Thursday, September 14, 2017

Observations and Sample of Recent Trades: FNB, HOPE, VEIRX

Market Commentary:

Julian Robertson blames Fed for potential stock market bubble: Delivering Alpha live blog-MarketWatch

I would agree that the extraordinarily abnormal monetary policies of major central banks maintained over almost a decade has caused massive misallocations into negative real yield bonds and has consequently contributed to excessive stock market valuations. A return to more spreads to inflation will cause carnage in bond land. The spillover will be a movement toward lower multiples for stocks.

When will that occur? 

It is hard to say since the CBs are still controlling and manipulating interest rates. It is possible that a non-temporary and persistent rise in inflation will cause the CBs to abandon more quickly their extremely abnormal monetary policies.  

The bond market may or may not front end the return to normal spreads to actual and anticipated inflation. 

The spike in 2013 was IMO a first attempt by the Bond Ghouls to return to a market based ratemaking process, but that was undercut by a continuation of abnormal policies by the FED and other central banks.

ECB announces expanded asset purchase programme (January 2015); Official interest rates (deposit rate is currently at -.4%; has been at that level since December 2015; and has been below zero since June 2014); Swiss National Bank (SNB) at -.75%Sveriges Riksbank (Sweden) at 0.5% for the repo rate; When Will the ECB Pull Its Trillions From the Markets? Bloomberg 9/7/2017

I believe that the CBs has created one huge problem in winding down their balance sheets.  

Deutsche Bank Thinks Draghi’s Gone Over to the ‘Dark Side’ - Bloomberg

Interest Rates After Inflation May Be a Real Bubble - Bloomberg
These Are the Charts That Scare Wall Street - Bloomberg

I do not regard negative real interest rates to be market determined rates. There is a tendency among humans to predict current and recent conditions indefinitely into the future and to search far and wide for purported rational reasons to explain a major historical anomaly as the new normal, when the most obvious reasons for the abnormality are dismissed until the abnormality ceases to exist since the causes were not long term ones. 

CB Balance Sheets: Yardini Research.pdf

The reality is that interest rates and inflation were close to normal prior to the Near Depression. 


Consumer Price Index, 1913- | Federal Reserve Bank of Minneapolis

10 Year Treasury:

10 Year Treasury Rate by Year

If you want to see blood in the streets, a persistent rise in the ten year treasury to 4.5% from the current 2.2% will cause carnage in bond land and to most securities that are bond like.  

As I have stated for about eight years now, the recovery from the Near Depression would take far longer than from a garden variety recession. Seven or eight years would be a normal recovery period based on history. Recovery from Financial Crises: Evidence from 100 Episodes

It has been more than 8 years since the last recession officially ended in June 2009.  



The government reported this morning that seasonally adjusted CPI rose a greater than expected .4% in August. Core CPI was up .2% which was in line with the consensus forecast. Economic Calendar The non-seasonally adjusted CPI rose 1.9% over the twelve month period ending in August. 

Consumer Price Index Summary

Table 2. Consumer Price Index for All Urban Consumers (CPI-U): U. S. city average, by detailed expenditure category

As I mentioned earlier, Irma and Harvey are likely to increase inflation and lower GDP for the third quarter compared to what would have happened with no hurricanes. The inflationary impact is like to be positive beyond the third quarter, and GDP for the 4th quarter and the 2018 first quarter is likely to be higher. 


Portfolio Management

I am currently predicting that intermediate term rates will start to rise after the 10 year near treasury hit a 2.05% (9/7/2007). The 7 year treasury closed the same day at a 1.88% yield. 

I have based on that opinion knocked down my exposure to intermediate term bonds and to longer dated TIPs. I am anticipating that I will be able to buy back those bonds at lower prices than my prior purchases. I have used the proceeds to increase my allocation to short term CDs. When those CDs mature, I have the option to buy more of the same or to redirect the proceeds into another more promising asset category. 

I have slightly increased my exposure to long dated Tennessee Municipal in the case that near term interest rate forecast proves to be wrong. Those bonds in many cases provide me with a higher tax free yield than the current taxable yield or YTM generated by the intermediate term corporate bonds that have been sold. 

I am now in what I would call a neutral trading mode for stocks. I will add positions only as trades. 

Since interest rates may have bottomed, I bought two regional bank stocks as discussed below. 

The technical picture for the regional banks was noted by the Barron's technical analyst as bad, as the regional bank ETF KRE recently had a "death cross" where the 50 day moving average fell below the 200 day SMA line. Death Cross Danger: Bad Omen as Bank ETFs Break Down - Barron's I did not need him to tell me that KRE was weak when he published that article on 9/7/17. Anyone can see that looking at a chart: KRE Chart

My opinion about the directional change in interest rates caused me to consider buying rather than selling regional bank stocks, as prices returned to levels prevailing at or near the election for many of them. I sold most of my positions into the rally after the election that petered out earlier this year and then reversed course as interest rates continue to fall.  


1.  REGIONAL BANK BASKET STRATEGY GATEWAY POST (contains snapshots of round trip trades since this basket started in 2009):

Net Profits: $38,386.47 as of 6/8/17

Unrealized Gains as of 9/13/17: About $6,900

Most of the unrealized gain is concentrated in BB& T, Bar Harbor (BHB), Bridge Bancorp (BDGE) and Washington Trust (WASH). New York Community Bancorp (NYCB) remains my only loser that has not been sold.  

A. Bought 100 FNB at $12.43-Satellite Taxable Account: I eliminated my remaining FNB position earlier this year as noted below.

Quote: F.N.B. Corp. (FNB)

I sold 57+ shares earlier this year for a $335.42 realized gain. Stocks, Bonds & Politics: Item 2.B. I sold that lot at $14.21I discussed buying 50 of these shares here: Item #  5 Added 50 FNB at $7.8 (7/20/2010 Post)

FNB Trading Profits To Date: $888.77

I am not a fan of this bank, and have not liked it since I first bought shares back in 2010.

However, the price did fall back into my consider to buy range that is based in part on the P/E, the one year estimated consensus PEG ratio and the dividend yield. 

Price/Earnings To Growth (PEG Ratio)

As of the date of purchase, the  consensus E.P.S. estimate for 2017 was $.95 and $1.1 for 2018. The P/E based on the 2018 estimate and a total cost per share of $12.43 was about 11.3. The dividend yield at a total cost of $12.43 is about 3.86%.  The estimated 2017 to 2018 E.P.S. growth rate is 15.79% and the P.E.G. would then be .8

One major drawback for this bank is that it sliced the dividend to $.12 from $.24 in 2009 AND has not raised the rate since that slash. FNB | FNB Corp | Dividend History | Dividend Channel

I discussed this bank in these recent posts:

Stocks, Bonds & Politics: Item 3.A. Sold 50 FNB at $15.53 (3/16/17 Post);

Item # 1 Sold 50 FNB-Recently Bought in a Roth IRA Account at $13.27: Update For Regional Bank Basket Strategy As Of 3/17/16 - South Gent | Seeking Alpha;

Item # 5 Bought 50 FNB at $11.13: Update For Regional Bank Basket Strategy As Of 1/28/16 - South Gent | Seeking Alpha

FNB has been growing by acquisition. The most recent acquisition was Yadkin, a bank formerly based in North Carolina. This acquisition was completed last March and was an all stock purchase:  

F.N.B. Corporation Completes Merger with Yadkin Financial Corporation

F.N.B. Corporation to Acquire Yadkin Financial Corporation, Creating Premier Mid-Atlantic and Southeast Regional Bank (7/21/16). 

The earnings reports will have a number of extraordinary items relating to that and other recent acquisitions. 

For the 2017 second quarter, FNB reported net income of $72.4M or $.22 per diluted share. Excluding after tax merger related expenses, E.P.S. was $.23 per share. 

The net interest margin was reported at 3.42% but that included 3 basis points of purchase accounting accretion and cash recoveries. 

"Annualized originated net charge-offs were 0.38% of total average originated loans, compared to 0.25% annualized in the first quarter of 2017 and 0.35% annualized in the year-ago quarter."

The annualized charge-off  ratio was near the average reported by U.S. banks in the second quarter which is currently hovering near a cyclical historical low using data starting in 1985:

Charge-Off Rate on All Loans, All Commercial Banks -St. Louis Fed

"The tangible common equity to tangible assets ratio (non-GAAP) was 6.83% at June 30, 2017, compared to 6.80% at March 31, 2017. The tangible book value per common share (non-GAAP) was $6.00 at June 30, 2017, an increase of $0.14 from March 31, 2017."

The tangible common equity ratio is low for the regional banks that I usually buy. 

The efficiency ratio is good at 54.26%, while the return on average equity at 6.8% is low. The return on tangible equity is good:

Non-performing assets and non-performing loans are better than the average U.S. bank and declined some compared to the 2016 second quarter:  

The coverage ratio for originated loans is good at 152.77%: 

F.N.B. Corporation Reports Second Quarter 2017 Earnings

This bank needs to quit expanding its geographic base with acquisitions at premium valuations using newly issued stock. The focus needs to be organic growth within its existing geographic territory.

The end result of FNB's acquisitions has been no GAAP E.P.S. growth over the past five years:

Form 10-K at page 41

The low P/E is partially explained by a lack of E.P.S. growth which in turn explains the non-existent dividend growth. The current P/E ratio probably contains a measure of hope that the Board and management will stop their empire building and focus instead on E.P.S. and dividend growth.

The lack of E.P.S. growth is another reason to dislike this stock. I would probably view another significant acquisition to be a major negative for existing shareholders.

Closing Price 9/13/17: FNB $12.83 +$0.02 0.16%

B. Bought 50 HOPE at $15.6:

Quote: Hope Bancorp Inc.  (HOPE) 
HOPE Analyst Estimates
2017 E.P.S. Consensus Estimate: $1.2
2018 E.P.S. Consensus Estimate $1.36
Estimated Consensus E.P.S. Growth 2017 to 2018: 13.33%
P/E at $15.6 Using 2018 Estimate =  11.47
Quarterly Dividend Rate Per Share: $.13 or $.52 annually
Dividend Yield at $15.6  =  3.33%
Corporate Profile-Bank of Hope
Deposit Loan Composition > Bank of Hope
HOPE SEC Filings
10-Q for the Q/E 6/30/17 
Hope Bancorp's (HOPE) CEO Kevin Kim on Q2 2017 Results - Earnings Call Transcript | Seeking Alpha

I discussed issues relating to HOPE's last earnings report in a recent post and have nothing to add other than the stock fell into my buy range: Stocks, Bonds & Politics: Item # 3.A. 

I am anticipating averaging down and then selling my highest cost lot when and if there is a pop back up to $17-$19. 

Hope Bancorp Reports 2017 Second Quarter Financial Results 

This is my first buy of this stock. I did own stock in a bank, Wilshire Bancorp, that was part of the merger that created HOPE: Stocks, Bonds & Politics: Sold 110 WIBC at $10.99 (5/6/2010 Post

Closing Price 9/13/17: HOPE $16.24 +$0.26 1.63%

2. Short Term Bond/CD Ladder Basket Strategy

A. Bought 2 Sterling Bank 1.75% CDs (monthly interest) Maturing on 8/8/19 (23 month CDs)

B. Bought 2 Guaranty Bank and Trust (CO) 1.6% CDs (monthly interest) Maturing on 6/13/19 (21 month CDs)

This bank has a 4 star rating from Bankrate: GUARANTY BANK AND TRUST COMPANY Review

Holding Company: Guaranty Bancorp (GBNK)

GBNK Analyst Estimates 
Guaranty Bancorp announces second consecutive quarter of record net income and the signing of a definitive agreement to acquire Castle Rock Bank Holding Company

C. Bought 2 Franklin Synergy 1.45% CDs (monthly interest) Maturing on 9/26/2018

Holding Company: Franklin Financial Network Inc. (FSB)

FSB Analyst Estimates 
Franklin Financial Network Announces Record Net Income On Continued Strong Loan Growth For The Second Quarter

D. Bought 2 Comenity Capital Bank 1.6% CDs (monthly interest) Maturing on 3/17/19 (18 month CD)

Holding Company: Alliance Data Systems Corp. (ADS)
ADS Analyst Estimates 

E. Bought 2 ZB Bank 1.1% CDs Maturing on 12/12/17

Holding Company: Zions Bancorp (ZION) 

ZION Analyst Estimates 

$10K Inflow into Short Term Bond/CD Ladder Basket

3. Stocks, Bonds & Politics: Gateway Post: Equity REIT Common and Preferred Stock Basket Strategy:

A. Bought 100 Pure Industrial REIT at C$6.62:

B. Bought 100 Pure Industrial REIT (PDTRF) at $5.35-Used Commission Free Trade:

This lot is the ordinary shares priced in USDs and traded on what is called the U.S. pink sheet exchange, but no dealer makes a market in this particular stock: OTC Markets (site contains a WARNING) Limit orders have to be used as with Grey Market orders, with the price set by first converting the ordinary share price in CADs into USDs. Schwab is easily my best broker for executions in the U.S. Grey Market and Pink Sheet Exchange. One reason is that the quote for Canadian ordinary shares is already converted into USDs.

Website: Pure Industrial Real Estate Trust | PIRET

This REIT owns some properties in the U.S.: Property Map

Earnings Report for the Q/E 6/30/17:  PURE INDUSTRIAL REAL ESTATE TRUST

FFO and AFFO Computation:

The AFFO payout ratio is high at 94.7%. However, as the company explains in the following snapshot, it has recently sold a number of properties in a capital recycling program and had a 23,977,500 unit offering last April at C$6:

As noted in the preceding snapshot, the company sold another 35,937,500 units at C$6.4 on 8/3/17. Pure Industrial Real Estate Trust Announces Closing of $230 Million Bought Deal

Other Financial Metrics:

The company intends to keep debt to gross book value at close to 40% which is conservative for a Canadian REIT. Occupancy was at 96.7% as of 6/30/17 which will increase to 97.5% based on the then existing commitments.

New Acquisitions:

Pure Industrial Real Estate Trust Announces Closing of Previously Announced Acquisitions and Other Investment Activities (8/21/17 Press Release)(link includes pictures)

The shares slid some after my purchase, possibly due to news that Toys R Us had hired the BK firm Kirkland & Ellis. Toys"R"Us taps law firm to weigh restructuring options: Reuters One of the facilities that was recently bought, and discussed in the prior link, was a distribution facility for Toys R Us Canada. That facility would be necessary if no BK is filed, or Toys R Us Canada is not included in the BK proceeding, or the company intends to keep most Canadian stores coming out of BK. This kind of facility could find another tenant even if the lease is rejected, but the acquisition appears nonetheless to be questionable IMO given the tenants known financial difficulties. 

Pure Industrial Real Estate Trust Announces $365 Million of Strategic Acquisitions and $200 Million Equity Financing

Pure Industrial Real Estate Trust Announces Core Acquisitions and Accretive Dispositions (6/15/17 Press Release)

Distributions are paid monthly at the current rate of C$.026 per unit or C$.312 annually. Pure Industrial Real Estate Trust Announces Cash Distribution for August 2017

Using a total cost per share of C$6.62, the current penny rate would produce about a 4.71% yield.

C. Eliminated MPW in Roth IRA: Sold 100 at $13.44+:

Profit Snapshot: +$40.35

Vanguard Roth IRA Account MPW History: 

I still own recently bought shares in taxable accounts: 

I discussed the 2017 second quarter earnings report in this post: Stocks, Bonds & Politics: Item # 2.A. Added 50 MPW at $12.66  (8/29/17 Post)

Stocks, Bonds & Politics: Item # 5.A. Bought 50 MPW at $12.85 Observations and Sample of Recent Trades: (GMTA, MPW, RMT)

The stock went ex dividend on 9/13/17.

My last sell transaction was a 50 share lot at $13.93: Stocks, Bonds & Politics: Item # 3 (5/15/17 Post) That post contains several links to prior discussions. 

I discuss in those posts my disapproval of MPW's constant stream of large acquisitions financed by large share offerings and the assumption of more debt. 

Medical Properties Trust Announces Public Offering of $1.0 Billion of Senior Notes Due 2027 (9/7/2017 Press Release)

Medical Properties Trust, Inc. to Invest $1.4 Billion in Ten Acute Care Hospitals and One Behavioral Health Facility (5/19/17 Press Release) 

Medical Properties Trust Announces Pricing of Public Offering of Common Stock (4/25/17 Press Release)

Trading Profits To Date: $1,375.18  

Snapshots at Stocks, Bonds & Politics: Gateway Post: Equity REIT Common and Preferred Stock Basket Strategy

4.  Intermediate Term Bond/CD Ladder Basket Strategy:

A. Sold 2 JPM 2.4% SU Bonds Maturing on 6/7/21:

I own still own several JPM SU bonds and a few CDs issued by that bank.

Profit Snapshot: +$26.08

FINRA Page: Bond Detail (prospectus linked)

Issuer:  JPMorgan Chase & Co. (JPM)

JPM Analyst Estimates

Sold at 101.014

YTM Then at 2.111%
Current Yield at 2.38%
Net at 100.814 (after $4 commission)

Bought at a Total Cost of 99.433

Stocks, Bonds & Politics: Item # 1.B.
YTM Then at 2.539%
Current Yield at 2.41%

B. Sold 2 General Mills 3.2% SU Bonds Maturing on 2/10/27:

Profit Snapshot: +$24.38

FINRA Page: Bond Detail (prospectus linked)

Issuer: General Mills Inc.  (GIS)

GIS Analyst Estimates
General Mills Reports Fourth-Quarter And Full-Year Fiscal 2017 Results; Provides 2018 Outlook

Sold at 101.2

YTM Then at 3.049%
Current Yield at 3.16%

Bought at a Total Cost of 99.881

Stocks, Bonds & Politics: Item 1.B.
YTM Then at 3.214%
Current Yield at 3.2%

I am going to redeploy the proceeds into GIS stock provided the price declines below $52 and preferably below $50. GIS and other packaged food companies have some well understood problems. At those lower prices, however, I will receive a higher current dividend yield compared to this 2027 bond. In addition, assuming a continuation of dividend increases which appears likely, though at a slower percentage pace than in the past, the current yield on the common shares will increase.

I last sold GIS common shares at $60.36: Item # 1 Update For Portfolio Positioning And Management As Of 4/1/16 - South Gent | Seeking Alpha (profit snapshot 52+ shares= $1,285.31).

That lot was bought at $35.53 in 2011.

C. SOLD 1 Bank of NY 2.05% SU Bond Maturing on 5/3/21:

Profit Snapshot: +$12.28

FINRA page: Bond  Detail

Issuer Bank of New York Mellon Corp. (BK)

BK Analyst Estimates
BNY Mellon Reports Second Quarter Earnings of $926 Million or $0.88 Per Common Share

Sold at 100.167

YTM Then at 2%
Current Yield at 2.05%

Bought at a Total Cost of 98.839

Stocks, Bonds & Politics: ITEM # 1.B.
YTM Then at  2.344%
Current Yield at 2.074%

D. Sold 1 WFC 3% SU Bond Maturing on 10/23/26:

Profit Snapshot: +$11.59

FINRA Page: Bond Detail

Issuer: Wells Fargo & Co.  (WFC)

WFC Analyst Estimates
Sold at 99.051
YTM Then at 3.12%
Current Yield at 3.03%

Bought at a Total Cost of 97.792

Stocks, Bonds & Politics: Item # 1.A.
YTM Then at 3.275%
Current Yield at 3.07%

Looking at the Finra chart for this bond, I will consider buying back at less than 95 preferably much closer to maturity than now.

E. Sold 1 BP 2.5% SU Bonds Maturing on 11/6/22:

Profit Snapshot: +$28.58

FINRA Page: Bond Detail (prospectus linked)

Sold at 100.481

YTM Then at 2.4%
Current Yield at 2.488%

Bought at a Total Cost of 97.523

Stocks, Bonds & Politics: Item # 1.D.
YTM Then at 2.979%
Current Yield at 2.56%

$7K Outflow from Intermediate Bond/CD Ladder Basket

5. Continued to Pare Stock Allocation

A. Sold $1,000 of VEIRX:

Vanguard Equity-Income Admiral Fund (VEIRX): Rated 5 Stars by Morningstar 

Sponsor's Website: Vanguard Equity Income Fund Admiral Shares

Whenever my position in this mutual fund goes over $51K in value, I will sell $1K. I am in a controlled burn of this position.  

I sold that amount yesterday at $74.1. 

I am not reinvesting the dividend which is another way to reduce my overall exposure.  

I inherited this position in December 2015 with a stepped up cost basis based on a 12/5/2015 closing price. The position started in the early 1990s. 

Other discussions of $1K dispositions this year: 

Stocks, Bonds & Politics: Item # 4.B. (6/20/17 Post)

Stocks, Bonds & Politics: Item # 2.C. (3/1/2017 Post)

Stocks, Bonds & Politics: Item # 3.C.  (2/16/17 Post)

I had been reducing the position in $3K increments but adopted my current policy starting last February. 

YTD Gains: +$547.44

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,

    Moody's just published its Weekly Market Outlook with a headline of "What Might Trigger the Next Market Plunge?"

    1. Y: A mild recession could easily cause a 20% decline in the stock market given the elevated valuation levels.

      A persistent rise in inflation that forces central banks to end their extremely abnormal monetary policies, which would include raising benchmark interest rates faster than currently expected, would be another cause.

      A decline in profits and profit margins would be problematic as well.

      Then there are the usual panoply of known possible causes, such as North Korea, trade wars, a failure to produce a meaningful tax cut, meaningful declines in consumer spending, and the onset of meaningful consumer stress among a significant part of the population caused by too much debt.

      The middle class will discover that Donald is not their savior, notwithstanding this Trump statement on taxes which implies that the tax cuts will be for the benefit of the middle class rather than the wealthy and the stock owning top 10%:

      "The rich will not be gaining at all. I think the wealthy will be pretty much where they are. ... If they have to go higher, they'll go higher, frankly"


      ALDX (owned)

      Aldeyra Therapeutics, Inc. (ALDX)
      $10.90 +4.55 (+71.65%)
      Volume 10,131,532
      Avg. Volume 260,345
      Day's Range 6.60 - 11.05
      52 Week Range 3.80 - 11.05

  2. South Gent,

    MRTX becomes a profitable trade in my small cap biotech lottery ticket basket.

    MRTX $9.30 (+$4.54 95.8%) as of 10am this morning.

    1. Y: MRTX was near $3.3 in July 2017. The news today involved results from a Phase 2 trial, so there is a long way to go before approval.

      Mirati Therapeutics, Inc. (MRTX)
      $10.57 +$5.82 (+122.63%)
      As of 10:37AM EDT
      Day's Range 9.15 - 10.80
      52 Week Range 3.23 - 10.80
      Volume 16,426,261
      Avg. Volume 122,156
      Market Cap 265.591M

      The market cap number is only $266M after that 122% rise in price. The market is basically repricing the value of the lottery ticket.

      YF has the short position as 6.2% as a percentage of the float based on the last data, with 1.12M shares shorted:

  3. I have published a new post: