Long Only, Value, Contrarian, Bonds
Contributor Since 2009
Effective 1/9/17, I will only be posting at my old website where I started to publish investment blogs back in October 2008. There will be no ads at that website.
This is an excerpt from a blog published earlier to today: Stocks, Bonds & Politics: Pared 95 of 200+ CHN Owned in a Taxable Account at $21.73/ Added 30 IDV at $34.55-Comission Free at Fidelity
I will be discussing below my share purchase of the iShares International Select Dividend ETF Fund. I am gradually increasing my exposure to foreign stocks through individual stock and fund purchases due to the parabolic spike in the USD's value. I am using a strong currency to buy assets priced in weak ones. That is normal for me as I explained in two posts published in 2010, a time when the Euro had plummeted in value against the USD.
Strong U.S. Dollar + Weak Market=Time to Start Looking Overseas (6/1/2010 Post)
International Trading and Currency Risks (7/11/2010)
I am making this move in my typical slow mo speed that makes a turtle look like a speed demon.
In my Roth IRA, I recently bought 100 CHN shares at $18.94 and still own those shares. Added To China Fund - China Fund (NYSE:CHN) | Seeking Alpha I noted in that post that CHN was far from tax efficient, having paid me 4 consecutive year end distributions at $3 per share or higher, with the 2014 dividend hitting $3.77 per share. I sold my highest cost CHN shares, including those bought with dividends, profitably, taking advantage of the recent price spike to lower my average cost per share and to harvest those large per share dividend payments, thereby increasing their value some.
Added 30 IDV at $34.55 -Commission Free at Fidelity (see Disclaimer):
Snapshot of Trade:
I can buy this ETF commission free in my Fidelity accounts. iShares ETFs
That is significant for any investor who wants to dollar cost average in small lots. I have bought as few as 5 ETF shares when I am able to do so commission free in one of my brokerage accounts. The low cost Vanguard ETFs are bought in my Vanguard brokerage accounts.
This last purchase brings me up to 50 shares. I am not yet close to being serious about this ETF.
I decided to buy IDV last year, rather than to keep the ETF DWX for 2 reasons. I liked the holdings in IDV better on a long term basis, and I could average into a position in small lots at Fidelity cost effectively due to the free brokerage commissions.
I eliminated DWX on 4/4/14, which was owned in a Fidelity taxable account, realizing a gain of $235+: Sold: 58+ DWX at $48.75 (4/14/14 Post).
I took a snapshot of the top 10 DWX holdings as of 4/16/15 which highlights IMO the problem:
I took a snapshot of the top 25 IDV holdings:
Both funds have issues in the weightings and stock selections. The energy weightings have been a drag since the 2014 summer due to the collapse in crude prices. In my opinion, IDV has fewer of those negative issues and I am just more comfortable owning it rather than DWX.
IDV owned 102 stocks as of 4/15/16.
Currency Risks and Benefits: Both DWX and IDV have also been negatively impacted by the parabolic rise in the USD since last summer which flows into the net asset value of a USD priced fund owning foreign stocks priced in Euros, British Pounds, Canadian and Australian Dollars and other currencies that have declined significantly since the USD parabola started last year.
Parabolic price spikes in any asset category will inevitably collapse upon themselves, taking away a substantial part of gains created during the parabola spike up.
The USD's parabola is clearly shown in a five or ten year Dollar Index: DXY chart.
I am using my USDs now to buy foreign stocks, which is what I do whenever investors drive my native currency to ten plus year highs against other major currencies based on what exactly. The FED may or may not raise the FF rate by a .25% later this year, or maybe not, and the U.S. did better in the third and forth quarters of 2014 than many other countries.
Green shoots have been appearing in Europe, particularly as the pick up in export activity accelerates resulting from the Euro's devaluation, as U.S. GDP numbers slow down.
I buy in small lots to build a position after the foreign currency has already suffered a substantial devaluation when converted into USDs. I started to pick up purchases of USD priced ADRs when the local currency had fallen close to 20% or even more in same cases.
USD's Long Term Future: I would simply note that USD strength comes and goes.
Many argue that currency trends are long term. There were in the more distant past some longer trends, perhaps a melt up occurring over 3 or 4 years and then a meltdown taking 3 or 4 years to find a bottom.
I am not sure what is meant by long term when looking at ten year currency charts.
I can not look at a ten year chart of the Euro per 1 USD and see anything that I would label a long movement. The chart just looks like up and down chop to me, with a parabolic spike in the USD starting last summer clearly shown in that chart.
At page 18 of his annual letter to BRK shareholders, Warren Buffet noted the purchasing power of the USD has declined by a "staggering 87%" during the 1964 through 2014 period. Just looking at the USD's value over the past several decades from a common sense perspective, I see a problem rather than a benefit.
Inflation Calculator: Bureau of Labor Statistics ($7.67 now has the same buying power as $1 in 1964). When discussing what is "gold's fair value", I observed that gold had no intrinsic value that could be determined using standard valuation measures and then conceded that the $20 bills in my wallet do not in "reality have a fixed real value either ...". (introduction section 4/23/13 post: What is Gold's "Fair Value"?)
Is the newly discovered fondness for the USD take into consideration, for example, the $18.152+ trillion in federal government debt, which amount was less than $1 trillion accumulated since the founding of the nation through 1979, plus the unfunded future liabilities for the baby boomers, and the soon to be reached $1 trillion in annual interest expenses that will be added to the existing debt (interest on that interest then) when rates normalize to something approaching average historical levels.
With historically extremely low rates, the interest cost in the F/Y ending last September was $430.8+ billion A weighted average rate of just 5% on $20T would take us to that $1T in annual interest.
So what am I really saying here.
I am an investor who owns mostly USD priced assets.
I am not enthusiastic about the long term value of the USD.
I am not as pessimistic as David Stockman (e.g. on this topic "Eating The Seed Corn-The Fed's Calamitous Corruption Of Corporate Finance".)
I find Stockman's comments too full of hyperbole and exaggerations, and some may even dismiss his warnings as the rantings and ravings of an old man. He is after all a few years older than me. Or, given his popularity at Zero Hedge, which is not held in high esteem among many investors, that linkage has a tendency to diminish what he is saying too.
I am leaning toward the same end result but seeing the end game further into the future. It will likely take more time to undermine what was built over the first 200 years.
The likelihood of a failed series of treasury auctions within 20 years is a significant and growing risk IMO. It is likely to happen when buyers start to cringe at buying treasuries unless the yields significantly increase which adds to the pre-existing problem. That is what some investors call a Black Swan. Sure, the FED may end up buying the debt that can not be sold, but the crater that follows will not be undone by that type of sop up. Might as well hit the U.S. with one of those giant asteroids from outer space.
I am consequently using what other investors are giving me now, until they come to their senses, to buy more assets priced in foreign currencies issued by governments viewed as more responsible than our dysfunctional one. On the one hand, the U.S. will end up spending more than $2 trillion (borrowed of course) on a war of choice (hardly looking so good now either), will likely find another Iraq or Vietnam type endeavor within the next 20 years, and will add costly new programs without bothering to fund long term the ones that we already have. It is a prescription for a train wreck caused by both political tribes in their own ways, each perpetually pointing the finger at the other rather than addressing rationally and fairly the nation's priorities and security interests. In the last analysts, wearing my investor's hat rather than the one that I wear on election day, I recognize that I have no power to change the likely result and it will not matter when it happens who is to blame.
When I see that kind of future long term risk, and assign in a probability rating which is currently high, that will influence my current investment strategy to some degree.
A great deal of what I do now in terms of asset allocations is dependent on a Big Picture analysis of long term trends. That is probably the most important component of my investment strategy and has always been so.
If I see problematic inflation as being in the rear view mirror for example, as I did in 1982, I will switch out of cash and buy stocks and bonds (more bonds today than I would have when I was 30). Problematic inflation was the key underlying cause of the long term secular bear markets in both bonds are stocks between 1966 to mid-August 1982 when the Stock Jocks went into their party dance mode. Similarly, a return to a problematic inflation trend will cause a downward adjustment to those risk assets. Relatively low actual and predicted inflation numbers, which will restrain interest rates, are preconditions to a long term secular bull market in stocks. Low inflation trends existed in the powerful 1949 through 1965 secular bull market in stocks and reasonably predicted low inflation number by Stock Jocks in August 1982 started a bull run into 2000 (Bond Ghouls needed confirmatory evidence for a decade or saw after it became plain to the Stock Jocks who are viewed by the Bond Ghouls as intellectual inferiors and subject to frequent delusions and emotional instability.
The looming U.S. government fiscal crisis is just one of many rational possibilities which receive probability ratings on a continuous basis.
Prior Trade: Prior to this purchase, I only owned 20 shares, so I am only gradually moving up to 100+ shares. I am adjusting my purchases based on risk assessment due primarily to valuation, dividends, and currency issues inherent whenever a U.S. investor buys a USD priced fund that owns foreign securities.
I generally do not discuss commission free ETF purchases until I am at 50 or more shares.
Dividends: This ETF makes quarterly dividend payments that are variable. The dividend yield will be decent, but is not capable of being measured due to the variations in quarterly payments.
I have not been reinvesting the dividend and probably will not start doing so until I own at least 100 shares.
Rationale and Risks: I am basically using the current strength of the USD to buy foreign dividend paying securities in anticipation of what I call a twofer down the road. Hard to say when. The twofer is a market price increase due to a rise in foreign currency values against the USD and to rise in value when priced in local foreign currencies. I may be too early catching that wave.
As shown above, the dividend support is decent.
In addition to the currency risks discussed above, there is the usual assortment of risks associated with stocks, which hopefully needs no further discussion Those kind of risks are summarized in the Prospectus, starting at page S-3. One of the risks mentioned is "industry sector risk" which does not need further explanation for those owning energy stocks over the past several months. A company may reduce or eliminate a dividend. Even a developed nation like Canada has country risks. An example would be what investors call the 2006 Halloween Massacre when the Canadian government announced an end to the favorable tax status of energy royalty trusts in 2011.
The concentration in Australian stocks is another prominent risk. The AUD has been weak against the USD for two years: AUD/USD Chart I noted some other issues relating to Australia's big banks when discussing the purchase of the ADR for Australia & New Zealand Bank Group last February. Since those large Australian pay good dividends, they will generally receive a good weighting in international dividend stock fund, as will the large Canadian banks that have similar issues, as I noted when buying a small lot of Toronto-Dominion Bank (NYSE:TD).
Disclaimer: I am not a financial advisor but simply an individual investor who has been managing my own money since I was a teenager. In this post, I am acting solely as a financial journalist focusing on my own investments. The information contained in this post is not intended to be a complete description or summary of all available data relevant to making an investment decision. Instead, I am merely expressing some of the reasons underlying the purchase or sell of securities. Nothing in this post is intended to constitute investment or legal advice or a recommendation to buy or to sell. All investors need to perform their own due diligence before making any financial decision which requires at a minimum reading original source material available at the SEC and elsewhere. Each investor needs to assess a potential investment taking into account their personal risk tolerances, goals and situational risks. I can only make that kind of assessment for myself and family members.
Disclosure: The author is long IDV, CHN.