Tuesday, April 11, 2017

Observations and Sample of Recent Trades: 4/11/17 (CYSPRA, NKTR, NLYPRD )

Prior to the election, the University of Michigan measured consumer expectations. The expectations for republicans was at 61.1, a level consistent with an ongoing recession. The Democrats were confident in a Clinton victory and their confidence was measured at 95.4.   

Last March, the republicans were just plain giddy with their expectation number increasing by almost 100% to 122.5. The Democrats have become more pessimistic than the republicans prior to the election. There never has been such a large partisan divide in the history of this poll.

Boom or Bust: Stark Partisan Divide on How Consumers View Economy - The New York Times

The Democrats are about 1/3 of the population. If they cut their spending by 5%, there could be a recession according to the Alan Blinder as noted in the preceding linked article.

The exuberance about the future among republicans is largely responsible for the robust stock move since 11/8/16 IMO, and is not based on reasonable future earnings expectations. Republicans dominate stock trading and have a far greater impact on marginal stock prices than investors who belong to the Democrat tribe.

The potential for disappointment looms large, and there is no room for disappointing GDP, job and earnings growth in the market's current multiples.

As measured by Birinyi Associates, the TTM GAAP P/E for the S & P 500 was at 24.63 as of 4/7/17. The non-GAAP estimate of forward 12 months operating earnings was 18.32. P/Es & Yields on Major Indexes

I like to keep track of how accurate the forward estimates turn out to be over time. Over the past several years, those estimates have been absurdly too high without question, and yet investors still base current pricing decisions based on those estimates. Those who rely on them now rarely, if ever, point that out. I have done so on many occasions in the past. {E.G. Update For Portfolio Positioning And Management As Of 7/24/16 - South Gent | Seeking Alpha: the difference in 2015 actual and estimated non-GAAP operating earnings was 26% using the estimate made on 12/31/14}

The following is a snapshot of both the GAAP and Non-GAAP consensus estimated S & P earnings as of 3/31/17 compiled by S & P:

As of 3/31/17, the 2018 4th quarter non-GAAP estimate was $39.08. 

With 62% of companies reporting for the 2016 4th quarter, the non-GAAP estimate for that quarter was at $27.9. 

To move from $27.9 to $39.08, earnings would have to increase by 40% over just two years. And, that would have to occur late in an economic cycle. No recession has occurred since the last one officially ended in June 2009. nber.org/cycles  

Sure, the market is forward looking. It is not rational however to move from that cliche to relying on analyst predictions about forward "operating earnings". The why is simple but ignored or forgotten. Their past track record is abysmal, as I have shown many times, and they have motives for being overly optimistic and back loading growth in the second half of every year. Yet, even though they have been way off, invariably being far more optimistic than warranted, investors still cite and rely on the forward estimates to justify current prices. 

Animal spirits frequently have no firm anchor in reality but nonetheless can influence stock prices for an extended period of time.  


10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity-St. Louis Fed

A narrower time frame shows this yield spread narrowing since late December 2016: 


1.  Intermediate Term Bond Ladder Basket Strategy:

A. Bought 1 Citigroup 3.875% Subordinated Bond Maturing on 3/26/25

Issuer: Citigroup Inc.  (C) 
C Citigroup Inc Page at Morningstar 
FINRA PAGE: Bond Detail (prospectus linked)
Credit Ratings:
Moody's at Baa3
S & P at BBB

YTM at Total Cost (99.319) = 3.975%

Citigroup has two classes of "subordinated" debt. The junior subordinated debt ranks below subordinated debt. The senior unsecured debt ranks above "subordinated" debt. Citigroup Credit Ratings This particular bond sits above junior subordinated debt and below senior unsecured bonds in the capital structure and is ranked two notches below Moody's Baa1 rating assigned to the senior unsecured debt. 

Citigroup Analyst Estimates 

If Citigroup ever does a Lehman Brothers, junior debt would be worthless and senior unsecured debt owners will be scrambling to receive 20 cents on the dollar. 

B. Bought 1 EPR Properties 4.5% Senior Unsecured Maturing on 4/1/25

Issuer: EPR Properties (EPR)-A REIT

EPR EPR Properties Page at Morningstar
FINRA PAGE: Bond Detail (prospectus linked)
Credit Ratings: 
Moody's at Baa2
S & P at BBB-

YTM at Total Cost (100.252 ) = 4.462%

EPR SEC Filings 

EPR 2016 Annual Report (debt listed at page 91)

2016 EPR 4th Quarter Report

EPR Analyst Estimates

Last December, EPR sold $450M of 4.75% senior unsecured notes maturing in 2026. Prospectus

I have bought and sold the common shares and several EPR equity preferred stocks.

Currently, I do not own the common, but did buy back EPRPRF at $24.95 and discussed that purchase in this comment.

EPR Properties 6.625% Series F Cumulative Preferred SharesProspectus (issuer has the right to redeem at the $25 par value on or after 10/12/17)

C. Bought 1 Goldman Sachs 3% Senior Unsecured Maturing on 3/15/24:

This is a new issue offered at par value under Fidelity's Corporate Notes Program:

Interest is paid monthly.

Issuer:  GS Stock Quote - Goldman Sachs Group Inc
GS Analyst Estimates

D. Bought 2 Duke Energy Carolinas 2.5% First Mortgage Bonds Maturing on 3/15/23:

The trade date was 3/21/17 which indicates how far I am behind in discussing these trades. 

Issuer: Duke Energy Carolinas, a wholly owned subsidiary of Duke Energy (DUK)

FINRA Page: Bond Detail (prospectus is not linked)

DUK Duke Energy Corp Page at Morningstar
Credit Ratings:
Moody's at Aa2
Moody's downgrades Duke, Progress, and Duke Energy Progress-Affirms Duke Energy Carolinas Senior Secured at Aa2 
S & P at A

YTM at Total Cost (99.183) = 2.648% 

2016 Duke Energy Annual Report 


E. Bought 2 Duke Energy Carolinas 2.95% First Mortgage Bonds Maturing on 12/1/26: Roth IRA Account

Finra Page: Bond Detail (prospectus linked)

Credit Ratings: Same as above
(make whole provision at page S-10 of the prospectus)

YTM at Total Cost (98.857) = 3.087%

This bond was sold in November 2016. Prospectus 

2. Continued Paring Fixed Coupon Equity Preferred Stocks

A. Sold 50 of 150 CYSPRA -Used Commission Free Trade:  

CYS Investments Inc. 7.75% Cumulative Preferred Series A Stock (CYS.PA:NYSE) 

Prospectus Supplement

CYS is a mortgage REIT. I view preferred stocks issued by mortgage REITs to be riskier than those issued by equity REITs. I have explained why in many posts here. And will drag and drop here a typical long discussion.

The preferred stock of a REIT has none of the positive characteristics of common stock, including an ownership stake in the business, and has all of the negative attributes.

The fixed coupon preferred stock, like CYSPRA or NLYPRD discussed below, has a nominal similarity with a bond but compares negatively with bonds in all other important respects.
The preferred security is junior in priority to all bonds and senior only to common stock. 
Unlike a bond, there is no maturity. The protection against a call is limited to generally five years after issuance and then the issuer has the option to redeem or stick the preferred owners with a non-competitive yield in a rising rate environment.
An appropriate description of the issuer's call option right is tails I lose and head's the issuer wins. If rates fall, the issuer will redeem and refinance at or after the call date depending on interest rates at that time. If rates rise a lot, the issuer will be happy to stick those owners with a non-competitive yield that can most likely only be sold for a loss when bought today in an abnormally low and artificial yield environment.
I am in a drop of the hat trading pattern for these securities. I do not need much of a profit to sell the shares, particularly when the shares were bought near par value, after collecting one or more dividend payments and being able to sell the shares profitably. This is just another example of small ball.
Mortgage REIT Preferred Are Viewed Here at HQ As More Risky in General Than Equity REIT Preferred Shares:
According to REIT.Com, the average debt to total assets ratio for equity REITs is about 32.1%. REIT.comEquity REITs Have Lowest Debt Ratio In 20 Years | REIT.com
It is at least conceivable that an equity REIT preferred stock would have some value in a BK, though I am familiar with at least one example where the preferred ended up worthless. That was a special case since the REIT was loaded up with debt in a private equity buyout (Innkeeper's Trust).
While other investors may differ with my opinion on the matter, I am consequently more nervous about preferred stocks issued by Mortgage REITs than by traditional equity REITs.
Both suffer from the risk associated with the absence of a cash cushion. After all, money is flying out the door every quarter to the common shareholders. 

To maintain the REIT tax status, at least 90% of the net income has to be paid out to the common shareholders. For an owner of an equity preferred stock, I would obviously prefer having most of that money retained by the corporation.
Both types of REITs are leveraged with debt, but there is a huge difference in debt to total asset value ratio. An equity REIT may be carrying both senior unsecured debt and/or mortgages, but the amount of debt will generally be 50% or less of the fair market value of the assets owned by the traditional REIT. The REIT could experience a dramatic decline in property values and still have something left for a preferred shareholder in a BK.
While the mortgages owned by the REIT are more liquid than the property owned by the traditional REIT, the possibility of a downward spiral leading to a bankruptcy and a total loss for preferred shareholders is far greater with the Mortgage REIT due to their greater leverage than the far less leveraged traditional REIT. "Should Investors Unload Their Mortgage REITs?" - Advisor Perspectives
The Mortgage REIT will have a much greater dependency on short term debt. In a credit crisis, similar to the one recently experienced, liquidity can dry up pretty quickly, leading to a liquidity driven adverse event.
I would also have a concern about a quick and unforeseen spike in short term interest rates, particularly one occurring at the same time as a decline in value of the paper bought by the Mortgage REIT with borrowed money.
Taking the potential downside risks and the upside which will likely involve almost exclusively the receipt of income, I will only invest small amounts in preferred stocks issued by Mortgage REITs.
Schwab CYSPRA Position Before Pare: 

Sold 50 Highest Cost Shares at $24.89:

Profit Snapshot: +$16.72

The remaining shares owned in the Schwab taxable account have a $23.9 total cost per share.  I will consider buying back the 50 shares sold when and if the price sinks below $23 which has happened on several occasions since the IPO: CYS.PA Stock Chart During the 2013 interest rate spike, the price fell from around $25.5 in early May to near $20.5 in late December 2013.

The quarterly ex dividend date was 3/29/17. 

I still own 50 CYSPRA shares in a Vanguard Roth IRA Account and paid too much for those shares: Item # 2 Bought 50 CYSPRA at $25.2-ROTH IRA (11/2/2012 Post) At least the security has been pumping out dividends for over 4 years in that account.

I also own 100 shares of CYSPRB: CYS Investments Inc. 7.5% Cumulative Preferred Series B Stock (CYS.PB:NYSE) 

I discussed buying 50 CYSPRB at $23.52 here. That lot has already been sold. 

I still own the 50 shares of CYSPRB bought at $23.7 and discussed here

B. Sold 50 NLYPRD at $24.81-Used Commission Free Trade

Profit Snapshot: +$16.57

This purchase was made on 10/30/15 at a total cost per share of $24.48 which is too high IMO based on my limited objective for this security. To improve the possibility of a total return in excess of the dividend, I need to buy at a total cost per share of <$23.  The price declined below that level in response to the 2013 interest rate spike and again in late 2015 and early 2016. The more recent interest rate spike starting last summer took the price down from over $26 to around $24. The price has rebounded some as the ten year treasury yields was unable to stay above 2.6% and had declined to 2.4% on my sell date. Daily Treasury Yield Curve Rates

I did receive six quarterly dividends of $.469 per share or $23.45 per quarter for 50 shares. The total dividend amount was $140.7, bringing the total return up to $157.27 or 12.85%. NLY.PRD- Dividend History at Dividend Channel This security went ex dividend for its quarterly distribution on 2/27/17.

NLYPRD is an equity preferred stock issued by the Mortgage REIT Annaly Capital Management (NYSE:NLY) that pays cumulative and non-qualified dividends at the fixed coupon rate of 7.5% on a $25 par value. NLY has the option to redeem this security on or after 9/13/17. Prospectus There is a possibility that Annaly will be able to redeem and refinance cost effectively at a lower coupon but I am skeptical that this option will be available to the company. 
The $24.80 or higher price is where I normally sell this security:  

Item # 1 Sold 50 NLYPRD at $24.82-Roth IRA (11/14/14 Post)-Item # 4 Bought Roth IRA 50 NLYPRD at $22.87 (2/10/14 Post)

Item # 1. Sold 50 NLYPRD at $25.03:Update For Exchange Traded Bonds And Preferred Stocks Basket Strategy As Of 5/10/16 - South Gent | Seeking Alpha -Item # 2. Bought Back 50 NLYPRD at $24.39: Update For Exchange Traded Bond And Preferred Stock Basket Strategy As Of 10/30/15 - South Gent | Seeking Alpha

This trade taught me to aim lower on my entry point: Item # 1 Sold 50 NLYPRD at $26.01 (5/20/13 Post)-Item # 6 Bought 50 NLYPRD at $24.99 (1/3/13 Post)

I still own 50 shares of NLYPRD that is owned in a Roth IRA.

Tax Characteristics of 2016 Dividend Payments:

All or almost all dividends paid by pass through entities will be classified as non-qualified dividends. Last year, Annaly's preferred stocks sourced a material amount of support from capital gains distributions and no ROC support. The total 2016 common share dividend was supported by $.35+ in ROC and only $.00647 per share in qualified dividends.

3Short Term Bond/CD Ladder Basket Strategy:

A. Bought at Auction on 3/20/17: $3K 3 month Treasury Bill at 99.807779-No Reinvestments:

Auction Results.pdf

Yield = .772%

At auctions, Treasury Bills are bought at a discount to par value. The difference between the discount rate and $1,000 par value is the interest.

100 - 99.80779 = .19201 x. 10 (to arrive at par value) = $1.92 in interest per bond x. 3 bonds = $5.76 in interest.

This purchase was funded out of a bank checking account that pays next to nothing and has a surplus of cash earning close to zilch. What can I say? $5.76 is more money than >$.01. 

B. Bought 2 Bank of India 1% CDs Maturing on 10/4/17:

C. Bought 1 Ford Motor Credit 2.4% Senior Unsecured Bond Maturing on 3/20/20:

This newly issued bond was bought at par value under Fidelity's Corporate Notes Program.

This SEC filed document (first entry) has more information about this security: Prospectus The note is callable at par value plus accrued and unpaid interest on or after 3/30/18. Interest is paid semi-annually. 

Since the maturity is less than 3 years away at the time of purchase, the purchase was made pursuant to the Short Term Bond/CD Basket Strategy.

Moody's upgrades Ford and Ford Credit long-term ratings to Baa2 from Baa3; outlook is stable.

Fitch Upgrades Ford & Ford Credit IDRs to 'BBB'; Outlook Stable 

2016 Ford Motor Annual Report 

D. Current Maturity Cluster 5/1/17 through 7/31/17:

SU= Senior Unsecured; U.S.T. = United States Treasury

2 Trustmark CD .6% 5/2/17
2 Merchant's Bank .65% CDs 5/2/17
2 State Bank of India CD .65% 5/3/17  
2 MidAmerican Energy 1.1% SU 5/15/17
1 Bank of China CD .7% 5/15/17
2 Peoples Savings CDs .55% 5/17/17
3 Citizens Bank PA CDs .65% 5/22/17
2 Citizens Bank CDs .65% 5/22/17
1 Bank of India CD .65% 5/24/17 
2 Disney .875% SU 5/30/17
1 Bank of Baroda .65% CD 5/30/17
2 Bank of Baroda .8% CDs 5/30/17 
1 State Bank of India .65% CD 5/30/17 
2 USTs .625% 5/31/17
1 WFC 1.15% SU 6/2/17
2 FNB .6% CDs 6/5/07
1 Banc of California CD .8% 6/14/17
1 U.S.T. .635% 6/15/17 (auction purchase)
2 Lakeside Bank .55% CD (monthly interest) 6/19/17
2 Bank of China .85% CD 6/19/17
3 USTs .772% 6/30/17 (auction purchase)
2 MMM 1% SU  6/26/17
2 Bank of Baroda .95% CDs 6/27/17
6 U.S.T. .625% 6/30/17
2 People's United .7% CDs 7/11/17
2 Synovus CDs .75% 7/19/17
3 Bank of China CDs .95% 7/19/17
2 Guilford Savings CDs .65% (monthly interest) 7/24/17
1 U.S.T. .61% 7/27/17
2 U.S.T. .625% 7/31/17
4 U.S.T. .5%  7/31/17 
1 Bank of N.C. .7% CD 7/31/17 
3 Enterprise Bank & Trust CDs 8/9/17
1 Bank of China .8% CD 8/15/17
2 HBAN .8% CD  8/15/17
1 Southern 1.3% SU 8/15/17
1 CAT 1.25% SU 8/18/17
1 Bank of India .8% CD 8/23/17 
2 Merrick Bank .7% CD (monthly interest) 8/28/17 
3 U.S.T. .625% 8/31/17

Principal Amount = $78K 

This list includes some securities that have been purchased but not yet discussed. 

For the most part, I will be able to secure higher yields for similar maturities when these securities mature. 

I added yesterday the following to this cluster: 

The YTM for the .625% UST maturing on 6/30/17 is .751%. I currently own 6 bonds.

The .85% Bank of China CD replaces one that matures on 4/17/17 that has a .55% coupon. Schwab pays almost nothing on sweep account balances. 

Currently, the odds of another .25% increase is slightly over 60% on or before 6/14/17 and slightly higher on or before 7/26/17. The market believes that it is more probable than not that the next increase will occur in June. Countdown to FOMC

I do not anticipate a .25% increase resulting from their May meeting. The Fed - Meeting calendars and information If there are going to be 3 hikes this year, the next will need to occur IMO in either June or July with the third in December. I have another cluster maturing between 11/1/7 to 1/3/118. And, if there is no increase in either June or July, then I am anticipating only 2 hikes this year.    

5. Small Cap Biotech Lottery Ticket Basket

A. Sold 50 out of 70 NKTR at $22.53

Profit Snapshot: +$355.4

I am keeping the 20 shares bought at 14.25 last October.  

Nektar Opioid Drug Does Well In Study-Investopedia
Could Nektar Therapeutics Be Worth More? -The Motley Fool

The stock spiked after NKTR issued this press release: NKTR-181 Meets Primary and Secondary Endpoints in Phase 3 SUMMIT-07 Study in Chronic Pain

Close on Friday 3/17/17: $15.5
Close on Monday 3/20/17: $22.11

Nektar | Pipeline | R&D Pipeline

2016 Annual Report

2016 4th Quarter Report

Links to a recent SA articles:

A Quick Evaluation Of Nektar Therapeutics' PEGylation Platform

Since I sold this lot, the shares have declined significantly and were down over 8% yesterday, closing at $18.5.

NKTR Stock Price

The close to $3B market cap at $18.5 is worthy of note.

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.


  1. I viewed today as one with inconsistent pricing as shown by these closing prices:

    SPDR Gold Trust
    $121.19 +1.73 +1.45%

    iShares 7-10 Year Treasury Bond ETF
    $106.29 $0.49 +$0.46%

    iShares 20+ Year Treasury Bond ETF
    $122.42 +$1.15 +0.95%

    S&P 500 Index 2,353.78 -0.14%

    CBOE Volatility Index 15.07 +1.02 +7.26%

    If I did not know the S & P 500 close and was given the other numbers, I would say the S & P was down at least 1% and possibly as much as 1.5% to 2%.

    The spot gold price was up $19.6 today closing at $1,275. Platinum rose 3.2%.

    The U.S. ten year is currently sitting just below 2.3%:

    The 2.3% point is viewed by some technical analysts as an important level.



    "FBI had FISA warrant to snoop on ex-Trump adviser Carter Page: report"


    The burden to issue a FISA warrant to wiretap a U.S. citizen is high and would require proof that the U.S. citizen is acting as an agent of a foreign power. Carter Page denies any connection.

    Washington Post article quote:

    "The government’s application for the surveillance order targeting Page included a lengthy declaration that laid out investigators’ basis for believing that Page was an agent of the Russian government and knowingly engaged in clandestine intelligence activities on behalf of Moscow, officials said. . .Since the 90-day warrant was first issued, it has been renewed more than once by the FISA court, the officials said."

    "CNN Exclusive: Classified docs contradict Nunes surveillance claims, GOP and Dem sources say"


  2. "Trump says he has to do health bill before tackling tax reform"

    The GOP is apparently having difficulty in agreeing to a tax plan, which appears to be floundering. The border tax was the linchpin for the corporate income tax reduction, and there is a lot of opposition to that "tariff". The GOP's alternative would be to drastically cut spending on Medicaid and other social programs to fund in part tax cuts.


  3. Trump Interview with WSJ:

    After stating repeatedly during the campaign that he would name China as a currency manipulator on day one, Trump now says that China is not a currency manipulator.

    He also stated that the dollar was too strong and he would like to see interest rates stay low.

    “I do like a low-interest rate policy, I have to be honest with you,”

    Yellen is no longer toast as the Fed Chairman when her term expires.



    Previous statements:

    First Debate With Clinton:
    "And believe me, we are in a bubble right now. And the only thing that looks good is the stock market. But if you raise interest rates even a little bit that is going to come crashing down”


    February 2017:
    "I think they're grand champions at manipulation of currency. So I haven't held back," Trump said.



    Prior to the election, Trump asserted that Yellen was keeping interest rates too low in order to help Clinton. So he favored an increase in rates. Then he would say in the next sentence that raising interest rates could cause the stock market to crash.

    There is no logic to be found in TrumpWorld.

    U.S. 10 Year Treasury Note
    2.24% -0.059
    Last Updated: Apr 12, 2017 5:03 p.m

    U.S. Dollar Index (DXY)
    100.13 -0.58 -0.58%

    Gold - Electronic Jun 2017
    1,288.90 +$14.70 1.15%
    Last Updated: Apr 12, 2017 4:59 p.m

  4. hello southgent,

    I think you have discussed this before. But I wanted to get your general take on your thoughts on dividend growth investing.

    I have certainly read your blog as carefully as I could. I have taken a lot of my cash and placed it in short-term bond or CD instruments. And that gives me a measure of safety for financial stability.

    For someone who is retired and is living off Social Security, dividends/interest income and a pension [self-directed], how does one best manage recessions, market corrections and bear markets.?

    My question is directed toward dividend growth investing. There is no question as you have clearly pointed out, the market is certainly overvalued. The economy also seems to be while chugging along, certainly unable to break 3% growth. Timing seems difficult as you pointed out. Your Vix model is certainly sound historically, but not predictive.

    I have tried to buy only high-quality dividend growth stocks with investment-grade balance sheets, increasing revenues and free cash flow.

    I have stayed away from story stocks, hot tips, and tried to view the stocks I own as bond type investments, that no matter what the fluctuation is price is that the dividend stream will live on. [Assuming the business is viable, which is one thing I check on intermittently, including cash flow etc.]

    I am asking what you think the pitfalls are of this type of approach. This question may be vague and certainly up to the individual investor but I wanted to get a general thought on what you think of the dividend growth investment model when used as an extremely conservative strategy. I.e., no business development companies, very few REITs. etc


    1. Sam: With dividend growth stocks, the investor needs to pay attention to the payout ratio, the ability to grow future earnings and the dividend cut risk due to adverse economic conditions.

      Financial stock, for example, is one sector where dividend cuts frequently happen during adverse economic conditions as shown by what happened in the last recession.

      A number of consumer staple stocks have been increasing their payout ratios further and further above 50%.

      It is not unusual now to see stock purchases and dividend payments to exceed free cash flow. Debt in many cases is being used to buy back stock. The investor has to do their own research for each stock and then make a judgment on these issues. The two most basic questions are the vulnerability of the dividend and the ability to grow the dividend.

      Some box retailers, for example, may have grown the dividend meaningfully in the past but may be unable to achieve anything close to past growth hereafter. Dividend growth could slow and then the dividend gets cut down the road, possibly using a mild, garden variety recession as the excuse for a long term secular decline in the business.

      A garden variety recession will not last long and the recovery has historically been quick. I am not overly concerned about that scenario. I would just turn on my dividend reinvestments, which are mostly off now, and buy more shares at lower prices.

      When the recession comes and generates a substantial valuation correction (similar to 2000-2002), that is just something that needs to be addressed in meaningful ways before it happens. Some paring of overvalued stock positions may be in order, particularly when situational risks may require forced selling at inopportune times.

      I am more concerned about a major recession similar to the last one or another great depression where dividend cuts and eliminations become routine. In those scenarios, I would want to own high quality bonds.

      And, time becomes critical as one ages. I was young enough in 2008 that I could use the Near Depression to build wealth. Next time, there may not be a snap back rally as economic conditions worsen.

      The ability to recover from a meltdown becomes increasingly difficult as one ages and the problems can become acute for those who have to spend all of their income and delve into their principal amount of their investments. What are the risks that a retired investor will have to sell stocks at an inopportune time, which falls under the situational risk category?

      The second troubling economic scenario would be the onset of persistent problematic inflation that leads to results similar to the long term bear markets in both bonds and stocks between 1966 to 1982.

      The answer to your questions depends in part on an analysis of your holdings and your situational risks, and I can not make that analysis for you. Being informed about what you own is certainly one way to prepare. Making realistic assessments of your situational risks is another, and that is a broad category. For many households, the unwillingness to take risks with their investments may end up being their most significant risk creation since they will run out of money. Staying attuned to big picture risks for the asset classes owned is also necessary IMO.

  5. "U.S. May Launch Strike If North Korea Reaches For Nuclear Trigger"


  6. hello SG,

    Thank you for your great answer. I understand fully that each investors risk profile is personal and related to assets and time horizon.

    When you reference that consumer Staples have a payout ratio of over 50% now, do you consider that really is significant ratio. I know that many people use dividends divided by earnings [operating earnings] or dividend divided by revenues


    it seems to me that dividend formation related to percentage of cash flow i.e. free cash flow is a better measure. I wondered which one you rely on.

    I also note that the Vix appears to be moving into a new box above 15 which I believe although still bullish according to your VIX asset allocation model, is still a change in the dynamic of the bull market.

    not being a technician, I still see that the the S&P index has pierced the 50 day moving average.

    I understand this could be transient events, but given all the data, your prognostications and risk versus reward analysis makes me take notice.

    So I am really asking about the payout ratio definition and thanks again for your answer.

    1. SAM: I would generally combine the dividend payout + stock buybacks as a percentage of free cash flow. An alternative which is easier for some investors is to use net income rather than free cash flow.

      It is a question of balance. The idea is to reward shareholders in both the short and long term. The cash used to pay dividends and to buy back stock is not being invested to grow the business.

      Morningstar does provide data as do other services.

      This page for KO may or may not be available to non-subscribers. It is found under the "financials" tab and then by clicking the "cash flow" tab:


      Last year KO had free cash flow of $6.534B. It used $6.043B to pay dividends and another $3.681 to buy back stock. It is also important to not the trends in net income, free cash flow and debt accumulation. Long term debt numbers can be found in the SEC filed annual reports. Morningstar has KO long term debt numbers starting in 2012:


      Long term debt almost doubled between 2012-2016. Is a significant part of the capital used to pay for capital expenditures, stock dividend and stock purchases coming from debt accumulation?

      For several years, publicly traded corporations have IMO placed too much emphasis on using cash for current rewards.


      The VIX Model is not perfect, but the Model has done well in making predictions. A persistent change in the VIX movement between 10-15 to 15-20 is noteworthy in the model, but it is too early to know whether a a different phase of a Stable Vix pattern has been established yet (called Phase 1 in the Model).


      It is important since movement to a 15-20 pattern is generally necessary before there can be a spike into the high 20s or 30s of sufficient duration to cause a Trigger Event.

      Using a YF 1 year chart, the 50 day SMA line for the S & P 500 has been broken to the downside. The 100 day SMA now sits at 2301. The 200 day SMA is at 2228.

      I do believe that more investors are starting to question their assumptions about earnings growth. Trump did not help them feel secure when he said that the tax cuts would have to wait on passage of Trumpcare (and all of his other position reversals this week calling into question whether he is anchored into much of anything or will just blow with wind)

      Others are becoming increasingly concerned by international tensions which partly explains the rallies in gold and high quality bonds.

      Some noises are being made about a possible first strike against North Korea in the event it proceeds with another nuclear test. The bunker bomb demonstration today would be noted by the NK leader. That kind of event would send the stock market down fast.

  7. I have published a new post: