Tuesday, June 20, 2017

Observations and Sample of Recent Trades: (MET, VEIRX)

Long Term Risks of Stock Ownership:


"Contrary to what everyone for years has assured us, investing in the stock market does not become safer as our holding periods lengthen. On the contrary, risk increases the longer we hold stocks." Stock market risk is much greater than we thought - MarketWatch

The preceding linked article written by Mark Hulbert focuses on reversion to mean research including this article: The Latest Look at the Total Return Roller Coaster - dshort - Advisor Perspectives

I have argued in several prior posts that stock ownership can become riskier as the holding period lengthens. 


Stocks, Bonds & Politics: Long Term Stock Risks and Situational Risk (March 30, 2009 Post)


Stocks, Bonds & Politics: Duality of Long Term Risks (March 29, 2009 Post)


When I wrote those posts back in March 2009, I was rotating back into stocks. I am not rotating out. 

Reversion to mean is relevant to a long term risk analysis. Think of it in terms of the inevitable long term secular U.S. bull and bear stock market cycles. 


The problem does not simply involve regression to mean however. There is an important context which relates to an individual's personal and unique situational risks. 


Reversion to mean and the inevitability of long term bull and bear cycles have to be analyzed in the context of a person's situational risks and the relatively short time period between the acquisition of sufficient assets and the need to spend savings.  


What happens, for example, when there is a long term bear cycle starting soon after a person retires with a heavy stock allocation. 


Assume the bear cycle kicks off with a catastrophic event which I define as a relatively quick 45%+ decline. 


Most retirees would have to draw down savings by selling stock into the catastrophic event and its aftermath to pay expenses. 


To make matters worse, there could be no snap back rally like the one experienced from March 2009 to date, but instead a long term bear market interrupted by relatively short bull cycles. Inflation could eat into the purchasing power of money raised after the market's entry into a long term bear cycle. 


Those series of events did in fact occur between 1/1/1966 to 8/15/1982. The Catastrophic Event in that long term bear market for stocks and bonds occurred in 1974. 


Bear cycles came into being with Catastrophic Events starting in 1929 and 2000. 

The Catastrophic Events have notably become more frequent since the 1997 Asian Contagion and the parabolic increases in debt. 

Given the current level of interest rates compared to historical norms and the longevity of the bond bull market (35+ years), the odds of a long term bear market in bonds, coinciding with a stock bear market, as was the case for an 18 year period between 1966-1982, have increased meaningfully as stocks continue a parabolic upward spike and yields remain near all time historical lows.  Those circumstances at least raises the specter of both asset classes failing to produce adequate returns to meet the financial needs of most households over the next ten to 15 years.  


S & P 500 Since August 1982 (Google Finance Chart): 






Historical S & P 500 Since 1900 


Average Annualized SPX Total Returns (dividends reinvested) Adjusted for Inflation and Before Taxes: 


Starting in September 1929  and ending in December 1941: -3.784% (4,504 days)

Starting in January 1966 and ending in July 1982: -1.813% (6,055 days)
Starting in March 2000 and ending in February 2009: -6.957% (3,287 days)

Those are per year numbers with dividends reinvested. If I did not adjust for inflation in the Great Depression period, which had significant periods of deflation, then the annual average total return with no inflation adjustment would increase to -4.643% between 9/1929 and 12/1941. 



Total Days in long term bear cycles since 9/29/29 = 13,856

Total days 32,070
Percentage of Total in Long Term Bear Cycles: 43.21%

Sourced from S&P 500 Return Calculator, with Dividend Reinvestment (click adjusted for inflation box)

What is my point other than bad things have happened in the past? It would not be rational to assume that bad things will not happen in the future. We were very fortunate that a Second Great Depression did not start in 2008. 


With the worldwide exponential growth in debt since 2007, I would argue that the negative ramifications flowing from another deleveraging and credit default cycle are potentially catastrophic.  

The IMF Is Worried About the World's $152 Trillion Debt Pile - Bloomberg

Debt and (not much) deleveraging | McKinsey & Company

And, what happens when interest rates on that debt pile return to more normal levels? 



Nonfinancial corporate business; debt securities; liability, Level-St. Louis Fed

Federal Debt: Total Public Debt-St. Louis Fed

There has been no U.S. recession since the last one ended in June 2009. nber.org/cycles The current cycle is about 96 months in duration. List of economic expansions in the United States - Wikipedia The current expansion is the third longest since WWII. The longest was 120 months in the 1990s and the second longest was 106 months in the 1960s. The current U.S. expansion will likely exceed the 106 month duration, but I would not bet much on exceeding the 120 month record.

++++++++++

Trump's Business Interest Driving Foreign Policy Positions-Possibly


When Saudi Arabia and other Gulf States broke off diplomatic and commercial ties with Qatar, a U.S. strategic partner, Donald decided to support that move in a tweet notwithstanding Qatar's willingness to permit U.S. military operations to be operated out of an airbase in that country. I previously noted that Trump's position was at odds with both the State and Defense Departments and made no sense strategically. (Trump and Qatar: Stocks, Bonds & Politics:  6/7/17


It does make business sense to the Trump organization. 


Trump’s Business Ties in the Gulf Raise Questions About His Allegiances - The New York Times

++++++++


1.  Intermediate Term Bond/CD Ladder Basket Strategy:

A. Sold 1 Shell International 1.375% Senior Unsecured Bond Maturing on 5/10/19

Profit Snapshot:  $2.6




This bond was sold on 5/25/17. I bought it at a total cost of 99.04. The current yield at that total cost number is 1.388%. The YTM on the purchase date was 1.791%. 

I sold at 99.4, netting 99.3 after a $1 commission. The YTM at 99.3, as of 5/25/17, was 1.743%. The two year treasury closed at a 1.3% yield that day. 

B. Sold 2 Microsoft 2.125% Senior Unsecured Bonds Maturing on 11/15/22


Profit Snapshot: $17.02




FINRA Page Bond Detail


I sold at 99.8 or 99.6 adjusted for a $2 commission. The YTM at 99.6 was 2.203%. The current yield at 99.6 is 2.13%.


This bond was purchased at a total cost of 98.176 (2/6/17). The current yield at that price is 2.164% and the YTM was 2.465% on the purchase date.


C. Bought 2 Verizon 3.1% Senior Unsecured Bond Maturing on 6/15/24:


This bond was a new issue bought under Fidelity's corporate notes program and sold to Fidelity's customers at par value.  


My current yield and YTM will consequently equal the 3.1% coupon for this purchase. 


Shortly after this purchase, I bought one more in the secondary market. 




Finra Page: Bond  Detail (prospectus not linked)

Pricing Supplement
Credit Ratings: 
Moody's at Baa1
Moody's rates Verizon's new notes Baa1
S & P at BBB+
Fitch at A - Fitch Rates Verizon's Sr. Unsecured Note Offering 'A-'; Outlook Stable | Reuters
Fixed Income | About Verizon

YTM at Total Cost (99.8) = 3.132%



I am concerned about the pricing wars erupting in wireless services. The Cost of Wireless Service Is Plummeting as Price War Rages On -- The Motley Fool







D. Sold 2 JNJ 2.45% SU Bonds Maturing on 3/1/26


Profit Snapshot: +$28.29




FINRA Page: Bond Detail


I sold at 98 or 97.9 after the commission.  The YTM at 97.9 is 2.721% as of 5/31/17. The current yield at that price is 2.5%. Hard to get excited about those yields for a bond maturing in March 2026 even if it is a JNJ bond with its AAA rating. 


I bought these 2 bonds in 1 bond lots: 


Date/Total Cost/Current YTM/YTM

2/23/17: 96.881/2.528%/ 2.845% Item # 1.E.
3/28/17: 96.09/2.549%/ 2.952% Item # 1.C

I will consider buying back 1 bond when and if the YTM goes above 3%. 


E. Sold Two .375% TIPs Maturing on 7/15/23


Profit Snapshot = $6.86





2. Long Term Bond Basket Strategy-Primarily Tennessee Municipal Bonds


A. Bought 5  City of Knoxville, Tennessee 3% Water Revenue Bonds Maturing on 3/1/2042





EMMA Page


Credit Ratings:

Moody's at Aa1
S & P at AAA

YTM at Total Cost (96.645) = 3.197%

Current Tax Free Yield = 3.1%

This bond was originally sold at 102.279 back in August 2016. 


Optional Redemption: AT PAR on or after 3/1/23


Security: 





Tax Matters: 





Offering Statement.pdf


B. Bought 50 EAI AT $23.85-Roth IRA Account




Quote: Entergy Arkansas 1st Mortgage Bonds 4.875% due 2066 Stock Quote (EAI) 


Credit Ratings: 

Moody's at A2
Moody's Upgrades Entergy Arkansas Senior Unsecured to Baa1 from Baa2 and Senior Secured Bonds to A2 from A3; Outlook Stable
S & P at A

EAI is a Baby Bond that is traded like a stock on the stock exchange rather than in the bond market, which explains why this security is called an Exchange Traded Bond. Par value is $25 rather than the $1K par value for bonds traded in the bond market which is why these $25 par value bonds are called baby bonds. 


This Entergy Arkansas first mortgage bond was sold to the public at $25 last August. The shares declined to $20.85 shortly after issuance, bottoming around 12/12/2017: EAI Stock Charts 


Interest payments are made quarterly. The issuer has the option to redeem at par on or after 9/1/21. If the issuer does not exercise its optional redemption right, the bond matures on 9/1/66. Prospectus 


I don't mind assuming the potential duration risk since I bought the bond in my Roth IRA. It is highly unlikely that I will ever withdraw any funds from the retirement accounts and will simply leave them intact for my heirs. So I am not concerned about being caught owning this security until my DOD because of a persistent rise in interest rates that drives the price down.  


Moreover, I have successfully traded first mortgage bonds issued by Entergy subsidiaries since 2008. The general idea is to clip a few interest payments and to sell at whatever profit is available. So, I have gotten stuck holding one yet.    


I recently discussed purchasing a $1K par value Entergy Arkansas First Mortgage Bond: Item # 1.E. Bought 2 Entergy Arkansas 3.05% First Mortgage Bonds Maturing on 6/1/23: 



3. Short Term Bond/CD  Ladder Basket Strategy:


When the following CDs mature, the proceeds will be used to buy short term bank CDs. 


A. Bought 2 Bank of China 1.1% CDs Maturing on 9/7/17:


This is a 3 month CD.




I have a 6 month Bank of China .75% CD maturing on 9/15/17. 

I am continuing to pick up incrementally higher CD yields with shorter terms than those maturing at about the same time.  


B. Bought 1 Bank of China 1.2% CD Maturing 12/7/17





C. Bought 2 Bank of China 1% CDs Maturing on 8/15/17






D. Bought 2 Bank of Baroda .85% CDs Maturing on 7/10/17 (1 Month)




For comparison purposes, I have two .7% People's Bank CDs maturing on 7/11/17 that had a 6 month term. 


When these CDs were purchased, the odds of a .25% increase in the FF range on 6/14 was about 88%. Consequently, I weighted these CD maturities in the 1 to 3 month range expecting that 4-6 month yields would rise some later in June. 


I have two Huntington Bank .8% CDs maturing on 8/15/17 that had a 6 month maturity when purchased last February. The 2 Bank of China CDs that mature on the same day have a 1% coupon and are slightly longer than 2 months in their term. 


4. Continued to Pare Stock Allocation:


A. Pared MET: Eliminated Position in One Taxable Account:




Profit Snapshot: +$149.48




MET Stock Price - MetLife Inc. 

MET Analyst Estimates 

For the Q/E 3/31/17, GAAP net income per share was $.75 per share while operating income per share was reported at $1.41. 
SEC Filed Press Release


I still own 106+ shares in another account. I will look for an opportunity to buy shares in that account, using commission free trades, only at lower prices. If the price goes over $55 per share, I may dump the remaining shares. I discussed buying 50 of those shares here: Added To METLIFE (MET) at $48.89 - South Gent | Seeking Alpha (1/31/15 Post) The other 50 share lot was bought at $51.76: Item # 7 Bought 50 MET at $51.76 (3/24/14 Post) I am reinvesting the dividend. 


The life insurance industry has faced a difficult operating environment due to CB interest rate repression that has narrowed the spread between short and longer term rates and kept all rates below normal levels. While there was initially optimism that interest rates would rise after Trump's victory, intermediate and long term rates have been falling this year and the yield spread has been contracting. 


So far, there is a disconnect between declining rates and the performance of life insurance stocks that have risen about 23% since the election.  


There is also increased regulatory risk due in large part to the non-bank SIFI designations that MET is still fighting in courts. Prudential and American International Group accepted their SIFI designations. 


I was not pleased to see recent losses in MET's hedging program and poor returns in hedge fund investments.  The 2017 first quarter had a derivative loss of $714M: 




That was much worse in the 2016 4th quarter:  MetLife Announces Fourth Quarter and Full Year 2016 Results | Business WireMetLife's Hedge Fund Chop - Bloomberg Gadfly


The company plans to spin off at least 80.1% of its U.S. retail unit to MetLife shareholders. That unit is now known as Brighthouse Financial (BHF) MetLife U.S. Retail Business to Rebrand as Brighthouse FinancialSEC Filed Information Statement for BHF The spin-off is scheduled for later this year.


This unit offers life insurance policies and annuities. The later business has caused losses in the past. BHF is expected to pay a one time dividend to MET, which will probably be used in a share buyback. While the amount is not certain, it is expected to be in a $3.3B to $3.8B range. 

MetLife Announces New $3 Billion Share Repurchase Authorization 


MET has also sold its U.S. retail advisor unit to MassMatual. 


Argus has a buy rating and a $60 target. Credit Suisse rates MET at neutral with a $65 price target. Those reports are available to Charles Schwab customers. 


Morningstar rates MET at 3 stars with a $55 FMV and a no moat rating. Life insurance is a no moat business.  


2016 MET Annual Report

MET SEC Filings

B. Sold $1,000 of Vanguard Equity Income Fund Admiral Class (VEIRX): 

I am in a controlled burn of this significant position. Whenever the fund goes up $1+K since my last pare, I will sell $1K. I am not reinvesting the dividend anymore. The quarterly dividends are generally around $350 or so and can be considerably higher when a capital gains distribution is made a year end.


   
Taking the dividends in cash is another way to pare a position.

Closing Price 6/19/17: $73.39 Up +$.41 or .56%

Sponsor's Website: Vanguard - Vanguard Equity Income Fund Admiral Shares (VEIRX)

VEIRX  Rated 5 Stars by Morningstar

The last $1K pare was discussed here: Stocks, Bonds & Politics: Observations and Sample of Recent Trades: 3/1/17

I will cease paring when the value falls below $50K.

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.

8 comments:

  1. NVS (own):

    "Novartis RTH258 (brolucizumab) demonstrates robust visual gains in nAMD patients with a majority on a 12-week injection interval"

    https://www.novartis.com/news/media-releases/novartis-rth258-brolucizumab-demonstrates-robust-visual-gains-namd-patients

    nAMD = neovascular age-related macular degeneration

    Discussed at
    http://www.reuters.com/article/us-novartis-rth-idUSKBN19B0WJ

    ReplyDelete
  2. South Gent,

    Re. the situational risk I think as a defense strategy one could build a diversified portfolio that generates enough cash flow to cover one’s expenses and have some cash position on the side to take advantage of market volatility. Could this strategy survive a long bear market such as those you have outlined above?

    ReplyDelete
  3. Y: The strategy will in part depend on correctly diagnosing the underlying causes of the secular stock bear market and whether both major asset classes are likely to fail long term. It would also be imperative to make a reasonable estimate of future expenses.

    E.G. Scenarios

    1. Great Depression Scenario: While the last one started almost 90 years ago, the Second Great Depression was a distinct possibility in 2008 and would have happened but for extraordinary interventions worldwide by governments and central banks.

    Bonds: Avoid everything rated below "A". Focus on secured debt issued by entities that provide essential services.

    Stocks: Avoid all banks. Stock allocation needs to be either non-existent or in the highest quality names focusing on companies with low dividend payout ratios that are likely to at least maintain their dividends. Trading mode, possibly long term buying after major Catastrophic Event.

    Personal Debt: Debt Free

    Short Term Money: Only in FDIC insured bank deposits from highest quality banks.

    2. Problematic Inflation Scenario: Stocks and Longer Term Bonds Fail to Produce Positive Inflation Adjusted Returns

    Debt: No debt or no debt that needs to be refinanced.

    Stocks: Minimal or fast trading mode where the investor is selling the rips and buying huge dips (e.g. 1974 after 45%+ decline). Focus on stocks that benefit the most from whatever is causing the problematic inflation or that will benefit the most. Identify quality companies that have the ability to raise dividends and wait to buy after Catastrophic Event occurs.

    Intermediate and Long Term Bonds: Minimal or Strong Hands Holding Until Maturity and Rolling Over at Higher Rates

    Expenditures: Cut down on spending on items most effected by inflation (e.g. staying put in a home, avoiding rent, drive autos longer, etc.). Some necessary expenditures subject to the inflationary spiral (e.g. health insurance, college) may require reductions in other discretionary spending items. In short, cut down spending where possible.

    Cash: Once removing oneself or substantially reducing expenditures on items causing problematic inflation, focus more on high quality, short term cash investments.

    3. Bubbles Bursting-Massive Credit Defaults and Deleveraging (no problematic inflation): This scenario could turn into a Great Depression with improper or inadequate policy responses.

    A. Bonds: High quality only. Zero junk bonds. Most bonds rated at least A- or better, most rated AA or AAA.

    B. Cash: Only in highest quality instruments including FDIC insured bank deposits issued by non-money center banks of high quality.

    C. Debt: Low or none

    D. Stocks: Minimal. Waiting for the Catastrophic Event. Trading mode.

    This is just a brief outline which does not do justice to what I would be doing. Other scenarios are possible. But the preceding three do describe 1929-WWII, 2000-2009 and 1966 to 1982 scenarios.

    And, it is my view that most individuals underestimate what their expenses will be in retirement. They focus too much on current living expenses. There has to be a realistic and informed assessment of personal financial circumstances and expenditures.

    ReplyDelete
  4. The energy infrastructure stocks have declined with E & P stocks as crude oil prices moved into a bear market again. Many of the infrastructure stocks have "direct" negligible exposure to energy prices. However, in a toll business that has high fixed costs, profits and cash flow is dependent on the amount of product that needs to be transported, stored and processed. The decline in energy prices can reach a point where production is curtailed and some fields become non-economical.

    To highlight the recent decline, I sold the ETN AMU at $21.27 on 2/6/17 and shortly thereafter eliminated the position by selling the remaining 100 shares.

    https://tennesseeindependent.blogspot.com/2017/02/observations-and-sample-of-recent_13.html

    UBS ETRACS Alerian MLP ETN (AMU)
    $17.59 +$0.02 (+0.11%)
    As of 11:29AM EDT 7/21/17

    The $17.59 price represents a 17.3% decline from my February exit price.

    It is hard to say where crude will find a bottom. The past history for the energy infrastructure stocks is that they will decline with crude prices. And, I would expect them to decline even if crude oil stabilizes at current or lower prices for a sustained period, which causes substantial production cutbacks. Still the recent decline in AMU may cause me to at least start my nibbles again.

    ReplyDelete
    Replies
    1. AMU: In another tentative move, I did buy back 50 AMU shares yesterday at $17.58 in my Vanguard taxable account.

      I had eliminated 209+ at $21.27 in the same account last February:

      Item # 4.A.
      https://tennesseeindependent.blogspot.com/2017/02/observations-and-sample-of-recent_13.html

      I sold the remaining 100 shares held in another account shortly thereafter.

      Delete
  5. South Gent,

    Thank you for the quick response. You have a very systematic approach for portfolio management. I am going to borrow your approach to review my portfolio for bear market readiness. Looking at the S&P chart makes me nervous. I think everyone should have a bear market strategy even there is no sign for a bear market any time soon.

    https://www.usatoday.com/story/money/markets/2017/03/07/bear-market-warning-flags/98695888/.

    ReplyDelete
  6. Novartis (NVS): Novartis had more positive news that was released earlier today:

    $85.78 +$3.22 (+3.90%)
    As of 9:51AM EDT.

    Drug: Canakinumab
    Trade Name: Ilaris

    "Novartis Phase III study shows ACZ885 (canakinumab) reduces cardiovascular risk in people who survived a heart attack"
    https://www.novartis.com/news/media-releases/novartis-phase-iii-study-shows-acz885-canakinumab-reduces-cardiovascular-risk


    Discussed at

    https://www.reuters.com/article/us-novartis-cardiovascular-idUSKBN19D0F4

    https://www.forbes.com/sites/matthewherper/2017/06/22/novartis-drug-becomes-first-to-prevent-heart-attacks-and-strokes-by-targeting-inflammation/?utm_source=yahoo&utm_medium=partner&utm_campaign=yahootix&partner=yahootix&yptr=yahoo#28ecd8cc2b1a

    I own 134+ shares.

    ReplyDelete
  7. I have published a new post:

    https://tennesseeindependent.blogspot.com/2017/06/observations-and-sample-of-recent_25.html

    ReplyDelete