Observations and Sample of Recent Trades: Another CAD/USD Exchange, NWHUF/Discussion of HOPE Bancorp Earnings Report and Accretion Income in Bank Accounting

Economy: 

A half-million flooded cars and trucks could be scrapped after Harvey: CNBC

The government revised its estimate of second quarter real GDP growth to a 3% annual rate from 2.6%. The increase was driven by an increased estimate of consumer expenditures which was revised to  a +3.3% rate from 2.8%. However, the savings rate declined to 3.7% from 3.9%. US revised second-quarter GDP up 3.0% vs 2.7% rise expected: CNBC 

News Release: Gross Domestic Product

ADP released its private payrolls report for August on the same day. ADP estimated that 237K private jobs were added in August. ADP National Employment Report | August 2017

Case Shiller reported last Tuesday that its home price index for twenty metropolitan areas rose 5.8% Y-O-Y through July 2017. 

Overall, these economic reports were good ones. 

The Labor Department's jobs report for August will be released on 9/1/17, with the current consensus estimate at +175K. August jobs data marks crucial test for U.S. dollar - MarketWatch

Hurricane Harvey will have a short term adverse impact on jobs and GDP but those numbers will not start to show up until September. 

The government released this morning the Personal Income and Outlays report for July. 

Updates for May and June: 

Inflation remains muted and continues to decline from numbers earlier in the year. Note that both real disposable income and real personal consumption expenditures rose by .2%. 

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Market Commentary: 

The bond ghouls barely reacted to the ADP jobs report and the upwardly revised second quarter GDP estimate. 

Closing Price 8/30/17: IEF $108.07 -$0.09 -0.08% : iShares 7-10 Year Treasury Bond ETF 

Nor are they concerned about the economy being near or at full employment with a 4.3% unemployment rate. 

This data, however, did cause me to press down on the gas as I slightly accelerated my ongoing reallocation out of  intermediate term bonds. This is based on a possibly correct forecast, or possibly wrong, that interest rates will reverse course soon and rise some, giving me an opportunity to buy back those bonds at lower prices. My time period for that to happen is prior to year end. The Bond Ghouls are not cooperating at the moment. U.S. 10 Year Treasury Note-MarketWatch

Given my capital preservation objective, I try to anticipate future events that would cause losses and respond accordingly before the events happen. 

Government shutdown could be “more catastrophic” than Lehman collapse, says S&P - MarketWatch 

S & P lowered its debt rating for U.S. treasuries to AA+ in 2011 after Congress barely averted a default on U.S. debt obligations. U.S. triple-A debt rating cut by Standard & Poor’s-MarketWatch S & P was the only ratings agency to lower U.S. debt from AAA in response to that self-inflicted dust up.   

Personally, I view U.S. government debt to be at best an "A+".  There is just too much of it and the problem is becoming worse at an accelerating rate. 

Another useful market report is published by the Canadian firm CIBC Wood Gundy: August Monthly Report

While I have reduced my exposure to Canadian reset equity preferred stocks, the same firm publishes a report on all Canadian preferred stocks including the resets. This one was published in February: Canadian Preferred Shares Report

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1. Canadian Dollar Strategy: 

A. Bought USD$15K Using C$18,747.15 ($2 IB conversion fee built into rate): 

C$1.2491 bought $1 USD

In my IB account, the realized gain for CAD currency exchanges is currently at $1,123 (consisting of a ST profit of $1,206.93 and a LT loss of $85.78), with a current unrealized gain of  almost +$500. Most of the realized gain this year was from this trade using FIFO accounting.  

I still have a meaningful CAD position. 

This kind of trade was precipitated by what I viewed as a short term reversal underway in the CAD/USD. I discussed the reasons in a prior comment. 

The general thrust of my reasoning involved three factors occurring at the same time, plus a low commission rate charged by IB for currency conversions which was a factor as well: 

1. The CAD/USD failed to stay above .8, a resistance level hit after one prior upswings within the past two years. XE: CAD / USD Currency Chart (use two year chart) The recent spurt from May 2017 in the CAD/USD appeared to me to hit the same resistance level before starting a drift down. 

2. The CAD is viewed as a commodity currency, particularly influenced by directional changes in crude oil prices. WTI prices have turned down meaningfully after closing at $50.21 on 7/31/17. That move to the downside has been exacerbated by Hurricane Harvey that has shut down a significant number of refineries and the seasonally slower demand period already here. Cushing, OK WTI Spot Price FOB (Dollars per Barrel)

3. Trump is making noises again about terminating NAFTA. While I do not expect that he will do so anytime soon, and probably lacks the legal authority to do it without congressional approval, he may actually try to do it, being the Know Nothing Demagogue that he is,  and the mere attempt would likely cause the CAD to lose value even if nothing happens right away.  

I may not have done this conversion if I had to pay a 1% commission which is what Fidelity would charge me. Instead, I paid only $2 to IB and can later purchase those CADs back at the same commission rate.  This low cost alternative to Schwab and Fidelity, both of whom charge 1%, allows me to focus more on pure currency trades in addition to earning income and hopefully profits on my foreign stock purchases in local currencies. 


B. Sold 100 NWHUF at USD$8.79: 

Profit Snapshot: +$106.98

Stocks, Bonds & Politics: Item 5.A. Bought 100 at $7.72 

This trade is related to the CAD disposition discussed above. 

NWHUF is the USD priced ordinary shares traded in the Grey Market. Volume is sporadic in that market and limit orders have to be used after converting the CAD ordinary share price into USDs. A symbol ending in "F" indicates ordinary shares rather than an ADR. 

Ordinary Shares Traded in Toronto: Northwest Healthcare Properties Real Estate Investment Trust (Canada: Toronto)

I still own 300 shares of the CAD priced shares after buying 100 recently. Stocks, Bonds & Politics: Item # 6.A. Those shares are owned in my IB account.

I have recently sold 1000 CAD priced shares in my Fidelity account and immediately converted the proceeds into USDs. Stocks, Bonds & Politics: Item # 1.A. (USD profit snapshot = $606.31).

When purchasing a Canadian stock priced in USDs rather than using my CADs to buy the same stock in Toronto, I am most likely engaged in a short term trade that is in part based on my short term forecast for the CAD/USD conversion rate. 

3. Short Term Bond/CD Ladder Basket Strategy: 

A. Bought 2 Bank of Hope 1.45% CDs (monthly interest) Maturing on 8/24/18 (1 Year CD): 

In this section, I will be discussing HOPE's second quarter report to highlight some matters that can be important in evaluating regional bank common stock purchases.  

Hope Bancorp Reports 2017 Second Quarter Financial Results:

The holding company, Hope Bancorp, is on my monitor list for a potential common stock purchase. However, I currently have a general negative opinion about regional bank stocks given what I view as the market's incorrect assessment, made starting immediately after the election, that net interest margins would expand significantly due to expansionary fiscal policies advocated by Trump. 

One issue with HOPE's report is that additional income was created through what is called purchased loan accounting and the accretion of income based on the revaluation of acquired loans. Purchased Loans and Financial Institution Acquisitions: CliftonLarsonAllen The topic is discussed more simply in this 2014 Barron's article: Regional Banks That Face EPS Headwinds - Barron's This is a complex accounting topic and is generally caused by a recent bank acquisition. The bottom line is that HOPE created additional accounting income through accretion of those purchased loans, but the accretion income will decline over a relatively short period of time. 

Another issue is the dependence on selling loans profitably to generate income. Income derived from banking operations is more reliable. HOPE realized a net gain of $3.267M in the quarter by selling SBA loans. That source of income can dry up with a rise in interest rates. 

To arrive at recurring operating earnings, I would back out merger related expenses, accretion income created by the accounting profession, and profits from security transactions. 

Margins are actually stable to down for most regional banks.  Another hike in the short term federal funds rate in December may serve only to contract NIM even more given how intermediate rates have responded to the hike earlier this year. 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity-St. Louis Fed Deposit costs are already repricing to higher levels. 

Holding Company: Hope Bancorp Inc. (HOPE)
HOPE Analyst Estimates

The stock price has almost returned to where it was on 11/8/16: Hope Bancorp Inc. Interactive Chart 

The stock has been drifting down some since the earnings report released after the close on 7/25. The  closing price on 7/25 was $18.57 and the close on the next day was $17.44. That would indicate that some investors were ignoring the $.30 per share net income number and looking under the hood on how that number was generated by the bank.

B. Bought 2 American Express 1.6% CDs (semi-annual interest) Maturing on 11/29/18 (15 month CDs):  

C. Bought 2 New York Community Bank CDs Maturing gon 5/30/18 (9 month CDs):

I also own the common shares, my only loser in the few remaining stocks held in my regional bank basket.

Holding Company: New York Community Bancorp Inc.  (NYCB)

NYCB Analyst Estimates

Bankrate assigns a 3 star rating to this bank: NEW YORK COMMUNITY BANK Review

D. Bought 2 GNB Bank 1.1% CDs (monthly interest) Maturing on 12/5/17 (3 month CDs):

This bank has a 4 star rating from Bankrate: GNB BANK Review

The bank holding company is privately owned.

E. Bought 2 Synovus 1.1% CDs Maturing on 11/30/17 (3 month):

This bank has a 4 star rating from Bankrate:

Holding Company: Synovus Financial Corp. (SNV)
SNV Analyst Estimates
Synovus Announces Earnings for the Second Quarter 2017

$10K Inflow into Short Term Bond/CD Basket

3. Intermediate Term Bond/CD Ladder Basket Strategy:

I am lowering my exposure slightly to low coupon corporate bonds maturing in the 2023-2026 range. The spread between the current yields of those bonds and the Vanguard Prime MM fund is narrowing and likely to narrow further. So, I am taking slightly less income now in exchange for cash that can be redeployed later in bonds with higher YTM and current yields.

Some of these trades are tied to the directional movement of the ten year treasury. In the past year, that yield has topped at twice near 2.6%. YTD, the bottom range is near 2.15%. U.S. 10 Year Treasury Note Interactive Charts-MarketWatch While that range bound parameter will eventually change, the general idea to lighten up on corporate bonds slightly in the 2.15% to 2.25% range and then wait to buy what was sold when the yield moves back up to 2.5%-2.6% and more between 2.6% to 3%. For whatever is purchased, I am financially capable of holding until maturity.

A. Sold 1 Anheuser Busch 2.625% SU Bond Maturing on 1/17/23-ROTH IRA:

Profit Snapshot: +$16.18

FINRA Page: Bond Detail (Prospectus linked)

Sold at 100.392
YTM Then at 2.586%
Current Yield at 2.618%

Bought a Total Cost of 98.476
Stocks, Bonds & Politics: Item # 1.C.
YTM Then at 2.91%
Current Yield at 2.67%

I still own 1 bond in a taxable account that was bought at a total cost of  98.5 on 1/30/17. 

B. Sold 1 Diageo 2.625% SU Bond Maturing on 4/29/23-Roth IRA: 

Profit Snapshot: +$25.76

Finra Page: Bond  Detail (prospectus linked)

Issuer: DEO Stock Price - Diageo PLC ADR (U.S.: NYSE); DGE Stock Price - Diageo PLC  (U.K.: London)
DEO Analyst Estimates

Sold at 101.544
YTM Then at 2.32%
Current Yield at 2.61%

Bought at a Total Cost of 98.768
Stocks, Bonds & Politics: Observations and Sample of Recent Trades: Item # 1.C. 
YTM Then at 2.844%
Current Yield at 2.66%

C. Sold 1 More Diageo 2.625% SU Bond Maturing on 4/29/13: IB Taxable Account ($1 Commission):

Profit Snapshot: $21.79

FINRA Page: Bond Detail

Sold at 101.56
YTM Then at 2.317%
Current Yield at 2.58%

Bought at a total cost of 99.206
Stocks, Bonds & Politics: Item 1.C. 
YTM Then at 2.766% 
Current Yield at 2.646%

D. Sold 2 Campbell Soup 2.5% SU Bonds Maturing on 8/2/22: 

Profit Snapshot: $32.46

Finra Page: Bond  Detail (prospectus linked)

Sold at 100.7
YTM Then at 2.348%
Current Yield at 2.48%

Bought at a Total Cost of 98.997
Stocks, Bonds & Politics: Item # 1B. 
YTM Then At 2.707%
Current Yield at 2.53%

Campbell Soup released another disappointing earnings report this morning. Campbell Reports Fourth-Quarter and Full-Year Results;  Campbell Soup says 2018 to remain difficult, warns of sales drop: Reuters 

The packaged food industry is in a world of pain now. 

I own 30 shares of the common recently bought at $51 and made a mistake by not selling at $54 a few days ago. Stocks, Bonds & Politics: Item 2.A. I titled that section "100% Contrarian Strategy-Though With No Conviction as to Near Term Positive Catalysts". 

As I mentioned in the preceding linked post, there is a faction in the Dorrance family, who controls CPB, that wants to sell the company. This kind of result may start other members to consider more seriously the possibility of letting go. 

E. Sold 1 Consolidated Edison 2% SU Bond Maturing on 5/15/21-A ROTH Account:

Profit Snapshot:  +$15.2

FINRA Page:  Bond Detail (prospectus linked)

Sold at 99.7
YTM Then at 2.084%
Current Yield at 2%

Bought at 98.08
Item # 3.A
YTM Then at 2.472%
Current Yield at 2.04%

$6K Outflow from Intermediate Term Bond/CD Ladder Basket

It just seems to me that the recent decline in intermediate term yields has gone too far, too fast and is not warranted by reasonably forecasted future events.  

4. Long Term Bond Basket: High Quality Tennessee Municipal Bonds: 

A. Bought 5 City of Knoxville, TN. 2.75% Electric Revenue Bonds Maturing on 7/1/41: 

This purchase was made in a Vanguard Taxable Account. Vanguard charges $2 per bond.  

EMMA PAGE

Credit Ratings:
Moody's at Aa2
S & P at AA+

Bought at 91.25
Total Cost at 91.45
Current Tax Free Yield: 3.% at Total Cost
YTM 3.269% at Total Cost

Optional Redemption: At Par Value on or after 7/1/23 (which is fine with me given the purchase at a discount to par value)  

Security: 

Tax Matters: Free From Federal Income Tax and AMT Free per

While this bond has significantly more interest rate risk than the intermediate term corporate bonds mentioned above, I view the credit risk to be better. 

The current yield is also higher than the taxable yields referenced above for the corporate bonds, and the interest income is double tax free for me. 

Tennessee does levy a tax, which is gradually being phased out, on interest and dividend income, but that tax does not apply to interest income paid by Tennessee municipal bonds or U.S. treasuries. There never has been an individual state income tax on other sources of income.

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.