Bond/CD Ladder Strategy:
I wanted to reiterate what I am attempting to accomplish with my short and intermediate term bond/CD ladder basket strategies.
Given the currently low interest rates by historical standards, I only expect a single digit total return from this strategy. My goal is simply to earn more in interest compared to what is earned on idle cash held in my brokerage accounts.
I am not going to make a significant reallocation into stocks or longer duration bonds and preferred stocks, until I am far more comfortable than I am now about the risk/reward balance. For me, the alternatives now are to keep those funds in cash or to buy FDIC insured CDs and high quality bonds using a ladder strategy.
The emphasis in the bond/CD baskets is on capital preservation, so only investment grade bonds and FDIC insured CDs are chosen for purchase.
Most of the bonds purchased to date are currently rated A- or higher by at least one rating agency. I have bought several first mortgage bonds issued by electric and gas utilities.
This strategy started in December 2016.
I am starting to receive proceeds from maturing securities which will start to pick up considerably after 5/1/17. A number of securities will mature each month.
While I am predicting that interest rates will trend up, I admittedly do not know the future.
A number of external events could happen that would send interest rates lower. If that occurs, I have a large number of intermediate term bonds that will benefit. Some bonds may be sold for profits in that scenario. I am flexible and will play whatever hand is dealt in the coming weeks, months and years.
If interest rates do trend up as I anticipate, I will have a number of securities maturing every month as part of my short term bond/CD ladder strategy.
As I receive the proceeds, I have several options that I will consider.
One option would simply be to buy a short term bond or CD.
Another would be to buy 1 or more intermediate term bonds that have come down in price providing me with a higher yield than previous purchases.
Or, I could decide to keep some or all of the proceeds in my cash brokerage accounts and to postpone making a reallocation decision.
Other options include buying stocks or other risk asset classes with the proceeds.
I will make the decision as the money flows into my account.
Interest rate risk is more of an issue than credit risk.
Interest rate risk is a potential issue assuming rates continue to rise. However, I personally have no concerns about that risk either for several reasons previously discussed in more detail:
(1) I am using a ladder strategy and buying only small lots;
(2) I am able to hold everything purchased until maturity;
(3) I have no situational risks that require a higher return on investments;
(4) I have a number of securities maturing every month; and
(5) I intend to buy more high quality bonds and FDIC insured CDs with the proceeds from maturing securities which will capture higher yields in a rising interest rate environment.
++++++++
Jobs:
Seasonal factors are impacting the government's job reports for February and March. February was unusually warm which pulled some new job numbers from early Spring into that month.
I discussed in comments to an earlier post that the February 2017 report was unusually strong due to those factors.
The government reported that only 98,000 new jobs were created last month: Employment Situation Summary The expectation was for 180,000. CNBC
In addition, BLS revised down January and February to show 38,000 fewer jobs were added than previously reported by it. February was revised from +235,000 to +219,000, while January went from +238,000 to +216,000.
Average hourly earnings increased by 5 cents to $26.14 per hour and were up 2.7% Y-O-Y.
The U-6 rate fell to 8.9% from 9.2%. Table A-15. Alternative measures of labor underutilization The 8.9% reading is the lowest since December 2007.
The following statement can be found in the FED minutes for the mid-March 2007 meeting: "Nearly all participants judged that the U.S. economy was operating at or near maximum employment." The Fed - Monetary Policy
I am expecting a slowdown in job growth for that reason. The issue is whether wages will continue to rise due to the shortage of desirable new hires. The increases in wages for unskilled labor at major employers suggests that those increases are necessary to keep those employees from leaving for higher paying jobs. Wage pressures then move up the labor chain.
As I noted in a recent comment, the U.S. economy is okay at the moment but is not gaining steam. There is a major divergence in consumer confidence and consumer spending numbers. Personal consumption expenditures have been trending down over the past few months.
Personal Income and Outlays
"Consumer confidence increased sharply in March to its highest level since December 2000 (Index, 128.6)". The Conference Board Consumer Confidence Index Increased Sharply in March
Conference Board Consumer Confidence Chart
The auto sales number for March was meaningfully below expectations: USA Today: Auto sales fall in March as discounts rise on unsold cars
Defaults on subprime auto loans are accelerating: Here’s why it’s getting harder to ignore rising subprime auto defaults - MarketWatch; Some 6 million Americans are delinquent with auto loans and it’s going to get worse - MarketWatch
The level of consumer liabilities is back to 2008 levels. Household Debt Increases Substantially, Approaching Previous Peak - FEDERAL RESERVE BANK of NEW YORK; U.S. households will soon have as much debt as they had in 2008 - MarketWatch
Fortunately, the cost for servicing the main debt obligation is lower now compared to then. (DSR Ratio Chart: Household Debt Service Payments as a Percent of Disposable Personal Income; Mortgage Debt Service Payments as a Percent of Disposable Personal Income)
The Atlanta FED GDP model is forecasting a .6% real rate of growth for the 2017 first quarter as of 4/7/17. That is lower than the range of the top ten and bottom 10 forecasts. If that estimate proves prescient, the Stock Jocks will be surprised but the Bond Ghouls will feel vindicated since they have become more ghoulish after suffering an anxiety attack after Trump won.
The initial reaction to the U.S. cruise missile attack was to take bonds and gold up in price and stocks down. This kind of event of limited response to Syria's use of chemical weapons is not relevant to market prices unless events spiral out of control which is not likely. A first strike against North Korea would be a whole different matter.
The ten year U.S. treasury closed at 2.38% yield, up from 2.34% on Thursday. However, the dominant trend since 3/14/17 is down in yield. 2017 Daily Treasury Yield Curve Rates
+++++++++++++++++++++
1. Intermediate Term Bond Ladder Basket Strategy:
I wanted to reiterate what I am attempting to accomplish with my short and intermediate term bond/CD ladder basket strategies.
Given the currently low interest rates by historical standards, I only expect a single digit total return from this strategy. My goal is simply to earn more in interest compared to what is earned on idle cash held in my brokerage accounts.
I am not going to make a significant reallocation into stocks or longer duration bonds and preferred stocks, until I am far more comfortable than I am now about the risk/reward balance. For me, the alternatives now are to keep those funds in cash or to buy FDIC insured CDs and high quality bonds using a ladder strategy.
The emphasis in the bond/CD baskets is on capital preservation, so only investment grade bonds and FDIC insured CDs are chosen for purchase.
Most of the bonds purchased to date are currently rated A- or higher by at least one rating agency. I have bought several first mortgage bonds issued by electric and gas utilities.
This strategy started in December 2016.
I am starting to receive proceeds from maturing securities which will start to pick up considerably after 5/1/17. A number of securities will mature each month.
While I am predicting that interest rates will trend up, I admittedly do not know the future.
A number of external events could happen that would send interest rates lower. If that occurs, I have a large number of intermediate term bonds that will benefit. Some bonds may be sold for profits in that scenario. I am flexible and will play whatever hand is dealt in the coming weeks, months and years.
If interest rates do trend up as I anticipate, I will have a number of securities maturing every month as part of my short term bond/CD ladder strategy.
As I receive the proceeds, I have several options that I will consider.
One option would simply be to buy a short term bond or CD.
Another would be to buy 1 or more intermediate term bonds that have come down in price providing me with a higher yield than previous purchases.
Or, I could decide to keep some or all of the proceeds in my cash brokerage accounts and to postpone making a reallocation decision.
Other options include buying stocks or other risk asset classes with the proceeds.
I will make the decision as the money flows into my account.
Interest rate risk is more of an issue than credit risk.
Interest rate risk is a potential issue assuming rates continue to rise. However, I personally have no concerns about that risk either for several reasons previously discussed in more detail:
(1) I am using a ladder strategy and buying only small lots;
(2) I am able to hold everything purchased until maturity;
(3) I have no situational risks that require a higher return on investments;
(4) I have a number of securities maturing every month; and
(5) I intend to buy more high quality bonds and FDIC insured CDs with the proceeds from maturing securities which will capture higher yields in a rising interest rate environment.
++++++++
Jobs:
Seasonal factors are impacting the government's job reports for February and March. February was unusually warm which pulled some new job numbers from early Spring into that month.
I discussed in comments to an earlier post that the February 2017 report was unusually strong due to those factors.
The government reported that only 98,000 new jobs were created last month: Employment Situation Summary The expectation was for 180,000. CNBC
In addition, BLS revised down January and February to show 38,000 fewer jobs were added than previously reported by it. February was revised from +235,000 to +219,000, while January went from +238,000 to +216,000.
Average hourly earnings increased by 5 cents to $26.14 per hour and were up 2.7% Y-O-Y.
The U-6 rate fell to 8.9% from 9.2%. Table A-15. Alternative measures of labor underutilization The 8.9% reading is the lowest since December 2007.
The following statement can be found in the FED minutes for the mid-March 2007 meeting: "Nearly all participants judged that the U.S. economy was operating at or near maximum employment." The Fed - Monetary Policy
I am expecting a slowdown in job growth for that reason. The issue is whether wages will continue to rise due to the shortage of desirable new hires. The increases in wages for unskilled labor at major employers suggests that those increases are necessary to keep those employees from leaving for higher paying jobs. Wage pressures then move up the labor chain.
As I noted in a recent comment, the U.S. economy is okay at the moment but is not gaining steam. There is a major divergence in consumer confidence and consumer spending numbers. Personal consumption expenditures have been trending down over the past few months.
Personal Income and Outlays
"Consumer confidence increased sharply in March to its highest level since December 2000 (Index, 128.6)". The Conference Board Consumer Confidence Index Increased Sharply in March
Conference Board Consumer Confidence Chart
The auto sales number for March was meaningfully below expectations: USA Today: Auto sales fall in March as discounts rise on unsold cars
Defaults on subprime auto loans are accelerating: Here’s why it’s getting harder to ignore rising subprime auto defaults - MarketWatch; Some 6 million Americans are delinquent with auto loans and it’s going to get worse - MarketWatch
The level of consumer liabilities is back to 2008 levels. Household Debt Increases Substantially, Approaching Previous Peak - FEDERAL RESERVE BANK of NEW YORK; U.S. households will soon have as much debt as they had in 2008 - MarketWatch
Fortunately, the cost for servicing the main debt obligation is lower now compared to then. (DSR Ratio Chart: Household Debt Service Payments as a Percent of Disposable Personal Income; Mortgage Debt Service Payments as a Percent of Disposable Personal Income)
The Atlanta FED GDP model is forecasting a .6% real rate of growth for the 2017 first quarter as of 4/7/17. That is lower than the range of the top ten and bottom 10 forecasts. If that estimate proves prescient, the Stock Jocks will be surprised but the Bond Ghouls will feel vindicated since they have become more ghoulish after suffering an anxiety attack after Trump won.
The initial reaction to the U.S. cruise missile attack was to take bonds and gold up in price and stocks down. This kind of event of limited response to Syria's use of chemical weapons is not relevant to market prices unless events spiral out of control which is not likely. A first strike against North Korea would be a whole different matter.
The ten year U.S. treasury closed at 2.38% yield, up from 2.34% on Thursday. However, the dominant trend since 3/14/17 is down in yield. 2017 Daily Treasury Yield Curve Rates
+++++++++++++++++++++
1. Intermediate Term Bond Ladder Basket Strategy:
A. Bought 2 Cisco 2.2% Senior Unsecured Bonds Maturing on 9/20/23-Sold 2 Cisco 1.6% Senior Unsecured Bonds Maturing on 2/28/19:
Issuer: Cisco Systems
Finra Page: Bond Detail (prospectus not linked)
Credit Ratings:
Moody's at A1
YTM at Total Cost (96.323 )= 2.824% ($4 commission included in total cost number)
This bond closed at 98.02 on 4/6.
This bond closed at 98.02 on 4/6.
10-Q for the Q/E 1/28/17 (debt listed at page 71)
CSCO Analyst Estimates
I sold 2 Cisco 1.6% senior unsecured bonds maturing on 2/28/19:
The price shown in the preceding snapshot is adjusted for the brokerage commission. I sold at 100.064. The YTM at that price is 1.566%. The interest amount shown is the accrued interest that the buyer paid me for these two bonds. This bond was bought at a total cost of 99.767 last December.
I basically substituted a higher current yield and YTM Cisco bond.
CSCO Analyst Estimates
B. Bought 2 BBT 2.05% Senior Unsecured Bonds Maturing on 5/10/21:
Issuer: BB&T Corp. (BBT)
BBT Page at Morningstar
Finra Page: Bond Detail (prospectus linked)
Credit Ratings:
Moody's at A2
S & P at A-
Fitch at A+
YTM at Total Cost (98.187) = 2.514%
This bond closed at 98.61 on 4/6.
2016 BB& T Annual Report
BB&T SEC Filings
2014 4th Quarter Earnings Release
BBT Analyst Estimates
I recently discussed paring my BB&T stock position in Item # 3.A.
I also own 4 BB& T 1.45% senior unsecured bonds maturing on 1/12/18. I discussed the purchase of two of those bonds in Item # 1.D.
C. Bought 1 Shell International Finance 2.25% Senior Unsecured Bond Maturing on 1/6/23:
Guaranteed by Royal Dutch Shell PLC as to payment of interest and principal
FINRA Page: Bond Detail (prospectus linked)
RDS.A Royal Dutch Shell PLC ADR Page at Morningstar
Moody's at Aa2
Link to Moody's 4/8/16 Report: Downgrades Royal Dutch Shell to Aa2; negative outlook
Fitch at AA-
YTM at Total Cost (96.955) = 2.816%
This bond closed at 97.55 on 4/6.
Several Shell International bonds are available in 1 bond lots. I discussed buying one 2022 senior unsecured bond in Item # 1.A.
My earliest maturity is a bond maturing on 8/21/17, which I mentioned in Item # 3.C. in the preceding linked post.
I have not owned the common shares since I eliminated my position in January 2014. Item # 2: Eliminated Royal Dutch After Profit Warning-Sold: 52+ RDS/A at $70.85 and 51+RDS/A at $70.83 (1/24/14 Post)(realized gains=$325.89).
D. Bought 2 Alabama Power 2.45% Senior Unsecured Bonds Maturing on 3/20/22:
Issuer: Alabama Power is a wholly owned subsidiary of the Southern Co.
FINRA Page: Bond Detail (prospectus linked)
Credit Ratings:
Moody's at A1
Moody's downgrades Southern Company to Baa2 stable; affirms subsidiary ratings and outlooks
S & P at A-
Fitch at A+ Fitch May 2016 Report
YTM at Total Cost (99.403) = 2.577%
This bond closed at 99.48 on 4/6.
In Item # 1.C., I discussed buying two Alabama Power 2.8% senior unsecured notes maturing in 2025.
E. Bought 1 Liberty Property LP 3.375% Senior Unsecured Bond Maturing on 6/15/23:
Issuer: Liberty Property Trust (LPT)-A REIT
Finra Page: Bond Detail
LPT Liberty Property Trust Page at Morningstar
Credit Ratings:
Moody's at Baa1 Moody's affirms Liberty Property LP senior unsecured rating at Baa1; stable outlook
YTM at Total Cost (99.892) = 3.394%
This bond closed at 100.15 on 4/5.
LPT Analyst Estimates (REIT estimates are generally based either on FFO or AFFO depending on the company)
LPT SEC Filings
LPT 2016 Annual Report
2. Short Term Bond/CD Ladder Basket Strategy:
A. Bought 2 Bank of North Carolina CDs (Monthly Interest Payments) Maturing on 3/29/18:
3. Continued to Pare Stock Allocation:
A. Sold 100 out of 130 Roche ADR (RHHBY)-Used Commission Free Trade:
Profit Snapshot: +$128.93
I sold 2 Cisco 1.6% senior unsecured bonds maturing on 2/28/19:
The price shown in the preceding snapshot is adjusted for the brokerage commission. I sold at 100.064. The YTM at that price is 1.566%. The interest amount shown is the accrued interest that the buyer paid me for these two bonds. This bond was bought at a total cost of 99.767 last December.
 |
| Profit $3.94 |
CSCO Analyst Estimates
B. Bought 2 BBT 2.05% Senior Unsecured Bonds Maturing on 5/10/21:
Issuer: BB&T Corp. (BBT)
BBT Page at Morningstar
Finra Page: Bond Detail (prospectus linked)
Credit Ratings:
Moody's at A2
S & P at A-
Fitch at A+
YTM at Total Cost (98.187) = 2.514%
This bond closed at 98.61 on 4/6.
2016 BB& T Annual Report
BB&T SEC Filings
2014 4th Quarter Earnings Release
BBT Analyst Estimates
I recently discussed paring my BB&T stock position in Item # 3.A.
I also own 4 BB& T 1.45% senior unsecured bonds maturing on 1/12/18. I discussed the purchase of two of those bonds in Item # 1.D.
C. Bought 1 Shell International Finance 2.25% Senior Unsecured Bond Maturing on 1/6/23:
Guaranteed by Royal Dutch Shell PLC as to payment of interest and principal
FINRA Page: Bond Detail (prospectus linked)
RDS.A Royal Dutch Shell PLC ADR Page at Morningstar
Moody's at Aa2
Link to Moody's 4/8/16 Report: Downgrades Royal Dutch Shell to Aa2; negative outlook
Fitch at AA-
YTM at Total Cost (96.955) = 2.816%
This bond closed at 97.55 on 4/6.
Several Shell International bonds are available in 1 bond lots. I discussed buying one 2022 senior unsecured bond in Item # 1.A.
My earliest maturity is a bond maturing on 8/21/17, which I mentioned in Item # 3.C. in the preceding linked post.
I have not owned the common shares since I eliminated my position in January 2014. Item # 2: Eliminated Royal Dutch After Profit Warning-Sold: 52+ RDS/A at $70.85 and 51+RDS/A at $70.83 (1/24/14 Post)(realized gains=$325.89).
D. Bought 2 Alabama Power 2.45% Senior Unsecured Bonds Maturing on 3/20/22:
Issuer: Alabama Power is a wholly owned subsidiary of the Southern Co.
FINRA Page: Bond Detail (prospectus linked)
Credit Ratings:
Moody's at A1
Moody's downgrades Southern Company to Baa2 stable; affirms subsidiary ratings and outlooks
S & P at A-
Fitch at A+ Fitch May 2016 Report
YTM at Total Cost (99.403) = 2.577%
This bond closed at 99.48 on 4/6.
In Item # 1.C., I discussed buying two Alabama Power 2.8% senior unsecured notes maturing in 2025.
E. Bought 1 Liberty Property LP 3.375% Senior Unsecured Bond Maturing on 6/15/23:
Issuer: Liberty Property Trust (LPT)-A REIT
Finra Page: Bond Detail
LPT Liberty Property Trust Page at Morningstar
Credit Ratings:
Moody's at Baa1 Moody's affirms Liberty Property LP senior unsecured rating at Baa1; stable outlook
YTM at Total Cost (99.892) = 3.394%
This bond closed at 100.15 on 4/5.
LPT Analyst Estimates (REIT estimates are generally based either on FFO or AFFO depending on the company)
LPT SEC Filings
LPT 2016 Annual Report
2. Short Term Bond/CD Ladder Basket Strategy:
A. Bought 2 Bank of North Carolina CDs (Monthly Interest Payments) Maturing on 3/29/18:
3. Continued to Pare Stock Allocation:
A. Sold 100 out of 130 Roche ADR (RHHBY)-Used Commission Free Trade:
Profit Snapshot: +$128.93
I sold this lot shortly after RHHBY went ex dividend for its annual distribution.
Quote: Roche Holding AG ADR (RHHBY:OTC)
Closing Price 4/7/17: RHHBY $31.92 -$0.11 -0.36%
RHHBY Roche Holding AG ADR Page at Morningstar (currently rated 5 stars with a consider to buy at $34)
Switzerland will collect a 15% withholding tax pursuant to Article 10 of the tax treaty between the U.S. and Switzerland. If the individual investor has more than 15% withheld, then their broker is unwilling to claim U.S. citizenship treaty rights.
This ADR is traded on the U.S. pink sheet exchange and is priced in USDs.
1 ADR = .125 Ordinary Shares
CHF Priced Shares: Roche Holding AG (ROG:SWL)
Subsequent to selling my 100 share lot, Roche issued these press releases: FDA approves Roche’s OCREVUS™ (ocrelizumab) for relapsing and primary progressive forms of multiple sclerosis; Phase III ALUR study supports the use of Roche’s Alecensa for people with advanced ALK-positive lung cancer
Over the past few years, I have had some difficulty generating profits in Roche shares and have gotten into a rut where I am content to take +100+ profits after harvesting the annual dividend.
Part of the problem, which started in 2011 when the Swiss National Bank launched its Jihad Against its own currency, is that the Swiss Franc has declined in value against the USD, but has stabilized near par: CHF / USD Currency Chart. Swiss Franc to US Dollar Rates
The following chart compares the CHF and USD priced shares over a 10 year period:
Roche has not done that well, up about 40% on a price basis over that period.
As I have noted in the past, Roche would not be worthy of consideration IMO without its past acquisition of the U.S. based Genentech where most of the drug innovation has taken place.
Genentech: Our Medicines
4. DLRPRF Redeemed by Issuer:
This security paid a 6.625% cumulative dividend on a $25 par value.
I received the $25 par value plus $.92 in accrued and unpaid dividends:
The last quarterly dividend was paid on 3/31/17:
I bought this lot using a commission free trade at $24.85 and discussed that purchase here.
Quote: Roche Holding AG ADR (RHHBY:OTC)
Closing Price 4/7/17: RHHBY $31.92 -$0.11 -0.36%
RHHBY Roche Holding AG ADR Page at Morningstar (currently rated 5 stars with a consider to buy at $34)
Switzerland will collect a 15% withholding tax pursuant to Article 10 of the tax treaty between the U.S. and Switzerland. If the individual investor has more than 15% withheld, then their broker is unwilling to claim U.S. citizenship treaty rights.
This ADR is traded on the U.S. pink sheet exchange and is priced in USDs.
1 ADR = .125 Ordinary Shares
CHF Priced Shares: Roche Holding AG (ROG:SWL)
Subsequent to selling my 100 share lot, Roche issued these press releases: FDA approves Roche’s OCREVUS™ (ocrelizumab) for relapsing and primary progressive forms of multiple sclerosis; Phase III ALUR study supports the use of Roche’s Alecensa for people with advanced ALK-positive lung cancer
Over the past few years, I have had some difficulty generating profits in Roche shares and have gotten into a rut where I am content to take +100+ profits after harvesting the annual dividend.
Part of the problem, which started in 2011 when the Swiss National Bank launched its Jihad Against its own currency, is that the Swiss Franc has declined in value against the USD, but has stabilized near par: CHF / USD Currency Chart. Swiss Franc to US Dollar Rates
The following chart compares the CHF and USD priced shares over a 10 year period:
Roche has not done that well, up about 40% on a price basis over that period.
As I have noted in the past, Roche would not be worthy of consideration IMO without its past acquisition of the U.S. based Genentech where most of the drug innovation has taken place.
Genentech: Our Medicines
4. DLRPRF Redeemed by Issuer:
This security paid a 6.625% cumulative dividend on a $25 par value.
I received the $25 par value plus $.92 in accrued and unpaid dividends:
The last quarterly dividend was paid on 3/31/17:
I bought this lot using a commission free trade at $24.85 and discussed that purchase here.
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
I did a nip and tuck shift last Friday by selling $6K in principal amount of low coupon short term bonds and buying $6K in longer duration bonds maturing in 2022, 2023 and 2026 where the YTMs are over 3%.
ReplyDeleteI sold the following bonds for a net profit of $1.46.
2 Pfizer 1.2% Maturing 6/1/18
2 Bank of Montreal 1.35% Maturing on 8/28/2018
2 Pepsico 1.25% Maturing on 4/30/18
I am basically substituting slightly more current interest income and a greater YTMs for slightly more interest rate risk.
First quarter 2017 real GDP growth will be anemic, but that would be consistent with the past few years. There are some worrying signs that the consumer may be pulling back. A significant part of the population is borrowing more at high rates using credit cards, larger amounts of auto loans, and/or are burdened by student loan repayments as shown in the NY FED data.
https://www.newyorkfed.org/medialibrary/interactives/householdcredit/data/pdf/HHDC_2016Q4.pdf
While it is too early to make future predictions, there is enough data for me to slightly extend my weighted average bond duration number. If interest rates continue to trend down, I can lighten up on longer duration bonds by harvesting some profits.
South Gent,
ReplyDeleteThank you for clearly laying out your Bond/CD Ladder Strategy. One can easily follow and adjust in accordance with ones own risk appetite and personal situations. Priceless!
What do you think about the latest development in geopolitical risks, China, and oil price (3% spike this week)?
Y: Crude prices are jumping around in a fairly narrow range. So far, I have not seen a move that suggest that the range is about to be broken either to the downside or upside.
DeleteThe OPEC production agreement is set to expire 6/30/17. If it is not extended then we will know whether demand has picked up sufficiently to soak up the supply. Otherwise, the price will head down with the supply problems aggravated by the significant ramp up in U.S. and Canadian production.
This is one view that the price will collapse:
http://www.cnbc.com/2017/03/13/oil-prices-could-hit-2016-lows-commentary.html?view=story&%24DEVICE%24=native-android-mobile
The U.S. field production numbers have moved up considerably since the 2016 lows. The last report for the week ending 3/31/17 was 9.199 million barrels per day, up from 8.428 million barrels per day for the W/E 7/1/16.
https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=WCRFPUS2&f=W
I have not heard much about Trump's summit meeting with President Xi Jinping other than no specific agreements about anything came out it:
https://www.nytimes.com/2017/04/08/world/asia/china-xi-jinping-president-trump-xinhua.html?rref=collection%2Fsectioncollection%2Fworld&action=click&contentCollection=world®ion=rank&module=package&version=highlights&contentPlacement=2&pgtype=sectionfront&_r=0
The Chinese state run press criticized Trump's missile attack on Syria referring to it as an act of a weakened politician who wants to distance himself from Russia.
We will have to wait and see what Trump does now with regard to China.
The missile strike does show that Trump will respond to pictures. While Trump blamed Obama for the chemical attack, that attack came immediately after the U.S. changed its policy toward Assad. Previously, the U.S. said he had to go and Trump's Secretary of State said he could stay. So there was a quick reversal of a U.S. policy set just a few days ago.
The WP says that Trump watches cable news all day and well into the night and does not like to read anything.
So Trump remains a major risk in that he does shoot from the hip, knows almost nothing, thinks he knows everything, and will make impulsive and emotional decisions. Why Russia wanted him to win is beyond me. One hedge against Trump is gold.
I do not see any stimulus being added this year.
It remains in doubt whether there will be a major tax cut and significant new infrastructure spending ($100B per year over what is now planned). The U.S. economy is so large that even a major stimulus will barely move the needle. The U.S. economy is still based on consumer spending and that has been slowing as of late.
I do believe that economic stresses are starting to appear in significant segments of the economy based on the ongoing accumulation of credit card and automobile debt, the continuing negative impacts of student loans and the rise in rents, and the rising number of consumer defaults and delinquencies.
"US households now have over $16,000 in credit-card debt"
http://www.cnbc.com/2016/12/13/us-households-now-have-over-16k-in-credit-card-debt.html
According to the 4th quarter FED report, which I linked above, student loans — the largest source of debt besides mortgages — increased by $31 billion to $1.31 trillion. Auto loan debt increased by $22B in the 2016 4th quarter to $1.16 Trillion. Credit card debt rose $32B to $779 Billion. New mortgage debt rose by $617 Billion, the highest level since the 2007 third quarter.
Overall, consumer debt went up $460 Billion last year to $12.58 trillion, near its previous peak of $12.68 trillion hit in 2008 and 12.8% above the 2013 second quarter level.
https://www.newyorkfed.org/newsevents/news/research/2017/rp170216
Hi SG,
ReplyDeleteI have been planning for investing in more prefs this month as I convert real estate assets to cash. All of it will go to that asset class or stay in cash. I'm finding that I just don't like the cash sitting there, so I will try to be patient in placing that cash.
I have completed my exit agreement from work.
I'm not used to having this level of time and there's only so much buying, selling and allocation planning I can do. I enjoy the research, but once you have the strategy and allocation, there's not much to do.
I am encouraged that there are some tax benefits on pref share income which really changes how I approach the space. Pref shares are taxed at marginal rates grossed up by 50% which reduces net tax paid by quite a bit. With that tax benefit there is no need to buy Canada Bonds which are 100% safe, but about 1/2 the yield or less.
I believe interest rates will not rise for quite some time and may even drift lower, at least here in Canada.
I hope all is well with you. Thanks Brian.
Thanks for laying out your bond goals!
ReplyDeleteYou don't mention the possibility that the bond price will go up if rates go down, which gives a nice bet over simple checking account.
(Obvious is that if rates go up it's not a big deal that the bond goes down since these can be held to maturity.)
I've been sticking with my various checking/savings accounts that give .95%, 1.15% and another 1.15%.
I face some risks if rates come down, and it'd make sense to hold at least some in bonds. Generally though it doesn't seem to matter that much if one sticks at least somewhat with checking/savings accounts instead of bonds? Unless I'm missing something?
The low unemployeement and a 5cent wage increase sound like a strong report, making the jobs increases matter a lot less. The economy has strongly needed wage increase.
Those strengths seem to contradict the slow GDP and economy.
I don't know what to make of it. Has this situation happened before? It doesn't seem to have. What then does it mean to have a full economy but low interest rates and low growth?
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Have stockjocks been less good predictors of the market's future than bond ghouls? Bond ghouls have a stronger reputation, but you've described the 80's when they got it wrong. So at this time is there any reason to believe one over the other, or even over neither being right and the economy being middling for a while?
"The missile strike does show that Trump will respond to pictures."
I think in particular to pictures of babies. One gets the impression he was a "beautiful baby" and then something happened to make him feel a lot less safe and okay. He spoke in an adult voice for most of that video of why he took this action (an adult voice we've almost never heard), until he once again got to the topic of "beautiful babies" and he went into his usual high pitched baby-like voice. With that big shift, it looked typically like a spot where a person is disassociating or reacting to something in their own life.
I quickly stopped watching the media and politicians' assessment of this latest "thing." They were all over the place.
Thanks for all of the info and insights. FYI Interactive brokers withheld 30% from NRBAY ADR in individual taxable acct. Have submitted ticket, will see what happens.
ReplyDeleteA: On 4/3/17, I received the Nordea Bank annual dividend in my Fidelity account. The dividend amount was $70.21 for 100 shares. A $10.53 foreign tax was withheld which is at 15%. That is correct under Norway's tax treaty with the U.S.
DeleteSo for whatever reason, IB did not claim U.S. citizenship rights for you or possibly was not set up to receive the dividend in a way where it could claim the treaty rate.
Fidelity has generally been the best at securing the treaty rate with SVNLY being the sole exception so far. I quit using Schwab to buy any foreign stock other than those from Canada since I do not recall them ever securing the treaty tax rate. Generally speaking, if more than 15% is withheld, you did not receive the tax treaty rate for U.S. citizens.
LMH: I do not expect much price movement either up or down in my short term bonds. I did mention that intermediate bond prices could go up and yields down:
ReplyDelete" A number of external events could happen that would send interest rates lower. If that occurs, I have a large number of intermediate term bonds that will benefit. Some bonds may be sold for profits in that scenario. I am flexible and will play whatever hand is dealt in the coming weeks, months and years."
The underlying rational for a bond ladder is that I am not certain whether interest rates will go up or down so I am playing both scenarios in effect.
The short term basket mitigates interest rate risk due a persistent rise in rates as proceeds from maturing securities can be reinvested in higher yielding ones.
The intermediate term bond basket will provide more income and mitigates interest rate risk due to a decline in interest rates. A persistently declining interest rate scenario also has interest rate risk, as bond and preferred stock investors have experienced since 2007.
Since 2007, I have had a large number of bonds called by the issuer. I lose a higher coupon issue and receive proceeds that can only be reinvested at a lower yield or the same yield with a significantly higher credit risk. For awhile now, even junk bonds have not provided the investor with a yield similar to those vintage higher quality bonds.
I also mitigate this kind of interest rate risk by buying bonds with "make whole provisions" which make it unlikely that the issuer will redeem in a declining interest rate scenario since the issuer would have to pay a penalty that would take away the refinancing advantage. Interest rate risks are far more acute in this scenario when the investor buys exchange traded bonds, where the issuer can redeem at par value after 5 years or so after the IPO.
In the declining interest rate scenario, I receive more current income compared to a short term investment, and I receive it for longer. Profit opportunities would also arise, and I may harvest a few particularly if I believe the downtrend is temporary.
Harvesting some profits would be a risk mitigation technique for intermediate term bonds. There will not be much profits available on the short end as shown by my first comment above.
The potential profits on the intermediate side are most likely to be concentrated in the 7 to 10 year range when and if the ten year treasury moves down closer to 2%, and then the profit may be around $50. Larry Fink places the odds at 51% that the ten year will fall below 2%. I would say that the odds of that happening within two years is 28.224148194% or thereabouts.
I think my comment didn't send. It's not giving me a send message and has spontaneously logged me out. Happily I put it to clipboard before sending. So I'm posting it again below.
ReplyDelete-------------
I see. So my accounts are similar to playing the short term bonds. (Not completely the same, don't mitigate the risks.) And I haven't set up to mitigate risk with intermediate, if rates go down not up.
You've added a lot more details as well that are helpful!
I definitely agree that the downside risk is closer to 28 than to 51%. I however will quibble that you didn't give enough (what's the math term for it again?) specificity to your %. It leaves way too much room for you to be exactly right.
Actually if a recession does move in, in another year or two, rates are likely to contract again. So the risk is higher than I would have put it pre-Trump and pre-rally and pre-new president with the pattern of a recession showing up in their 1st or 2nd year.
I'm still stuck on from the prior post, that this time is showing up at least a little different. That exuberance isn't here even though valuations are over 30 on shiller CAPE.
LMH: I pay a lot more attention to what investors are doing compared to what they say in a survey. I do not place much reliance on whether surveys show investors being bullish or bearish. What do the prices actually reflect and the market's current valuations spell BULLISH and Extremely Optimistic about the future.
DeleteHum, well that's a good point. "Watch what I do, not what I say."
DeleteVIX model is still stable and doesn't say yet to sell. And in theory (of the model), when it triggers to unstable there's likely another exit point. (For someone in my horizon that still needs growth and not just preservation.)
Fear&GreedTrader argues that valuations aren't too high. This is an earning driven market (where PEs can shrink as earning increase.) He seeing earnings as needing only a small boost to meet PEs and not needing Trump's policies to come much into play and that the business optimism can itself create an upward spiral now, that then doesn't need his policies (such as they were - I still have no idea what they actually are). FG has been right a lot on timing, so I'm inclined to take a look. I'm merely presenting this counterpoint to bounce it around, and ponder things...
LMH: I would be skeptical about valuations based on future "operating earnings" estimates. I will discuss that issue in my next blog.
DeleteI periodically address this issue. Analysts are invariably too optimistic:
The difference in 2015 actual and estimated "operating earnings" estimates was 26% using the operating estimate from 12/31/14:
https://seekingalpha.com/instablog/434935-south-gent/4898841-update-portfolio-positioning-management-7-24-16
Another characteristic of future estimates is that the growth is backloaded into more distant quarters, like the 2017 4th quarter and the 2018 quarters. As we move closer in time to those quarters, the estimates will frequently start to come way down and the more distant quarters then go up.
As of 3/31/17, S & P is showing the 2018 4th quarter at operating earnings estimate at $39.08.
With 62% of companies reporting the 2016 4th quarter so far, the estimate for that quarter is at $27.9 for the Non-GAAP number.
The prediction is for earnings to increase 40% over the next two years.
How much reliance would I put in that percentage gain being equal to or greater than that number? Zero.
The estimated 2016 4th quarter Non-GAAP number was 33.25 on 12/31/15 and is now at 27.9.
And, the odds of a recession increase as you go out further in time now. Economic cycles are never repealed by investors made highly optimistic future earnings forecasts.
Recently Left Brain was deeply involved in analyzing the variables and did not see Right Brain making a move at HQ's trading station. Before anything could be done to stop the Nit Wit, orders were placed to buy two stock ETFs that Left Brain would not even consider buying at current levels.
First Trust Cloud Computing ETF (SKYY)
http://www.marketwatch.com/investing/fund/skyy
Holdings:
http://www.ftportfolios.com/Retail/Etf/EtfHoldings.aspx?Ticker=SKYY
ROBO Global Robotics & Automation Index ETF (ROBO):
http://www.marketwatch.com/investing/fund/robo
Holdings:
http://roboglobaletfs.com/fund-holdings.aspx
Interesting looking ETFs even if not great valuation points. Should do well long term no matter.
DeleteOperating earnings is the term for non-GAAP, i.e. none regulated earnings calcuations? "Operating" sounds nicer than "non-gaap."
On earnings my first question would be how much actual earnings increase year over year, and how much range of year over year increase there is. That would give a much better way to assess how forward estimates compare to what's even reasonably realistic.
I havent' looked much at earnings enough. Especially not at GAAP vs non-GAAP.
I have seen your comments and data over the years about the backloading and super high estimates. They are amusing...
Look forward to your thoughts... :).
I have published a new post:
ReplyDeletehttps://tennesseeindependent.blogspot.com/2017/04/observations-and-sample-of-recent_11.html