Thursday, January 13, 2011

MVO Watch

Every ex-dividend day is a black swan in the making.

MV Oil Trust (MVO), with a 7% annual dividend yield, is an example. It went ex-div today for a 67.5¢ quarterly payout, and the price at this point is running $3.90 below Wednesday's close, the equivalent of nearly six quarterly dividend payments.

ppspfe trendpfe loc

A "black swan" is an event that comes out of the blue, of the sort that no trader can fully anticipate and one that has a significant impact in its realm.

The 9/11 terrorist attacks were black swans whose reverberations are still echoing through the global polity. An anouncement of corporate guidance that revises the conventional wisdom about a company's prospect, causing the stock to tank or soar, is a black swan.

A stock going ex-dividend with a slight increase in payout is anything but a black swan. We're known, pretty much for years, that the ex-div date would come in January, and we could make a pretty good guess for at least the past year what the level of payout would be.

This is why I dislike dividend plays. See my essay on the subject.

And yet, like an addict, I keep coming back to them, stuffing the occasional high-yield stock into odd corners of my portfolio, quietly muttering, "This time it will be different."

But no regrets. To the numbers:

MVO has good points among its financials, but at other points, it is entirely awful.

The return on equity is nearly 82%, an outstanding level but one to be expected from a company who's goal is to pursue maximum distributable returns.

MVO's return on equity has risen in each of the three years it has been operating, and the company has no debt to speak of.

However, the company's profits have consistently declined, as have its revenues. There's nothing to indicate that will change going forward.

So MVO is punter's stock for traders looking to get quick current income at high levels, 5 percentage points above forward inflation.

An alternative way of looking at stocks is the one embraced by Warren Buffet, the Sage of Omaha, Friend to Value, Lord of the Long-Term Investors, yada yada yada.

Buffet sees a stock as being very much like a bond, with the return on equity equivalent to the yield. Sure, it's a variable yield, and stockholder can't count on getting principal back, so it's a far stretch from being a T-bill.

Buffet doesn't go for the dividend, and in fact is much happier if the dividend is retained. His argument goes that a retained dividend will be used to increase the company's value, and so produce higher earnings and greater return on equity, and therefore a growth in the stock's price.

If the money were paid out, the stock's price would suffer, and Buffet says that he would be unable on his own to get such high yields on the dividend he was paid.

Makes sense. By paying a 67.5¢ dividend, MVO is putting the burden of reinvesting that money on me. There's no "safe" alternative out there that will bring me enough return to even equal inflation, so the minute that dividend payout hits my brokerage account, it becomes a wasting asset.

Moreover, the payout has caused the price to decline, although far more than I would have expected.

Had MVO retained the dividends, the price would be happily sitting where it was on Monday, and I would happily counting on higher stock prices in the future as that money is applied to producing even more returns in the 80%+ range.

But, that's not Thursday's reality.

The stock hit an all-time high on Tuesday, before declining on Wednesday. The price decline on Thursday (today) pierced the 20-day moving average and bounced off the level of the prior minor swing high attained on Dec. 22.

Reversal Levels
  • $43.73, +14.3% (all-time high)
  • $38.82, +1.4% (20-day moving average)
  • $38.27 --- You are here.
  • $37.50, -2.0% (prior swing high)
  • $34.85, -8.9% (50-day moving average)

I treat high-yield stocks as long-term plays. I want the tax benefit on the dividends and any capital gains (and MVO has produced large capital gains, rising 544% -- not a typo -- since December 2008).

On the monthly chart, which I use for slow-trading analysis, the stock remains in bull phase, although with the confirmation line falling with a very shallow slope beginning last summer.

Monthly chart
ppspfe trendpfe loc

Well, OK. It's a pretty scary price decline, and it comes on volume that is more than double that of Tuesday, when the all-time high was reached. However, the price has pulled back from the intra-day low, suggesting downside resistance of at least some efficacy.

As a trader, I need to decide whether this decline is "real" (stupid concept!) or just amateur hour.

The high-resolution 133-tick chart shows a gap down in pre-market trading, but it was only 100 shares changing hands. Wednesday's post-market trading showed a price rise with more than 1,000 shares traded.

From the opening bell, the price showed a steady decline down to the day's low set around 11 a.m. Eastern.

The biggest decline and the most activity came between 10 a.m. and 10:15 a.m.

To me, that says amateur hour. With only 15% institutional ownership, MVO is prone to swings prompted by retail-trader speculative panic.

Had the sellout been prompted by the pros, then I would expect a decline before the open, when the big boys and girls typically weigh in.

I have skin in this game. MVO is a slow trade for me, so for the shares in my portfolio, I'll follow the slow-trade chart and close upon a switch to bear phase confirmed by a distinct downward slope on the confirmation line.

A persistent decline below $37.50 would prompt me to exit, as would negative news of some sort that accounted for the sharp price decline.

  • pps - Person's Proprietary Signal.
  • pfe trend - Trend of the polarized fractal efficiency line.
  • pfe loc - Location of the polarized fractal efficiency line.

Key to the PPS/PFE tables
pps bull phase
bear phase
pfe trend uptrend
no trend
pfe loc +100 and above
+50 to below 100
0 to below +50
below 0 to above -50
-50 to above -100
below -100

PPS/PFE Analytical Tools

The analysis uses the daily Person's Proprietary Signal (pps), developed by John Person.

This is a black box signals -- the "proprietary" means that Mr. Person knows how it works under the hood, and I don't. But it has shown a fair degree of success in identifying good entry and exit points, and I find it useful.

For confirmation, the analysis uses an indicator called the polarized fractal efficiency (pfe) technical tool. It uses the fractal math of Benoit Mandelbrot to measure how efficiently move between levels. The higher the efficiency, the more directional the price trend.

The math for the pfe is public knowledge, but it is well above my math knowledge, and so to me is also a black-box signal.

This is a relatively new technical tool, based on fractal math. Investopedia has only a cursory explanation. Wikipedia is silent on the subject. ThinkOrSwim has a fuller explanation.

PPS/PFE Trading Rules

These rules are very preliminary. I’m still trying to figure out how the polarized fractal efficiency signal works.

When Person’s Proprietary Signal (pps) is in bull phase, enter when the polarized fractal efficiency (pfe) line crosses the zero line in an uptrend trend) A pps signal and pfe uptrend have less strength but greater upside potential when the pfe location (pfe loc) is below +50, and greater strength but less upside potential when the pfe location is at or above +50.

When the pps in in bear phase, enter when the pfe trend crosses the zero line in a downtrend. The set up has less strength but greater downside potential when the pfe loc is above -50, and greater strength but less downside potential when the pfe loc is at or below -50.

How should the pfe line be treated when it has flatlined at either end of its range, around +100 or -100. My preliminary observations are that the price by then has had a large run and tends to present a picture of exhaustion. However, by the description of the pfe, a high level should indicate a continued strong trend.

This is something that I’ll figure out as I go along.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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