Closing Prices Last Friday:
S & P 500 1,978.22 +20.10 (+1.03%)
VIX: 12.06 -2.48 (-17.06%) : VOLATILITY S&P 500
TLT: $114.52 -0.37 (-0.32%) : iShares 20 Year Treasury Bond ETF
GLD: $126.13 -0.96 (-0.76%) : SPDR Gold Trust
Big Picture Synopsis:
S & P 500 1,978.22 +20.10 (+1.03%)
VIX: 12.06 -2.48 (-17.06%) : VOLATILITY S&P 500
TLT: $114.52 -0.37 (-0.32%) : iShares 20 Year Treasury Bond ETF
GLD: $126.13 -0.96 (-0.76%) : SPDR Gold Trust
Big Picture Synopsis:
Stocks:
Stable Vix Pattern (Bullish):
Stable Vix Pattern (Bullish):
Use of the VIX as a Timing Model
Short Term: Market Needs a 15%+ Correction
Intermediate Term: Slightly Bullish
Long Term: Bullish
Jaime Caruana, the General Manager for the The Bank of International Settlements (the bank for central banks), indicted central banks for failing to lean against boom times while easing aggressively during busts. Telegraph That cycle amounts to central bank malpractice, in that it causes low interest rates and the related accumulation of debt levels as well as the mispricing of risks. In his view, the international monetary system is now more fragile in many ways than just before the Lehman crisis.
Those who are inclined toward bearishness will point to both the Shiller CAPE and Q ratios when arguing that stocks are in a bubble. The U.K. money manager Smithers & Company noted that the S & P was overvalued by 88% for non-financials as of 6/6/14: CAPE and Q chart The columnist Brett Arends, who has been sounding the valuation alarm for an extended period, summarized Andrew Smither's bearish argument in a recent MarketWatch article, calling the current market valuation the "third biggest bubble in U.S. history".
The Shiller P/E has been below its long term average only 2% of the time since 1990. The forward estimated P/E for the S & P 500, based on "operating earnings", is close to its long term average of 15.5. Bloomberg View; slide 7 at J.P. Morgan 3Q 2014.
Bonds:
Short to Long Term: Slightly Bearish Based on Interest Rate Normalization
The Difficult Path to Interest Rate Normalization
Short Term: Market Needs a 15%+ Correction
Intermediate Term: Slightly Bullish
Long Term: Bullish
Jaime Caruana, the General Manager for the The Bank of International Settlements (the bank for central banks), indicted central banks for failing to lean against boom times while easing aggressively during busts. Telegraph That cycle amounts to central bank malpractice, in that it causes low interest rates and the related accumulation of debt levels as well as the mispricing of risks. In his view, the international monetary system is now more fragile in many ways than just before the Lehman crisis.
Those who are inclined toward bearishness will point to both the Shiller CAPE and Q ratios when arguing that stocks are in a bubble. The U.K. money manager Smithers & Company noted that the S & P was overvalued by 88% for non-financials as of 6/6/14: CAPE and Q chart The columnist Brett Arends, who has been sounding the valuation alarm for an extended period, summarized Andrew Smither's bearish argument in a recent MarketWatch article, calling the current market valuation the "third biggest bubble in U.S. history".
The Shiller P/E has been below its long term average only 2% of the time since 1990. The forward estimated P/E for the S & P 500, based on "operating earnings", is close to its long term average of 15.5. Bloomberg View; slide 7 at J.P. Morgan 3Q 2014.
Bonds:
Short to Long Term: Slightly Bearish Based on Interest Rate Normalization
The Difficult Path to Interest Rate Normalization
The bond forecast assumes that investors are correctly forecasting the average annual inflation rate near 2.25% over the next ten years, as reflected in the their pricing of the ten year TIP.
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Performance Numbers Year To Date-Fidelity Accounts:
As noted earlier, I feel no pressure to deploy cash reserves, now hovering over 20%, when I am able to outperform the S & P 500 with that large cash reserve earning .01%. If the S & P 500 continues to move up, I will most likely fall behind given that cash allocation. I have been helped so far this year by the rally in bonds and equity preferred stocks. I have pared my bond/equity preferred stock positions, but would still be hurt by a decline in bond prices.
The following snapshot shows my Y-T-D returns in 4 Fidelity accounts through 6/30/14. The first two listed accounts are large taxable accounts. The last two are a regular and a Roth IRA.
Fidelity computes those numbers.
I have to compute my number for my Vanguard accounts. The Vanguard Roth IRA was up 10.32% Y-T-D through 6/30/13. The Vanguard Mutual fund accounts were up 8.32%, helped significantly by the outperformance of the Vanguard Health fund which was up 14.47% Y-T-D through 6/30/14: Vanguard - Health Care Fund Investor Shares - Price & Performance
For comparison purposes, Fidelity provides Y-T-D returns of bond and stock indexes:
Performance numbers through May 2014 were published in this post: Performance Numbers YTD
Other performance updates include the following:
Portfolio Management Goals-Snapshots of Performance Numbers: YTD and 5 Year Cumulative (April 2014)
Main Taxable and Regular IRA Accounts Performance Numbers Calculated by Broker: 1, 3 and 5 Years (12/13/11Post)
I will take more risks in my taxable accounts than in my IRAs. Even in the taxable accounts, preservation of capital and income generation are the primary goals. I am not swinging for the fences.
As previously noted, the portfolio design is intended to avoid 75% of a greater than 1% daily decline in the market. Last Thursday, the S & P 500 lost 1.18%, and my main taxable account was down .49%, more than the acceptable limit of .295% or 25% of the S & P 500 decline. The primary culprit was my allocation to regional banks, with my basket declining 1.77% on top of a significant decline on the prior day. The declines in that sector were widespread last Thursday, and the regional bank ETF KRE was done more than my basket. {Closing Price Thursday 7/7/14: KRE: $38.55 -0.95 (-2.41%)} Those small regional banks have nothing to do with the Ukraine or Europe for that matter. The basket recovered some last Friday, rising 1.1%.
In addition to a few bonds and preferred stocks, my REITs were positively correlated for the most part with bonds last Thursday. On other 1%+ down days, the REITs act more like regular common stocks than bond substitutes.
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Performance Numbers Year To Date-Fidelity Accounts:
As noted earlier, I feel no pressure to deploy cash reserves, now hovering over 20%, when I am able to outperform the S & P 500 with that large cash reserve earning .01%. If the S & P 500 continues to move up, I will most likely fall behind given that cash allocation. I have been helped so far this year by the rally in bonds and equity preferred stocks. I have pared my bond/equity preferred stock positions, but would still be hurt by a decline in bond prices.
The following snapshot shows my Y-T-D returns in 4 Fidelity accounts through 6/30/14. The first two listed accounts are large taxable accounts. The last two are a regular and a Roth IRA.
I have to compute my number for my Vanguard accounts. The Vanguard Roth IRA was up 10.32% Y-T-D through 6/30/13. The Vanguard Mutual fund accounts were up 8.32%, helped significantly by the outperformance of the Vanguard Health fund which was up 14.47% Y-T-D through 6/30/14: Vanguard - Health Care Fund Investor Shares - Price & Performance
For comparison purposes, Fidelity provides Y-T-D returns of bond and stock indexes:
Performance numbers through May 2014 were published in this post: Performance Numbers YTD
Other performance updates include the following:
Portfolio Management Goals-Snapshots of Performance Numbers: YTD and 5 Year Cumulative (April 2014)
Main Taxable and Regular IRA Accounts Performance Numbers Calculated by Broker: 1, 3 and 5 Years (12/13/11Post)
I will take more risks in my taxable accounts than in my IRAs. Even in the taxable accounts, preservation of capital and income generation are the primary goals. I am not swinging for the fences.
As previously noted, the portfolio design is intended to avoid 75% of a greater than 1% daily decline in the market. Last Thursday, the S & P 500 lost 1.18%, and my main taxable account was down .49%, more than the acceptable limit of .295% or 25% of the S & P 500 decline. The primary culprit was my allocation to regional banks, with my basket declining 1.77% on top of a significant decline on the prior day. The declines in that sector were widespread last Thursday, and the regional bank ETF KRE was done more than my basket. {Closing Price Thursday 7/7/14: KRE: $38.55 -0.95 (-2.41%)} Those small regional banks have nothing to do with the Ukraine or Europe for that matter. The basket recovered some last Friday, rising 1.1%.
In addition to a few bonds and preferred stocks, my REITs were positively correlated for the most part with bonds last Thursday. On other 1%+ down days, the REITs act more like regular common stocks than bond substitutes.
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Recent Developments:
As noted in last week's post, industrial production declined in the Euro area during May. Eurostat reported that the decline was 1.1% in both the Euro area (EA 18) and the EU28. Industrial production in May 2014 remained almost 12% below peak 2008 levels:
eurostat.ec-PDF
With unemployment hovering at 11.6% in May 2014, eurostat.ec-PDF, Europe is probably in or very close to a recession. Home prices declined .3% in the Euro area in the 2014 first quarter. eurostat.ec-PDF The potential repercussions from events in the Ukraine, which may cause more sanctions to be imposed on Russia, will have more impact on the EU than anywhere else.
U.S. industrial production rose a tepid .2% in June, which looks robust compared to Europe. Industrial Production and Capacity Utilization Capacity utilization was reported at 79.1% in June. As that number increases, and taking into account that corporate cash levels are near record highs, companies may start to build new plant and to add new equipment.
The Atlanta FED has developed a tool to predict GDP. Introducing the Atlanta Fed's GDPNow Forecasting Model The prediction will be updated during a quarter based on incoming data. The prediction as of 7/10/14 was for 2.6% real GDP growth in the 2014 second quarter. If that number holds, it will be a disappointment.
An article published by Seeking Alpha has a good list of 16 items that would support a stock market bearish thesis. The problem with this kind of analysis is that positive data points are largely ignored and data from one month is assumed to be part of downward trend (though the same is never true for one month of positive data)
The NY FED manufacturing index for the NY region rose to 25.6 in July, a four year high. Empire State Manufacturing Survey (overview) - Federal Reserve Bank of New York
The Philly FED manufacturing index rose to 23.9 from 17.8 in June, much higher than the consensus forecast of 15.5. philadelphiafed.org regional-economy/business-outlook-survey
While I would not call this news, the CBO warned that the U.S. could face a fiscal crisis that would have a "substantial negative impact on the country" unless the government reduces its growing debt burden. The CBO sees a potential crisis developing when the federal debt starts to grow faster than GDP. The CBO projects that spending on SS, Medicare and Medicaid will rise to 14% of GDP by 2039 from the 40 year average of 7%. The 2014 Long-Term Budget Outlook - CBO; MarketWatch
Even with abnormally low interest rates over the past several years, the annual interest payments on the government's debt is growing due to the substantial increases in debt. For the fiscal year ending 9/30/13, the interest payments totaled $415.688+B, up from $359.796+B in the 2012 F/Y. Through June of the current F/Y, interest payments have totaled $354.688+B. Government - Interest Expense on the Debt Outstanding When rates start to normalize, and the debt continues to increase, the problem will become even more serious.
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MKZ Matures-Redeemed at $10 Par Value + Last Annual Coupon:
MKZ was a PPN that paid the greater of 3% or up to 30% based on the annual performance of the DJ-UBS Commodity Index, now known as the UBS Bloomberg CMCI. Reuters; BCOM:IND Quote I am leaving out important details since they are no longer relevant.
The Starting Value for the last annual coupon period was 126.52 and the Ending Value on 7/3/14 was 134.22 or a 6.1+% increase. There was no Maximum Level Violation in the last coupon period.
Bought 100 MKZ at $9.96
I had sold the 100 shares bought in the ROTH IRA back in 2010: Sold 100 MKZ at $10.49
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Omega Healthcare (own):
Omega increased its quarterly dividend to $.51 from $.5, the eight consecutive quarterly common stock dividend increase. Omega Healthcare Investors, Inc. - Dividends
UBS downgraded OHI in early January 2014, WSJ.com, shortly after I bought some shares: Bought: 100 OHI at $29.85 (12/23/13 Post)
Based on the new rate and at a total cost of $29.85, the dividend yield is about 6.83%.
Closing Price Last Friday: OHI: $38.56 +0.74 (+1.96%)
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General Electric (own):
GE reported 2nd quarter operating earnings of $.39 per share, in line with estimates. The industrial segment profits rose 9%. Cash generated by industrial operating activities totaled $2B YTD. The backlog of services and equipment orders increased $23B to $246B.
Earnings Call Transcript | Seeking Alpha
My average cost per share is $20.13 Snapshot Introduction 4/18/14 Post I am not reinvesting the dividend. My plan is to sell my highest cost shares profitably, which will lower my average cost per share to around $15. Those shares were bought with cash flow after Lehman's failure. Item # 4 Snapshot of GE and Intel Purchases with Cash Flow
The GE share price has broken its 50 day SMA line to the downside and is near its 200 day SMA: GE Interactive Chart The recent price action looks weak to me.
I had a blah response to that report and the market appeared to agree:
Closing Price Last Friday: GE: $26.46 -0.15 (-0.56%)
The shares closed at $28.02 on 12/31/13: GE Historical Prices
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Notice Received Cincinnati Bell Bond Redemption:
Link to SEC Filing on Redemption Notice: SEC Form 8-k
I have been receiving redemption notices on a continuous basis over the past month or so. Possibly, corporations believe that the window of opportunity for refinancing at lower rates is about to disappear.
This bond was owned in a regular IRA account. Item # 4 Added 1 Senior Sub 8.75% Cincinnati Bell Bond at 97.45 Maturing on 3/15/2018-Regular IRA My current yield based on that purchase price is about 8.94%.
I sold the two 2018 bonds owned in a taxable account back in 2012: Sold 2 Cincinnati Bell Senior Subordinated Bonds at $97
I have also bought and sold a 2020 senior unsecured Cincinnati Bell bond. Bought 1 Cincinnati Bell Senior Bond Maturing in 2020 at 96.8-Sold: 1 Cincinnati Bell Senior Maturing 2020 at 102.25
I will probably substitute a bond CEF for this bond. Possible candidates include ERC and BWG. Since that purchase would be in a regular IRA, I am less concerned about a downdraft in price. My general rule of thumb is do a Roth conversion whenever a security falls 10%+ from my purchase price. I then would hope for a recovery in price after the conversion. I do not plan to have any funds in a regular IRA when I hit 70, having transferred all of those assets into a Roth IRA which I intend to leave alone.
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Independence Realty (IRT):
Independence Realty Trust announced its intention to sell 6 million shares which tanked the share price last Tuesday.
Closing Price on 7/15/14: IRT: $9.70 -0.62 (-6.01%)
This is the second share offering since I bought 150 shares. Item # 5 Bought 50 IRT at $8.17-Roth IRA/Bought: 100 IRT at $8.87 (1/28/14 Post). The 50 share lot was purchased after this REIT announced a share offering which knocked the share price down. Independence Realty
The offering was upsized to 7 million shares, with the usual over-allotment option. Independence Realty Trust, Inc. Prices and Upsizes Public Offering of Common Stock The shares were priced at $9.5. The underwriters were granted an over-allotment option of up to 1,050,000 more shares at that price.
Independence Realty Trust is currently paying a $.06 per share monthly dividend.
Closing Price Last Friday: IRT: $9.69 +0.19 (+2.00%)
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Intel (own):
Intel Corporation reported second quarter revenue of $13.8B and an E.P.S. of $.55. The consensus estimate was for $.52. Intel raised its guidance for 2014 revenue growth to 5%. The company boosted its share repurchase program to $20B. Intel sees a refresh cycle occurring in the PC market. PC client group revenue rose 6% Y-O-Y.
I currently own 110+ shares with an average cost per share of $15.52 per share (see snapshot at Stocks, Bonds & Politics: Performance Numbers YTD/Intel)
The shares responded positively to this last report:
Closing Price 7/16/14: INTC: $34.65 +2.94 (+9.27%)
Closing Price Last Friday: INTC: $33.70 0.00 (0.00%
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Ares Capital (own):
The BDC Ares Capital priced a stock offering of 13.5M shares, plus an over-allotment option. Unlike other BDCs, Ares does not provide the price in its press release, which simply adds to the annoyance already created by the offering so soon after the last one last December. Prospectus The last reported net asset value per share was $16.42, as of 3/31/14. SEC Filed Press Release
In the offering Prospectus, Ares estimates that its net asset value per share was in the range of $16.49 to $16.53 as of 6/30/14. The company recognized a loss of approximately $48 from the $767M in investments exited during the last quarter (page S-6). Is it possible for the shareholders to receive a refund on the management fees paid in connection with those those losses?
This offering, and the information disclosed in the offering prospectus, are discussed in this Seeking Alpha article. That author argues that the offering was accretive, apparently due to the price being higher than the current net asset value per share. If the investments made with those funds result in a net loss, however, then the offering may end up being non-accretive. In other words, the real net asset value benefit or loss resulting from that offering can only be measured by the net results realized after expenses, including the offering expenses and management fees.
Closing Price on Day of Offering 7/14/14: ARCC: $17.02 -0.38 (-2.18%)
I have clipped some small gains:
Item # 1 Sold 50 ARCC at $18.02-Satellite Taxable Account (5/6/13 Post)-Item # 3 Bought: 50 of the BDC ARCC at $16.3 (January 2011 Post); Sold 50 ARCC at $17.7 (5/4/11 Post)-Bought: 50 ARCC at $16.89 (12/3/2010 Post); Item # 2 Sold 100 ARCC at $17.54-IRAs in Two 50 Share Lot (9/13/12 Post)-Bought 50 ARCC at $16.51-Roth IRA (3/17/11 Post); Added 50 ARCC at $16.9-Regular IRA (5/24/11 Post)
My total net realized gains trading ARCC shares is currently at $162.62. After harvesting one or more quarterly dividends, any gain is viewed as acceptable. The largest gain was a 50 share lot held for about 25 months:
That result is viewed as ideal for a BDC. Ultimately, it is like playing blackjack at a casino. If you stay at the table too long, the house will win.
I currently own I currently own 170 shares and have a slight unrealized profit: Bought 50 of the BDC ARCC at $16.17 Taxable Account (January 2011 Post); Bought 70 ARCC at $17.24-REGULAR IRA (4/16/13 Post); ROTH IRA: Bought 50 ARCC at $16.9 6/8/13 Post)
Since the external managers of this BDC receive compensation based in part on the assets under management, including those purchased with debt, it is in the interest of the managers to increase assets which increases their compensation. Ares sold $150M in 4.875% senior notes maturing in 2018 last January soon after the December 2013 stock offering. Prospectus The common stock offerings allow this BDC to sell more debt which results in even more fees paid to the external managers (i.e. non-employees of the corporation).
Ares acknowledges in its Annual Report that there "are significant potential conflicts of interest" between the external managers and the shareholders. (page 38: 2013 Annual Report SEC Form 10-K)
ARCC sold another 19.1M shares back in April 2013 at $17.43. In 2012, the company sold 25.875M shares at $16.55 and another 16.422M shares at $15.41 in January 2012 (page F-74, 10-k)
Closing Price Last Friday: ARCC: $17.03 +0.03 (+0.18%)
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MKZ Matures-Redeemed at $10 Par Value + Last Annual Coupon:
MKZ was a PPN that paid the greater of 3% or up to 30% based on the annual performance of the DJ-UBS Commodity Index, now known as the UBS Bloomberg CMCI. Reuters; BCOM:IND Quote I am leaving out important details since they are no longer relevant.
The Starting Value for the last annual coupon period was 126.52 and the Ending Value on 7/3/14 was 134.22 or a 6.1+% increase. There was no Maximum Level Violation in the last coupon period.
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| Email Notice MKZ Redemption |
I had sold the 100 shares bought in the ROTH IRA back in 2010: Sold 100 MKZ at $10.49
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Omega Healthcare (own):
Omega increased its quarterly dividend to $.51 from $.5, the eight consecutive quarterly common stock dividend increase. Omega Healthcare Investors, Inc. - Dividends
UBS downgraded OHI in early January 2014, WSJ.com, shortly after I bought some shares: Bought: 100 OHI at $29.85 (12/23/13 Post)
Based on the new rate and at a total cost of $29.85, the dividend yield is about 6.83%.
Closing Price Last Friday: OHI: $38.56 +0.74 (+1.96%)
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General Electric (own):
GE reported 2nd quarter operating earnings of $.39 per share, in line with estimates. The industrial segment profits rose 9%. Cash generated by industrial operating activities totaled $2B YTD. The backlog of services and equipment orders increased $23B to $246B.
Earnings Call Transcript | Seeking Alpha
My average cost per share is $20.13 Snapshot Introduction 4/18/14 Post I am not reinvesting the dividend. My plan is to sell my highest cost shares profitably, which will lower my average cost per share to around $15. Those shares were bought with cash flow after Lehman's failure. Item # 4 Snapshot of GE and Intel Purchases with Cash Flow
The GE share price has broken its 50 day SMA line to the downside and is near its 200 day SMA: GE Interactive Chart The recent price action looks weak to me.
I had a blah response to that report and the market appeared to agree:
Closing Price Last Friday: GE: $26.46 -0.15 (-0.56%)
The shares closed at $28.02 on 12/31/13: GE Historical Prices
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Notice Received Cincinnati Bell Bond Redemption:
Link to SEC Filing on Redemption Notice: SEC Form 8-k
I have been receiving redemption notices on a continuous basis over the past month or so. Possibly, corporations believe that the window of opportunity for refinancing at lower rates is about to disappear.
This bond was owned in a regular IRA account. Item # 4 Added 1 Senior Sub 8.75% Cincinnati Bell Bond at 97.45 Maturing on 3/15/2018-Regular IRA My current yield based on that purchase price is about 8.94%.
I sold the two 2018 bonds owned in a taxable account back in 2012: Sold 2 Cincinnati Bell Senior Subordinated Bonds at $97
I have also bought and sold a 2020 senior unsecured Cincinnati Bell bond. Bought 1 Cincinnati Bell Senior Bond Maturing in 2020 at 96.8-Sold: 1 Cincinnati Bell Senior Maturing 2020 at 102.25
I will probably substitute a bond CEF for this bond. Possible candidates include ERC and BWG. Since that purchase would be in a regular IRA, I am less concerned about a downdraft in price. My general rule of thumb is do a Roth conversion whenever a security falls 10%+ from my purchase price. I then would hope for a recovery in price after the conversion. I do not plan to have any funds in a regular IRA when I hit 70, having transferred all of those assets into a Roth IRA which I intend to leave alone.
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Independence Realty (IRT):
Independence Realty Trust announced its intention to sell 6 million shares which tanked the share price last Tuesday.
Closing Price on 7/15/14: IRT: $9.70 -0.62 (-6.01%)
This is the second share offering since I bought 150 shares. Item # 5 Bought 50 IRT at $8.17-Roth IRA/Bought: 100 IRT at $8.87 (1/28/14 Post). The 50 share lot was purchased after this REIT announced a share offering which knocked the share price down. Independence Realty
The offering was upsized to 7 million shares, with the usual over-allotment option. Independence Realty Trust, Inc. Prices and Upsizes Public Offering of Common Stock The shares were priced at $9.5. The underwriters were granted an over-allotment option of up to 1,050,000 more shares at that price.
Independence Realty Trust is currently paying a $.06 per share monthly dividend.
Closing Price Last Friday: IRT: $9.69 +0.19 (+2.00%)
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Intel (own):
Intel Corporation reported second quarter revenue of $13.8B and an E.P.S. of $.55. The consensus estimate was for $.52. Intel raised its guidance for 2014 revenue growth to 5%. The company boosted its share repurchase program to $20B. Intel sees a refresh cycle occurring in the PC market. PC client group revenue rose 6% Y-O-Y.
I currently own 110+ shares with an average cost per share of $15.52 per share (see snapshot at Stocks, Bonds & Politics: Performance Numbers YTD/Intel)
The shares responded positively to this last report:
Closing Price 7/16/14: INTC: $34.65 +2.94 (+9.27%)
Closing Price Last Friday: INTC: $33.70 0.00 (0.00%
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Ares Capital (own):
The BDC Ares Capital priced a stock offering of 13.5M shares, plus an over-allotment option. Unlike other BDCs, Ares does not provide the price in its press release, which simply adds to the annoyance already created by the offering so soon after the last one last December. Prospectus The last reported net asset value per share was $16.42, as of 3/31/14. SEC Filed Press Release
In the offering Prospectus, Ares estimates that its net asset value per share was in the range of $16.49 to $16.53 as of 6/30/14. The company recognized a loss of approximately $48 from the $767M in investments exited during the last quarter (page S-6). Is it possible for the shareholders to receive a refund on the management fees paid in connection with those those losses?
This offering, and the information disclosed in the offering prospectus, are discussed in this Seeking Alpha article. That author argues that the offering was accretive, apparently due to the price being higher than the current net asset value per share. If the investments made with those funds result in a net loss, however, then the offering may end up being non-accretive. In other words, the real net asset value benefit or loss resulting from that offering can only be measured by the net results realized after expenses, including the offering expenses and management fees.
Closing Price on Day of Offering 7/14/14: ARCC: $17.02 -0.38 (-2.18%)
I have clipped some small gains:
Item # 1 Sold 50 ARCC at $18.02-Satellite Taxable Account (5/6/13 Post)-Item # 3 Bought: 50 of the BDC ARCC at $16.3 (January 2011 Post); Sold 50 ARCC at $17.7 (5/4/11 Post)-Bought: 50 ARCC at $16.89 (12/3/2010 Post); Item # 2 Sold 100 ARCC at $17.54-IRAs in Two 50 Share Lot (9/13/12 Post)-Bought 50 ARCC at $16.51-Roth IRA (3/17/11 Post); Added 50 ARCC at $16.9-Regular IRA (5/24/11 Post)
My total net realized gains trading ARCC shares is currently at $162.62. After harvesting one or more quarterly dividends, any gain is viewed as acceptable. The largest gain was a 50 share lot held for about 25 months:
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| 2013 ARCC 50 Shares +$71.97 (holding period 1/9/11 to 4/29/13) |
I currently own I currently own 170 shares and have a slight unrealized profit: Bought 50 of the BDC ARCC at $16.17 Taxable Account (January 2011 Post); Bought 70 ARCC at $17.24-REGULAR IRA (4/16/13 Post); ROTH IRA: Bought 50 ARCC at $16.9 6/8/13 Post)
Since the external managers of this BDC receive compensation based in part on the assets under management, including those purchased with debt, it is in the interest of the managers to increase assets which increases their compensation. Ares sold $150M in 4.875% senior notes maturing in 2018 last January soon after the December 2013 stock offering. Prospectus The common stock offerings allow this BDC to sell more debt which results in even more fees paid to the external managers (i.e. non-employees of the corporation).
Ares acknowledges in its Annual Report that there "are significant potential conflicts of interest" between the external managers and the shareholders. (page 38: 2013 Annual Report SEC Form 10-K)
ARCC sold another 19.1M shares back in April 2013 at $17.43. In 2012, the company sold 25.875M shares at $16.55 and another 16.422M shares at $15.41 in January 2012 (page F-74, 10-k)
Closing Price Last Friday: ARCC: $17.03 +0.03 (+0.18%)
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1. Sold 50+ TRMK at $24.63-Satellite Taxable Account (REGIONAL BANK BASKET STRATEGY)(see Disclaimer):
Snapshot of Trade:
Snapshot of Profit:
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| 2014 TRMK 50+ SHARES +$81.39 |
Company Description: Trustmark (TRMK) is a bank holding company that operates 209 bank branches through its wholly owned subsidiary Trustmark National Bank.
Prior Trades: This is my third round trip in TRMK shares. Item # 3 Bought 50 TRMK at 19.57 August 2010-Item # 3 Sold 50 TRMK at 24.7 January 2012; Bought 50 TRMK at $21.54 November 2012-Item # 1 Sold 50 Trustmark at $26.52 July 2013 (Snapshots total realized gains=$473.64)
Total Realized Gains (three 50 share lots) : $555.03
Rationale: I read in Barron's a summary of an Evercore report that listed several banks, including Trustmark, that faced E.P.S. headwinds due to "purchase accounting accretion". The article needs to be read to understand this accounting concept. Basically, when loans are purchased at a discount through a bank acquisition, the discount on acquired loans to future value is accreted back to interest income over the loan's life which increases the net interest margin and E.P.S. That benefit is short lived.
The two main reasons for selling this 50 share lot are that there has been no dividend raise in almost seven years, as noted below, and I have manage to generate decent total returns by harvesting relatively quick gains after buying just 50 shares.
Future Buys and Sells: I am apparently in a trading mode for TRMK shares. I would consider repurchasing a 50 share lot when and if the price falls again below $22.5. I would prefer to see the bank raise its dividend before repurchasing shares. One negative is that there has not been a dividend increase since the 2007 4th quarter when the quarterly rate was raised to $.23 per share from $.22. I will, as always, adjust my purchase price up or down based on subsequent developments.
Closing Price Last Friday: TRMK: $23.32 +0.29 (+1.26%)
2. Sold 50 BPFHP at $24.84 (see Disclaimer): I mentioned in a recent post that I would likely sell 50 of my remaining 100 BPFHP shares: Sold ROTH IRA: 50 BPFHP at $24.7 (6/28/14 Post)
Snapshot of Trade:
Snapshot of History:
Snapshot of Profit:
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| 2014 BPFHP 50 Shares +$104.47 |
Security Description: The Boston Private Financial Holdings Inc. Non-Cumulative Perpetual Preferred Series D (BPFHP) is an equity preferred stock that pays qualified and non-cumulative dividends at the fixed coupon rate of 6.95% on a $25 par value. Prospectus
Prior Trades: Item # 6 Sold ROTH IRA: 50 BPFHP at $24.7 (6/28/14 Post)(snapshot of profit=$51.58)-Bought Roth IRA: 50 BPFHP at $23.35 (5/10/14 Post)
I still own 50 shares in a taxable account: Item # 2 Bought: 50 BPFHP at $22 (12/10/13 Post)
Related Trade: I still own the common shares in my regional bank basket: Bought: 50 BPFH at $12.35 (5/10/14 Post)
Rationale: The current trading rule for fixed coupon equity preferred stocks, which represents a balance between risk and potential rewards, requires that serious consideration be given to selling equity preferred stocks when their yields fall to 7% or lower based on the current market price. At $24.84, the yield is about 7%.
I am also harvesting decent annualized gains, generally between 10% to 20%, with significantly less than a one year holding period. The $147.91 gain realized on this last 50 share lot is equivalent to collecting almost 7 quarterly dividend payments in advance.
I am now left with 50 BPFHP shares purchased in another taxable account.
Closing Price Last Friday: BPFHP: $24.70 -0.11 (-0.44%)
3. Sold 100 ELB at $25.57 (See Disclaimer):
Snapshot of Trade:
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| 2014 Sold 100 ELB at $25.57 |
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| 2014 ELB 100 SHARES +$50.06 |
The 100 share lot sold at $25.57 consisted of the remaining 34 shares bought at $24.44 (12/3/13 Post) and 66 shares bought earlier this year to round the lot out. Item # 5 Added 66 ELB at $25.0 (4/15/14 Post)
Interest Payments: $50.25
Total Return: $100.31
Security Description: Entergy Louisiana LLC First Mortgage Bonds 6.00% Series 2040 (ELB) is a first mortgage bond issued by a wholly owned distribution subsidiary of Entergy Corp.(ETR). Interest payments are made quarterly at the fixed coupon rate of 6% per annum on a $25 par value. The issuer has the right to redeem at par on or after 3/15/15. If not redeemed early, the bond matures in 2040.
Prospectus for ELB
Prior Trade: I still own 50 shares bought in a Roth IRA account: Roth IRA: Bought 50 ELB at $25.06
Rationale: It is certainly possible that rates may be sufficiently low on 3/15/15 that the issuer will redeem this security. If that happens, there is little to be gained by holding this security for a few more months when I was able to sell it at a premium to its par value. On the other hand, if rates start rising into that optional redemption date, and the issuer is unable or unwilling to refinance, then there could potentially be a long period when interest rate risk is assumed entirely by the ELB owners, as the security declines in price to reflect the rise in rates. Interest rate risk is asymmetric between the issuer and the owners of this security.
Future Buys: Given my views about interest rates, I am more likely to sell the remaining 50 shares rather than to buy 50. I may come back to this security as a trade when the re-entry price provides better compensation for the potential interest rate risk.
Given this bond's investment grade rating and its secured status, I will not require 8% or even 7.5% for a re-entry current yield. I will start considering a repurchase when the yield exceeds 7%, somewhere close to $21. Needless to say, that price will not be realized without an acceleration of inflation and an abrupt change in the mindset of bond investors who currently view current yields as satisfactory and/or worth the risks.
Closing Price Last Friday: ELB: $25.57 -0.01 (-0.02%)
4. Paired Trade Sold 150 JDD at $12.25 and Bought 20 IEFA at $63.05-Commission Free (see Disclaimer): IEFA is one of the ETFs that can be bought commission free at Fidelity.
Snapshot of Trades:
IEFA:
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| 2014 Bought 20 IEFA at $63.05 |
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| Sold 150 JDD at $12.25 |
Snapshot of JDD Profit:
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| 2014 JDD 150 Shares +$66.25 |
I still own 100 shares bought in a Roth IRA account: Item # 3 Bought 100 JDD at $11.64 in Roth IRA (4/12/14 Post)
I received one dividend:
Total Return: $105.25
Total Trading Gains: $497.23 ($66.25 last trade and $439.98 prior trades, snapshots at preceding linked post)
JDD Description: The Nuveen Diversified Dividend & Income Fund (JDD) is a leveraged CEF that invests in a variety of income producing securities including REITs, non-REIT common stocks, bonds and variable rate senior loans.
CEFConnect Page for JDD
JDD Page at Morningstar
Data on Date of Trade 7/3/14:
Closing Net Asset Value: $13.76
Closing Market Price: $12.26
Discount: -10.9
Average Discounts:
1 Year: -11.46%
3 Years: -6.92%
5 Years: -8.61%
IEFA Description: The iShares Core MSCI EAFE ETF (IEFA) will own stocks in developed markets outside of the U.S. and Canada. The expense ratio is low at .14%. As of 7/3/14, this ETF owned 2,482 stocks.
Top 25 Holdings as of 7/3/14:
Sponsor's webpage: iShares Core MSCI EAFE ETF | IEFA
Rationale: JDD has more downside risk to a rise in interest rates than IEFA in my opinion. The JDD interest risk is concentrated in both its bonds and REITs.
I can average down during a market correction cost effectively as long as Fidelity permits commission free purchases of IEFA.
While IEFA owns a large number of securities, giving an investor broad exposure to equities, the concentration is still in large blue chips, as shown in the snapshot above. I would not mind owning most of those 25 stocks long term. Currently, I only have an individual position in Novartis.
Future Buys: I am not likely to average up on IEFA. I will consider averaging down. I would want at least a 10% lower price than my first buy for a 20+ share purchase or 5+% decline for a 5 to 10 share purchase.
Closing Prices Last Friday:
IEFA: $61.75 +0.44 (+0.72%) : iShares Core MSCI EAFE ETF
JDD: $12.28 -0.02 (-0.16%) : Nuveen Diversified Dividend and Income Fund
5. Added 50 BHLB at $23.75 (Regional Bank Basket Strategy)(see Disclaimer):
Snapshot of Trade:
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| 2014 Added 50 BHLB at $23.75 |
BHLB announced an agreement to purchase 20 Bank of America branches in NY back in July 2013. SEC Filed Press Release This acquisition was completed last January. This acquisition increased the total number of branches to 91 across New England and New York.
Other acquisitions include Rome Bancorp (Rome, N.Y.) in 2011; Legacy Bancorp (Pittsfield, MA) in 2011; Connecticut Bank and Trust (Hartford, CT) in 2012; and Beacon Federal (Syracuse, NY) in 2012
A long term chart shows a steady rise from around $12 in 2000 to a double top formation at close to $38 occurring first in 2004 and again in 2006. In October 2007, the shares were changing hands at close to $30 and thereafter declined to $17 before bottoming. For the most part, the shares have been in an uptrend with chop since early 2010. The most recent correction started last July after the shares crossed $29, hitting $29.2 on 7/5/13. Long Term BHLB Interactive Chart The movement over the past year has shown two distinct and relatively sharp downturns, the first being in July 2013 and the next one starting in January of 2014. BHLB Interactive Chart The price dip in 2014, roughly from $27 to $24.5, brought the stock back into my reasonable valuation range. Since 7/7/13 to my purchase at $24.51, the price has corrected by 16.06%.
Link to December 2012 Seeking Alpha article on Berkshire Hills Bancorp
Map of Branches: Page 52, 10-Q
Prior Trades: Prior to this trade, I owned a 50 share lot bought at a higher price. Bought: 50 BHLB at $24.51 (2/17/14 Post). I realized a gain of $338.12 by trading a 50 share lot (snapshot in preceding linked post): Item # 1 Sold 50 BHLB at $28.74+ (7/13/13 Post)-Item # 2 Bought 50 BHLB AT $21.66 (3/12/12 Post)
Recent Earnings Report: Berkshire Hills Reports reported core earnings of $.42, up from $.40 in the year ago period. The consensus estimate was for $.4 per share.
Net Interest Margin: 3.35%
Efficiency Ratio: 64.42%
NPL Ratio: .6%
NPA Ratio: .46%
Charge Offs Annualized: .3%
Coverage Ratio: 132%
ROTE: 10.84%
While the NPL and NPA ratios are good, the capital ratios are among the lowest in my regional bank basket:
Rationale and Risks: BHLB appears to be a prudently managed small regional bank trading at a reasonable valuation with some dividend support to the current price. I am also averaging down some from my last purchase. In the event of another pop to the high 20s, I may elect to sell my higher cost shares.
The risks are the usual ones for a small regional bank. Regulatory costs have increased after the Near Depression and the FED's abnormal monetary policies have resulted in net interest margin compression. The capital levels are above "well capitalized" levels but are low by my standards. The bank discusses risks incident to its operations starting at page 33 of its 2013 Annual Report. A long term chart highlights the risks relating to recessions, as the price declined from over $35 in 2006 to $19.5 in early March 2009: BHLB Interactive Chart The price has declined from a high of $29+ to the current price over the past year, and the stock is currently trading below its 200 day SMA.
Closing Price Last Friday: BHLB: $22.73 +0.06 (+0.26%)
The risks are the usual ones for a small regional bank. Regulatory costs have increased after the Near Depression and the FED's abnormal monetary policies have resulted in net interest margin compression. The capital levels are above "well capitalized" levels but are low by my standards. The bank discusses risks incident to its operations starting at page 33 of its 2013 Annual Report. A long term chart highlights the risks relating to recessions, as the price declined from over $35 in 2006 to $19.5 in early March 2009: BHLB Interactive Chart The price has declined from a high of $29+ to the current price over the past year, and the stock is currently trading below its 200 day SMA.
Closing Price Last Friday: BHLB: $22.73 +0.06 (+0.26%)
6. Sold 50 GYLD at $28.09-ROTH IRA (see Disclaimer):
Snapshot of Trade:
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| 2014 Roth IRA Sold 50 GYLD at $28.09 |
Total Dividends= $120.63
Snapshot of Profit:
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| 2014 Roth IRA GYLD $33.97 |
Rationale: I am de-risking the IRAs based on my satisfaction with their Y-T-D returns and my increasing discomfort with both stocks and bonds. That will not stop me from trading leveraged bond CEFs in those accounts, however.
Closing Price Last Friday: GYLD: $28.05 +0.05 (+0.18%)
7. Sold 100 Riocan REIT at C$27.04 (Canadian Dollar (CAD) Strategy)(see Disclaimer): I have now sold my two lowest yielding Canadian REITs. The other one, Canadian Apartments, was discussed in last week's post. Sold on the Toronto Exchange: 200 CAR_UN:CA at C$23.16
Snapshot of Trade:
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| 2014 Sold 100 REI_UN:CA at $C27.04 |
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| 2014 Riocan 100 Shares USD+$48.4 |
Profit in CADs:
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| Cost: C$2,584 |
Company Description: RioCan Real Estate Investment Trust (REI.UN:TOR) is Canada's largest REIT focused on retail real estate.
Rationale: This one was sold for several reasons.
The P/AFFO was probably the highest among REITs that I own. This REIT reported AFFO at C$1.48 in 2013. The dividend yield is one of the lowest. The current monthly rate is C$.1175 per unit or about 5.21% at a total cost of $27.04 per unit. RioCan-Investor--Distribution History The dividend was last raise in January 2013 from C$.1150. The rate was C$.11 in 2007.
Needless to say, I would not call that history as supportive of a hold under a dividend growth strategy (e.g. the current market price is above a fair value range, but the company has a history of doubling the dividend in 6 to 8 years) The market price is near an all time high. REI.UN Stock Chart And, I am more concerned about a rise in interest rates than when I bought this security.
Future Buys: If the CAD declines against the USD and the dividend yield goes over 6%, one option for a repurchase would be to buy the ordinary shares traded on the pink sheet exchange. RIOCF Riocan Real Estate Investment Trust I can use USDs to buy those shares and the commission would be less at USD $7.95 compared to C$19.
RIOCF would become more attractive with a decline in CAD/USD below .9 and a modest decline in the ordinary share price from current levels.
Closing Price Last Friday: REI-UN.TO: C$27.42 +0.03 (+0.11%)
