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.  

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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: 

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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 Shares; Prospectus (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)
Prospectus
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 

Collateral: 

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.com; Equity 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.

3. Short 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.