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Update For Portfolio Positioning And Management As Of 3/13/16

|Includes: EXC, Manulife Financial Corporation (MFC), PWCDF, SLRC, VFH

This topic was last updated here: Update For Portfolio Positioning And Management As Of 3/3/16 - South Gent | Seeking Alpha

My portfolio management goals are described in this 2014 post: Portfolio Management Goals-Snapshots of Performance Numbers YTD, 3 and 5 Years Cumulative.

OIL: Markets worldwide need a sustained recovery in crude prices. This story highlights one of the problems: Latin America Oil Giants Owe $275 Billion- Bloomberg

U.S. field production of crude oil was last reported at 9.078 million barrels a day. Weekly U.S. Field Production of Crude Oil (Thousand Barrels per Day)

The high was hit in the 2015 summer at $9.604M per day.

Production was going up as crude cratered in price.

WTI closed at $107.95 on 6/20/2014. Cushing, OK WTI Spot Price FOB (Dollars per Barrel) U.S. field production of crude oil was then at 8.446M barrels per day. WTI closed at $26.68 on 1/20/16 and U.S. field production had increased to 9.221M. Between 6/20/14 and 1/20/16, WTI declined by 75+% and production went up 9.18%.

The modest rise in crude recently is insufficient so far to prevent widespread bankruptcies this year. WTI Crude April Contract As of 3/11/16: $38.49 +$0.66 (+1.74%)

E & P companies that will soon declare bankruptcy have already seen their senior unsecured bonds marked down into the single digits, so a lot of bad news is already baked into the credit cake. Possibly, OPEC does not fully comprehend how the U.S. bankruptcy process works. Costs are decreased and a leaner, meaner fighting machine emerges to do battle with them.

It is only a question of time before demand and supply come back into balance and crude starts a sustained move up in price. IMO, it is too early now to claim that a persistent rise is currently underway.

The main reduction in future supply will not originate from shale producers. The huge decline in energy prices have caused a large and widespread decline in capital expenditures among the major publicly traded oil companies that has included the mothballing of projects which take years to complete.

Wordwide demand will continue to increase somewhere in the 1% to 1.5% range. The following shows EIA's number for worldwide crude oil consumption between 2014 through a 2017 estimate.

(millions of barrels per day)

Short-Term Energy Outlook - U.S. Energy Information Administration (NYSEMKT:EIA)

The foregoing projections have demand increasing 1.23% between 2015 and 2016 and then 1.28% Y-O-Y.

Production is estimated to grow .26% between 2016-2017. The estimate now is that production will increase by .26M barrels per day in 2017 over 2016, while consumption increases by 1.21M barrels per day. Call it a million more barrels consumed than are produced.

This EIA chart shows consumption in a black line and production in a blue line:

Interest Rates: Interest rates have to started to move back up a tad, but are still well below normalized rates. Daily Treasury Yield Curve Rates

There has been a spike in the ten year break-even inflation rate starting on 2/11/16, when the market was forecasting only a 1.18% average annual CPI rate over the next ten years. However that spike has only returned the break-even point to where it was last January before the latest market meltdown and is still below the abnormally low levels prevailing late last year. 10-Year Breakeven Inflation Rate

The bond ghouls remain firmly ensconced in their beliefs that problematic inflation will not return during my lifetime. The thirty year break-even inflation rate is a measly 1.66%, the market's anticipated average annual inflation rate for the next 30 years. I wonder if the Las Vegas bookies are taking bets from the Bond Bookies on that forecast.

This chart of the ten year treasury starts in January 1962 when the yield was 4%:

10-Year Treasury Constant Maturity Rate-St. Louis Fed

What does all of this mean? For one, an average annual inflation rate of 1.5% to 2% is ideal IMO for stocks. That kind of inflation rate will cause most investment grade bonds maturing within ten years to have negative yields or insignificant real returns before taxes.

The most important takeaway IMO is that bond investors are in for a big surprise and huge losses by buying vintage high quality bonds now just by a return to normal spreads to average inflation rates.

For shorter term bonds, there would always be the option of holding until maturity and that option causes the investor to lose the opportunity to generate more income by selling a bond going down in value and reinvesting the proceeds into higher yielding bonds. A 4% ten year is after all going to generate more income than a 1.9% coupon bought at par value. The two options in that kind of scenario-take a loss or lose the opportunity, are bad and bad again.

It is not like much income is being generated by buying a ten year treasury yielding 1.9%. It takes about 36.83 years for money to double at that rate before inflation and taxes. Estimate Compound Interest

I can not say with 100% certainty whether the Bond Bookies have lost their marbles. I can only say that it is more probable than not that they are seriously mispricing inflation risk longer term.

The five year TIP had an .08% coupon as of last Friday, up four fold from .02% on 3/1/16. What a percentage gain from nothing to nothing. Daily Treasury Real Yield Curve Rates The coupon was negative for a long time.

The break-even inflation rate for the 5 year TIP closed at 1.41%. I believe that will turn out to be low but will end up being closer to the actual CPI numbers than the ten, twenty and thirty year break-even inflation rates which are likely to way off. The five year nominal treasury yield was at 1.49%, up from 1.31% as of 3/1/16.

VIX Model:

Current Status: Second Recovery Period in an Ongoing Unstable VIX Pattern

I am starting the Second Recovery Period on 2/25/16. The Stable VIX Pattern day count stands at 11 as of 3/11/16.

Mar 11, 2016 17.09 17.27 16.28 16.50 0 16.50
Mar 10, 2016 18.17 19.59 17.06 18.05 0 18.05
Mar 9, 2016 18.56 19.11 18.31 18.34 0 18.34
Mar 8, 2016 18.38 18.89 17.82 18.67 0 18.67
Mar 7, 2016 17.98 18.04 16.87 17.35 0 17.35
Mar 4, 2016 16.48 17.35 16.05 16.86 0 16.86
Mar 3, 2016 17.25 17.56 16.32 16.70 0 16.70
Mar 2, 2016 17.98 18.41 16.78 17.09 0 17.09
Mar 1, 2016 19.84 20.17 17.66 17.70 0 17.70
Feb 29, 2016 20.49 20.81 18.38 20.55 0 20.55
Feb 26, 2016 18.89 20.13 18.46 19.81 0 19.81
Feb 25, 2016 20.54 21.26 19.10 19.11 0 19.11

I am now looking for an opportunity to buy SDS as a small hedge for my stock portfolio and to lighten up on my stock allocation on strong rally days.

As previously explained in several posts over the past 8 years, I will purchase of that flawed product as a hedge during an Unstable Vix Pattern period. The purchase and sell will be timed based on the VIX movements.

The purchase timing first requires VIX movement below 20 occurring after a spike into the high 20s.

After spiking into the high 20s, the VIX has returned to below 20 movement so that criteria has been met.

The VIX Model does not provide guidance as to when to buy hedges during the Second Recovery Period and it really comes down to feel for me.

I have not bought back any SDS shares. I mentioned above that I might wait for SDS to at least return to the $19-$19.5 range where I initiated positions during the First Recovery Period, all of which were sold when the VIX spiked up to the high 20s thereafter. I do not like this product so my purchases were small and spaced out over several days. I did generate close to a $1K profit by selling them during the VIX spike earlier this year.

The double and triple short ETFs are terribly flawed products due to losing tracking.

This admonishment is made by the SDS sponsor:

" This Short ProShares ETF seeks a return that is -2x the return of an index or other benchmark (target) for a single day, as measured from one NAV calculation to the next. Due to the compounding of daily returns, ProShares' returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period. These effects may be more pronounced in funds with larger or inverse multiples and in funds with volatile benchmarks. Investors should monitor their holdings consistent with their strategies, as frequently as daily" (emphasis supplied)

ProShares ETFs: UltraShort S&P500 - Overview

For this kind of hedge to work, timing has to be good for both entry and exit points over a short period of time. I would have gained nothing by buying SDS at $19.5 last November and holding onto the shares until today. And if I bought a few days ago at $22, the hedge would not be working either.

I am close now to reinitiating a position, gradually building it in small lots on major stock rally days. My first marker will be a return to the $19.20-$19.5 price range, the lower the better for the hedge to work.

Some investors might prefer to hedge with options or futures or to short long ETFs. I am not set up to do any of those hedging techniques and that is not going to change.

Market Valuations: Valuations continue to be stretched and are a flashing a bright yellow light IMO.

The GAAP trailing twelve month P/E currently stands at 23.02. P/Es & Yields on Major Indexes - Markets Data Center -

Morgan Stanley cuts S&P 500 target as recession fears rise - MarketWatch ("Morgan Stanley strategists are growing increasingly concerned about the risk of a global recession, slashing forecasts for all major equity markets and advising investors to sell stocks that have recently rallied.")


The following transactions indicate a very slight tilt away from a bond like common stock to insurance stocks that would benefit from a rise in interest rates and an improvement in the CAD/USD.

The first stock discussed below is priced in USDs and would consequently directly benefit from a rise in the CAD/USD after purchase.

Those benefits occur through an increase in share value flowing through the currency conversion and an increasing dividend yield caused by the CAD gaining in value.


1. Bought 50 MFC at $13.78: So far, I have managed to avoid losing money in this one which was not easy. My last foray lasted about a month. I jettisoned a 50 share lot at $16.85 last November, realizing a $5.58 gain which turned out to be the right decision. I am still somewhat compos mentis to realize that $13.78 is a better buy price than $16.85.

Buy and hold has not worked for this stock for a long time.

Some would say it is a dog. I do not comprehend the use of the word dog in that context. I would understand using the words cat, hyena, cockroach or poisonous snake maybe.

Value trap would be another correct characterization.

However, Right Brain sees value and a potential worthwhile total return, but is ridiculously wishy washy on when that may turn from a wish to something more tangible. So far at least, I have a profit.

Trade Snapshot ($1 Commission):

Company Description: Manulife Financial (NYSE:MFC) is a life insurance and wealth management company based in Canada. MFC acquired John Hancock in 2004. Manulife: Company Overview

A.M. Best Affirms Ratings of Manulife Financial Corporation and Its Subsidiaries and Assigns Issue Ratings

Manulife Financial Is a Dividend and Growth Play-The Motley Fool Canada

Manulife Financial Corporation Completes U.S. Public Offering of Senior Notes -March 4, 2016 ("U.S.$1.75 billion aggregate principal amount of two series of its senior notes consisting of U.S.$1.0 billion aggregate principal amount of 4.150% senior notes due 2026 and U.S.$750 million aggregate principal amount of 5.375% senior notes due 2046.")-Prospectus

The USD priced MFC shares have significantly underperformed the ordinary shares priced in CADs over the past two years due to the CAD falling in value against the USD.

That performance differential would be found in any Canadian stock that is traded in the U.S. and priced here in USDs.

Manulife Financial Corp. Interactive Stock Chart

The CAD has recently rallied some which has caused the USD priced shares to outperform the ordinary shares traded in Toronto recently. The CAD/USD was at .7458 when I bought MFC (1 CAD buys 74.58 USDs), and had risen further to .7565 last Friday. The exchange rate was at .6875 on 1/19/16.

Closing Prices 1/19/16:

MFC: $12.38

MFC.TO: C$18.04

Closing Prices 3/3/16:

MFC: $14.26

MFC.TO: C$18.88

A quarterly distribution went ex dividend between those dates.

MFC Historical Prices

MFC.TO Historical Prices

MFC.TO was up 4.46% unadjusted for the dividend.

MFC was up 15.19%

The rise in the CAD has caused MFC to significantly outperform the same shares priced in CADs, just like the decline in the CAD reflected in the chart caused MFC to substantially underperfrom the same shares traded in Toronto. The most ideal scenario would be for the CAD to rise in value after the purchase of USD priced Canadian stock and for the ordinary shares to rise in Toronto, which has happened so far for MFC.

Dividends: Manulife has been increasing is dividend in Canadian Dollars since a slash in 2009 that cut the penny from $.26 to $.13.

Manulife: Dividend Rates

Dividend cuts are frowned upon here at HQ. But, I had never bought this stock before the dividend cut and there was a long history of dividend raises before the 50% slash.

I took a snapshot of the dividend rates as expressed in CADs, USDs and other currencies:

First, look at the USD rate from the 2010 1st quarter to the 2011 2nd quarter. Without looking at the CAD/USD chart, I know that the CAD is rising in value against the USD. There is then a drift down in the USD penny rate for one quarter as the CAD rate stays at C$.13. The CAD/USD thereafter rises but tops out in 2012 third quarter. With the CAD dividend still at C$.13, the USD penny rate had fallen to $.117562 (4h Q 2013), down from $.133006 (Q 1 2011). While the dividend remained constant in CADs, the owners of MFC received a 11.61% dividend cut.

The CAD thereafter continued to decline. Even after two CAD dividend increases, which brought the penny rate up to C$.17, the USD rate was at $.127743 for the 2015 third quarter.

Assume that the CAD returns to parity for one quarter and the CAD dividend is the current rate of C$.185. That would then equate to USD.185 and a dividend yield of about 5.37% at a total MFC cost per share of USD13.78.

If I took last Friday's exchange rate, and converted the C$.185 into USDs, the dividend rate would be about $.1387 that would result in an annualized dividend yield of 4.03%.

Even if the C$ dividend remains at C$.185, my dividend yield goes up to 5.37% when and if the conversion rate is 1 CAD for 1 USD. A rise in the CAD penny rate would then increase the yield above 5.37%.

On the other hand, if I used the conversion rate for 1/19/16, the penny rate falls to $.1272, and the yield declines to 3.69%.

Currency risk has to be understood when buying foreign securities priced in USDs. I discussed this issue in two old posts as well:

Stocks, Bonds & Politics: Strong U.S. Dollar + Weak Market=Time to Start Looking Overseas (6/1/2010)

Stocks, Bonds & Politics: International Trading and Currency Risks (7/11/2010)

My preference is to buy USD priced foreign securities when the USD is strong compared to the local currency used to price the ordinary shares and the ordinary shares have declined in local currency terms preferably for non-fundamental reasons.

Last Earnings Report: The market reacted negatively to this report. Manulife Financial (MFC) Stock Drops on Earnings Miss - TheStreet This report was released before the market opened on Thursday 2/11/16. MFC.TO closed at C$17.31 on 2/10 and at C$15.84 on 2/11. The Toronto listed shares thereafter recovered slowly and are currently trading above the close prior to that release.

Look at the decline in net income to $246M from $640 in the 2014 4th quarter:

Core earnings, which exclude a large number of loss items, are rising. The 2013 net income number was substantially higher than the core earnings.

I included MFC's explanation for the GAAP net income downdraft in that snapshot.

Sourced: Page 30 SEC Filing

The current consensus MFC E.P.S. estimates are $1.9 for this year and $2.13 next year. MFC Analyst Estimates

Earnings for the last quarter are scheduled to be released on 3/23.

2. Added 100 to Power Corporation of Canada (NASDAQ:CA): This purchase brings me up to 400 shares.

The fact that I own 50 MFC shares and 400 POW reflects my opinions about the two companies. I may be wrong of course, but I have to formulate opinions after gathering relevant information in order to make an informed decision about capital allocations.

I could not figure out how to transfer my CADs held in my Fidelity account to Interactive Brokers. I consequently dipped into the Fidelity stash even though IB charges $1 and Fidelity charges C$19. I really want to dump Fidelity as my primary broker for trading international stocks and all securities where online trading is prohibited by that broker. That list is a long one. There should not be one security on that list.

Trade Snapshot:

I have discussed this Canadian company several times here. When it reports earnings, I will leave some comments below. The most recent discussion was here: Update For Portfolio Management And Positioning As Of 11/11/15 - South Gent | Seeking Alpha (scroll to Contrarian Income and Value Investing: Canadian Securities Priced In USDs/Rationale For Purchases Described Below and 1. Bought 50 PWCDF at $22.44)

I bought the ordinary shares then that are priced in USDs and traded on the U.S. pink sheets. My broker then changed the symbol to the Toronto listed shares.

Power Corp. of Canada Stock Price Today (PWCDF:OTC)

Power Corp. of Canada (POW:TOR)

Comparison Two Year Chart:

POW-Power Corp. of Canada Interactive Stock Chart

The same currency conversion issue applicable to any Canadian stock priced in USDs is reflected above as well.

Dividend History In CADs: Power Corporation of Canada | Dividends POW raised the quarterly dividend to C$.29 from C$.24125 effective for the 2008 second quarter. The C$.29 rate was maintained until the 2015 second quarter when it was raised to C$.31125.

There was no dividend cut in response to the Near Depression which is one important distinction in favor of Power Corporation compared to ManuLife.

The last quarterly distribution went ex dividend on 3/10/16. I will be receiving C$123.5 on 3/31 minus the 15% Canadian withholding tax or about C$105.83.

Schwab Publication: Claiming Foreign Taxes

3. Nibbled at VFH: Commission Free in my Vanguard Accounts:

Trade Snapshot: Bought 10 Shares at $45.38

This is part of the same rising interest rate theme. The inclusion of REIT stocks in this index may cause this ETF to underperform bank ETFs during interest rate spikes.

I of course do not know when rates will normalize to historical spreads to inflation or how much CPI will increase over the next several years. I only know that a rising interest rate scenario is viewed by investors as a positive for banks and insurance companies.

In 2013, when the ten year treasury spike up in yield, the Vanguard Financials Index Fund ETF (NYSEARCA:VFH) had a total return of 33% based on net asset value per share. The return was held down significantly by the REIT components of this ETF. The S&P Regional Banking ETF (NYSEARCA:KRE) had a 47.34% total return that year, while the S&P Insurance ETF (NYSEARCA:KIE) rose 45.58%.

Sponsor's website: Vanguard

Expense Ratio: .1%

Holdings: 567

I took a snapshot of the top holdings as of 1/31/16:

Fund Holdings

Berkshire Hathaway is classified as a financial in this index.

Prior Trades: I periodically flip this ETF:

My last purchase was quickly sold as I changed my opinion about my financial allocation last year starting in the late Spring and ending in that summer. My regional bank exposure was then cut almost in half. Update On Regional Bank Basket Strategy As Of 7/17/15 - South Gent | Seeking Alpha

Increased Exposure To Financial Sector: Bought The Vanguard Financials ETF (VFH) - South Gent | Seeking Alpha (scroll to Bought 50 of the ETF VFH at $49.15-Commission Free at Vanguard)

Sold 50 VFH at $33.56 (10/18/12 Post)(+$119.97)-Bought 50 VFH at $31.16 and Sold 50 VFH at $31.05 (February 2012)(+$92.57)-Bought 50 of the Stock ETF VFH at $29.2 (January 2012)

Sold 100 of the ETF VFH at 34.88 (February 2011)(+$403.28)-Item # 7 Bought 100 ETF VFH at 30.85 (November 2010)

Total VFH Realized Gains to Date=$689.7

I will also trade a similar ETF that can be bought commission free in my Fidelity accounts: FNCL | ETF Snapshot - Fidelity (expense ratio of .12%).

Before the advent of low cost sector ETFs that could be bought commission free, I used the as a vehicle to increase exposure to financial stocks. XLF-Financial Select Sector SPDR Fund (expense ratio .14%). That one owns financial stocks in the S & P 500 and consequently has much higher weightings in the large companies. The weighting in the top five (BRK, WFC, JPM, BAC, and C) was at 35.15% as of 35.15%. XLF would probably be a better choice when and if BAC, C and the other big banks start to outperform an equally weighted index. BRK had a 9.48% weighting in XLF compared to a 4.32% weighting in VFH.

So far at least, the heavier weighting in the big financial names has not helped XLF:

Five Year Average Annual Total Returns Through 3/11/16:

VFH: 8.49%

XLF: 8.21% XLF Total Returns

When and if I gain more confidence about some of the big names, I may buy some XLF in my IB account.

4. Sold 107+ Exelon: My decision to dip my toe back into Exelon after prior successful trades proved to be a less than optimal decision. I subsequently averaged down, reinvested a few dividends and dug myself out of the hole, realizing a net profit of $64.76 plus dividends. I would call it a failed investment.

SOLD: 100 EXC @ 44.67 (7/27/11 Post); Sold Remaining Shares of EXC at $44.44 (9/21/11 Post)(realized gain=$259.13)

Small Ball with BDCs: As long time readers know, I have a strong dislike for externallly managed BDCs. Consequently, I generally buy only in small lots (50 to 100 shares) and sell at whatever profit is available whenever I collect a few dividends. The general idea is to generate a total return in excess of their typically large dividend yields, recognizing that many of them enrich only their managers as net asset value per share inexorably declines closer to zero.

I am trying to concentrate on a few that have at least been able to maintain their net asset values over time and do not appear to have managers that pay more than lip service to shareholders. I am also interested in prior dividend history, the long term history of net asset values per share, and the BDCs coverage of the current dividend with real recurring income (i.e. cash in the bank) generated by its investments.

SLRC is a borderline flip however. It has coverage problems for the past two years, and the net asset value per share has started to trend down last year after remaining steady near $22 per share since 2011: Page 57 Form 10-K

I will buy 50 shares here and there, collect a few dividends and then sell when I have a profit.

My last purchase was discussed here: Update For Portfolio Positioning And Management As Of 10/1/15 - South Gent | Seeking Alpha (1. Bought Back 50 SLRC at $16.77)

I have now sold that 50 share lot after receiving just one quarterly dividend of $20:

Profit $43.98 (total return $63.98/7.62% in about 6 months)

I had previously bailed on SLRC by selling the ubiquitous 50 share lot at $18.95 on 5/21/15. And that is my point.

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. A failure to perform due diligence only increases what I call "error creep". Stocks, Bonds & Politics:ERROR CREEP and the INVESTING PROCESS. 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: I am/we are long VFH, PWCDF, MFC.