almost $10 trillion in "risk free" savings causes substantial reductions in consumer spending, a loss of jobs, and lowers GDP growth. (study summarized in The Big Picture blog).
The refinancing wave has allowed the large Indebted Class members to dramatically lower their debt service payments to disposable income which will enable them to spend and/or save more for many years to come. The long term benefit for future U.S. economic growth, which is derived from refinancing the main debt obligation at abnormally low rates, has already mostly been achieved as shown by the current DSR and FOR Ratios: Household Debt Service Payments as a Percent of Disposable Personal Income- St. Louis Fed; Household Financial Obligations as a percent of Disposable Personal Income- St. Louis Fed The refinancing wave is now in a diminishing return mode, involving primarily those households who do not qualify for refinancing under HARP and whose homes are only now moving into positive equity.
The main increase to aggregate disposable income going forward would be increased earnings from savings, particularly by those members of the Saving Class who own their homes free and clear (about 1/3rd) and those who rely mostly on savings accounts, certificates of deposit, treasury bills and money market funds as investments. I view the continuation of these asset purchases, without any reduction, to be a policy mistake. The market was ready for a $10B reduction and now it can undergo-again-the same readjustment process in a few more months.
BB is also concerned about the tightening in fiscal policy and the possibility of a government shutdown. WSJ It is difficult for the OG to view $85B in annual spending cuts through sequestration as fiscal restraint after budget deficits exceeded $1 trillion per year for four straight fiscal years US Federal Deficit (fiscal years ending in September: FY 2009 $1.413T; FY 2010 1.294T; FY 2011 $1.3T; FY 2013 $1.087T)
The FED also revised its prediction on inflation, real GDP growth and unemployment. The 2014 PCE inflation estimate was reduced from a range between 1.3 to 1.8 from June's forecast of 1.4% to 2%:
I would agree with most of Brian Wesbury's take on this announcement. "yellen takes over".PDF He notes correctly in my opinion that "QE3 is not boosting growth" and is simply adding to the already bloated excess reserves in the banking system. If the FED does not start to taper until December, then I would not agree with his statement that QE will end in June 2014. A more likely scenario now is an end to QE in September rather than June 2014.
One of the most successful hedge fund managers in history, Stanley Druckenmiller, wryly noted that the billionaires were in favor of the FED's monetary policies since it shifted wealth from the middle class and poor to them. NBC News.com That is hyperbole. Any household that has refinanced their main debt obligation at absurdly low rates has benefited from QE. For the most part, those households are in the middle class. This subsidy has been paid by other members of the middle class, primarily older folks, who own their homes free and clear and whose risk free savings have been earning almost nothing since late 2008.
The market started to react negatively to the announcement last Thursday with bonds rising in yield and stocks falling.
On Friday, the St Louis Fed President James Bullard called the decision a close call and a small tapering was possible in October. Bloomberg This created some confusion and contributed to the market taking back all of Wednesday's gains and then some. Another contributing factor to Friday's swoon involved the House republicans conditioning their temporary approval of a debt limit increase to the Democrats' willingness to defund Obamacare.
With the exception of regional banks, my portfolio responded extremely well to the FED's announcement for one day. The rally in regional banks since early May was predicated on the FED ending soon its abnormal monetary policies which would gradually increase the banks' net interest margin. That trade went into reverse last Thursday after the regional banks failed to participate in Wednesday's rally. After Bullard's statement, however, the banks rallied on Friday with my regional bank basket rising .69% as the S & P 500 declined .72%.
Inflation is tame. The government reported that CPI increased a seasonally adjusted .1% in August. Over the past 12 months, CPI increased just 1.5% before seasonal adjustments. Consumer Price Index Summary Core CPI increased .1% after increasing .2% for the prior three months.
Industrial production rose .4%, "broadly based", in August. Manufacturing production rose .4%. Total industrial production has now returned to 99.4% of its 2007 average. Capacity utilization increased .2% to 77.8% which is 2.4% below its long run average. Industrial Production and Capacity Utilization
Industrial Production Index - St. Louis Fed
I am always interested in trends and super cycles. I doubt that anyone would disagree that online sales are in an uptrend and a long term super cycle:
E-Commerce Retail Sales- St. Louis Fed Maybe I need to buy one share of Amazon in my LT basket strategy, notwithstanding my firm unfavorable opinion about its valuation.
In August, privately owned housing starts were at a seasonally adjusted 891,000 annualized, up .9 from July and 19% above the annualized rate for August 2012. Single family housing starts were at a 628,000 annualized rate which was 7% above the revised July annualized rate. census.gov/pdf
Mortgage applications increased 11.2% for the week ending 9/13, with the refinance index increasing 18%. MBA Weekly Survey
The National Association of Realtors reported that existing home sales rose to the highest level in 6 1/2 years in August. realtor.org Those sales rose 1.7% over the July number and were up 13.2% Y-O-Y.
The Philadelphia FED manufacturing index rose to 22.3 in September, much better than the consensus estimate of 11. Any reading over zero indicates expansion. The employment index increased by 7 points to 10.3, the highest reading since April 2012. New orders increased 16 points to 21.2. philadelphiafed.org .pdf
****************
Miscellaneous:
During my years playing baseball, I fortunately never had a slide like the one shown here. MLB News
With the recent rise in PSEC's stock price, I elected to take my last monthly dividend, paid by the shares owned in a taxable account, in cash. I did reinvest a few recent monthly dividends when the share price was near book value:
 |
| PSEC Monthly Dividend Taxable Account |
My most recent adds in the taxable account are discussed in these posts: Item # 2 Added 50 PSEC at $10.15 June 2013; Item # 6 Added 100 PSEC at $10.85 (8/10/13 Post)
General Mills (own) slid last Thursday in a delayed reaction to its earnings report released early Wednesday.
Closing Price Thursday 9/19/13: GIS: $48.83 -1.32 (-2.63%)
The earnings report is discussed in this Seeking Alpha article. This is a link to the SEC press release announcing the earnings: SEC
I thought that the report was just okay. The guidance for fiscal 2014 is for an adjusted E.P.S. between $2.87 to $2.9. The F/Y ends in May 2014. I always like that kind of tight guidance rather than something like $2.6 to $3.1 which gives me far less comfort. The tight guidance range is indicative of a stable relatively low growth business. Assuming a $49 price and a $2.9 E.P.S. for the 2014 F/Y, the forward P/E would be about 16.9 which is neither cheap nor expensive. I am neither a buyer nor a seller at that multiple and price.
Jack Hough argues in this week's Barrons that GE shares "could rise more than 30% over two years to $32". That is a realistic target provided the world economy cooperates. I plan to sell my highest cost shares at some point over $30 which will lower my average cost per share to near $15. Stocks, Bonds & Politics: GE (introduction)
 |
| GE Position as of 9/20/13 |
1. Bought 200 Canadian Apartments at C$20.67 (See Disclaimer)
Snapshot of Trade:
 |
| 2013 Bought 200 CAR_UN:CA at $C20.67 |
I viewed many of them at the REIT's website: CAPREIT This is a link to more information about one of them, Somerset Place Apartments in Mississauga ON. Somerset Place Apartments
The REIT calls itself a "growth-oriented investment trust owning interests in 38,164 residential units, comprised of 34,794 residential suites and 14 manufactured home communities comprising 3,370 land lease sites located in or near major urban centers across Canada". About CAPREIT
I acquired the following information from the 2012 Annual Report .pdf. NFFO per unit rose 9.5% "showing strong accretive growth". The monthly cash distribution increased by 3.7%. Occupancies "remained at near-full levels, with stable increases in average monthly rents". The overall occupancy rate was at 97.9%. FFO for the year was $1.448 per unit, up from $1.322 in 2011. NFFO was $1.486 in 2012, up from $1.357 in 2011.
The REIT did have two share offerings in 2012. One was 7.705M shares offered at C$24 and the other was 7.75M shares at C$22.75. CAPREIT | Investor Relations
Compared to the cost of housing in Canada, apartment rents at least look affordable to the average household.
Due to the high cost of housing, debt has increased to 163.4% of disposable income in Canada. Bloomberg The average cost of a home in Canada is about C$387,147 or about 33% higher than in the U.S. The average cost in Vancouver is C$780.500, higher than NYC and London. Toronto's average home price is about C$523,147. It would be tempting for me to sell a home in Toronto, locking in that tremendous rise in price, and move into a nice apartment.
Prior Trades:
 |
| 2013 100 Shares Canadian Apt +$220.45 |
Recent Earnings Report: The REIT will provide three funds from operation numbers (FFO, NFFO, and AFFO). The adjusted funds from operations (AFFO) reduces FFO by the provision for property maintenance. That kind of capital expenditure is recurring for REITs. Those with older properties may have a larger recurring capital expenditures. It is important for the AFFO to be comfortably above the dividend payout. An investor does not want to see cash needed for maintenance flying out the door to shareholders. When that starts to occur, a dividend cut will likely be forthcoming. A slim margin between the AFFO per share and the dividend rate will or should restrain dividend growth.
In the 2013 second quarter, CAR reported a AFFO of C$39.546M and paid out to shareholders C$28.996 or 73.3%. That is fine.
The REIT reported normalized FFO at C$.4225 per unit, up from C$.358 per unit in the 2012 second quarter. Portfolio occupancy was reported at a strong 98.4%. The average monthly rent increased by 2.8% Y-O-Y to C$1,044 per month.
Financial Report For Q/E 6/30/2013
Rationale: (1) Sitting in a chair located at some geographical distance from this REIT's properties, the company appears to be well managed, and it is in a acquisition mode.
One of the benefits of a Canadian REITs from my perspective is that they pay monthly dividends. As noted in the preceding link, CAR raised its dividend in June to an annual run rate of C$1.15 per unit. The overall rate of distribution increases is not impressive however: CAPREIT | Investor Relations
The current monthly rate is C$.0958 per share.
At that rate and a total cost per share of C$20.67, the current dividend yield is about 5.56%. I will be paid in Canadian Dollars after a 15% withholding tax.
I maintain a position in Canadian Dollars which had risen to almost C$10,000 prior to this purchase. That stash earns nothing. One purpose of the Canadian Dollar strategy is to receive income in Canadian dollars and hopefully make something on the shares. Canadian Dollar (CAD) Strategy
I used some of those CADs to settle this trade made on the Toronto exchange.
Risks: The Canadian REITs have gone done in price just like their American cousins during the recent interest rate rise. As the ten year treasury moves up in yield, there are some investors who will find low single digit yields offered by REITs and electric utilities, prior to their recent correction in prices, to be relatively unattractive or less attractive. CAR shares have fallen from C$26.04 on 4/30/13: CAR-UN.TO Interactive Chart At that price, the yield was 4.41% based on the current dividend rate.
This process of readjustment may continue with further rises in "risk free" yields.
I would view the long term dividend growth history to be unimpressive. Recently, the REIT has been increasing the dividend but there have been prolonged periods where the dividend remain unchanged. A more robust dividend growth would be a positive, while another long period of dividend stagnation would place downward pressure on the stock units when interest rates are rising.
Like most REITs, the share price tanked during the Near Depression period falling to C$12. If that kind of event happens again, and hopefully it is more like a 50 year flood type of happening, I would at least like the option of reinvesting the dividend which I do not have now at Fidelity. I can only trade round 100 share lots. Hopefully, I will see the next Dark Period coming and will lighten up before my portfolio suffers too much damage which I did manage to do before the last one.
Currency risk is important, irrespective of whether an investor buys a ADR using USDs on the NYSE or converts their USDs into a foreign currency to buy ordinary shares on the local stock exchange. Stocks, Bonds & Politics: International Trading and Currency Risks; Stocks, Bonds & Politics: Strong U.S. Dollar + Weak Market=Time to Start Looking Overseas
I am a long term holder of Canadian Dollars and do not consider the currency risk as important for me. In the event one CAD buys $1.25 I may convert some of my CADs back to USDs. For someone trading foreign securities, the currency conversion rate can have a significant positive or negative impact on your total return.
The recent decline in the CAD vs. the USD would have been sufficient to wipe out the value of CAR's dividends for almost two years. The CAD has recently been gaining some of those losses back. USD/CAD Currency Conversion Chart
Future Buys/Sells: I am not likely to buy more and would consider selling at over C$24.
I bought 300 shares of another Canadian REIT, using my existing CADs, last Thursday which will be discussed in the next post.
2. Bought 100 Unilever (UN) at $38.1055 (see Disclaimer): I mentioned in my last post, at the bottom, that I bought this stock.
Snapshot of Trade:
Unilever has two sets of common shareholders that originate from its history. Unilever PLC is based in the UK and Unilever NV is from the Netherlands. A concise history can be found at Wikipedia.
{A similar type of situation and history exists for Royal Dutch Shell with its RDS/A and RDS/B shares Difference between A and B shares - Shell Global}
I bought the Unilever NV shares.
Unilever NV (UN) Profile at Reuters
There is a unity of shareholder's rights agreement that makes the Unilever PLC and Unilever NV shares equivalent.
Understanding NV & PLC shares | Unilever Global
unilever.com/ Governance_of_Unilever/.pdf
Some of Unilever's major acquisitions include Chesebrough-Pond's in 1987 for $3.1B (Vaseline, Ragu and Pond's skin care products); Helene Curtis in 1996; Slim Fast and Ben & Jerry's in 2000; and Alberto-Culver for $3.7B in 2010.
Unilever will frequently sell parts of a business it acquires, either soon after an acquisition or years later and will then focus on what it really wanted from the acquisition.
I recall the Chesebrough acquisition in 1987. Unilever quickly sold Stauffer Chemical, a subsidiary of Chesebrough, for $1.69B to the U.K.s Imperial Chemicals. Chesebrough also owned Bass Shoes which was sold to Phillips Van Heusen for $79M. Chesebrough also owned Prince Tennis which was also sold after Unilever's acquisition. There has been some speculation that Unilever may want to find a buyer for the Ragu line of products. The Unilever CFO recently referred to Ragu as an important generator of cash and that management needed to turn around the business. Reuters That article in Reuters also refers to a recent Deutsche Bank upgrade to buy from hold.
In July 2013, Unilever increased its ownership interest in Hindustan Unilever to 67.2% from 52.5% for €2.5B. Unilever generates about 57% of its sales in emerging and developing markets. Reuters
Unilever is also an active seller of brands. Last month, it sold Wish-Bone and Western dressings to Pinnacle Foods for $580M or about 3.1 times sales. Unilever Agrees to Sell Wish-Bone and Western Brands to Pinnacle Foods Earlier this year, it sold Skippy peanut butter to Hormel for approximately $700M. Last year, the company sold its frozen meals business (Bertolli and P.F. Chang) to Conagra for $265M. ConAgra Foods
2012 Unilever Annual Report: Form 20-F
Morningstar has UN rated at 4 stars with a fair value estimate of $44, and has assigned the company a "wide moat".
Prior Trades: I went back to 2006 in my main taxable account looking for prior trades. I have flipped UN twice, but have not owned it since 2007:
In this first trade, I held 100 shares for slightly more than 1 month:
 |
| 2006 UN 100 Shares +$125.91 |
The next trade was in 2007 and I was hyper nervous then, holding the shares only for four days:
+$69.31.jpg){kind=small} |
| 2007 UN 100 Shares $61.91 |
If I had held the shares until March 2009, I would have had a loss of about $800 or so for each 100 share lot. I would now have a $1,200+ profit per 100 share lot by keeping those shares until now.
Reinvesting the dividend, moreover, would have captured some of those low prices in late 2008 and 2009, which would have reduced my average cost per share for the lots originally bought in 2006 and 2007 provided I had held onto them.
Clearly, in retrospect, I would have been better off just holding those shares and then reinvesting the dividend.
However, if I had more nerve, I could have bought 300 shares at $18 in March 2009, spending about the same amount of money as the proceeds realized from the 100 share sales in 2006 and 2007. I would now have over a $6000 profit before taking into consideration shares purchased with dividends.
Then again, if the world had slipped into another Great Depression in 2008, which was certainly a possibility in October 2008 (maybe 50/50), then I could have ended up with significant losses in those shares purchased in 2006-2007 by holding them into 2008 and beyond.
I found two prior trades of the functionally equivalent UL.
I still own 70 shares bought in March 2009:
 |
| UL 70 Shares +$1,620.9 as of 9/20/13 |
I flipped a 30 share lot in 2009:
 |
| 2009 UL 30 Shares +$138.78 |
Why did I do that? I had to check the trading log of HQ's operation: Stocks, Bonds & Politics: Evening Comments 5/21/2009/Pared 30 Unilever at $23.38. I did not give a reason and merely expressed a hope that I could buy the shares back at $18.
Realized Gains: $326.5
Unrealized Gain on 70 Share Lot Bought in March 2009 as of 9/20/13: $1,620.9
Recent Earnings Report: During the first six months of 2013, Unilever reported a 4% increase in core earnings to €.76 on underlying sales growth of 5% and 10.3% in emerging markets. Fully diluted earnings per share was €.83 for the six month period, which included the profit on the disposal of the Skippy brand. Developed markets declined by 1.3%. "Turnover" in the first quarter was €13.3B and €25.5 for the first half. 2013 Second Quarter Earnings Release
Free cash flow was reported at €1.3B for the first half with core operating margin at 14% versus 13.6% in the 2012 first half.
EUR/USD Chart
If I converted €.76 into USDs on 9/13/13, the result would be about $1.0107. Currency Converter
Rationale: (1) Unilever is a large, financially stable consumer products company with a growing presence in emerging markets. The senior debt is rated A1 by Moodys and A+ by S & P. FINRA I have no concerns about Unilever surviving for the remainder of my life.
Unilever is the European version of Proctor & Gamble, which I have owned more often and in larger quantities.
Some of the well known brands in the U.S. include Lipton Tea, Ben & Jerry's ice cream, Hellmann's, Ponds skin products, Knorr, Dove and Vaseline. View brands | Unilever Global
A number of the major brands are known primarily outside the U.S.
Unilever is the third largest packaged food firm behind Nestle and Mondelez. Fourteen of its household and personal products generate more the €1B in revenue.
The dividend yield at a total cost of $38.1 is about 3.7%. Unilever N.V. ADS Stock Price MarketWatch
The dividend rate has been increasing. For the 4th quarter of 2009, the quarterly dividend for the ordinary shares was €.195 per share and had been increased to €.269 for the 2013 first quarter or 37.95%. NV share dividend history | Unilever Global
The dividend for the UN ADR shares would be impacted by the exchange rate between the Euro and the USD. Generally, an owner of the UN ADR would want the Euro to rise against the USD for two reasons. NV New York share dividend history | Unilever Global The dividend paid in Euros and then converted into USDs would be worth more when the Euro is gaining in value. More importantly, the ADR share price will reflect the price of the ordinary shares priced in Euros as converted into USDs during the course of the trading day.
The main reason for buying Unilever is its significant and growing presence in emerging markets. The growth in sales is coming from those markets.
Recently, the UN shares have pulled back from a recent closing high of $42.78, UN Historical Prices-May 3, 2013 The decline in consumer staples coincided with the rise in interest rates. I discussed some possible reasons for the price correction in a recent post (Stocks, Bonds & Politics-Introduction under the heading "Weakness in Consumer Staples"). I viewed the main reason for the decline as a correction to the slight excesses in valuations.
The current consensus E.P.S. estimate for 2013 is $2.19 and $2.4 for 2014. UN Analyst Estimates Assuming $2.4 proves prescient, the forward P/E multiple at a total cost of $38.1 is about 15.875 which is fine for a consumer staple company. The growth rate Y-O-Y with both the 2013 and 2014 estimates proving to be accurate would be okay at 9.58%.
UN Key Statistics
Yahoo Finance will also display a UN chart going back to 1985 which is interesting for those interested in long term investing and possible entry points for consumer staple stocks. UN Interactive Chart If that chart does not display, just click "max". The price was $1.67, adjusted for 3 stock splits, in early 1985. (if stock splits do not display, click the "events" tab and then click "splits") The splits were 5 for 1, 4 for 1 and 3 for 1. For anyone desiring to start a position, the period between 1999-2000 and 2008-2009 would have provided attractive entry points. I have previously noted that consumer staple stocks are on my buy list whenever there is a cataclysmic stock market decline (one greater than 45%) Lastly, another interesting point revealed by this chart is that Unilever topped out in December 1998 and had experienced a serious decline before the major averages started to decline. Coca Cola hit a higher price in 1998 than the current price. Just something to keep in mind. The Nasdaq Composite continued to move skyward, hitting a high of 5,046.86 on 3/9/2000 (Historical Prices) While it is hard to believe now, that average was hovering just over 2000 in December 1998. Historical Prices
Risks: Recessions and bear markets will knock down the stocks of consumer staple stocks, but generally not by the same percentage amount as the overall market. I mentioned above selling Unilever stock at over $26 in 2007 and then buying shares back at $18 in March 2009. Few stocks will buck the downtrend during a bear market and far fewer will even maintain their value during the catastrophic bear markets such as the ones experienced between 1929-1932, 1974 or September 2008-March 2009. Consumer product stocks will be hit during those types of down markets.
Even at the depth of the recent cataclysm, I was only able to buy PG and PEP below $50 for a relatively brief period. PEP Interactive Chart (max); PG Interactive Chart
A brand product company like Unilever is subject to competition from store brands and cheaper brands. The large competitors of Unilever have financial heft and are competent competitors.
A rise in commodity costs can squeeze margins.
As a buyer of Unilever's ADS shares using USDs, I am still subject to currency conversion risk. The price of the Unilever NV ADS shares will be governed by the ordinary share price traded in Euros. I would now want the Euro to gain in value against the USD, at least when focused solely on my positions in ADR/ADS shares of European companies.
The chart is showing technical weakness. The shares are currently selling below their 50 and 200 day SMAs. UN Interactive Chart; PG Interactive Chart (Max).
Unilever is one of the large companies that have benefited from the abnormally low rates. Unilever recently sold $750B of senior notes, maturing in 2019, at a 2.2% yield. Prospectus When that note comes due, I would expect that Unilever will have to pay significantly more.
Some of the negatives, including the recent emerging market currency problems, are discussed by Zacks when that firm downgraded Unilever to underperform.
Future Buys and Sells: I am going to reinvest the dividend on this last 100 share purchase. I may add to it some on a decline below $35. I would consider selling the shares within 18 months at a price over $42.
3. Bought 50 AFPRC at $21.75 Roth IRA (see Disclaimer):
Snapshot of Trade:
 |
| 2013 Roth IRA Bought 50 AFPRC at $21.75 |
Astoria Financial is the largest thrift in NY. Astoria (AF) is the holding company for Astoria Federal Savings & Loan. As of 6/30/13, the bank had $16.1B in assets and 85 branches.
Profile Page at Reuters.com
Website: Astoria Federal Savings
2012 Annual Report
Prior Trades: AFPRC is a new issue, and this is my first purchase. I have bought and sold the common stocks: Bought: 100 AF @ $13.08; Bought 50 AF @ $12.08; Sold 50 AF at $14.09; Sold 101 AF at $14.89 (snapshots at Stocks, Bonds & Politics: REGIONAL BANK BASKET STRATEGY GATEWAY POST: Total Realized Gain=$244.97)
I am not likely to buy back the common stock due to a substantial cut in the common share dividend and the lackluster recent earnings reports. Thrifts have been hit hard by the FED's extremely abnormal monetary policy that has resulted in net interest margin compression. Thrifts depend primarily on mortgage loans.
Recent Earnings Report: Please note that there are two new line items in the following table relevant to the ownership of an equity preferred stock:
2013 2nd Quarter vs. 2012 2nd
SEC Filed Press Release
SEC Form 10-Q for Q/E 6/30/13
Net Income: $15.664M / $12.824M
Preferred Stock Dividends: $2.827M / None
Net Income Available To Common Shareholders: $12.838M/ $12.824M
E.P.S.: $.13 / $.13
Net Interest Margin: 2.22% / 2.14%
Efficiency Ratio: 71.89% / 70.6%
ROTE: 4.47%/ 4.7%
Net Charge Offs to Average Loans Annualized: .15%/ .35%
NPL Ratio as of 6/30: 2.82%
NPA Ratio as of 6/30: 2.22%
Coverage Ratio as of 6/30: 40.32%
Total Risk Based Capital Ratio: 16.82%/15.69%
The only numbers above viewed as good are the low charge-offs and the capital ratio. While these numbers would turn me off as a potential common shareholder, at least until many of them improve substantially, I am comfortable with Astoria's ability to pay the preferred stock dividend given the net income number.
Rationale: I am attempting to generate cash flow in the ROTH IRA. The aggregate amount of cash flow will be used to purchase more income generating securities.
The dividend yield at a total cost of $21.75 is about 7.47%. I lost the tax advantage by buying this security in the ROTH IRA.
Assuming the market is correctly forecasting the average annual inflation rate over the next ten years at 2.1%, I would have a 5.37% real rate of return with no tax obligation given my ownership in the Roth IRA. That is one reason to nibble at the security rather than keeping the funds in a MM fund earnings .01% or a significant negative real rate of return.
I am attempting to balance the current yield differential between this type of security and a money market fund yielding .01% (the source for payment) against what I view as a more probable than not future decline in the market price. Note that I did not say that the market price will materially decline. I am dealing in possible and probable scenarios, with varying ranges, when making security purchases.
The market price could decline almost another 7.5% below $21.75 before offsetting a year's worth of that yield differential. That militates in favor of at least a small purchase after the recent decline in price rather than keeping those funds invested at .01%.
In the event the security does decline more than 7.5%, I will consider adding another 50 shares. A 7.5% decline would amount to $1.63 per share or a $20.12 market price. I view that decline as probable within the next year and having a 20%-50% possibility before the end of 2013. As mentioned below in the Future Buy section, the automatic trigger for another 50 share purchase is less than $19.5 with two conditions.
In the 2012 second quarter, Astoria cut its quarterly common share dividend from 13 cents to 4 cents per share. Investor Relations Dividend History | Astoria The bank had no choice in my opinion given its recent earnings history. While a dividend cut is viewed unfavorably, and signals weakness, it does mean that there is more money available for paying the preferred stock owners.
Risks: I would classify interest rate risk as the most important, but credit risk is present and worthy of future monitoring. Since Astoria is on my regional bank monitor list, and I have previously owned the common shares, I will be reading earnings releases anyway. Given the recent dividend cut and earnings history, I would need a significant drop in price before repurchasing the common. When my ownership is limited to a preferred stock or bond, it is important to read earnings releases and material information in order to detect any potential problem that would create rational credit risk concerns.
A perpetual preferred stock will be sensitive to material changes in long term interest rates.
This security was recently sold to the public in mid-March at $25, hit a high of $25.69 on 5/9 and then proceeded to fall off a cliff as intermediate and long term interest rates started to rise. Interactive Stock Chart - MarketWatch From the closing high price on 5/9 to my purchase at $21.75 on 9/16, this preferred stock had declined $3.94 per share or 15.34%. That decline is all about interest rate risk.
Future Buys and Sells: I discussed in a recent SA comment that a 50 share add would be triggered by a decline below $19.5, provided there was no material adverse change in Astoria's credit risk profile and the average annual forecasted inflation rate remained embodied in the 10 year TIP pricing remained below 2.25%. Seeking Alpha I would not add to this fixed coupon security with that inflation expectation in a rising mode above 2.5%.
4. Sold 100 PBCT at $14.612 (REGIONAL BANK BASKET STRATEGY)(see Disclaimer):
Snapshot of Trade:
Snapshot of Profit:
 |
| 2013 PBCT 100 Shares +$298.47 |
Rationale: PBCT was sold based primarily on valuation considerations. The secondary reasons include the high dividend payout ratio and profit taking.
The 12 month trailing P.E. was about 20.32 at the $14.61 price. The consensus E.P.S. estimate for 2014 is currently $.9. PBCT Analyst Estimates The forward P/E on that estimate would be 16.23 at the $14.61 price. That is high for a regional bank. The 5 year estimated P.E.G. is also high at 2.52. PBCT Key Statistics
While the current dividend yield is good, the payout ratio is high. Based on the estimated E.P.S. of $.78 in 2013 and a $.1625 quarterly dividend (Dividend History), the payout ratio is 83.3%. While PBCT has been raising the dividend some, that kind of payout ratio will restrain dividend growth going forward and deprives the bank of capital derived from earnings as a funding source for growth.
Future Buys: I would consider buying back the shares at less than $13 provided the $.9 E.P.S. estimate for 2014 looks doable. At $13 the P/E would still be high at 14.44 particularly given the operating metrics discussed in Item 2 A of the July Update: Stocks, Bonds & Politics: Updated Tables for Regional Bank and Lottery Ticket Basket Strategies The main positive feature is the dividend yield, but that needs to be offset with the high payout ratio.
I referred to PBCT as a "marginal hold" in the preceding linked post.
5. Sold 100 EWM at $16.01 (see Disclaimer):
Snapshot of Trade:
Snapshot of Profit:
 |
| 2013 EWM 100 Shares +$57.07 |
Item # 4 Bought Back 100 EWM at $15.28 (8/17/13 Post)
Rationale: The OG sometimes needs positive reinforcement. It is not soothing, nor conducive to a positive feedback loop, to have a security decline from $15.28 on 8/13, the day of my purchase, to a $13.91 close on 8/28 or a 8.96% descent. EWM Historical Prices Such occurrences increases anxiety and self doubt which are already at elevated levels for such a specimen way past his prime.
I intend to try again when and if this ETF declines to $14. The emerging market currencies, stocks and bonds took a hit in August on tapering concerns. And, last Wednesday, emerging market securities had a robust up day, as shown in the closing price for the Vanguard Emerging Markets ETF (VWO) which is owned by me:
Closing Prices Wednesday 9/18/13
VWO: $42.97 +1.67 (+4.04%)
The emerging market local debt ETFs also had a good day last Wednesday, as those currencies strengthened against the USD:
ELD: $48.36 +1.11 (+2.35%) : WisdomTree Emerging Markets Local Debt ETF
LEMB: 50.46 +1.07 (+2.17%) : iShares Emerging Markets Local Currency Bond ETF
The Brazilian Reel rose 3.25% against the USD as an example.
***************
Politics and Etc:
1. The GOP's Anarchist Tendencies: The GOP House members are attempting to link a temporary extension of the debt ceiling to the Democrats' agreement to defund Obamacare. MarketWatch; WSJ.com That kind of linkage is just exceedingly irresponsible, juvenile, and reckless. It is of course red meat to the GOP's core voters, but will be viewed as irresponsible by independents who are needed in Presidential elections and in several close Senate races.
A government shutdown triggered by such posturing could lead to a significant loss in republican House seats, even in some of those gerrymandered congressional districts that have been carved out to insure the election of GOP representatives. My congressional district is one of those. My Know Nothing reactionary congresswoman, Michele Bachmann's soul sister, is safe.
The GOP has already forgotten the historical precedent following their last successful effort to shut down the government.
Bill Clinton looked like a one term President until the GOP gave him the gift of a government shutdown, Bloomberg; The Atlantic. Maybe the GOP secretly desires to have Bill's wife as President for 8 years after Obama's second term ends, just to give them something to gripe about for another eight years.
Several GOP politicians are talking about impeaching Obama, another potential tactic for them to aid Hilary's election and a continuing Democrat senate majority.
The GOP will find a way to improve the Democrats chances to win back the House and to reach that magical 60 number in the Senate again. Did they not learn anything from some of the recent senate elections in states that lean in their direction? Those who routinely create their own reality are incapable of learning anything from current history, let alone the past.
In Missouri for example, Obama lost to Romney 53.9% to 44.2%. The reactionary Tea Party's candidate, Todd Akin, lost to the Democrat securing only 39.2% of the vote. 2012 Election Results Map by State Akin was one of the many recent gifts given by the GOP to the Democrats.
I voted for the current GOP governor in Tennessee and both GOP senators (Corker and Alexander).
