Wednesday, January 21, 2015

Update for Equity REIT Common and Preferred Basket as of 1/21/15

The last update for this basket was in December 2014: Update of Equity REIT Common and Preferred Stock Basket as of 12/26/14

 For the reasons discussed in a March 2014 post, I started a tactical allocation shift into REIT common and preferred stocks starting in September 2013. Equity REIT Common and Preferred Stock Table as of 3/5/14 This particular shift started after prices had significantly corrected in the May to September 2013 time frame. Most of my best buys were made in December 2013 that marked the high point in the correction process.

I currently view the valuations for most U.S. REITs to be stretched and unappealing. 

Aggregate P/FFO data can be found in Lazard's monthly Real Estate Report. The aggregate P/FFO has become elevated again.

I am not tracking reinvested dividend in the following table.

 This basket did outperform the Vanguard REIT ETF (VNQ) today:
VNQ: 86.59 -0.06 (-0.07%)
Basket: +.65%

Click to Enlarge:
Equity REIT (Common and Preferred) Basket 
I am also summarizing in this update the performance numbers for this basket during 2014. Overall I would have better off owning the low cost Vanguard REIT ETF (VNQ), which has a total return of 30.36% during the year.

I had several securities outperform VNQ during the year, but I also had two clunkers among my U.S. REIT selections and my Canadian REITs had an awful 2014 4th quarter.  

U.S. Equity REITs Common Shares 2014:

 I calculated that this basket produced $3,623.05 in dividend income during 2014.

The following percentages are total return number for 2014 calculated by Morningstar.

HCP Inc (HCP)= +27.23% 


The positions in OHI, O, and HCP were acquired in December 2013:

Snapshot at Item # 2 Bought: 100 OHI at $29.85 (12/23/13 Post)

OHI just increased its quarterly dividend again by 1 cent per share. Omega Announces Tenth Consecutive Increase in Common Stock Dividend The new quarterly rate is $.53 per which translates into about a 7.1% yield at a total cost of $29.85.

Realty Income (O) just increased its monthly distribution by 3.0%. The monthly rate is $.189 per share. At that rate, the dividend yield at a constant total average cost per share of $36.96 is about 6.14%.

The IRT lots were acquired during the year at prices lower than the $9.31 closing price on 12/31/13. Bought 50 IRT at $8.17-Roth IRA/Bought: 100 IRT at $8.87 (1/28/14 Post) I also bought 50 IRT shares in a Vanguard IRA at $8.45 in January 2014: IRT

SRC was acquired in February 2014: Item # 1 Bought 100 SRC at $10.7 Roth IRA (2/25/14 Post) SRC closed at $9.83 on 12/31/13.  

For both MPW and EPR, my annualized total returns would be substantially higher than the total return for someone who bought shares on 12/31/13. Bought 30 EPR at $50.72/Bought Roth IRA: 50 MPW at $12.33 (10/14/14 Post)

The current EPR position was acquired in October 2014. EPR closed at $49.16 on 12/31/13.

EPR just increased its monthly dividend rate to $.3025 per share or $3.63 annually. EPR Properties Increases Monthly Dividend Over 6% for Common Shareholders At the new rate, the dividend yield at a total cost of $50.72 is about 7.16%. 

The current MPW position was acquired in October 2014. MPW closed at $12.22 on 12/31/13.  


The following stocks underperformed VNQ During 2014 with positive total returns: 

Chambers Street Properties (CSG)= +11.95%

One of the more recent buys, Bluerock Residential Growth (BRG), recently had a public stock offering: Bluerock Residential Growth REIT (BRG) Announces Closing of Public Offering of Class A Common Stock and Full Exercise of Underwriters' Option BRG also completed it disposition of an apartment complex in Nashville. BRG Completes Sale of 23Hundred@Berry Hill in Nashville for $61.2 Million BRG only had a minority interest in that property, along with two other entities affiliated with its external manager and the developer of that project. I left some comments about the issues raised in the ownership division among three entities controlled by the external manager in a a comment to a Seeking Alpha article. I also have an article. REIT Basket Strategy: Added 100 Bluerock Residential Growth Shares At $12.85-Bluerock Residential Growth REIT, Inc. (NYSEMKT:BRG) | Seeking Alpha

Negative Total Returns: 

Campus Crest Communities Inc (CCG)= -16.1% (long story)

U.S. Equity REIT Preferred Stocks: 

This basket includes some Equity REIT preferred stocks. I sold several issues during 2014, realizing a total share gain of $834.52 plus clipped dividend payments.

I still own the following preferred stocks, with slight unrealized profits in the positions: AMHPRA, CBLPRD, CCGPRA, CORPRA, and FPOPRA.

Bought: 50 FPOPRA at $24.25 (1/6/14 Post)
Bought 50 CORPRA at $23.9 (3/3/14 Post)
Bought 50 CCGPRA at $25.13-Roth IRA (3/24/14 Post)
Bought 50 CBLPRD at $24.6 (9/14/13 Post)(one of the first buys in this basket)

Canadian REITs 2014: 

The had several trading profits in Canadian REITs. The largest was in a 300 unit position in Healthlease which accepted a buyout offer from HCN: Item # 6 SOLD: 300 HLP-UN:CA at C$14.17 (CAD profit=C$1,244.75/USD reportable report at $1,039.15). Since my holding period was just a few months, the total annualized return on this position was superior.

I also generated gains trading Canadian Apartments, Artis and Riocan. Item # 2 Sold on the Toronto Exchange: 200 CAR_UN:CA at C$23.16 (7/12/14 Post)(CAD profit=C$460); Item # 1 SOLD: 300 AX-UN:CA at C$15.71 (9/26/14 Post)(CAD profit=C$367); Item # 7  Sold  100 REI_UN.CA at C$27.04 (7/19/14 Post)(CAD profit=C$101).

2014 Realized Gain in CADs=C$2,172.75 

In the 2014 4th quarter, the remaining Canadian REITs that I owned took a tumble that coincided with the substantial decline in the WTI crude oil price and further weakness in the Canadian currency. Several Canadian REITs hit 52 week lows and/or all time lows during that quarter. The decline in prices occurred even though interest rates were declining some and the yields went over 9% in many cases. Prices started to recover some in late December.

Hopefully, my Canadian REITs will outperform VNQ in the current year based on their higher current yields and more favorable valuations. There are doing little better so far this year.

Main Canadian REIT Positions: Closing Prices as of 12/31/14

12/31/14:   300 units of Cominar (CUF-UN.TO) C$18.61
1/21/15:     $19.55 +0.30 (+1.56%)

12/31/14:   200 units of Dream Office REIT (D-UN.TO) C$25.15
1/21/15:      D-UN.TO: C$27.23 +0.37 (+1.38%)

12/31/14:   500 units of Dream Industrial REIT (DIR-UN.TO) C$8.42
1/21/15:     DIR-UN.TO: C$9.01 +0.04 (+0.45%)

12/31/14:   500 units of  Dream Global REIT (DRG-UN.TO)  C$8.57
1/21/15:     DRG-UN.TO: C$8.87 +0.08 (+0.91%)

12/31/14    500 units of  Northwest Healthcare (NWH-UN.TO) C$9.28
1/21/15:     NWH-UN.TO: C$9.48 +0.20 (+2.16%)

I did argue in my last update that those REITs were undervalued particularly when compared to the distribution yields and P/FFO valuations of U.S. REITs.


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Monday, January 19, 2015

Added 300 of the Bond CEF ACG at $7.5-Roth IRA/Added 100 of the Stock ETF EWS at $12.8/Bought 50 BMLPRJ at $20.25

Stable Vix Pattern (Bullish):


Recent Developments: 

The Shanghai Index declined -260.14 or -7.70% on Monday. That index had the largest 2014 percentage gain among major markets and had risen about 40% in 90 days. The total gain in 2014 was 53%. The purported precipitating event was a crackdown on illegal margin lending. WSJ
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I published a long introduction to my discussion about ACG at SA: Generating Tax Free Income In The Roth IRA: Bought Back ACG - South Gent | Seeking Alpha


1. Bought 300 ACG at $7.5-Roth IRA (see Disclaimer): This purchase brings me up to 600 shares.


Snapshot of Trade:

2015 Roth IRA Bought 300 ACG at $7.5+


Security Description The AllianceBernstein Income Fund (ACG) is a leveraged closed end bond fund that is weighted in investment grade rated bonds, and has close to a 60% portfolio weighting in U.S. treasuries as noted below. This fund also has a significant weighting in junk rated bonds.

Sponsor's Website: AllianceBernstein Income Fund, Inc.

The sponsor claims that the effective duration was 5.65 years as of 12/31/14.

The general rule of thumb is that the securities owned by a bond fund with a 5.65 year duration will decline 5.65% for each 1% rise in interest rates.

Bond Fund Duration: Vanguard Publication

Interest Rate Risk and Bonds: FINRA Publication

A 2% rise in interest rates would offset approximately 2 years of dividend payments. Interest rate risk is material.

Data on Date of Trade 1/15/15: 
Closing Net Asset Value Per Share: $8.46
Closing Market Price: $7.49
Discount: -11.47%
Average Discounts:
1 Year:  -10.68%
3 Year:  -10.4%
5 Year:  - 9.87

Sourced: CEFConnect Page for ACG

Last SEC Filed N-Q: AllianceBernstein Income Fund (holdings as of 9/30/14; cost of investments=$2.912+B with a market value of $2.995+B)

The largest weighting will be in U.S. Treasury securities:

U.S. Treasury Holdings as of 9/30/14 
The unrealized gain in the fund's U.S. treasury holdings represented about 48% of the total unrealized gains as of 9/30/14.

Credit Quality as of 12/31/14:


While the fund in weighted in "AAA" due to the treasury holdings, there is a significant exposure to junk rated securities that provide more yield but also exposes the fund to credit risks.

The fund also assumes some foreign currency risks with foreign bonds priced in local currencies.

Leverage is high at 36.68% as of 12/31/14. The fund does not specifically state whether or not its duration number is adjusted for leverage which increases duration.

When looking at those historical average discount numbers, the only conclusion to draw is that this fund sells at a persistent discount close to 10%. This pricing may of course change. A continued consistent trend removes the potential of a market price gain due to a significant narrowing of the discount after purchase.

A common trading technique is to buy a closed end fund when it is selling at a substantially larger discount than the historical averages for the past 1, 3 and 5 years and then to consider selling or paring the position when the discount narrows to the historical range. Hopefully, the net asset value per share has also materially increased adjusted for the dividend payments. In that kind of optimal scenario, the investor makes money in three ways: (1) the narrowing of the discount to net asset value after purchase; (2) dividend payments; and (3) an increase in net asset value per share which hopefully will be reflected entirely in the market price.

ACG Filings with the SEC

Last SEC Filed Shareholder Report: AllianceBernstein Income Fund (semi-annual for the period ending 6/30/14)

Last Monthly Update: AllianceBernstein Income Fund Releases Monthly Portfolio Update

ACG is rated 1 star by Morningstar even though the analyst refers to the fund as a "solid core option".
The expense ratio is .63% according to Morningstar.

Prior Trades: I purchased another 300 share a few weeks ago: Bought  300 ACG at $7.53 (10/17/14 Post)


Item # 6 Sold 150 ACG at $7.54-Regular IRA (1/28/14 Post)(profit snapshot= $68.83)-Item # 2 Bought 150 ACG-$6.975-Regular IRA (10/9/13 Post)

Item # 3 Sold 400 ACG at $8.44 (8/21/12 Post)(profit snapshot=+$85.62)-Bought 400 of the Bond CEF ACG at $8.19 (5/31/13 Post);

Item # 1 Sold 400 ACG at $8.122 (12/2/2011)(snapshot of profit +$59.28)-Item # 4 Added 200 of the Bond CEF ACG at $7.98 (10/4/11 Post) and Item # 4 Bought 200 ACG at $7.85 (8/8/11 Post);

Item # 3 Sold 300 of the Bond CEF ACG at 7.82 (5/26/11 Post) (snapshot profit=$41.65-preceding linked post)-Item # 3 Bought 300 of the Bond CEF ACG at $7.63 (4/11/11 Post)

Item # 4 Sold 200 ACG $8.45-Roth IRA (8/26/10 Post)(profit snapshot $104.27)-Bought 200 ACG at $7.85 (5/6/10 Post)

Sold 200 ACG at $8.35 (8/17/10 Post)(Snapshot of profit $58.27)-Added 200 ACG at 7.98 (5/6/10 Post)


Total Trading Profits: $417.92


Distributions: The fund is currently paying a monthly dividend of $.03455 per share. AllianceBernstein Income Fund, Inc. Monthly And Special Distributions There was a slight addition to the December distribution that brought the total up to $.03679 per share.

ALLIANCEBERNSTEIN INCOME FUND INC (ACG) Dividend History

Assuming a continuation of that rate, which is in no way assured, the dividend yield would be about 5.53% at a $7.5 total cost per share.

ACG cut its monthly dividend rate to .0346 from $.04 effective for the August 2013 distribution.

There was apparently a significant capital gain distribution of $.5687 per share in December 2012.

Provided a fund desires to avoid supporting a dividend with a return of capital, it is to be expected that a bond fund will cut its dividend during a prolonged period of declining interest rates. As vintage bonds mature or redeemed by the issuer before maturity, the reinvestment opportunities will generally have lower coupons, possibly even with the assumption of more credit risk, and new bond purchases will consequently produce lower amounts of income.

Rationale: With this type of purchase, I am playing what I call the Japan Scenario, which the Bond Ghouls view as certain for Europe and highly probable for the U.S. The current bond yields in Europe, with the 10 year bonds of several countries priced below 1% and at least 3 below .5%, would be irrational unless investors believed that Europe will be facing a long period of stagnation burdened by periodic bouts of deflation possibly alternating with periods of abnormally low inflation. Global Government Bonds-WSJ.com

Current 10 year yields below .5% include the following:

Germany 10Y Yield-Bloomberg

Netherlands 10 Yr Bond - Bloomberg

Switzerland 10 Year Note Generic Yield- Bloomberg

The Swiss 10 year government is below a zero yield.

Just stunning in the future economic assumptions underlying those yields.

The bond investors in the U.S. are not as pessimistic but are moving in that direction in what appears in an inexorable march to a 1% ten year treasury yield.

I am not about to lend the U.S. government money for 10 years at 1.8%. I am barely able to tolerate ACG's yield of 5.5% even with its large exposure to U.S. treasuries and consequently fitting somewhat into a portfolio design for the Japan Scenario.

The 30 year U.S. treasury hit an all time low last week.

Risks: Personally, I think the Bond Ghouls have lost their marbles.

Sure, deflation is likely for several months in Europe.

A forecast of a persistent Japan Scenario taking root is not supported by the current evidence.

Europe slipped into a mild Y-O-Y deflation number last December after the huge decline in crude prices.

The strength of the Euro until recently has contributed to deflationary pressures, but that issue is no longer applicable. There is always a time lag for exports to perk up after a currency devaluation.

When crude prices bottom and start to tick up, inflationary pressures will ensue due to the higher price and the slide in the EUR/USD conversion rate.

And, it is important to recognize that it will not take much of an uptick in inflation and inflation expectations for the current low intermediate and long term yields to look ridiculous.

So, while the Bond Ghouls are pessimistic now, and recognizing that it usually takes them a long time to recognize their severe shortcomings as forecasters even after being confronted with years of data inconsistent with their future forecasts, the risk is still to the downside for leveraged bond funds, particularly when the FED starts to raise the federal funds rate that will increase their borrowing costs.

But, just in case the bond investors are become prescient in their long term predictions, I will play along with them some in my security selections.

As I have noted in earlier commentary, stock investors recognized quickly in August 1982 that the Federal Reserve had strangled problematic inflation out of the system. It took bond investors over a decade to quit mis-pricing inflation in 10 to 30 year bond yields. That fact can be easily confirmed by comparing the actual inflation rates starting in 1983 and the yields for 10 and 30 year treasury bonds. The real rate of returns were extremely high to the persistent mis-pricing due to a continuous erroneous inflation forecast which was being contradicted by an array of current factual information including the CPI reports and productivity gains due to technological advancements and other innovations.

The sponsor discusses risks starting at page 4 of its last SEC filed shareholder report. AllianceBernstein Income Fund, Inc.

Future Buys and Sells: I am in a trading mode for this leveraged, low yielding bond CEF, as shown by my trades noted above.

I am more likely to sell the 300 shares bought in the taxable account first. The non-qualified dividends paid by ACG become tax free when that fund is owned in the Roth.

2. Bought 50 BMLPRJ at $20.25 (see Disclaimer):


Snapshot of Trade:



Security Description: The Bank of America  Floating Rate Non-Cumulative Preferred Series 4 (BML.PJ) is an equity preferred stock that pays qualified and non-cumulative dividends at the greater of 4% or .75% above the 3 month Libor rate on a $25 par value.

There are five BAC equity preferred floaters that pay the greater of a guarantee or a spread over the 3 month Libor rate. These equity preferred stocks are functionally equivalent. All have $25 par values and pay quarterly non-cumulative and qualified dividends.  

BACPRE 4% or .35% above the 3 month Libor Bank of America Corporation
BMLPRG 3% or .75% above the 3 month Libor  Prospectus Supplement
BMLPRH 3% or .64% above the 3 month Libor Final Prospectus Supplement
BMLPRJ 4% or .75% above the 3 month Libor Final Prospectus Supplement
BMLPRL 4% or .5% above the 3 month Libor Term Sheet


Chart: 3-Month London Interbank Offered Rate (LIBOR) St. Louis Fed

The securities starting with the prefix BML were originally issued by Merrill Lynch, which was later acquired by Bank of America.  

When I placed the trade, the following snapshots show the prices and yields for the functionally equivalent BMLPRJ and BMLPRL:

BMLPRJ $20.25: Yield 5.05%

BMLPRL $20.15: 5.07% Yield
So, why would I buy the BMLPRJ with a .02% lower yield-because it was only .02%. I did one prior paired trade when the spread was larger: Item # 4 Paired Trade: Sold 100 BMLPRL at $19.14 & Bought 100 BMLPRJ @ $19.32/ (2/17/11)

While I know that it is difficult to think ahead, particularly way ahead, there will be a time when short term interest rates rise sufficiently to trigger the 3 month Libor float. BMLPRJ has a .25% higher float rate than BMLRPL's .5%.

If the three month Libor rose to 6% during the relevant computation period, the coupon for BMLPRJ would become 6.75% and BMLPRL would be 6.5%. The BMLPRJ effective yield at a $20.25 total cost per share becomes 8.333%. The BMLPRL effective yield at a $20.15 total cost per share becomes  becomes 7.75% or .583% less.

For a negligible give back now in yield, I have the potential to earn substantially more when the 3 month Libor rises sufficiently to trigger the Libor float provisions. It would not thereafter take long to recoup that .02% differential.

Prior Trades:

2014 BMLPRJ 50 Shares +$40.08 
2012 BMLPRJ 50 Shares +$90.98
2010 BMLPRJ 100 Shares +$50.16 
Total Trading Gains BMLPRJ: $181.22

Some Related BAC Preferred Floater Trades:

2011 BMLPRG, BMLPRH and BMLPRL +$221.87

2010 BMLPRH 100 Shares +$363.48
2009 BMLPRG 50 Shares +$166.48
2009 BACPRE 40 Shares +$137.18
Total Related Trades: $889.01

Links to discussions of those transactions can be found in Floaters: Links in One Post.


Rationale: The floaters that pay the greater of a guarantee or some percentage over a short term rate are part of my Inflation or Deflation strategy, confined to a narrow group of securities that can swing both ways, irrespective of whether there is deflation or inflation. The main issues are credit and volatility risks.

These securities have been discussed since the earliest days of this blog, when their pricing presented what may end up being a once in a lifetime opportunity: Item # 4 LIBOR AND THE MET LIFE FLOATING RATE PREFERRED STOCK (October 2008); LIBOR AND THE AEGON FLOATING RATE PREFERRED STOCK (October 2008). I was able to buy the Aegon hybrid at below $5. The Met Life floater METPRA was bought as low as the single digits.

The current coupon is the minimum 4% and that is likely to remain the applicable coupon for several years. Based on that coupon, and assuming a total cost of $20.25 per share, the current yield is about 4.94%.

The 3 month Libor rate would have to rise above 3.25% to trigger any increase in the coupon. The market may be wrong in forecasting future inflation and the FED's federal funds rate which is one reason to own some securities whose coupons can increase in response to problematic and unexpected inflation and the FED's response thereto.

I view the 3 month Libor float provision as a kind of insurance policy for unexpected inflation. In effect, I am paying an insurance premium for every quarterly payment representing the difference between the BMLPRJ yield and yield of fixed coupon BAC equity preferred stocks.

I can price that insurance premium at the time of purchase. I will just take one of the fixed coupon BAC preferred stocks to compute that premium.

The Bank of America 6.625% Non-Cumulative Preferred Series I closed at $26.43, or a significant premium to its $25 par value. BAC has the option to redeem this security on or after 10/1/ 2017, Bank of America Corporation. At a total cost of $26.43, the current yield would be about 6.27%. The YTM would be lower in the event BAC exercises its optimal redemption right in 2017. A redemption of BACPRJ, which is not going to happen in the foreseeable future, would result in a $4.75 per share gain based on a $20.25 total cost and would add to its YTM.

Just taking the current yield numbers, the inflation insurance premium is a bit expensive at 1.33% per annum lower current yield. When I started trading these floaters, the premium was closer to 2%, but then inflation was running hotter than now. Bond investors believe that inflation is as good as dead until the end of days now, just like they believed back in the 1980s that problematic inflation would last for 30 years even after it was clear that this prediction was profoundly erroneous and embarrassingly so.

If BAC calls BACPRI on 10/1/2017 at its $25 par value, the difference shrinks to .19%, using the Morningstar Bond Calculator to calculate that YTM. (YTM becomes just 5.13%)

Risks: I have discussed the many risks relating to non-cumulative equity preferred stocks in my Gateway Post on this subject: Stocks, Bonds & Politics: Advantages and Disadvantages of Equity Preferred Floating Rate Securities

I have also repeatedly discussed the risks in several recents posts here and at SA:

Equity Preferred Floating Rate Stocks: Added 50 Goldman Sachs Group Preferred Series C At $19.63 - Goldman Sachs Group Inc. (NYSE:GS) | Seeking Alpha

Equity Preferred Floating Rate Stocks: Added To MSPRA At $19.87 - South Gent | Seeking Alpha

These securities were smashed down into the single digits during the Near Depression period and its immediate aftermath. Stock charts highlight their risks. In 2007, BMLPRJ was selling at over its $25 par value with a peak price around $27.25 (January 2007). By late February 2009, it had collapsed to just above $3: Bank of America Corp. PRFD 'J': NYSE:BML-J  That had to hurt. Fortunately, I did not start buying these securities until Lehman collapsed and their prices tanked. There is nothing like fear of a price going to zero to shake out the weak hands. And, just for emphasis, an equity preferred stock issued by a leveraged financial institution would have the same value as used toilet paper after a BK.


3. Added 100 of the Stock ETF EWS at $12.8 (see Disclaimer):

Snapshot of Trade:



Security Description: The iShares MSCI Singapore Index Fund (EWS) is an ETF that owns stocks in a Singapore stock index.

Sponsor's webpage: iShares MSCI Singapore ETF | EWS (expense ratio .47% as of 6/30/14; 30 holdings as of 10/3/14; 5 year total annualized returns of 8.37% and 11.21% over ten years through 9/30/14)

EWS Page at Morningstar

This purchase is an average down from an October 2014 buy: Bought Back 100 EWS at $13.27 (10/11/14 Post) The fund did pay a $.2474 semi-annual dividend after my purchase. Adjusted for that dividend, the previous purchase price was $13.02.

Prior Trades: Item # 2 Sold Taxable 100 EWS at $13.69(7/26/14 Post)-Bought Back 100 EWS at $13.1 (12/17/13 Post)(realized gain $44.25); Bought 100 EWS at $12.96 (September 2012)-Sold EWS @ $13.91 (April 2013)(realized gain +$79.22); BOUGHT 100 ETF EWS AT $10.9 February 2010-Sold EWS at $11.55 June 2010 (realized gain +$47.15)

Total Trading Gains: $170.82

I have not yet caught the wave on this yet. I really can not say that keeping those shares bought at $10.9 back in February 2010 would have been worthwhile, given the almost five year time elapse since that purchase and comparing the return with a U.S. stock index ETF like SPY.

EWS has had some stellar years. I want count the +67.47% total return in 2009 after the disastrous 2008. The fund did have recent total returns of +24.58 (2010) and +31.79% (2012) compared to SPY's 15.06% and 15.99%.  The EWS total return in 2013 was +.96% and +2.91% in 2014, based on net asset value, so that market and the U.S. are not in tandem to the upside. The ten year annualized total return is a decent 9.86% through 1/16/15, particularly given the dismal 2008 number of -47.01%. This security does provide some diversification to a U.S. weighted stock portfolio.

Sourced From: EWS Total Returns

Distributions: Dividends are paid semi-annually in June and December. For 2014, the fund paid $.4381 per share. The rate will be variable. Assuming $.44 per share on an annual basis, and a total cost per share of $12.8, the dividend yield would be about 3.44%.    

Rational and Risk: With this ETF, I achieve some diversification into a developed market that will participate long term in Asia's growth. The dividend yield provides some support.

EWS will have a much higher standard deviation than SPY. Morningstar calculates the 3 year standard deviation for EWS at 15.61  and 22.96 over ten years-through 12/31/14.

Standard Deviation Defined

One risk is highlighted by the total return in 2008. Any foreign country fund will a number of important risks, including currency risks and what is generally labelled "country risk". Singapore is going to have less country risk than other Asian markets or any Latin America stock market. Singapore is not viewed as emerging market and consequently would not be included in an emerging market stock fund.

The Singapore Dollar has been declining against the USD which is another negative, assuming it continues since the currency decline will flow through into the USD priced EWS. USD/SGD Interactive Chart

On 7/23/14, 1 USD would buy about 1.23SGD and over 1.33 now, or about a 8.13% decline in the SGD which would flow into the EWS price. 
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Sunday, January 18, 2015

Sold 2 Oasis Petroleum 7.25% Senior Unsecured Bonds at 95.25-Bought at $89.347/Added to Vanguard Capital Opportunity Mutual Fund (VHCOX)/Bought 100 SWZ at $11.3-Roth IRA

Stable Vix Pattern (Bullish):


Recent Developments: 

 The government reported a .4% decline in CPI during December. The energy price decline, particularly the much lower gasoline cost, caused that decrease. CPI declined .3% in November for the same reasons. On a non-seasonally adjusted basis, CPI rose .8% Y-O-Y. Consumer Price Index Summary On a non-seasonally adjusted annual basis, food prices rose 3.4%; the cost of shelter increased 2.9%; the rent index rose 3.4%; the medical care index accelerated at 3% and the the food category that includes meat, poultry, fish and eggs rose 9.2% (veal and beef rose 18.7%). My Blue Cross insurance premium rose 18%. I am curious why so many are seeing deflation based on these numbers, taking into proper context the strong and probably temporary downward pressure resulting from the dramatic decline in crude oil prices.

Since 1955, the U.S. has had one year of negative inflation. That was a in 2009, which was understandable, at a -.4%. Consumer Price Index, 1913- | Federal Reserve Bank of Minneapolis The problem has been historically problematic inflation rather than deflation getting planted in the U.S. economic system for a prolonged period.

The pricing of European sovereign bonds by the Bond Ghouls implies a consensus opinion among those investors that Europe is in an inescapable vise of alternating deflation and abnormally low inflation for well over the next decade. Those investors or their kindred spirits were forecasting greater than 10% inflation for thirty years in the early 1980s. They have considerable difficulty seeing beyond the tips of their noses.

As I have noted in several recent comments at SA, stock investors came to the realization in August 1982 that problematic inflation, the primary cause of an 18 year stock bear market, was dying and would soon enough be dead. Bond investors, on the other hand, continued to mis-price long term bonds for more than a decade, assuming that problematic inflation would return with a vengeance and were not convinced by the contrary information until they had about 15 years of data pointing out that inflation was not running hot anymore and it did not make much sense to price a 30 year treasury bond at 13.8% (1984), or at 9.3% in 1998. It is possible to look at the subsequent data and see the absurdity of the inflation predictions embodied in those yields.

There are many reasons why Europe slipped into a slightly negative inflation number last month. The decline in crude prices is one. The strength of the Euro against the USD and other currencies until recently is another. The negative crude price influence on Europe's recent CPI numbers is probably at or near its nadir. Crude prices may not go up much this year from the current prices, but the direction starting in the late Spring will be up as more demand is created and some production starts to decline.

The negative impact of the strong Euro has already been corrected over the past few months. Europeans will have to pay more for imported foreign goods (oil being a temporary exception); and the export Euro based economies will be a better position to compete abroad and will consequently start to generate more sales and jobs.

Needless to say, it will not take much inflation to make the buyer of a ten year German government bond at a .4% yield or one from France at .63% look like the biggest sucker in the history of mankind.  Global Government Bonds-WSJ.com As the noted philosopher and financial commentator W.C. Fields once noted, when he was sober enough to form a sentence, "never give a sucker an even break".  Never Give a Sucker an Even Break (1941) - IMDb
****************

1. Sold 2 Oasis Petroleum 7.25% Senior Bonds Maturing in 2019 at $95.25-Bought at $89.347 (see Disclaimer):

Snapshot of Trade:


Snapshot of Profit:


2015 Oasis Petroleum 2 Bonds +$98.38

High Risk Junk Bond Strategy: Bought 2 Oasis Petroleum 7.25% Senior Unsecured Bonds Maturing on 2/1/19 at 89.347

The net interest was $11.68.

Rationale: 

As noted in my prior post, I decided to harvest my profits in the recently purchased junk E & P bonds. Sold 2 LINN 2020 Bonds at $88.5-Bought at $81/Sold 2 Northern Oil & Gas 8% Senior Unsecured Bonds Maturing in 2020 at $81.75-Bought at 73.9

When I bought this bond at 89+, WTI closed at $56.43. stlouisfed.org The WTI spot price had declined by 17.83% to $46.37 when I sold the Oasis bond at $95.25. That $95.25 price represented a 6.6% increase from my purchase price.

I am aware that the EIA and other sources are predicting that the supply glut will grow during the remaining months, and further downside pressure on crude oil prices is certainly possible. U.S. Energy Information Administration (EIA)

I am keeping only the two highest risk one bond lots issued by the  Sandridge and Petroquest. Bought 1 Extremely High Risk Sandridge Energy 8.75% Senior Bond Maturing 1/15/2020 at 65 (12/17/14 Post); Extreme High Risk Junk Bond Strategy: Bought 1 Petroquest Energy 10% Senior Unsecured Bond at $91.638 Maturing 9/1/17 (12/24/14 Post)

I do not have profits in those two bonds with both near breakeven, nor do I have much monetary exposure. The Sandridge bond has the highest potential total return of the ones that I bought in December 2014 and my monetary exposure is only $650. I just received the semi-annual interest payment:



Future Buys and Sells: I may buy the three E & P bonds back sold in a few weeks or months, assuming there is another panic selloff that takes the price below my last purchase.

2. Bought 100 SWZ at $11.3 in Roth IRA (see Disclaimer):

The Swiss Helvetia Fund Inc (SWZ) is an unleveraged closed end investment fund that owns primarily equity and equity-linked securities of Swiss companies.

CEFConnect shows the expense ratio at 1.29%.

I have not sold any shares of this closed end stock fund held in a taxable account since I reinitiated a position in 2008. I currently own over 900 shares in that taxable account, where I have been reinvesting the dividend.

The last annual distribution was $2.235 per share, of which $2.195 was characterized as a long term capital gain. The ex dividend date was in December, but the payment date is delayed until 1/23/15: Swiss Helvetia Fund

The total dividend will be over $2,000. I will have a snapshot of the reinvestment in the first blog post published after receipt of those shares.

I did liquidate a 200 SWZ position in 2006:

2006 SWZ +$166.87
I have no memory of those transactions, which is not unusual for me now, but apparently it was just a trade rather than a long term investment. I will try to generate some income through trading, but most of my investment assets have been held for more than a year.

Snapshot of Trade:

2015 Bought Back SWZ at $11.3
I have previously traded this stock CEF in the Roth IRA. (e.g. Sold SWZ in Roth IRA at $10.75 (8/5/2009 Post)

Swiss National Bank and the Swiss Franc: 

The Swiss stock market has been in turmoil since the Swiss National Bank (hereinafter SNB) abandoned its three year policy of capping the Swiss Franc at €1.2 last week. www.snb.ch/pdf

The cap was maintained by the creation of Swiss Francs (hereinafter CHF) that would then be sold to buy Euros, a Q/E type program aimed at torpedoing the CHF against the Euro and in effect all other major currencies including the USD.

That money creation led to a huge expansion in the SNB balance sheet.

This policy started in the 2011. Prior to starting this intervention, 1 CHF would buy 1.3+ USDs.

On the day prior to abandoning this intervention, 1 CHF would buy about .98 USDs. CHFUSD Interactive  Chart In other words, a strong currency was turned into a weak one through central bank intervention.

The weakness in the CHF helped Swiss manufacturers who were exporting to other European countries and the U.S. The policy was instituted during a period when the CHF was rapidly increasing in value against both the EUR and the USD.

The policy had a negative impact, as I have pointed out in previous posts, on Swiss ADRs priced in USDs. The CHF/USD currency decline flows through into the USD pricing and has resulted in the U.S. Swiss ADRs substantially underperforming their ordinary share counterparts priced in CHFs and traded in Switzerland.

The SNB's decision to abandon its peg resulted in an instantaneous rise in the Swiss Franc against the Euro, USD, GBP and other currencies, and created chaotic conditions in the Swiss stock market, generating large losses in stocks traded in Switzerland and priced in CHFs.

Even with low double digit losses in CHFs, USD priced Swiss stocks went up in value as the CHF's rise in value more than offset the decline in the ordinary shares prices.

NVS Interactive Stock Chart

NSRGY Interactive Stock Chart


Sponsor's Website: Swiss Helvetia Fund

Data on Date of Trade Thursday 1/15/15:
Closing Net Asset Value Per Share: $13.16
Closing Market Price: $11.53
Discount: -12.39%
Discount at $11.3 Purchase Price: -14.13%
Average Historical Discounts:
1 Year: -11.78%
3 Years: -12.08%
5 Years: -12.05%

Sourced from SWZ Page at CEFConnect

The most important holdings are Novartis, Roche and Nestle which accounted for 37.93% weighting as of 12/31/14.

Top Ten Holdings as of 12/31/14:


Of those top ten companies, Swatch is notable in having most of their costs in Swiss Francs and deriving most of their revenues through exporting their products made in Switzerland. Swatch has to manufacture most of its watches in Switzerland to keep the Made in Switzerland label. Those type of companies would be hurt more by the rise in the Swiss Franc than multinationals like Nestle, Novartis and Roche whose costs and revenues are mostly in the same currencies. Those multinationals have factories and employees worldwide and consequently have most of their costs sourced in local foreign currencies (USD, EUR, etc.).

An article published in Reuters noted that Nestle only has less than 5% of its cost sourced in Swiss Francs. Novartis has 12% of its costs in CHFs, but NVS also reports in USDs rather than CHFs. 2014 Third Quarter Earnings Report.pdf; Page 169 2013 Annual Report .pdf

Last SEC Filed Form N-Q for the Period Ending 9/30/14:  THE SWISS HELVETIA FUND, INC.

As of 9/30/14, the fund's investments had a total cost of $243+M and a market value of $$374M.

Most of the unrealized gain was concentrated in Nestle, Novartis and Roche.

The Novartis shares had a total cost of $10.4+M and a market value at that time of $50+M. The Nestle shares had a cost of $6.4+M and a market value of $36+M. The Roche position had a cost of $13+M and a market value then of $52+M. Those returns, just on price, highlight the benefits of long term investing.

One of the nice unrealized gains as of 9/30/14 was in the chocolate make Lindt & Sprungli, with a share cost of $9+M and a market value of close to $19M. That company's stock took a  hit in reaction to the SNB's decision. Chocoladefabriken Lindt & Spruengli AG Interactive Stock Chart I believe that company has nine factories outside Switzerland.

Last SEC Filed Shareholder Report: The Swiss Helvetia Fund, Inc.


Distributions Since 2007: 


2008-2014 Per Share:
Long Term Capital: $5.622
Short Term Capita; $.412
Income: $1.292
Total: $7.326 per share


A good chunk of the dividend income is eaten up by the fund's expenses.

Rationale and Risks: I view this fund as an attractive long term holding at its current discount to net asset value per share, the overall quality of the holdings, the fund's exposure to Swiss Franc priced assets after the SNB ended its currency manipulation, and its dividends.

Since most of my assets are priced in USDs, I want more assets priced in Swiss Francs, Canadian and Australian Dollars and a few other currencies for diversification purposes.

I am concerned about our government's long term fiscal situation and recognize that the current USD strength is most likely a transitory phenomenon.

In case anyone has been comatose for the past decade or so, I would just highlight that the U.S. government's debt has expanded from less than $1 trillion in 1979 to over $18 trillion as of 1/14/15: Government - The Debt to the Penny

And being a member of the baby boom generation, I have paid attention to those rumors that the government has not exactly planned that far ahead in meeting its future Medicare obligations and other long term unfunded entitlements.

Even with abnormally low interest rates, hitting an all time low for the 30 year treasury recently, the federal government paid $430+ billion in interest for the F/Y ending last September, up from $415+ in the prior fiscal year.  Government - Interest Expense on the Debt Outstanding

So, what happens when interest rates rise to say a 5% average rate on $18 trillion in debt, assuming for ease of calculation the ludicrous proposition that the debt will not keep growing in worrisome amounts. That works out to a whopping $900 billion per year, which will most likely be borrowed and added to the debt number.

At some point, possibly before I meet my maker, there is going to be a failed series of treasury auctions, as the world tires of sending the U.S. their savings to spend.

Switzerland, and the Swiss Franc, impress me as decent alternatives for diversification.

While I have traded this security in my IRAs, I am now likely to keep this position long term and add to it on occasion.

I may downsize my taxable account position by 200 to 300 shares when and if I can sell my highest cost shares profitably. That becomes difficult to do when the fund pays a large year end distribution such as the last one that knocks the price back down.

I also own Novartis, Nestle and Zurich Financial.

I have two SA Instablogs discussing Novartis and Nestle: Dividend Growth Strategy: Novartis - South Gent | Seeking Alpha; Added To Nestle (NSRGY) At $68.8 - South Gent | Seeking Alpha

My longest recent discussion involving a NVS purchase was when I added 50 shares in 2013 Item # 1 Bought: 50 NVS at $76.72 (12/23/13 Post)(contains snapshot of pre-existing position)

I only own 100 shares of Zurich with an average cost per share of $19.13.



The risks currently include the somewhat chaotic conditions in the Swiss stock market resulting from the SNB's decision to cease supporting the 1.2 Euro floor. The strong rise in the Swiss Franc after that decision will make it harder for Swiss exporters to compete in Europe, particularly if the Euro continues to weaken.

And, repatriation of foreign earnings will result in less CHFs being purchased with the weaker currencies and earnings will be negatively impacted by the accounting conversion from the weaker foreign currencies into CHFs. I am only aware of Novartis reporting in a currency other than CHFs.

My general belief, call it a guess, is that investors are now selling Swiss stocks to capture the huge currency gain in the Swiss Franc versus the Euro primarily and secondarily against the USD and GBP.

CHFUSD Interactive Chart

CHFGBP  Interactive Chart

CHFEUR Interactive Chart

Once those traders finish doing what comes naturally to them, investors will look at the Swiss multinationals who have worldwide operations and will start buying, even if that means biting the bullet on the currency exchange.

The ordinary shares of those multinationals, priced in CHFs, were shellacked in the Swiss market's selloff in response to the SNB decision:

Nestle: NESN.VX Interactive Stock Chart

Roche: ROG.VX Interactive Stock Chart

Novartis: NOVN Stock Chart

Zurich Financial: ZURN

Syngenta: SYNN Stock Chart

Swiss Re: SREN Stock Chart

Credit Suisse: CSGN Stock Chart


Over time, the Swiss Franc could reasonably be expected to be a strong currency, and there will be an opportunity in the future to harvest a currency gain in Swiss shares even after converting from Euros or USDs into CHFs after the big spurt in CHF's value.

The problem faced by the SNB is that Switzerland is just too small to be so safe.

It will take time for companies to recover who manufacturer in Switzerland and are primarily dependent on export sales to Europe and the USD. Stocks of those companies may be treading water for awhile after their recent large declines, as adjustments are made.

As of 1/16/15, SWZ closed at $11.36 and had a net asset value per share that day of $13.29, creating a discount to net asset value based on those numbers of -14.52%.


Future Adds in the Roth IRA: Generally, I will be looking for a correction in the Swiss stock market coinciding with a discount above the 1, 3 and 5 year averages. I may elect to add a 50 share lot after a large year end distribution goes ex dividend provided the discount is then over 12%.


3. Added to Vanguard Capital Opportunity Fund (VHCOX) (see Disclaimer):

Snapshot of Trade:


Prior Trade: I initially bought share in 2013 when the fund opened for new investors and removed the initial $25,000 investment requirement. Initiated Position in VHCOX (4/9/13 Post) Prior to that reopening, the fund has been closed to new investors since March 2004.

As I explained in the post discussing my initial purchase at the then minimum amount of $3,000, I just wanted to stick my toe in the door and then decide how much to invest later. I have periodically added to the fund thereafter.

The fund has closed again to new investors.

Security Description: The Vanguard Capital Opportunity Fund is offered through Vanguard, but the fund is managed by Primecap.

At the time of my purchase, the Vanguard Capital Opportunity Investors Fund had a "Gold" designation from Morningstar and a 5 star rating.

Sponsor's Website: Vanguard - Vanguard Capital Opportunity Fund Investor Shares (total holdings as of 12/31/14=138; foreign holdings at 11.8%; expense ratio at .48%)

The sponsor calls this fund an "aggressive growth fund", which of course scares the Old Geezer since there is not a cell in his body that fits into that mode of investing.

After reading that statement about aggressive growth, I expected to see companies like Priceline, Netflix, Amazon and Facebook.

Instead, the top ten holdings included stocks like Novartis, which I own, Roche, Lilly, Biogen and Amgen. I would call those companies "growth" blue chips and possibly my 92 year mother would use the term "aggressive" to describe their risk nature. The turnover is low.

Top Ten Holdings as of 12/31/14: 



Rationale and Risks: This fund has performed well in bull stock markets, as shown in its historical total return numbers.

The total returns were 48.91% in 2009; 42.61% in 2013 and 18.88% last year.  That works for me.

The risk is summarized by the 2008 return of -39.08%, slightly worse than the S & P 500 -37% total return that year.

The fund pays dividends annually. Given the nature of the holdings, most of the dividend will be sourced from capital gains rather than income.

In 2013, I received a $1.736 per share distribution, of which $1.548 was a long term capital gain and most of the remainder were short term capital gains.

The per share distribution last year was $2.185 and $1.836 of that amount was classified as long term capital gains.
 
In the 2014 Annual period, which covers the 12 month period ending in September 2014, the total cost for common stocks owned by the fund was $5.885+B and the then market value was $12.233+B. So, there are currently a large unrealized appreciation in the shares owned by the fund.

The reports and prospectuses can be viewed at the sponsor's website or downloaded at Morningstar.

Future Buys: I will buy more shares when the spirit moves me.


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