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Adams Express: A Good Fund, But Recent Changes Are A Risk

ADX has a storied history unique in the CEF space. That said, ADX recently went though a management change resulting in a new investment approach. Although history suggests ADX is a solid CEF offering, the new manager has yet to be tested by a notable downturn. Adams Express (NYSE: ADX ) traces its history back to 1929 . It’s paid a dividend consistently since 1935. Unlike most closed-end funds, or CEFs, it is its own company with no sponsor to appease. The longevity, a mandate to distribute at least 6% of assets annually, and low expenses are all good reasons to own Adams. However, you’ll need to take a step back and consider the new guy at the top before you pull the trigger. I did it my way Adams Express really is an odd duck for a CEF. While most CEFs are sponsored by major financial companies, which get paid to manage the funds, Adams is a company unto itself. In fact, the CEO heads up the investment process. I highly doubt the CEO of Eaton Vance Corp (NYSE: EV ) has anything to do with the closed-end funds his company sponsors. And Adams Express has an impressive history of paying dividends. For example, between 2007 and 2014 the CEF paid out $18 a share in distributions. It started that period out with a market price of around $13 a share. It’s recently been trading hands at around $13.50 a share. If you lived off of those dividends you can’t exactly brag about capital appreciation, but you certainly can’t complain that your capital has been slowly returned to you, bleeding the fund’s assets in the process. And the CEF has an extremely low expense ratio at around 0.6%, according to the Closed-End Fund Association . It isn’t unusual to see closed-end funds with expense ratios two to three times greater than that. Low costs are a true benefit to shareholders over the long term. But what about management? All of the above points are solid reasons to consider Adams Express as a long-term holding for your portfolio. That said, there are some reasons to avoid it, too. For starters, the 6% dividend policy ensures that distributions will fluctuate from year to year. And, generally, the CEF pays three small distributions and then one large one at the end of the year. If you are looking for regular income, this isn’t the best option. But the bigger issue is actually management. In 2013 , Mark Stoeckle replaced long-time CEO Douglas Ober. Stoeckle has over 30 years of experience in the finance industry, spending time at BNP Paribas, Liberty Financial, and Bear Stearns. At BNP he was the Chief Investment Officer for U.S. Equities and Global Sector Funds. That’s not a bad pedigree. That said, as you might expect, he came in, took a look at the portfolio, and made some changes. That’s what all new managers usually do. But, more important, it meant a 55% turnover for the fund in 2013. In the four prior years, the highest turnover was roughly half that at 27%. Turnover through the first nine months of 2014 was around 30% on an annualized basis. So he’s clearly gotten the portfolio pretty close to the way he’d like it. However, his approach at Adams Express hasn’t been tested by a major market downturn. That fact alone is enough reason to take a wait and see attitude, or to at least start slowly and build a position over time. Still, it’s worth delving into what Stoeckle does. For starters, he, wants to, “…invest in good businesses. These types of companies typically have a visible growth path and a defendable market position that they can use to their advantage.” He’s also fond of business operating in an, “…improving competitive environment…” That’s step one. He also wants to see a management team that has demonstrated its ability by, “…generating cash flow and using that cash to prudently grow the business and fortify its market position and balance sheet…” And before pulling the trigger he also wants to make sure he’s getting a good deal, making valuation a chief concern. After a stock is in the portfolio, meanwhile, Stoeckle and his team set milestones against which to grade each company’s performance. This all sounds great. But it’s roughly similar to things I’ve heard and read from hundreds, if not thousands, of pooled investment vehicles (mostly open-end mutual funds in my former life as a mutual fund analyst for a financial publishing company). Having a good story doesn’t mean you’ll have good performance. That’s not to say that posting a one-year gain of about 13% in 2014, roughly in-line with the broader market according to Morningstar, was a bad showing. Quite the contrary; job well done. But remember, 2014 wasn’t 2007 or 2008, when the broader market was, well, a little less hospitable. So, a new manager who’s only recently gotten Adams Express into fighting shape is a good reason to pause before you pull the trigger. And while the fund is trading at an around 14% discount to net asset value, that’s actually in line with the fund’s average over the last five and 10 years. So it’s probably fairly priced right now, but certainly not cheap. Not ready to pull the trigger I like Adams Express based on its long-term history and unique profile. But I’d wait until the market shakes things up a little before buying. I just want to see how the new CEO handles a bad market.

Arctic Cold Brought Up UNG – For A Short Time

Summary Colder-than-normal weather brought up the price of UNG. EIA still estimates this year’s natural gas price to remain lower than last year’s. This week’s extraction from storage is estimated to be higher than the 5-year average. The recent news of possible Arctic weather in the coming week pushed up back up the price of United States Natural Gas (NYSEARCA: UNG ) to pass $16 at one point. Since then, however, its price resumed its descent. The price of UNG ended last week at $15.69 – representing a 4.6% gain, week over week. Despite the recent rally in UNG, it’s still 16% down in the past month. The cold snap drove up the U.S. consumption by nearly 7%, week over week. Most of this gain was in the residential/commercial sectors. Despite the low prices of natural gas, the U.S. natural gas output is still up by roughly 10% for the year. If prices were to remain low, however, this could eventually curb down the growth rate in the natural gas output in the coming quarters. But the main issue revolves around the potential changes in the demand for natural gas mainly in the residential/commercial sectors. Over the next couple of weeks, the temperatures mainly in the Northeast and Midwest are projected to be lower than normal. In the west coast temperatures are expected to be higher than normal. Conversely, this week, the current outlook for the heating degrees days shows lower than normal levels. Nonetheless, it seems that the low temperatures are likely to keep driving up the demand for natural gas for heating purposes. Let’s turn to the latest from the natural gas storage. Last week’s Energy Information Administration update showed a 236 Bcf extraction from storage – this was 46 Bcf higher than the 5-year average. But it was also 51 Bcf below last year’s extraction. Source: EIA This week’s extraction from storage is likely to be, again, higher than the 5-year average. Keep in mind, last week’s deviation from normal temperatures was, on average, -4.29. The lower-than-normal temperatures may result in higher than normal withdrawal. Even though the changes in storage provide an indication for the changes in the demand and supply for natural gas on a weekly scale, as I pointed out in the past, the relation between the prices changes in UNG and shifts in storage tend to have a low correlation. This is mostly on a week-to-week examination. On broader scale, however, lower extractions from storage tend to keep UNG down and vice versa. Looking forward, if the extractions from storage were to remain roughly 10% lower than the 5-year average, this could bring the natural gas storage in line with the 5-year average by the time the injection season commences. This is shown in the chart below. Source: EIA The EIA also estimates that the natural gas inventories will be roughly in line with the 5-year average by the end of March 2015. On a yearly scale, the EIA still expects natural gas prices to remain low in 2015 – the annual average price is estimated at $3.44; this is roughly 22% lower than the average yearly price in 2014. The uncertainty in the weather forecasts in the next couple of weeks could lead to big swings in the price of UNG – as was the case in recent weeks. Nonetheless, if temperatures don’t fall below current estimates, this could result in UNG resuming its descent. For more see: Has the Weakness in Oil Fueled the Decline of UNG?

Investing Lessons And Portfolio Update

Never go “all-in”, no matter how tempting it may be. Many forex traders got wiped out by using too much leverage trading the Swiss franc last week. “Protect the downside” and “regular re-balancing” have kept my portfolio from big drawdowns and losses. We have added multiple equity positions and precious metal positions to our 1% income portfolio. First thing, let’s go through what happened with the Swiss franc last Friday. The currency’s value had been pegged to the euro since 2011. The pegged price was “1.2:1”, which meant 1.2 Swiss francs bought you 1 euro. Last Friday, the Swiss National Bank announced that it was going to break the peg and allow its currency to trade freely. The franc rallied strongly on the news, and at one point last Friday, the franc was worth 0.85 euro cents, before finishing at practically parity with the euro. The Swiss stock markets fell sharply, but when you factored in the added strength of the franc, the losses in real terms were much less than reported. So why did the Swiss bank announce such a measure? Well, I believe there could be 2 answers. Firstly, the franc has lost a lot of purchasing power since the middle of last year, as the dollar has made massive gains against the euro. Also, secondly, is the Swiss central bank sniffing our quantitative easing in the near future by the European central bank? If QE gets the go-ahead in Europe, then all currencies that are pegged to the euro will also have to undergo devaluation. However, the Swiss franc is seen as a safe haven internationally, so it would have definitely lost its prestige if the currency continued its devaluation against other currencies such as the dollar. The Swiss economy may hurt for a while, but the right decision was made, in my opinion. The purchasing power of the franc has been prioritised, and this is excellent news for its citizens. So what’s the lesson to be learned here? Well, many currency traders got their portfolios wiped out because of last Friday’s action. An investor or trader can never go “all-in”, no matter how tempting the investment or trade may be. I spoke about this in one of my previous articles . Greed can destroy a portfolio overnight, if it is allowed to. The dollar has been rallying strongly since the middle of last year. Moreover, many currency traders thought that the impending QE in Europe would strengthen the dollar even more against the euro and the Swiss franc. Some shorted the Swiss franc en masse in the hope of making a killing. Unfortunately, all that was “killed” was their portfolios. Re-balancing your portfolio is one of the best techniques out there for controlling greed and keeping your portfolio fresh. If you are holding US stocks, the US dollar or US bonds in your portfolio, I would recommend that you rebalance your portfolio. These 3 sectors have risen a lot in the last 12-18 months. Smart investors would take some money off the table in these sectors and deploy extra capital in more depressed sectors. I am not advocating withdrawing all your capital from these sectors, as there may be many more months of upside, but now may be the time to lighten up instead of doubling down. We are living in volatile times, where any move by a country or central bank could have devastating effects on your portfolio if it is not set up correctly. I say all of the above because the sentiment on the US dollar at the moment is extremely bullish. Everyone expects the dollar rally to continue (and it may very well continue) as Europe tries to get a grip on deflation. Nevertheless, surprises can happen in any market, as we witnessed last week. Could China, for example, break its currency’s peg against the US dollar? Many would say this is highly improbable, as China owns huge amounts of dollar reserves. What if the US announced QE4 in the coming months? Would the Chinese let their currency weaken alongside the dollar? These scenarios may never happen, but position sizing and diversification in your portfolio would protect you from all possible outcomes. Another valuable lesson in investing which ties in well with my last point is “protecting the downside”. Professional investors are far more concerned with the downside (risk) than the upside. Losing money is not an option for them. So let’s look at what an investor can do when he or she is sitting on some nice profits. Let’s take a look at the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ), for example. This ETF has gained 80% over the last 5 years, which is a fantastic return for an ETF. How do we protect the downside? (click to enlarge) 1. We take some money off the table and deploy it into a depressed sector, such as the gold mining sector. 2. We buy a put option (like insurance). If the ETF drops, our put option will go up in value. The net result is that we will lose less if the market falls sharply. If the market continues to rise, we will only lose what we paid for the put option. 3. We place a stop loss under the present price of the ETF (the 200-day moving average is used often by professionals). The problem with a stop loss is that it is less effective when there is volatility in the market (violent swings both ways). Protecting the downside and rebalancing my portfolio every once in a while has not only protected my portfolio, but also has grown it. Finally, we added many positions to our 1% portfolio last Thursday and Friday (see screenshot below). We now have in the region of $130k invested in stocks, but will not be investing more into this asset class for the moment, as we feel other asset classes can give us higher returns going forward (rebalancing). We will fill up our Precious Metals & Commodities asset classes with the full $180k each soon enough, as we have unearthed depressed companies in these sectors and low-cost indexes. Stay tuned. (click to enlarge) Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.