Saturday, April 29, 2017

Observations and Sample of Recent Trades: 4/29/17 (SCEPRJ, TDIV, WTBA): The GOP's Alternate Reality Universe/S & P 500's Gain Since September 2012 Mostly Due to Multiple Expansion

Another Anemic 1st Quarter GDP Report:  

The government's GDP estimate, released yesterday, will be revised twice in the coming months. The second estimate is scheduled for 5/26/17. 

News Release: Gross Domestic Product

The government has had difficulty measuring 1st quarter GDP growth for decades. It has paid for stock investors over the last several years to ignore the weak first quarter numbers. 

At some point, ignoring the weakness will prove to be the wrong decision, but it is impossible to say now whether the latest report is just another one that should be ignored by investors.  

The government's first estimate for real GDP growth in the 2017 first quarter was an anemic .7% annualized, down from the 2016 4th number of 2.1%. The consensus estimate was for .9% to 1.1% depending on who compiled the data. The Atlanta FED GDP model currently has the number at .2% as of 4/27/17, down from .5% as of 4/18/17. GDPNow - Federal Reserve Bank of Atlanta

The main concern about the data is that personal consumption expenditures increased at a .3% annualized rate. If that continues, then we are in trouble. 

I have been highlighting in several recent posts that consumer spending was at best lackluster notwithstanding the ebullient consumer survey data. As we all things about the future, time will tell soon enough whether this is the start of something bad or merely a short term blip that will reverse in the spring and summer.  

The positives in the report was a double digit increase in business spending. Using annualized numbers, investments in non-residential structures rose 22.1% and residential investment increased by 13.7%. Equipment investment rose at a 9.1% annualized rate. 

("Nonresidential structures: Investment in nonresidential structures consists of new construction (including own-account production), improvements to existing structures, expenditures on new mobile structures, brokers' commissions on sales of structures, and net purchases of used structures by private businesses and by nonprofit institutions from government agencies. New construction includes hotels and motels and mining exploration, shafts, and wells. Nonresidential structures also includes equipment considered to be an integral part of a structure, such as plumbing, heating, and electrical systems." Glossary "N": Bureau of Economic Analysis)

("Residential structures. .Investment in residential structures consists of new construction of permanent-site single-family and multi-family units, improvements (additions, alterations, and major structural replacements) to housing units, expenditures on manufactured homes, brokers’commissions on the sale of residential property, and net purchases of used structures from government agencies. Residential structures also include some types of equipment that are built into residential structures, such as heating and air-conditioning equipment." Glossary "R": Bureau of Economic Analysis)

In several old posts, I have discussed the reasons why the recovery has been so slow over the past 9 years or so. One problem has been lower than normal business investment as a percentage of GDP. (see, e.g. Update On Portfolio Positioning And Management As Of 9/21/15 - South Gent | Seeking Alpha)


Trump Does Not Lie-The Media Lies About Trump: The GOP's Alternate Reality Bubble That is Impervious to Accurate Information

So far, Trump has told over 400 easily documented falsehoods since his inauguration. All of Trump’s false and misleading claims: the first 100 days - Washington Post

No President has lied more than Donald. No one has come close. He will set a record that will never be matched until the end of days. The record will most likely be a multiple of the combined total of all predecessors.  

Yet, a recent poll showed that 76% of Trump voters believe that Donald does not regularly make false statements. 59% of all adults, including 81% of Democrats and 62% of independents, believe that Trump regularly makes false statements. 

(Part 1 of Poll: President Trump is least popular president at 100-day mark - The Washington Post; a question in part 2 asked whether Donald is honest and 58% said no)

80% of Trump voters think the bigger truth telling problem lies with the news media, meaning just about every news organization in the U.S. other than Fox and Friends, Brietbart, the National Inquirer, and Alex Jones' Infowars and a few personalities like Ann Coulter, Rush Limbaugh, and Sean Hannity who claim to be conservatives.  

Donald believes that the National Inquirer needs to be awarded many “Pulitzer Prizes for their reporting.” MSNBC

100 Days of Whoppers -

S & P 500's Gain Since 9/30/12 Mostly Due to Multiple Expansion:

The following information is taken from data provided by Standard & Poor's (S &P)

2014 Third Quarter S & P 500 Actual GAAP and Non-GAAP Earnings:
GAAP 29.6
Non-GAAP 27.47
S & P 500 at 1972.29 on 9/30/14

Estimated 2017 First Quarter as of 4/20/17 (22.5% reporting)
GAAP 26.41
Non-GAAP 29.11
S & P 500 Closed at 2,387.45 on 4/26/17

S & P 500 has gained 21.05% as both GAAP and NON-GAAP earnings have declined.

2012 Third Quarter Actual Earnings
Non-GAAP 21.21
S & P 500 Closed at 1440.67 on 9/28/12 (a Friday)

From 9/28/12 through 4/26/17, the S & P 500 has gained 65.72% while GAAP earnings have increased 10%. 

S & P 500 P/E as 4/28/17

TTM P/E Based on Reported GAAP Earnings = P/E 24.17
Forward 12 months Non-GAAP Estimated "Operating Earnings"  = P/E 18.42

The last recession ended in June 2009:


BlackRock's Fink Says U.S. on Path to 'Exploding' Deficits - Bloomberg (worse than he thinks)

The latest Trumpcare plan clearly throws those with pre-existing conditions under the bus, primarily in red states carried by the republicans, by giving states the right to opt out of the Obamacare requirement that those with pre-existing conditions can not be charged more than healthy insureds.

Fears of losing pre-existing conditions protection under GOP - ABC News
New bill tests GOP promise on pre-existing conditions | TheHill;
GOP Health Care: Republicans Aim to Keep Pre-existing Conditions-But Only For Themselves | Money

One inherent flaw in Obamacare, as Blue Cross of Tennessee found out when it lost over $500M in three years, is that there are not enough healthy persons in the plans to offset the high costs for those with illnesses. The pain for both insurance companies and insureds in Tennessee was aggravated since Tennessee did not adopt the Medicaid expansion, which caused those with illnesses, who would have been covered by the Medicaid expansion, to enroll in an Obamacare plan.

Then there is the fairness issue to the healthy persons having to pay significantly higher premiums to offset the costs of providing those with pre-existing conditions at the same rate. If that system continued, then more healthy individuals would simply drop out due to premium increases and insurance companies would quit offering policies due to losses. Then the insurance pool would have an even higher sick to healthy people ratio and less options for coverage due to insurance companies dropping out. It is a system designed to fail, starting with the smaller states first.

The only ways for Obamacare's pre-existing condition policy to work long term is to have a single payer system, where coverage extends to the entire population, or to have the state and federal governments footing all or most of the costs for those with significant illnesses above a certain average level. The single payer system is not going to happen in my lifetime. Perhaps, after the baby boom generation passes away, then something could be adopted along those lines.

As I explained in a 2013 post, I would have voted against Obamacare as the wrong solution: Stocks, Bonds & Politics: Why I Would Have Voted Against Obamacare (scroll to end of post)

The republican plan also prohibits insurance policies that cover for abortions. In several blue states, including California and New York, insurance companies are prohibited from excluding abortion coverage by state law and residents in those states would not be entitled to receive credits provided in TrumpDoesNotCare plan.

Most California insurance plans could be ineligible for tax credits under the GOP's new proposal - LA Times;  GOP health care plan would threaten 1M New Yorkers' insurance - NY Daily News

A number of NY republicans intend on voting for this plan nonetheless including the reactionary Chris Collins, an early supporter of Donald Trump, who has found a way to stick it to NYC and other liberal Democratic bastions on Medicaid funding in the current GOP "healthcare" bill. Collins' Medicaid proposal prompts battle with governor - The Buffalo News


1.  Intermediate Term Bond/CD Ladder Basket Strategy:

A.  Bought 2 CVS 2.875% Senior Unsecured Bonds Maturing on 6/1/26

Issuer:  CVS Health Corp 
FINRA Page: Bond Detail (prospectus linked)
Credit Ratings: 
S & P at BBB+

YTM at Total Cost (95.933) = 3.388%

CVS Analyst Estimates 

B. Bought 2 Kimberly Clark 2.65% Senior Unsecured Bonds Maturing on 3/1/25:

Issuer:  Kimberly-Clark Corp.
KMB Kimberly-Clark Corp Page at Morningstar 
Finra Page: Bond Detail (prospectus linked)
Credit Ratings: 
S & P at A

YTM at Total Cost (97.791) = 2.965%

KMB Analyst Estimates

C. Bought 2 Pepsico 2.85% Senior Unsecured Bonds Maturing on 2/24/26

Issuer:  PepsiCo Inc.
PEP PepsiCo Inc Page at Morningstar 
Finra Page: Bond Detail (prospectus not linked)
Credit Ratings: 
S & P at A

YTM =2.936% 

D. Bought 1 Anheuser Busch Imbev 2.5% Senior Unsecured Bond Maturing on 7/15/22-ROTH IRA Account:
FINRA Page: Bond Detail (prospectus linked)
Credit Ratings: 
Moody's at A3
YTM at Total Cost (99.431) = 2.616%

E. Bought 1 Healthcare Reality 3.875% Senior Unsecured Bond Maturing on 5/1/25:

Issuer: Healthcare Realty Trust HR:NYSE)-A MEDICAL OFFICE REIT

HR Healthcare Realty Trust Inc Page at Morningstar
FINRA PAGE: Bond Detail
Credit Ratings:
Moody's at Baa2
Moody's upgrades Healthcare Realty to Baa2; outlook stable
S & P at BBB

YTM at Total Cost (99.977 )= 3.878%

2016 Annual Report

Investor Presentation February 2017
2016 4th Quarter Earnings Report
Supplemental Package for 4th Quarter Report
HR Analyst Estimates

I owned the common shares briefly in 2015:

Item # 2. Bought 50 HR at $23.95 Update For REIT Basket Strategy As Of 8/11/15/Interest Rate Cycles And REIT Stock Prices - South Gent | Seeking Alpha-2. Sold Lower Yielding HR at $26.33: Update For REIT Basket Strategy As Of 10/19/15 - South Gent | Seeking Alpha

The sell was less than optimal.

2. Sold 30 SCEPRJ at $27.29-Used Commission Free Trade:

Profit Snapshot:  +$70.4

Quote SCE Trust IV 5.375% Preferred Series J Fixed-To-Floating Stock (SCE.PJ:NYSE)

I discussed buying this lot here. 

This is a fixed-to-floating rate security:

"From and including August 24, 2015 to but excluding September 15, 2025, distributions will accrue and be payable at a rate of 5.375% per annum, payable beginning on December 15, 2015 and ending on September 15, 2025. From and including September 15, 2025, distributions will accrue and be payable at a floating rate equal to the three-month LIBOR plus a spread of 3.132% per annum, payable beginning on December 15, 2025. ... At our option, at any time, or from time to time, on or after September 15, 2025, we may redeem the Series J Preference Shares, in whole or in part, at 100% of their liquidation preference, plus accrued and unpaid dividends, if any."


In other words, this security pays a 5.375% coupon on a $25 par value until 9/15/25.

As is typical with U.S. fixed-to-floating rate preferred stocks, the issuer has the option to redeem starting on the expiration date of the fixed coupon period, so owners of this security may never see the 3.132% + the 3 month Libor rate as the coupon. If short term rates are too high, SCE may simply exercise its option to redeem at par rather than pay the floating rate.

3. Continued to Pare Stock Allocation

A. Sold 100 WTBA at $23.12-Used Commission Free Trade

Profit Snapshot: +$1,146.24

Quote West Bancorp Inc

Bought 100 WTBA at $11.67 (6/29/13 Post)

Closing Price 11/8/16: $19.35 WTBA Historical Prices

$19.35 to $23.12 = 19.48% Calculate Percent Increase

$11.67 to $23.12 = 98.11%
Average Annual Return With Dividends Reinvested (start date 6/26/13/end date at 4/7/17) = 24.22%
DRIP Returns Calculator | Dividend Channel
Average Annual Return with Dividends Paid in Cash = 23.03%

I took all of the dividends in cash.

After I sold the stock, WTBA raised its quarterly dividend to $.18 from $.17 per share.

West Bancorporation, Inc. Announces Record Net Income, Declares Record Quarterly Dividend  

This is another small bank that I like and will consider buying back a position at what I view as a more reasonable price for this stock. 

4. Short Term Bond Ladder:

A. Bought 2 WFC 1.25% CDs (Monthly Interest) Maturing on 5/29/18:

I will not buy corporate bonds in my Schwab account since the minimum commission is $10. That leaves me with newly issued CDs and fixed coupon treasuries that can be bought commission free. A two corporate bond order would cost me five times the rate charged by Fidelity or IB.

5. Pared Trade Generated by Boredom: Sold 50 ROBO at $33.11 and Bought 50 TDIV at $31.7

I am discussing this trade out of order. This transaction occurred yesterday. I am generally anywhere from 2 to 4 weeks behind discussing trades. 

I used commission free trades to buy and sell ROBO in my Schwab account. Those commission free trades expire in August. 

ROBO Global Robotics & Automation Index ETF

Fund Holdings - ROBO Global ETFs
Management Fee = .95%
No Dividends Paid in 2015 and 2016

ROBO Profit:  +$50.56

I used a Fidelity commission free trade to buy 50 shares of TDIV which I view as a more conservative technology fund and the expense ratio is lower at .5%. In short, I am more comfortable with TDIV than ROBO. 

TDIV Fund - First Trust ETF VI NASDAQ Technology Dividend Index ETF  

Holdings Over 1%: 

First Trust NASDAQ Technology Dividend Index Fund (TDIV) Holdings

I also bought 30 shares in my Schwab account. Any stock ETF bought at elevated stock market valuation levels is a short term trade.

This fund does pay quarterly dividends: Distribution History

Unfortunately, I sold out of TDIV too soon, which is a known hazard for someone who trades as much as I do.

2014 TDIV 100 Shares +$581.59 
2012 Roth IRA 50 Shares +$101.98. 
Total TDIV Trading Profits = +$683.57

Sold: 100 TDIV at $25.63 (10/17/14 Post)
Item # 5  Sold 50 TDIV at $22.26 (7/27/13 Post)

Among the current TDIV holdings, I own CSCO and INTC. I sold out of Corning as part of my stock allocation reduction this year, and I pared my CSCO position.

Item # 3.B Eliminated Corning-Sold 103+ Shares at $26.45

Item #3.B. Sold 30 out of 80 Cisco at $34.14

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. South Gent,

    I found out the other day that Fidelity website has a new feature that helps clients build a CD ladder. An investor can specify an investment amount in a $4k increment and whether it is a 1-year, 2-year, or 5-year ladder. The website will select the CDs. In general the YTMs of the bonds you picked are higher (by up to 10% or more) than the rates of their CDs of comparable duration, but it is an option if one does not have the skills and/or time to do the research. It took me a few weeks to complete my CD/Bond ladder. Won't it be nice if Fidelity can provide a Bonds Ladder Builder? You might want to consider offering your service to help Fidelity design an automated Bonds Ladder Builder.

  2. Y: The bond ladder is less susceptible to a computer generated automatic build. All of the CDs have FDIC insurance protection up to $250K per bank per person. The bonds, on the other hand, have different levels of credit risk, even for those rated at the same level. The Bond Ghouls are making judgments about credit risk that differ from the ratings. The bond that you previously mentioned to me, issued by Deutsche Bank AG. The yields on DB bonds are consistently higher than other bonds with the same credit ratings. There are a lot of corporate bonds that I do not buy, or where I significantly limit my credit exposure, because I view the yields as insufficient compensation for credit risk compared to other bonds maturing at the same time with the same credit ratings.

    In my next post, I will be discussing the purchases of several longer term Tennessee municipal bonds last week, totaling $50K in principal amount. I am basically reinvesting the proceeds from short term instruments that are about to mature in May and June.

    Based on an array of weak economic data that I am seeing, I have recently increased my long duration bond weightings from immaterial to significantly underweighted.

    There is a significant number of data points that are worrisome, including the recent consumer spending, auto sales, and consumer default numbers.


    "Capital One’s provisions for losses in the credit-card unit, the firm’s biggest business, jumped 29 percent to $1.7 billion in the first quarter from the preceding three-month period, the McLean, Virginia-based company said Tuesday in a statement. The write-off rate rose to 5.02 percent, the highest in almost six years."

    You can see at Fidelity that the Capital One bonds are being priced at meaningfully higher yields than similarly rated bonds.

    The muni bond market is less transparent and friendly to individual investors than the corporate bond market. Frequently, the investor is buying bonds held by their own broker. For the bonds that I bought, there was only one ask price and no bids.

    I have more comfort with the credit risk of some Tennessee governments than I do with the U.S. government, which I view as fiscally irresponsible.

    The State of Tennessee has a AAA rating, as does my city, Brentwood and my country Williamson.

    A sample purchase was fifteen 2.5% General Obligation Williamson County bonds maturing in 2027.

    EMMA Page (municipal bond alternative to FINRA):

    You can see my 15 bond purchase by clicking the "Trade Activity" tab and then clicking the trades for 4/28/17. The total cost to me was 101.564, which creates a YTM of 2.254% which will be double tax free to me.

    Tennessee does not have an income tax on earned income, but does tax interest and dividends, though that tax is gradually being phased out unless the legislature changes its mind before 2022.

    I do not regard the U.S. government as AAA but its 10 year taxable bond closed last Friday with a 2.29% yield.

    With municipal bonds, there is call protection up to a point. For this bond, the county can redeem at par plus accrued interest on or after 4/1/24. I doubt that will happen given the 2.5% coupon, but it is certainly possible that something will happen that will cause interest rates to decline to a level that makes it advantageous to redeem and to refinance.

  3. OHI: Nursing home REITs dived in price last Friday:

    OHI $33 -0.94 (-2.77%)

    The apparent culprit was news that the Centers for Medicare & Medicaid Services was considering a reimbursement change:

    The SA blog references a Bloomberg article which I could not find at Bloomberg.


    The ISM manufacturing index fell to 54.8% in April from 57.2%. The consensus estimate was for 56.5.

    The employment component declined to 52% from March's 58.9% reading. New orders fell to 57.5% from 64.5%.

    All of those declines are from historically high numbers posted in March.

    The index did hit March 2017 levels back in 2014 before sliding to 48 last December:

    See Chart:

    Only time will tell whether the manufacturing index peaked in March 2017 and started a downward trend in April.

    I am seeing an array of data pointing to a slowdown, but that is not unusual for the first quarter based on recent history. The question is whether there will be a snapback in the other 3 quarters as in recent prior years. The Stock Jocks are 100% certain that there will be a resurgence in growth in 2017's remaining quarters and through 2018 and beyond. The probability of a recession within the next two years is priced at zero IMO.


    I noticed that Pembina (PBA) has agreed to acquire Veresen:

    I went ahead and sold my remaining Pembina reset equity preferred stock (PPL.PR.C) this morning at C$21.64 and will look for a re-entry point on the common. PPLPRC went ex dividend on 4/26/17 for its quarterly distribution:

    Both the Veresen and Pembina equity preferred have been excellent preferred stock investments for me, and all of those positions have now been sold.

    I bought PPLPRC at C$16.67 last year.

    I sold PPLPRG, which will be discussed in an upcoming blog post, at C$23.32, realizing a C$507 gain.

    4. Bought 100 PPLPRC at C$16.66:

    My last two dispositions of the USD priced common stock were at $33.19 and at $29.3.

    The $33.19 price was from 2013. The $29.3 price was from a disposition last year:

    1. Sold 50 PBA at $29.3:

    Two minor reasons for paring my Canadian equity preferred positions are as follows: (1) the recent decline in the CAD/USD lowers my USD reportable profit and (2) I am buying more CADs at lower price since I take the proceeds in CADs. The CADs are then assigned a USD cost basis. Hopefully, down the road, I will have an opportunity to exchange back into USDs at a far more favorable exchange rate when my marginal tax rate is lower than now.

  5. I have published a new post that deals with recent municipal bond purchases:

  6. Jeremy Grantham has published his quarterly letter which can be found starting at page 9:

    It is worth a read. Unlike his less than cheery outlook for stocks expressed in earlier missives, Grantham is now trying to explain why stock multiples are high.