Observations and Sample of Recent Trades: FIE:CA, PG, SGP:AU, ZRE:CA/Tennessee Municipal Bond Allocation/Middle Class Homeowners As Collateral Damage in GOP's Tax Plan

Portfolio Management-High Quality Tennessee Municipal Bonds:

I have with two recent purchases, including the one mentioned below, brought my Tennessee municipal bond allocation up to $250K in principal amount. I intend to keep it at that amount until the 2018 first quarter where I will buy 5 more bonds as outlined in the portfolio management section here.

The current breakdown as revised for two $5K bond purchases is as follows:

Par Value Totals/ Cost Numbers / Estimated Annual Tax Free Income
Fidelity: $125K/$124.831K/ $3,600
Schwab:  $100K / $99.28K /$3,172
Vanguard: $25K /$24.044K / $750

Total Principal Amount:  $250K
Total Cost: $248.155K
Total Tax Free Income:  $7,522 (does not include profits/double tax free for me)
Current Tax Free Yield Based on Cost = 3.03%

Tax Equivalent Yield Calculator

For this year, I have to pay a 5% Tennessee state tax on dividend and interest income. There are no other state income taxes. The tax on interest payments after a standard deduction will drop to 4% in 2018; 3% in 2019; 2% in 2020; 1% in 2021 and 0% in 2022. There is no state gift or inheritance taxes.

For a single person with $90K in income, and a 5% state tax rate, the tax equivalent yield would be 4.253% at a 3.03% tax free yield.

Interest rates did decline last Friday: 

10/27/2017 Closing Prices: 

IEF $105.85 +$0.34 +0.32%: iShares 7-10 Year Treasury Bond ETF 

TLT $123.24 +$0.81+ 0.66%: iShares 20+ Year Treasury Bond ETF 

ZROZ $114.43 +$1.27 1.12%: PIMCO 25 Year Zero Coupon U.S. Treasury ETF 

LQD $120.91 +$0.36 0.30% : iShares  Investment Grade Corporate Bond ETF 

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German federal budget surplus could reach 14 bln euros-magazine

Kissinger: All of Asia Should Get Ready for Nuclear War

The government estimates that third quarter real GDP growth increased at an annualized rate of 3% in the first quarter. This is the first of several estimates. News Release: Gross Domestic Product

Pending Home Sales Flatten in September | www.nar.realtor

White House reiterates Trump's claims that his 12 sexual harassment accusers lied - CNN (Trump: "As you have seen, I am a victim of one of the great political smear campaigns in the history of our country. They are coming after me to try and destroy what is considered by even them the greatest movement in the history of our country." I am still waiting for Trump to sue those ladies as he promised to do prior to the election)

Trump ally Roger Stone's Twitter account suspended after expletive-filled rant - CBS News

While it is to be expected that Trump has an 81% approval rating among Republicans, which is not likely to change much no matter what he does, the worrisome number for the GOP is the 57% disapproval rating among independents. Trump's Approval Rating Drops to Lowest Level Yet in New NBC News/WSJ Poll - NBC News

In the Gallup Daily Trump Job Approval poll, Trump's approval rating was at 36% as of 10/27/17. Historically, a President's approval rating is over 50% in the first year: Presidential Job Approval Center

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GOP's Budget Bill:

Congress quietly passed a budget outline with $1.8 trillion in health care cuts - Vox (cuts Medicare spending by $473B over ten years). There is also a trillion dollars in cuts to programs that will be identified at a later time.  

Proposed Senate Budget Is Likely to Leave Millions of Americans Worse Off | Center on Budget and Policy Priorities
  

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GOP's Secret Tax Plan To Be Revealed Soon: More Collateral Damage to the Middle Class in the Works

Under current tax law, taxpayers in the 4th quintile pay a higher percentage of their income in taxes than taxpayers in the top quintile, excerpt for those in the top 1%:

When the specifics of the GOP's secret tax plan are finally released this week, shortly before a vote is scheduled, I will understand more about how the Republicans will hurt the middle class in their effort to help pay for the slash in corporate tax rates and the overall tax obligations of the top 1%.

The key provisions that will cause this shift are:

1. Eliminating the Federal Estate Tax (paid now only by the wealthy);

2. Eliminating all Exemption Deductions;

3. Capping the tax rate at 25% for income received from pass through entities which in practice will reduce the tax rate from the higher marginal rates to 25% while providing no benefit to  all middle class taxpayers who are already in the 25% bracket or lower;

4. Eliminating and/or curtailing other individual deductions and credits including the deduction for state and local taxes, though the GOP may allow property taxes to be deducted when a taxpayer itemizes. Property-tax deduction could help GOP reform bill - POLITICO;

5. Eliminating the AMT;

6. Watch for changes in the deductibility of retirement plan contributions and whether the ostensible top tax rate is reduced to 35% from the current 39.6% (and then to 25% for those operating through LLCs, subchapter S corporation, partnerships, etc.); and 

7.  Reducing Demand for Homes Through "Tax Reform" and Thereby Reducing Home Prices-The Middle Class as Collateral Damage 

Keeping the property tax deduction would help taxpayers who are in high property tax regions and have relatively high mortgage interest payments. If the standard is raised to $24,000, a couple with high numbers in those two categories may still find it advantageous to itemize.  

The national associations for both the home builders and realtors oppose the GOP's plan, because it would take away the benefit of home ownership from too many households. This is an obvious point. 

With the planned for increase in the standard deduction, the National Association of Realtors claims that existing home prices would fall 10%. 

The doubling of the standard deduction would exceed both the mortgage interest and property tax amounts for a large swath of taxpayers, making the purchase of a home less desirable from a tax viewpoint than under current law. 

Why buy a home, assume a large debt, and all of the other costs and burdens associated with home ownership, when the standard deduction exceeds what the taxpayer can deduct in Schedule B after the GOP's takeaways? It is estimated that only the top 5% will continue to itemize (significant mortgage debt on large homes) Realtors: Don’t penalize homeowners: USA Today

The National Association of Realtors is right that new single family home starts and the prices of existing homes would suffer under the GOP's plan.

That would also have a negative blowback impact on the economy. 

If the 10% loss in a home's value proves to be accurate, and I suspect that it is too low, then that negative impact is just another way for the middle class to pay for  increasing the wealth of the top 1%. That result is pretty sneaky though, and most Trump voters will not have a clue about how x ("tax reform") caused y (decrease in their home's value) by reducing the demand for homes significantly. 

It is also sneaky to reduce the top individual tax rate from 35% (reduced from 39.6% under current law) to 25% by the pass through entity loophole. Very sneaky stuff here. The republican politicians are magicians when it comes to deception. 

2017 Brackets: Married Filing Jointly-Taxable Income

GOP tax plan trashes the value of two popular tax breaks: CNBC

Mortgage interest deduction: GOP tax plan gives a break to renters: USA Today

Tax Reform Ad: Don't Raise Taxes on Middle Class Homeowners | www.nar.realtor

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1. Sold 500 SGP:AU at A$4.40:

Profit Snapshot: +A$63

Quote: Stockland (Australia: Sydney)

This eliminates my Australian stock positions denominated in AUDs and bought on the Australian stock exchange. I kept the proceeds in AUDs.

I am becoming concerned about how a rise in interest rates will impact REIT prices.  

I discussed interest rate cycles and REITs here: Update For REIT Basket Strategy As Of 8/11/15/Interest Rate Cycles And REIT Stock Prices - South Gent | Seeking Alpha (scroll to "Interest Rate Movements and REIT Stocks")

2. Long Term Bond Strategy: Tennessee Municipal Bonds:

A. Bought 5 Maury County Tennessee 3.25% GO Bonds Maturing on 4/1/42:

I may make it to this bond's maturity date. This bond was recently sold by Maury County.

EMMA Page

Maury County - Google Maps

Maury County is located south of Nashville. It largest city is Columbia, Tennessee. The county is part of the Greater Nashville Metropolitan Statistical area which is the 36th largest in the U.S.

Credit Ratings (only rated by Moody's):
Moody's at Aa2

Bought at a Total Cost of 98.768
YTM Then at 3.323%
Current Tax Free Yield at 3.29%

Optional Redemption: At Par Value on or after 4/1/26

Security:

Tax Matters:

3. Short Term Bond/CD Ladder Basket Strategy: 

A. Bought 2 Hanmi Bank 1.7% CDs (monthly interest) Maturing on 10/25/19 (2 year CDs):

I had 1 Bank of China .9% CD mature on the day of my purchase. So I reallocated that $1K into a higher yielding and longer term CD that pays monthly interest. 

Holding Company Hanmi Financial Corp. (HAFC)
HAFC Analyst Estimates 

B. Bought Bank of China 1.2% CD Maturing on 1/28/18 (3 month CD):

The inflow into this basket has gone way down as CD rates have declined as interest rates have gone up. 

While I did not buy this CD to shift income into next year, when tax rates may be lower, CD and bond purchases are one way to move income receipts out of one year into another.  

$3K into Short Term Bond/CD Ladder Basket Strategy

4. Small Ball:

A. Sold Highest Cost 100 Share Lot of FIE:CA at C$7.57 Using FIFO Accounting:

Snapshot of Position Prior to Pare:

So I sold the lot bought on 5/3/17 and kept the other 300 shares.

Profit Snapshot: +C$35

Stocks, Bonds & Politics: Item # 1.A. Bought 100 FIE:CA at C$7.2 (6/1/2017 Post)

Quote: iShares Canadian Financial Monthly Income ETF

Sponsor's Website iShares Canadian Financial Monthly Income ETF 

Dividend Frequency: Monthly at C$.04 per share

Last Discussed: Stocks, Bonds & Politics: Item # Added 200 FIE:CA at C$7.13 (9/3/17 Post) 

Holdings: 

Currently, my largest individual Canadian stock position, which is owned by this fund, is Toronto Dominion:  

I have a 200 share position in Pure Industrial REIT. I have sold out of Artis and Power Corporation earlier this year.

Prior FIE:CA Trade Snapshots:  

2017 +C$166

2017 +USD $391.32

2014 +USD $58.07 

The last two snapshots are from my Fidelity taxable account where Canadian dollar profits are converted into USDs by that broker.  

B. Bought 10 of PG at $86.99-Used Commission Free Trade:

I am not a fan of this company and have not owned a share for some time. I will buy up to 30 shares in 10 share lots. My next purchase would be the the $82-$83 range. The P/E is currently too high for such a slow grower IMO.

2017 PG Fact Sheet.PDF
Our Brands | P&G

What’s behind Procter & Gamble’s Sluggish Margins? - Market Realist

Quote Procter & Gamble Co
PG Analyst Estimates

The current quarterly dividend is $.6896 per share and was last raised in the 2017 first quarter from $.6695. Splits & Dividend History | P&G Given the low grow rates, I would not anticipate much more than a $.08 per share annual growth in the penny rate, and would not be surprised by less. The payout ratio has been climbing. 

Morningstar calculates that the payout ratio was 50.1% for F/Y ending 6/30/11 and at 74.8% for the F/Y ending 6/30/17.

This is another consumer staple where free cash flow is exceeded by the total amount spent on share buybacks and dividends:

Free Cash Flow F/Y 6/30/17 = $9.527B
Common Stock Purchases = $5.204B Cash Flow for PG
Dividends = $7.236B

Unlike some other consumer staples, PG's long term debt has decreased since 2013. Balance Sheet

Last Earnings Report: P&G Announces First Quarter Earnings

PG uses a fiscal year ending on 6/30. The first quarter for the current fiscal ended on 9/30/17.

The market responded unfavorably to this report.

Free Cash Flow:

Business Segment Information:

Grooming suffered declining revenues, probably due to discount razor companies like Dollar Shave.  

Over the past 3 years, PG has divested more than 100 brands, leaving it with 65 core brands. 

Several beauty brands were sold to Coty in 2016. Procter & Gamble Completes Transfer of Specialty Beauty Business to Coty ("As part of the transaction, P&G retired 105.0 million shares of P&G stock, behind the exchange of 409.7 million shares of Galleria Co., which converted into common shares of Coty. At P&G’s closing stock price on Friday, September 30 of $89.75, these shares represent value of $9.4 billion. In addition, Galleria Co. assumed approximately $1.9 billion of debt in the transaction, the proceeds of which were subsequently distributed to P&G prior to the consummation of the split/merger. The combination of the stock retirement and debt proceeds results in a total value of approximately $11.4 billion.")

The Duracell battery business was sold to Berkshire in exchange for 52M PG shares owned by BRK. P&G Completes Exchange of Duracell to Berkshire Hathaway 

North America accounts for about 44% of total sales.

Analyst Ratings:

GS has a sell rating on PG based in part on that stocks "elevated" valuation: Goldman loses appetite for food stocks, downgrades Kraft Heinz - MarketWatch:

In a September 2017 report, Morningstar rated PG three stars with a $96 fair value estimate. 

In a report dated 10/19/17, S & P rates the stock at 4 stars with a $100 twelve month price target.  

Prior Trades: As far as I have been able to determine, my last two round trips were made in 2009 and 2010: 

2010:50 Shares +$160.05 

Stocks, Bonds & Politics: Item # 6 Sold  50 PG at $63.33 (10/21/2010 Post) 

2009: 130 Shares +$907.12  

In the preceding snapshot, the lowest purchase price was made in March 2009 at $47.59: Stocks, Bonds & Politics (3/17/2009 Post)

Prior to those two trades, my only prior trade since 1/1/2006, which is how far I go back with these snapshots, was this 100 share lot sold in 2006: 

2006: 100 Shares +$227.42

That lot was sold at $57.27 after netting the brokerage commission, on 7/11/2006.   

If I had bought that lot at $57.27 on 7/11/16, and reinvested the dividends, my total annual average return through 10/24/17 would have been 6.97%. DRIP Returns Calculator | Dividend Channel  The SPDR S&P 500 ETF (SPY) had an annual average return of 8.55% over the same period. That difference does mean a significant underperformance and certainly adds up over an 11 year period. The differential is $5,107.24 in favor of SPY starting with $10K in both securities.  

PG Trading Profits 1/1/2006 to Date = $1,294.59

So I am obviously not brimming with enthusiasm about this stock, when my first purchase since 2010 is a 10 share lot with an anticipation that I will be able to average down twice in 10 share lots.

I would opine, however, that a 7% annual average return for SPY would be about 3% higher than I am expecting for the next 11 years, so maybe PG will outperform the S & P 500 over that future time span.   

C. Sold 100 ZRE:CA at C$20.29: 

Profit Snapshot: +C$45

Stocks, Bonds & Politics: Item # 2.B. Bought 100 ZRE at C$19.82 (Bought 7/13/17 and received 3 monthly distributions totaling C$26.4.  

Quote: BMO Equal Weight Canadian REITs Index ETF 

ETF Products- BMO Asset Management Inc.

I am becoming concerned about the rise in interest rates and REIT prices.  
For both ZRE:CA and FIE:CA, one reason for selling shares was simply to buy some of the CADs back that I recently sold at a higher price. 

A related reason is that my reportable USD profit is lower after the most recent CAD slide while I increased slightly my CAD position. Stocks, Bonds & Politics: Item 1.A. Bought USD$15K Using C$18,747.15 CADs. 

CAD / USD Currency Chart

I still own 150 shares of iShares S&P/TSX Capped REIT Index ETF, which is another Canadian REIT ETF.

5. Intermediate Term Bond/CD Ladder Strategy:

A. Sold 2 VZ 2.45% SU Bonds Maturing on 11/1/22:

Profit Snapshot: +$31.6

Finra Page: Bond Detail

Sold at 98.999
YTM Then at 2.665%
Current Yield at 2.475%

Bought at a Total Cost of 97.319
Stocks, Bonds & Politics: Item 1.C.
YTM Then at 2.967%
Current Yield at 2.52%

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.