Monday, November 13, 2017

Observations and Sample of Recent Trades: EBGUF, M, MDRX, RHHBY

Portfolio Management

I am naturally skeptical when so many engage in happy talk about economic nirvana finally being achieved by the human race. 

There is nothing in the historical record that justifies or even supports that human beings are even capable of engineering an era of robust profits without the inevitable busts that follow in relatively short order. 

Ten years is an awfully long time before humans screw everything up, never learning, except for a few souls unable to effect a change, from their prior mistakes or recent history, let alone anything from the more distant past. 

Debt acquisition was the underlying problem that nearly caused another Great Depression in 2008. The solution was to acquire far greater amounts of debt, but to shift ownership to governments and their agencies including central banks. Individual debt levels have been moving up since the Near Depression and now exceed the prior Near Depression peak. 
The Center for Microeconomic Data - FEDERAL RESERVE BANK of NEW YORK

The seeds of the bust period are sown during the everything is good and going to get a lot better period. 

I am not sure what will ultimately undermined the enthusiasm of the Stock Jocks, but only that something will happen that can not be ignored or explained as a positive. Most likely, it will be a series of events that coalesce to cause a major change in the herd's consensus opinion about future earnings. 

The most serious potential near term catalysts would be a failure to pass "tax reform" legislation, except in such a watered down version that the impact would be meaningless. 

These Unruly GOP Tax Factions Will Put Senate's Plan in Question - Bloomberg

A related item would be a growing realization that a major corporate tax cut will last at best only a few years and/or will have only marginal positive impacts on the real economy while causing U.S. budget deficits to soar even more than now. 

The other potential near term catalysts include the following: 

(1) U.S. debt default and/or government shutdown in December; 

(2) A major weakening of consumer spending as a rise in interest rates and debt levels that cause debt servicing costs to rise at a significantly faster rate than disposable income, which then causes large segments of the consumer population to incur more debt to finance their living standards. 

(3) An initiation of a trade war with Mexico and Canada after Trump tries to terminate NAFTA.  

(4) a sustained rise in intermediate and long term rates triggered by increased inflation and inflation expectations and/or a more accelerated return to normalized rates even with inflation expectations remaining relatively constant. 

(5) the onset of a garden variety recession, which is overdue, earlier than most people, including me, now expect. 

My portfolio positioning is becoming increasingly conservative as the market jaunts to new record highs. 

I am extremely well positioned for a Catastrophic market event (which I define as a 45%+ decline over a relatively brief period) or a more normal bear market decline of more than 20%. Even a 20% decline  now would leave the S & P 500 higher than the day before the election. 

Notwithstanding those reservations, I am still maintaining a significant stock allocation, close to $400K and primarily now in stock funds, due in significant part to the continued green light signal given by my Vix Asset Allocation Model. 

I only have a few individual stocks left where the current value is over $5k, with NVS being the largest individual stock position at 135 shares. After paring BBT and BHB, the current value of my positions remains over $5K for both (225 shares of BHB; 121+ BBT) 

Some stocks bought in 2008-2009 and previously pared to small positions have risen to over $5K this year (e.g. 110+ shares of Intel): 

Basically, I am down to what I call fumes in my individual stock portfolio. 

There are a large number of small individual stock positions remaining and most of those are being actively traded for small gains, usually in some kind of dividend harvesting strategy or using commission free trades to average down in tiny lots and then selling the higher cost shares on a price pop while harvesting dividends. 

The short term bond/CD ladder has expanded significantly over the past several weeks, but the intermediate term bond basket has been trimmed by over $100K. 

Additions have been made to the Tennessee municipal bond portfolio to pick up more after tax yield and to play the "what if I am wrong about interest rates going up" opinion.   

In effect, I assumed slightly more interest rate risk in those longer term municipal bonds compared to the corporate bonds that were sold, but moved up the quality ladder and increased my after tax income.  


Market Commentary:

Stock-market investors are starting to freak out about this ugly chart- MarketWatch (wide divergence between S & P 500 and junk bond ETF performance; junk bonds are usually positively correlated with stocks since credit quality issues are less pronounced during an economic expansion)

Elevated CAPE ratio suggests stock market returns to decline, regional Fed bank finds - MarketWatchFederal Reserve Bank of San Francisco: Stock Market Valuation and the Macroeconomy 


GOP's Tax Plan:

Fortunately for the republicans, most people do not understand taxes and will tune out any discussion relating thereto. 

So the GOP can make a variety of false claims without fear of being questioned by their tribe members and fellow travellers.

A. Estate Taxes and the Stepped Up Cost Basis

Just as another example. The House Tax Plan keeps the step up cost basis applicable to inherited property even the though the estate tax is eliminated over a brief period. 

What's in the Senate Republicans' tax bill - Nov. 9, 2017

Everything You Need to Know About the Senate GOP Tax Plan - Bloomberg

Senate's Tax Plan Fixes Some House "Mistakes" - Bloomberg

Allowing the heirs to step up the cost basis to fair market value on the date of death will shelter appreciated assets from the federal income tax. Keeping the stepped up cost basis rule and eliminating the estate tax will allow wealth to become even far more concentrated in the top 1%, who can then return the favor by donating additional funds to GOP politicians or to controlled "non-profit" organizations with nice sounding names like "Americans for Prosperity who could then spend hundreds of millions attacking the opposition in false advertisements.

Republicans Wonder How to Make the Rich Richer - The New York Times

The Senate's plan would not eliminate the Estate Tax, but would increase the exemption to $22M for married couples. Donald claims that millions pay the estate tax now, which is just another one of his "big lies" that requires the listener to be ignorant of the current facts.   

B. Pass Through Income Tax Rates

Most small businesses would not benefit from a 25% tax rate cap on pass through income for the simple reason that they are in lower brackets. 

The reduction in  rates from higher than 25% to 25% for such income is intended to benefit the idle rich, who receive "passive" income through those structures, and to the rich who actively manage a business. The small business organizations complained about this provision that would not benefit their members; and I expect some kind of change to lower the tax rate for them.  

The Senate plan does allow the first 17.4% of income received through pass through structures tax free, with the remainder taxed at the individual's tax rate. That will do more for small businesses than the House plan, but the 17.4% exemption also applies to the wealthy as well. Neither the House nor the Senate will allow those providing  professional services to receive the benefit of revised and lower rates for pass through income. 

C. Deduction for State Tax Payments

The Senate plan eliminates the deductions for both property taxes and state and local income taxes.  The problem with what the GOP is doing in this category is that upper middle class households living in suburban districts are more informed than their typical supporter and have already realized that the GOP is out to screw them. 

I saw proof of that when looking at the recent election returns in Virginia and Georgia. It was also confirmed in several articles that I have reviewed. (e.g. ‘I don’t feel wealthy’: The upper middle class is worried about paying for the tax overhaul - The Washington Post) The GOP will be handing suburban districts to the Democrats when and if the "tax reform" bill passes in something close to its current form, either the Senate or House versions.  

It is questionable whether a final bill that includes the repeal of both property tax and state income tax deductibility will survive a House vote. If both were repealed, then all of the congressional districts currently held by republicans in high tax states, where there is a concentration of upper middle income and educated voters, will be in play in 2018. 

If those republicans survive the 2018 election, then survival in 2020 would be even more problematic for them since more of their constituents will figure out what happened to them after filing out their 2018 and 2019 tax returns. 

I understand the GOP's position on this issue. 

In part, the elimination of the state tax deduction is aimed at the Blue States and is a political payback. 

As a policy matter, and this thought would equally apply to the tax free status of municipal bond interest, there is a reasonable argument that the federal government should not be subsidizing indirectly state and local government spending. 

The problem is political. Once the federal government gives a huge deduction to taxpayers living in high state tax states, there will be political repercussions when that tax break is taken away.    

D. $300 Credit for Single Filers and $600 for Married Filing Jointly

This gimmick, found in the House bill, was set to expire in five years and was intended to generate some tax savings among middle class families who would otherwise suffer a tax increase due to the elimination of all exemptions and most deductions. 

The Senate Bill does not adopt that gimmick. 

E. Medical and Other Deductions:  

Most other deductions are eliminated in both the House and Senate versions. 

The Senate does keep the medical deduction as is; keeps the deduction for student loan interest and allows for a casualty loss deduction when that occurs in a federally declared disaster area only. All of those deductions were eliminated in the House bill. 

If a bill is passed, several other deductions will likely be eliminated including those for alimony payments, casualty losses and moving expenses except for military families.  

F. Overall Individual Tax Decreases and Increases in the Senate Plan

Sourced: Senate Plan Could Increase Taxes on Some Middle-Class Workers - The New York Times

The disparate results will be caused by one or more changes, with the most widespread cause being the elimination of the state tax deductions. I would expect the final plan, revised to fall within the Senate's budget reconciliation rules, to be even less favorable to the middle class than the current version. 

G. Corporate Tax Rates and the AMT

Both the Senate and House versions reduce the top corporate tax rate to 20% from the current 35%, but the Senate delays the cut to 2019.  

Both plans eliminate the AMT. 

The one year delay allows the Senate bill to be slightly more favorable to average Americans within the ten year budget window, a very brief period in the life of a nation. It is just another gimmick. 

Investors are far too sanguine about a corporate tax cut, assuming one is enacted into law which is open to doubt, surviving for a meaningful period of time. 

The Democrats will win control over Congress and the Presidency soon enough. Budget reconciliation rules, as a means to avoid the Senate's filibuster rule, can work for both political tribes. Whatever rate is ultimately adopted will be raised possibly as early as 2021. 

Each party finds its own way to accelerate the day of financial reckoning, a fiscal train wreck of epic proportions likely to happen in my lifetime, assuming I live as long as my parents. This "tax reform" bill when passed will be the GOP's gift to that ultimate and probably unavoidable disaster that will likely start with a series of failed treasury auctions.  

The aggregate effective marginal corporate tax rate is below 20% under existing law. 

Sourced Table 1  Framework for Business Tax Reform: An Update 4-4-2016

Loopholes and legal tax avoidance schemes cause this result. While the GOP plan closes some loopholes, it creates new ones and keeps old ones that will  effectively lower the 20% statutory rate down, probably closer to 10%. 

The current system creates an uneven playing field for corporations that favors both certain industry sectors for no good economic reason and large corporations capable of hiring the best lawyers and accountants to create tax avoidance schemes-some legal or others of varying decrees of questionable legality. 

The GOP does not create a level playing field that would allow all corporations to receive similar cuts in the statutory rate to lower effective marginal tax rates through the elimination of loopholes and most tax avoidance schemes. Their will still be many corporations who will be able to reduce their effective marginal rates to below 10% while smaller businesses in non-tax favored industry sectors will be paying the statutory rate.  

H. Tax Brackets

The Senate Version has different tax brackets than the House bill. The Senate keeps the 10% lowest number which is eliminated in the House bill in favor of 12%. The Senate bill lowers the top tax bracket to 38.5%. And the Senate keeps the number of tax brackets at 7. 

Existing 2017 Tax Brackets: 



Let's assume after all deductions and credits, the single taxpayer has $80K in taxable income, keeping in mind that the taxpayer may have taken a hit before arriving at the taxable income number through the loss of personal exemptions and deductions. 

What is the tax paid under current law, the House bill and the Senate bill with that assumption? 

Current Law: $15,738.6 or 18.5% of taxable income

House Version: $14,149.88

Senate Version: $14,244.66

The key is what is given (lower tax rate brackets) and what is taken away (exemptions and deductions). 

One of the most important takeaways that apply to individuals is changing the inflation measure that increases the tax brackets and certain deductions over time to a slower inflation adjusted number than under current law. That will cause the more favorable GOP proposed brackets to disappear over time and to result in less favorable tax brackets in the 10 to 20 year out period that becomes more unfavorable each passing year. 

Donald tweeted today that maybe more tax cuts need to be given to the super wealthy. Trump Tells Republicans to Cut Taxes for the Rich - NBC News His idea is to get rid of the individual mandate which would result in several million individuals dropping Obamacare plans to become uninsured, which then results in millions no longer using tax credits to support their premium payments. The money saved could then be transferred to the rich. 

The fact that Trump's plan would cause premiums to rise about 10% in most years due just to healthy people leaving the health insurance market altogether is not relevant. 

Repealing the Individual Health Insurance Mandate: An Updated Estimate: CBO and JCT Analysis

It is even more irrelevant for Trump that the increases would fall on those in the middle class. And what is beyond any doubt irrelevant for republicans is the increase in the uninsured population. The big GOP donors could care less about those families.  

Roy Moore and Trump's Republican Party:

New Roy Moore accuser, Beverly Young Nelson, alleges he assaulted her when he was Alabama district attorney - CBS News ("Fighting back tears, Nelson told reporters she fought off Moore in the car as he squeezed her neck and tried to force her head onto his crotch and locked the door when she tried to escape." Roy signed her yearbook as the District Attorney) 

Teresa Jones, who once worked with Roy as a district attorney and is now a partner in a Sarasota law firm, said it was common knowledge that Roy was dating teenagers and hanging out at high school football games to meet the girls when he was in his 30s. Roy Moore's former colleague says it was "common knowledge" he dated teens - CBS News 

And Roy was evasive when asked by Sean Hannity whether he dated teenage girls when he was in his 30s. Roy replied "No, not generally." Then he added that he always asked for the mother for permission. Roy Moore on whether he dated teenage girls: “Not generally, no”-Vox I would characterize those statements as a confirmation that he dated teenagers when he was in his 30s.  

Here is the Bible defense of Roy Moore curtesy of Jim Ziegler: 

“There is nothing to see here,” Alabama State Auditor Jim Ziegler told the Washington Examiner. “The allegations are that a man in his early 30s dated teenage girls. Even the Washington Post report says that he never had sexual intercourse with any of the girls and never attempted sexual intercourse.”

Mary Was a Teenager.  Alabama Republican Jim Ziegler Uses Jesus to Defend Roy Moore (The Bible does not mention Mary's age when she became pregnant with Jesus, but that is not the issue either); AL auditor compares Democratic congresswomen wearing white clothes to the KKK-WSFA

Prior to Ms. Nelson coming forward, the most serious allegation is that Moore exposed himself to a 14 year old girl, Leigh Corfman, who claims that Moore touched her bra and underpants, and moved her hand to touch him over his underwear. I would also note that Ms. Corfman's statements, "if true", would be evidence IMO that he "attempted sexual intercourse". Alabama's legal age of consent is 16. Sean Hannity had to say he misspoke when he called this contact "consensual". He shortly thereafter lost more advertisers. Advertisers Ditch Sean Hannity Over His Coverage Of Roy Moore's Alleged Pursuit of Teens

Roy has gone far in Alabama playing the evangelicals. 

And, it has been financially lucrative for him as well, far more rewarding than having to work for a living practicing law. He is what I would call a "professional Christian". 

Roy Moore-connected foundation's back pay to Senate candidate, second mortgage raise

Charity’s promised back pay to Roy Moore was not reported to IRS as income-The Washington Post

Several republican officials in Alabama have come to Roy's defense: 

GOP official says he’d vote for Moore even if allegations are true

Alabama State Rep. Ed Henry Says Roy Moore's Accusers Should Be Prosecuted

Alabama Republicans defend Roy Moore over allegations he had sexual contact with 14-year-old | Toronto Star (quotes a number of Alabama GOP politicians)

Alabama Republicans Defend Roy Moore: ‘It Was 40 Years Ago’ - The New York Times

In Alabama, Republican Voters Stand by Roy Moore - NBC News

Why Roy Moore supporters are standing by him, in their own words- CNN 

Roy decided to use the story about his alleged relationship with teenage girls to raise money for his campaign: Moore fundraises off of report alleging relationships with teenagers - POLITICO

The general GOP response is to say in unison that "if" the allegations are "true", Moore needs to step down.

Senate Majority Leader Mitch McConnell stated today that he believed the women, but many will view that statement as lacking in sincerity given the delay in making it and the fact that Moore beat McConnell's candidate in the primary.  Mitch was formerly in the "if true" camp. He may have changed his tune after learning about Ms. Nelson coming forward today. 

The evangelicals and holier than thou crowd overwhelmingly supported Donald in Alabama even after he admitted on tape to inappropriate sexual encounters and 15 women had came forward to validate his taped admission of sexual misconduct and unwanted sexual advances. Possibly a few will draw the line at child molestation. 

But, republicans will generally dismiss women who accuse a GOP candidate of sexual misconduct, but will accept without equivocation similar accusations made against a Democrat. 
The former is just politics while the later is good investigative journalism. The GOP is after all the Double Standard Party knee deep into various categories of hypocrisy.  

Donald Trump sexual misconduct allegations - Wikipedia

Donald can recognize in Roy a kindred spirit, 
carnival barker and grifter. 

The response among a majority of republicans in Alabama will generally be that the allegations are Fake News hatched by the liberals to defeat a true Christian and to further their conspiracy to destroy Christian values. 

Others will fall back on the "if true" but "not proven" in a trial by jury rationalization, or just dismiss the allegations as too suspicious given their timing. The fact that the statute of limitations has expired long ago, and no court case on the merits could now be heard, is not relevant. "Let the court's decide" just sounds reasonable on the surface in this context, a place where creepy crawlers go to hide. 

Moore played this theme when trying to raise money off the report: "The Obama-Clinton Machine's liberal media lapdogs just launched the most vicious and nasty round of attacks against me I've EVER faced"

Moore is attempting to shore up support by threatening to sue the WP which I would view as a frivolous suit: Roy Moore threatens to sue Washington Post over report - CNN 

Will Moore still win the election? 

While the election will be far closer than in the past, Moore will probably win even if more women come forward confirming his interest in teenage girls. My best guess is that Roy will receive anywhere from 52% to 55% of the vote. 

A loss, which is certainly possible, would be a headwind for passage of the GOP's "tax reform" legislation that may need Roy's vote. The GOP seems confident of passage at the moment. Three GOP senators, including Flake and Corker who have already announced their retirement, have expressed an unwillingness to vote for a tax bill that materially increases the federal government's debt. Major concessions will probably be needed to gain the support of Senate Democrats and those concessions could easily cause a rebellion among House republicans. It is no slam dunk.  

Longer term, the Roy Moore/Donald Trump republican party will turn off a growing number of independents in swing states; and that will make it less likely that any GOP policy, which the republicans manage to enact into law, will survive past 2020. I don't think the wingnuts will ultimately prevail long term in the U.S. but it is certainly possible that I am wrong about that too.  


Donald Trump:

Trump formally accepted over the weekend Putin's denial of Russian interference in the U.S. election interference, rejecting the massive evidence collected to date that proves otherwise. Trump Says He Believes Putin’s Denials of U.S. Election Meddling-Bloomberg In Trump's view, the evidence is just Fake News collected by Democrat political hacks. 

Then, Donald changed his story the next day apparently after being told that his appointees stood behind the massive evidence and the conclusions reached by U.S. intelligence. 

Donald has a strong tendency to say one thing and then contradict that statement without missing a beat soon thereafter. Trump Backs Intel Agencies After Raising Doubts Over Russian Meddling - NBC News

John Brennan, a former CIA director, had this to say about Trump's comments about Russia's election interference:  “I think it demonstrates to Mr. Putin that Donald Trump can be played by foreign leaders who are going to appeal to his ego and try to play upon his insecurities, which is very, very worrisome from a national security standpoint. I don’t know why the ambiguity about this. Putin is committed to undermining our system, our democracy and our whole process. And to try paint it in any other way is, I think, astounding, and, in fact, poses a peril to this country.”

Ronald Reagan: “freedom is never more than one generation away from extinction.” Freedom is never more than one generation away from extinction - YouTube

I agree with that sentiment, though Reagan was talking about external threats which concerns me less than the obvious and growing internal threat to freedoms. 

The Despot's Apprentice: Donald Trump's Attack on Democracy: Brian Klaas

Vanity Fair published an article back in 1990 that alleged that Donald had Hitler's collected speeches and kept them in a cabinet next to his bed. That would be consistent with Trump's pervasive and persistent demagoguery. Huey Long is probably the closest to Trump's demagoguery among U.S. nationally known politicians over the past 100 years, though Long did accomplish a lot of good things in Louisiana.

In another interesting tidbit in that article, Trump's lawyer is quoted as saying that (1) Trump believed in the effectiveness of the "big lie" and a (2) people will believe the big lie by repeating it over and over again. Donald and Ivana Trump’s Divorce: The Full Story | Vanity Fair Donald has proven both observations to be true repeatedly over the past two years.  

Yes, Mexico is going to pay for the wall and climate change is a hoax perpetrated by China to take away U.S. jobs. Obama was born in Kenya.  Donald is of course going to be hurt financially by the GOP's "tax reform" legislation. He even confirmed that fact that he would pay more taxes than under current law with his accountant. All of the women accusing Donald of sexual misconduct are liars and he will sue them all after the election, etc. and so on into infinity. Donald will probably hit 2000 separate and demonstrably false statements in his first year in office. It will be downhill from there. He is not going to change. 

I do believe that a majority in this country now view Donald as an irredeemable liar, and the number reaching that obvious and accurate conclusion grows every day. 

Donald is still supported by 80%+ of the republicans and that will probably hold firm no matter what he does. 

Those core voters will not matter when the GOP manages to energize the usually lethargic democrats to vote, to lose independents in mass numbers, and to cause more traditional republicans who are actually conservative to vote for centrist Democrats or to stay at home on election day. 

7 Takeaways from Vanity Fair’s 1990 Profile of Donald Trump | Vanity Fair

So what can you say. 61.2+M adults voted to elect a President who is obviously a demagogue with serious mental issues, a pathological liar, and a serial sexual predator. That is not a positive for the nation's future. 


1. Bought Back 100 EBGUF at USD$23.43-Used Commission Free Trade:

History in this Account:

Last Earnings Report

"The Company holds a 67.0 percent ordinary trust unit (Fund Unit) interest in Enbridge Income Fund (the Fund) and an approximate 19.2 percent overall economic interest in the Fund Group. The Fund Group is comprised of the Fund, Enbridge Commercial Trust (ECT), Enbridge Income Partners LP (EIPLP) and the subsidiaries and investees of EIPLP. EIPLP holds the operating entities of the Fund Group."

Enbridge Income Fund Holdings Inc. Reports Third Quarter Results

Overview - Enbridge Income Fund

2016 Annual Review.pdf

Currency Issues

EBGUF is the USD priced ordinary shares that are currently traded on the OTC. Any symbol ending in "F" represents the ordinary shares of a foreign security that is priced in USDs and traded in the U.S. EBGUF is not an ADR. If it was an ADR, the symbol would end in the letter "Y".

So, I bought the same shares that are traded in Toronto that are priced in CADs.  Enbridge Income Fund Holdings Inc. (Canada: Toronto).

The EBGUF stock price should be the price of the ordinary shares traded in Canada converted from CADs into USDs.

The owner of EBGUF will received monthly distributions paid in USDs after conversion of the dividend from CADs to USDs. So the value of the dividend and the dividend yield will depend in part on the conversion rate for each monthly dividend payment. 

If owned in a taxable account, and assuming your broker is not totally out to lunch and too lazy for words, Canada will withhold 15% as a dividend tax. That tax will not be withheld when owned by a U.S. citizen in a retirement account, assuming again that the broker asserts the investors tax treaty rights. 

Monthly Dividend: Currently at C$.1711 per share

I can not calculate the dividend yield on the U.S.D. priced ordinary shares due to currency fluctuations. The yield at C$29.77, the closing price from last Friday, would be about 6.9%. 

Enbridge Income Fund Holdings Inc. Announces 10% Dividend Increase to Monthly Dividend (1/5/17 Press Release)

Dividend History - Enbridge Income Fund

What if the CAD/USD exchange rate was at par for an entire year and the total cost per share for the USD price shares was $23.43? Then the yield would be about  8.76% (USD dividend rate becomes $.1711 x. 12 months = $2.05 annually divided by $23.43 = 8.76%)

On the other hand, if the CAD/USD remained constant at .7 for one year, the dividend yield would be reduced for EBGUF bought at $23.43 to about 6.13%. 

Recent Mild Double Whammy: The USD priced shares have been the victim of the infamous Double Whammy recently. The ordinary shares traded in Canada have declined as the Canadian Dollar declined against the USD. CAD / USD Currency Chart 

The CAD priced shares closed at C$32.47 on 10/16 and at C$29.77 last Friday. Enbridge Income Fund Holdings Inc. (ENF:CA) Interactive Chart And the CAD/USD closed at .7988 on 10/16, down from a recent high of .8258 hit last September, and closed last Friday at .7878.  

I would anticipate the CAD to decline when and if Trump becomes frustrated with the ongoing NAFTA negotiations and attempts to terminate the treaty on his own initiative, as he has threatened to do many times. Any such action would probably be illegal since only the United States can terminate the treaty. Congress approved the treaty and would need to sign off on its termination as well IMO. 

Last DiscussedStocks, Bonds & Politics: Item # 6 Eliminated EBGUF-Sold 100 at $25.73 (10/2/17 Post)-ITEM # 2.A. Bought 100 EBGUF at $24.55: Stocks, Bonds & Politics (8/25/17 POST)

2. Intermediate Term Bond/CD Ladder Basket Strategy:

A. Sold 2 Canadian National Railway 2.25% SU Bonds Maturing on 11/15/22:

Profit Snapshot: +$22.96

Issuer: Canadian National Railway Co. (CNI on the NYSE)

CNI Analyst Estimates
Canadian National Railway Co. (Canada: Toronto Exchange)


Sold at 99.2

YTM Then at 2.42%
Current Yield at 2.268%
NET at 99.1 (after $2 Fidelity commission)

Bought at a Total Cost of 97.592
Stocks, Bonds & Politics: Item # 1.E.
YTM Then at 2.644%
Current Yield at 2.3%

3. Small Ball:

A. Added 10 Shares of Roche ADR (RHHBY) at $28.85:

I bought the U.S.D. priced ADR traded on the pink sheet sheet exchange. 

Roche Holding AG ADR (RHHBY)

1 ADR = .125 Ordinary Shares Priced in Swiss Francs ("CHF")

I am in the hole on a 50 share lot purchase. Stocks, Bonds & Politics: Item # 1.A. Bought 50 RHHBY at $31.44. So I am now in an averaging down phase, either in 10 or 20 share lots, only at lower prices, until I own 100 shares or the price quits going down. As noted in that post, I have realized profits in prior small trades but it has been difficult since the ADR share price has been stuck in the mud for several years now. Roche Holding AG ADR Interactive Five Year Chart 

Shortly after the 50 lot purchase, Citigroup  downgraded the stock to neutral while maintaining a CHF260 target price. Roche Holding AG Stock Quote (Switzerland: SWX Europe)

The ADR price has been pressured down also by the decline in the CHF/USD conversion rate since early September.

Dividends and Dividend Tax Issues:

Roche is one of the European stocks that I will buy prior to the annual ex dividend date, and then hopefully sell for a small profit thereafter. This is a short term dividend harvesting strategy.

The ex dividend date for the annual dividend is usually in March. Roche - Dividend calendar

Switzerland has a tax treaty with the U.S. that permits Switzerland to withhold a 15% tax from the dividend. While I am entitled to that treaty rate, and no more, the broker needs to assert my treaty rights. Many do not bother and consequently Switzerland would withhold 35%.

IB did not assert my treaty rights for the 2017 Roche dividend payment, so I fired IB as my broker for international stock trades except for Canada, the U.K and most Australian stocks.

The U.K. does not withhold a tax; IB manages to assert treaty rights for payments made by Canadian companies, and Australia does not collect a dividend tax when it is "fully franked".

Currency Issues: I bought the U.S.D. priced ADR. The price of that security will reflect the price of the ordinary shares converted from Swiss Francs into USDs.

The Swiss Franc has been falling in value against the USD since early September 2017, and that will cause the USD priced ADR to underperform the shares priced in Swiss Francs.

CHF / USD Currency Chart. Swiss Franc to US Dollar Rates

A decline in the Swiss Franc's value after purchase will also act to lower my dividend yield on the ADR shares when the dividend amount is converted from Swiss Francs to USDs. The opposite is true. With no change in the dividend rate, my dividend yield will go up if the Swiss Franc has higher than when I initially purchased shares. The main impact, however, is on the ADR share price.

Personally, I want some assets whose price is determined in part by the value of the Swiss Franc against the USD. The CHF is a better long term store of value than the USD IMO. The Swiss National Bank unfortunately has manipulated the value of its currency lower since the 2011 summer through excessively abnormal monetary policies. Conducting trade wars through CB currency manipulations needs to stop.

Roche's Last Earnings Report:

Sourced: Roche reports strong sales growth in the first nine months of 2017

Pharma Division:

Diagnostics Division: A Bright Spot

Sourced: Supplemental Package.pdf

Roche - Pipeline

Negative News Since My Last Discussion:

Roche announces phase III study results of Zelboraf for adjuvant treatment of BRAF V600 mutation-positive melanoma

FDA approves first biosimilar for the treatment of cancer (biosimilar for Roche's Avastin cancer drug); FDA Approves Amgen And Allergans MVASI bevacizumabawwb For The Treatment Of Five Types Of Cancer

Roche is facing, or will face generic competition for some of its mega revenue biologic cancer drugs which is a major concern.

Positive News Since My Last Discussion:

There shares did not receive any upside swing after two FDA drug approvals on 11/7/17.

FDA approves Roche’s Alecensa (alectinib) as first-line treatment for people with specific type of lung cancer (11/7/17)

FDA approves Zelboraf (vemurafenib) for Erdheim-Chester disease with BRAF V600 mutation (11/7/17)

There was no positive share price response to this development either: Roche’s OCREVUS (ocrelizumab) gains positive CHMP opinion for relapsing forms of multiple sclerosis and primary progressive multiple sclerosis (10/10/17)

Roche receives EU approval of TECENTRIQ® (atezolizumab) in a specific type of metastatic lung cancer and two types of metastatic bladder cancer (9/22/17)

New data suggest Roche’s etrolizumab can provide clinically meaningful improvements in the treatment of two of the most common forms of inflammatory bowel disease

New OCREVUS (ocrelizumab) data at ECTRIMS advance clinical understanding of underlying progression in multiple sclerosis

FDA accepts Roche’s supplemental Biologics License Application for Avastin as a front-line treatment for women with advanced ovarian cancer

Roche blood cancer drug gets FDA priority review - MarketWatch

Roche owns Genentech, the granddaddy of the biotech industry, which is operated independently of Roche.

The drug innovation comes mostly from Genentech. I would not bother with Roche without Genentech.

It was Genentech that introduced Rituxan (1997); Activase (1997); Herceptin (1998); TNKase (2000); Xolair (2003); Avastin (2004); Tarceva (2004); Lucentis (2006); Actemra (2010); Perjeta (2012); Kadcyla (2013); Gazyva (2013); Esbriet (2014); Alecensa (2015), Tecentriq (2016) and Ocrevus (2017). (plus Cotellic, Erivedge, Pulmozyme,  Venclexta, and Zelboraf).

Genentech: Our Pipeline

I will average down in 10 or 20 share lots until I reach 100 shares. The next 10 share purchase would be in the $28.5 to $28.6 range and then a 20 share somewhere between $28 to $28.25. The remainder would be purchased at below $27.5. If all of those lots are bought, then the highest cost 50 share lot would be sold at over $32 after the next annual ex dividend date. 

Tecentriq-A Checkpoint Inhibitor:

Roche: Buying The Dip-Seeking Alpha by DoctoRx (published 10/25/17)(worried about Tecentriq's success);

In a stunning setback, Roche says its top cancer drug Tecentriq failed a key PhIII study – ENDPOINTS NEWS (5/10/17 published article); 

FDA says Tecentriq won't lose its bladder cancer nod despite phase 3 failure, Roche reports | FiercePharma

In a report dated 10/19/17, Morningstar assigned a five star rating to RHHBY with a fair value estimate of $41.5. The analyst is bullish on Tecentriq as a growth driver, projecting a 19% share of the immuno-oncology market in 2021 with CHF$5B+ in sales. So the upcoming trial data could confirm or blow up that thesis, or knick it materially in some way.     

B. Bought Back 50 MDRX at $12.75-IB Trading Account $1 Commission:

Closing Price Day of Trade (11/1/17): MDRX $12.74 -$0.74 -5.49%: Allscripts Healthcare Solutions

Allscripts Healthcare Solutions Company

Allscripts Healthcare Solutions Key

2016 Annual Report 

MDRX was scheduled to release its earning report on the next day, and possibly some one heard through the grapevine that the report would disappoint.  I did not see any publicly available news to account for the slide on 11/1.

On the day of my trade, the consensus E.P.S. estimate, which is a non-GAAP number, was for $.61 this year and $.75 next year or a 23% Y-O-Y increase. If that proves to be right on the money with analysts predicting in 2018 similar growth, then the stock is undervalued IMO. MDRX Analyst Estimates

Last Trade: Stocks, Bonds & Politics: Item # 2 Sold 50 MDRX at $14.32 (10/16/17 Post)

This will be the start of my third MDRX round trip trade. I have added this stock to my list where I make small ball trades based on what I perceive as the stock's trading channel.

Allscripts Healthcare Solutions Inc. Interactive Chart (2 year)

The bottom of the two year range is near $10 with the high near $15. I would consider buying another 50 shares, assuming no material adverse development, on a slide to $10-$11 with the consider to sell range being between $14-$15.

MDRX reported third quarter results after the bell on 11/2/17. The non-GAAP E.P.S. number was $.16 per share which was in line with the consensus estimate. 

The shares did rise modestly in response to that report: 

Closing Price 11/3/17: MDRX $12.94 +$0.19 +1.49%

Volume: 3.326+M shares
Average Volume: 2.196+M Shares

Allscripts announces third quarter 2017 results 

Revenue beat the consensus estimate by $21.9M. Allscripts Healthcare Solutions EPS in-line, beats on revenue-Seeking Alpha

After the end of the quarter, MDRX closed on the acquisition of McKesson Corporation’s hospital and health system IT business, known as the Enterprise Information Solutions (EIS) business" for $185 million in cash" Allscripts closes acquisition of McKesson’s Enterprise Information Solutions business

In a report dated 10/3/16, Argus rates this stock as a buy with a $18 price target. The Argus analyst notes that the business of digitizing hospital records has matured, but the company was seeing increased demand for "solutions" such as revenue cycle management, clinical care analytics, patient care coordination, and IT management.

In a report published in August, the S & P analyst rates the stock at 4 stars with a $15 twelve month price target. 

C. Sold 10 of 35 Macy's at $20.3-Highest Cost Lot (used commission free trade)

Position Before Pare: I discussed in my last post my small ball buying program for this stock. Stocks, Bonds & Politics: Item # 2.C. (11/9/17 Post).

Investors responded positively to the earnings report released on 11/9/17 after my last lots were purchased on 11/7. 

Profit Snapshot: $14.41

I would have done the same trade irrespective of the number of shares, as I average down and then sell the highest cost lot when and if there is a price pop. So this trade would be made if I had bought 100 shares four times at the prices shown above.  

For the remaining 25 shares, my average cost per share is $17.86. My dividend yield based on that constant total cost number is about 8.44% up from 8.31% with that highest cost 10 share lot. 

Assuming that I have still have commission trades in this account, I would consider buying that 10 share lot back at a price lower than my lowest purchase price which is currently $17.5. 

4. Short Term Bond/CD Ladder Basket Strategy

A. Bought 2 Great Southern Bank 1.5% CDs (Monthly Interest) Maturing on 1/15/19

Holding Company: Great Southern Bancorp  (GSBC) 

B. Bought 1 MB Financial 1.75% CD (monthly interest) Maturing on 11/15/19-A Roth IRA Account (2 year CD):

C. Bought 2 Merrick Bank 1.75% CDs (monthly interest) Maturing on 11/8/19 (2 year CDs):

D. Early Redemption of 4 Anheuser Busch 1.25% SU Bonds Maturing on 1/17/18

It is commonplace for issuers to redeem my short term bonds within three months of maturity. I bought these BUD bonds earlier this year. All four bonds were bought separately at a slither below par value, with a total cost per bond remaining below par value after brokerage commissions: 

Profit: +3.93

This type of purchase is nothing more than a temporary holding pond for cash that provided me with a greater current yield and YTM than the brokers' sweep accounts. 

While this bond had a make whole provision, interest rates for a comparable maturity (2 months) are so low that the make whole provision was not triggered as providing a higher amount than the $1000 principal amount per bond plus the unpaid interest amount that was paid along with the redemption proceeds. Many of these bonds also exempt optional redemptions from the make whole provision when done within a few months of redemption. 

I am fine with these redemptions shortly before maturity since I can now reinvest the proceeds into higher yielding securities than the yields paid on the bonds being redeemed.  

DisclaimerI 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. For the risk adverse crowd, the government just published its base rate for I-Bonds purchased between 11/1/17 and through April 2018.

    The base rate is .1%.

    The coupon of the inflation savings bond combines that rate, which lasts until the bond matures or is redeemed, with the percentage increase in CPI. The composite rate for the six month period ending in April 2018 is consequently 2.58% annualized.

    I discuss this type of bond in more detail here:

    Some quotes:

    "Every six months from the bond's issue date, all interest the bond has earned in previous months is in the bond's new principal value.

    If I bought a TIP in a taxable account, the accretion in the principal amount would be taxed in the year received.

    The IBond is different here. I can elect to pay taxes on the interest every year or defer reporting the interest until I redeem the bond, give up ownership or the IBond matures (30 years)

    I can redeem the IBOND in five years without penalty.

    I would only consider doing that when the new coupon for an IBOND is higher than the coupon of the existing IBOND."

    As noted in that post, I would compare the IBOND with the 5 year treasury TIP.

    As of 11/13, the five year TIP had a base current yield of .29% (also called the "real yield) plus the inflation accretion to principal until maturity.

    It only makes sense to buy that TIP in a retirement account since the accretion to principal would be taxed as interest when held in a taxable account, a problem that can be avoided with the IBOND.

    I am not a buyer of the IBOND with a .1% base rate. I do own some TIPs in my Roth IRA that mature in 2021. If I wanted to buy a five year inflation bond, I would buy a five year TIP now in the Roth rather than an IBOND in my Treasury Direct account.

  2. New York Community Bancorp, Inc. (NYCB)
    $13.01 +$0.23 (+1.80%)
    Volume 3,843,899
    Avg. Volume 3,252,494
    As of 11:19AM EST.

    I own NYCB shares.

    NYCB has significantly outperformed the regional bank index over the past two days. The stock closed at $12.12 last Friday and rose $.66 yesterday to close at $12.78. Volume was heavy yesterday at 9.8+M shares.

    One issue among several for this bank is that its assets were bumping right up to $50B. Going over that amount would subject it to supervision under the FED's Comprehensive Capital Analysis and Review (CCAR):

    As part of that review process, the FED can control dividends and share buybacks.

    As noted by this SA blog, NYCB was the poster child for banks doing all kinds of contortions to stay under $50B in assets.

    The Senate reached a bipartisan deal to raise the limit to $250B from $50B.

  3. The NY FED released today its third quarter report on consumer debt and delinquencies, a topic discussed in this post:

    "total household debt increased by $116 billion (0.9%) to $12.96 trillion in the third quarter of 2017. There were increases in mortgage, student, auto and credit card debt (increasing by 0.6%, 1.0%, 1.9% and 3.1% respectively) and a modest decline in home equity lines of credit (HELOC) balances (decreasing by 0.9%). . .

    Credit card and auto loan flows into delinquency increased. Specifically, credit card flows into delinquency have increased over the past year, while auto loan flows into delinquency have been steadily increasing for several years. Also notable, auto loan originations were at $150.6 billion, up slightly from the previous quarter, marking the second highest level in more than a decade. . ."

    “Delinquency flows across several debt types climbed this quarter, including for auto loans,” said Wilbert van der Klaauw, senior vice president at the New York Fed. “Examining the auto loan market more closely revealed notable differences between auto finance and auto bank lenders. Delinquency rates among auto finance lenders are considerably higher and rising, especially for subprime borrowers, in part reflecting differences in underwriting standards.”

    Mortgage delinquencies fell from 1.7% to 1.4%.

    "Aggregate delinquency rates ticked up slightly, from 4.8% to 4.9%."

    "Flows into delinquency deteriorated somewhat—with auto loans and credit card debt seeing persistent increases."

    Overall these reports are not yet flashing red on the issues of consumer debt and spending, but the data is continuing to march toward becoming a problem. There is clear overall aggregate evidence that consumers are financing purchases more with debt accumulation than with disposable income.

  4. Omega Healthcare Investors, Inc. (OHI)
    $27.15 -$1.18
    Last Updated: Nov 15, 2017 at 11:54 a.m. EST

    The dividend yield at the $27.15 price is about 9.58% which indicates that the investors who count view the current dividend to be in jeopardy.

    OHI remains a heavily shorted stock as well. YF has the short interest at 22.4% of the float.

    I have called OHI a dangerous stock. I suspect that something negative may be in the offing regarding Signature Healthcare, one of OHI's problematic tenants. I do not see anything specific to account for today's decline.

    When I knocked my position down to 44+ shares last September, just a placeholder, I mentioned that I might add to that position when and if the price fell below $29:

    Item # 6

    I have not done so. Possibly, I will buy 5 or 10 shares, using a Schwab commission free trade, at a price somewhere below $27. My gut "feeling" says wait for another shoe to drop even for such a small buy.

  5. CISCO:
    $35.84 +1.73 +5.07%
    After hours: 5:24PM EST

    So far, the market is responding favorably to CSCO's earning report released after the close.

    I started trading CSCO in 2009 and currently own just 50 shares bought at $23.14 (1/21/16):

  6. Wal-Mart Stores, Inc. (WMT)
    $94.34 +4.51 (5.02%)
    Pre-Market: 8:08AM EST

    Investors are reacting positively to the third quarter earnings report.

    Perhaps, I could have been more adventuresome when I recently bought 10 shares at $78.93 (10/6/17).

    I briefly mentioned that purchase as part of my small ball strategy in this comment:


    The year-end distribution consists of the following:

    $1.15 per share from net capital gains realized during 2017, of which $0.06 was short-term gain and $1.09 was long-term gain.

    $0.08 per share from 2017 net investment income.


    Adams Natural Resources Fund (PEO)

  8. Hello southgent.

    I had a general question about your feelings about Amazon. It appears to me, that other retailers are starting to get the message that their very existence depends on improving the online experience and adapting to more convenient shipping and shopping.

    Walmart seems to have gotten this message loud and clear and has started to deliver both on their food and online experience.

    What I am suggesting is that as Amazon moves into bricks and mortar it's starts to lose some of its luster as a category killer. It certainly is a powerful company with an unbelievable ability to use artificial intelligence etc. and has become a powerhouse in retail. It certainly has a first mover advantage.

    But my feeling is that many of these programs and algorithms are becoming commoditized. Just like the mainframe computer was subjected to third-party off-the-shelf parts to create an experience just as good.

    I wonder if there will be a day when Amazon must show earnings growth as well as revenue growth. I know that a lot of their products in retail do not make them any or any significant profit and they rely on their cloud service as a source of ability to grow.

    I see a company like Target who is caught between a rock and a hard place, with their food portfolio and store size(numbers), unlike Walmart given its much smaller size, as a hindrance and not to help to sales.

    I know their CEO said they are probably 2 to 3 quarters behind Walmart and Amazon in terms of any type of online experience, but it seems to me their very existence depends on making this happen successfully.

    I wonder if Amazon will be re-evaluated in terms of earnings.

    Thanks, Sam

    1. Sam: What Amazon offers now is not unique but the market is pricing the stock as if had no worthwhile competitors.

      WMT has the financial capability to match AMZN online retailing and delivery and eventually beat AMZN on pricing.

      As I have noted in the past, I have started to buy more from WMT online where the item was priced lower than Amazon's price.

      I can get free shipping on WMT online orders for $35, while AMZN charges an annual fee which is currently $99.

      At some point, I could forego that $99 fee and simply order from WMT and keep Netflix as my alternative to AMZN video which can be bought separately at $8.99 per month or comes included in the $99 prime membership package which includes free shipping.

      The AMZN web service business is subject to rapid commoditization. What AMZN offers in that category can be duplicated by heavy weights like Google and MSFT.

      AMZN has strong support among mutual fund managers who have benefited from owning the shares. The question then becomes when will they start to abandon the stock when earnings necessary to support the stock price never materialize and revenue growth rates start to decline meaningfully. Maybe that has to happen before the valuation is reset.

      The current year P/E is at 266.38 which is probably a non-GAAP number.

      After WMT's recent run up, the P.E. is about 20.77 based on the $96.88 price and WMT pays a dividend:

  9. I have published a new post: