Wednesday, November 21, 2018

Observations and Sample of Recent Trades: COTY, FENY, IBM, QQQX



Markets and Market Commentary:

The S & P 500 index is showing a "firmly bearish" price action. Bearish momentum accelerates, S&P 500 ventures under major support - MarketWatch 

S & P 500 Index 2,641.89 -48.84 -1.82% (11/20 close); 200 day SMA line at 2,760.63 using 1 year YF Chart.   

The SPX is accelerating below its recently pierced 50, 100 and 200 day SMA lines: S&P 500 Interactive Chart (1 Year) However, note the recent bottom at 2641.25 (10/29/18) with the close yesterday at 2641.89. Will that line hold? The market is bouncing back up this morning, but I doubt the line will hold other than temporarily.  

The downdraft yesterday probably originated from some lackluster retail earnings reports and another breakdown in the FAANG stocks that now has all of them in bear markets (20+% declines from recent intra-day highs) 

Target shares tumble after profit miss, big jump in inventories | Reuters
TGT $69.03 -$8.12 -10.53%:  Target Corporation 
ROST $82.64 -$8.55 -9.38%: Ross Stores, Inc.  
TJX $46.84 -$2.12 -4.33%: TJX Companies 
DDS $62.62 -$4.29 -6.40% : Dillard's, Inc. 
M $31.95 -$1.13 -3.42%: Macy's Inc 

Goldman Sachs' 2019 stock market outlook: Raise cash and get defensive

Billionaire investor Dalio: Fed rate hikes are now ‘hurting asset prices’ - MarketWatch I do not view the rise in interest rates as the main factor negatively impacting asset prices. 

That is a common theory among the uber wealthy who, along with corporations, are the primary beneficiaries of the GOP's tax "reform" package. 

They are not going to blame the lack of meaningful tax relief for the middle class as a cause, and certainly will not be discussing the households who received a meaningful tax increase living in congressional districts that just swung from red to blue. 

The Federal Funds rate is well below the average historical rate as are the treasury yields throughout the maturity spectrum. Interest rates are still benign for stocks. 

Federal Funds Rate 1954 -
Effective Federal Funds Rate-St. Louis Fed

3-Month Treasury Constant Maturity Rate Since 1982-St. Louis Fed

10-Year Treasury Constant Maturity Rate-St. Louis Fed

The Fed's monetary policy remains exceptionally dovish by historical standards and in light of current economic conditions. 

A rise in interest rates can deflate asset prices that have run up too far based on overly optimistic future predictions and market manias. So, in that sense, even a benign rise in rates can be a cause of a stock market correction. 

Those complaining about a modest rise in interest rates, including Jim Cramer, are just a bunch of whiners who also have an ulterior motive of wanting the FED to continue inflate asset prices through an extremely abnormal monetary policy, so that their fortunes can continue to multiply at the expense of the Savings Class. 

Trump says he would like to see lower Fed rates

Paul Tudor Jones says we're in a global debt bubble and maybe tax cut wasn't a good idea

GE is now fighting to avoid becoming a junk bond name 

The GE Capital bonds, while ostensibly still rated at investment grade, are being traded now with yields well into junk bond territory. 

I took a snapshot yesterday of a GE Capital maturing in 2022 as an example: 

Ask YTM for 1 Bond at 7.384%
Bond Detail

I do not own any GE or GE Capital bonds. I have avoided buying any because I have viewed those bonds as junk for more than a year now; notwithstanding Moody's current rating of Baa1. 

Prior to 2017, I just viewed those bonds as overpriced. This 2022 GE Capital bond was trading at over 115 in 2015. 

My bond strategy now is to avoid junk until I can receive much higher yields and spreads to investment grade bond yields. I am looking at GE Capital bonds some now, just window shopping, but my focus is on those maturing in 1 to 3 years.      


Donald continued his rants against the Mueller investigation last week:

Why rant so much? Is the Duck worried about something?

And why is Donald expressing so much sympathy for those who have been convicted or plead guilty to multiple felonies due to Mueller's investigation. Donald makes it look like the prosecutor needs to be berated for securing convictions and required to apologize to the felons for even making the effort.

And since Donald rarely tells the truth and just makes things up, it is impossible to accept his representation that the Mueller team is "screaming and shouting at people" and "threatening them to come up with the answers they want" which is an accusation of subordination of perjury or close to it. 

As the main part of the caravan inches closer to the U.S. border, Don the Con has started to send the troops home that were sent shortly before the election to stop the "invasion". Troops at U.S.-Mexican border to start coming home - POLITICO

Trump-Abuse of Executive Power

Just Another Example of Trump's Misuse of Executive PowerTrump Wanted to Order Justice Dept. to Prosecute Comey and Clinton - The New York Times That is not surprising. Trump wants to use the power of the Presidency to criminally prosecute political enemies. The only question is whether there is someone willing to stop him. I doubt that the Acting AG will exercise any restraint on Trump's desire to broaden the powers of the imperial presidency. It is clear that Trump views the DOJ and other governmental agencies as mere tools to reward friends and punish political enemies.  

Conservative nonprofit with obscure roots and undisclosed funders paid Matthew Whitaker $1.2 million - The Washington Post ("In the three years after he arrived in Washington in 2014, Matthew G. Whitaker received more than $1.2 million as the leader of a charity that reported having no other employees, some of the best pay of his career.") It is important IMO to quit calling these organizations "conservative". That will be a minor first step in the long recovery process. 


FOX "News"-Let's Just Make it Up:

Lou Dobbs casually makes up story that ‘many’ illegal immigrants voted in midterms and had ‘immense impact’ - The Washington Post

More examples:

Coverage And Rhetoric Surrounding Migrant Caravan : NPR


College Students Vote the Wrong Way-So Let's Make It  Difficult for Them to Vote:

I have detailed in this blog numerous republican efforts to disenfranchise college students since too many are "liberal" and vote for Democrats.

This sentiment was expressed by the GOP Senator from Mississippi, Cindy-Hyde Smith, just recently as follows: “they remind me that there’s a lot of liberal folks in those other schools who maybe we don’t want to vote. Maybe we want to make it just a little more difficult. And I think that’s a great idea.” Mississippi Sen. Cindy Hyde-Smith says voter suppression a “great idea” - Vox

Walmart requests a refund from Republican senator who said she would attend a public hanging - MarketWatch


One Problem with Autocrats-No Restraints:

Saudi Arabia reportedly tortured women’s-rights activists as part of effort to squelch dissent - MarketWatch

CIA concludes Saudi crown prince ordered Jamal Khashoggi’s assassination

To ease Turkish pressure on Saudis over killing, White House weighs expelling Erdogan foe

If Trump sacrifices Fethullah Gulen to protect Saudi Arabia, he will make a mockery of the U.S. extradition system

Lawmakers denounce Trump's backing of Saudis, despite Khashoggi killing

The judiciary is, at the moment, continuing to restrain Trump's strongly authoritarian impulses. 

The most recent example was a federal court decision barring Trump from implementing a rule that changed a law passed by Congress as to how immigrants may claim asylum. East Bay Sanctuary Covenant et. al. v. Trump (order granting TRO)In blow to Trump’s immigration agenda, federal judge blocks asylum ban for migrants who enter illegally from Mexico Donald required anyone applying for asylum to enter the country at a designated point of arrival. 

The law that Donald decided to repeal on his own initiative was 8 U.S. Code §1158 (a)(1):

"Any alien who is physically present in the United States or who arrives in the United States (whether or not at a designated port of arrival and including an alien who is brought to the United States after having been interdicted in international or United States waters), irrespective of such alien’s status, may apply for asylum in accordance with this section or, where applicable, section 1225(b) of this title." (emphasis added)

Trump justified the change on national security grounds, a frequent excuse used by authoritarian leaders to change laws through non-democratic means. Donald's approval rating among republicans stands at around 90%. 

The issue is not whether it is good or bad policy to allow an illegal immigrant to apply for asylum irrespective of whether or not they enter at a designated point of entry. The issue is how is that policy changed in a democracy. 

Donald is doing whatever he can to undermine the foundations and principles of a democracy. 

At least for the time being, there are checks on the improper and unlawful exercise of executive power by the current President. Those checks improved with the Democrats gaining control over the House. For two years, the only check has been the courts that are being refashioned in Trump's image. 


Portfolio Management

I am still in my bunker waiting for incoming. 

The turtle is still in his shell protecting the soft tissue. 

The small ball purchases of common stocks is meaningless to me, but does give me some psychological satisfaction of doing something when I am not really doing anything meaningful. 

The small ball strategy is one designed for falling prices and is based in part on a recognition that I do not know when prices will stop falling and start going back up.   

Current Small Program List with lowest prices shown in chain:  

Once a small ball position is eliminated, the symbol is removed from the list and will remain off until a new program is started. Some purchases have not been discussed yet. 

One benefit of the recent downdraft is that new purchases increase my portfolio dividend yield.

There has not been many places to hide recently other than cash equivalents, which I broadly define as short term instruments maturing in 3 months. 

During major declines, the best performing sectors go down the least. 

Yesterday, for example, SPX declined 1.82% while the Vanguard REIT ETF was down -1.04%. The worst sectors just go down more than the major market indexes: XLE $64.98 -2.18 -3.25%-SPDR Select Sector Energy Fund ETF 

Within the better performing sectors, there can be a number of green arrows: DUK $88.52 +$ 0.88 +1.00%: Duke Energy CorporationOHI +$36.48 +$1.02 +2.88%: Omega Healthcare Investors, IncAEP $77.82 +$0.39 +0.50% VTR $62.35 +$0.49 +0.79% : Ventas, Inc.

But, most of the stocks in those better performing sectors will nonetheless be down, with many stocks just declining less than the major market index decline generally speaking. (e.g. O $63.86 -$0.11 -0.17%: Realty Income CorporationSTAG $26.47 -$0.04 -0.15%: Stag Industrial, Inc.; and WPC $68.41 -$0.19 -0.28%: W.P. Carey Inc. REIT, which has probably been my best performing REIT so far this month. I also own STAG.) 

YTD Numbers for BND and VTI: 

Vanguard Total Bond Market Index Fund ETF Shares (BND) Total Returns
Vanguard Total Stock Market Index Fund ETF Shares (VTI) Total Returns


1. Deeply Contrarian-Probably Masochistic-Income Generation Small Ball

A. Bought 4 IBM Shares: 1 IBM at $135.8, 1 at $131.5, 1 at $126.08, 1 at $115.85-Used Commission Free Trades

Closing Price Yesterday: IBM $117.23 -$3.08 -2.56% 

The better tech companies, which does not include IBM IMO, have been under selling pressure with many now in bear markets. 

It is difficult to teach an elephant to tap dance. That is my primary observation about IBM.

CHART: Major Bear Trend

A number of individual investors view IBM as uninvestable. I am not disagreeing with that opinion but there is always hope or at least a rally that takes the stock back over $150 within the next two years.  

Current Position: 11+ shares 

Maximum Position: 20 Shares + Shares Bought with Dividends

Highest Cost Lot: 2 Shares at $148.78

Purchase Restriction: Small Ball Rule 

The next purchase will be 2 shares at less than $110. 

Average Cost Per Share: $137.98

Dividend: Quarterly at $1.57 per share ($6.28 annually)

IBM Board Approves Quarterly Cash Dividend; Authorizes $4 Billion for Stock Repurchase (10/30/18)

Last Ex Dividend Date: 11/8/18

Dividend Yield at Average Cost Per Share = 4.55%

Dividend Reinvestment: Yes at less than $150

Last Substantive DiscussionItem 1.A. (4/26/18 Post)

Last Earnings Report: Q.E. 9/30/18

The market reacted unfavorably to this report.  

IBM Reports 2018 Third-Quarter Results 

"In the third quarter, the company generated net cash from operating activities of $4.2 billion, or $3.1 billion, excluding Global Financing receivables. IBM’s free cash flow was $2.2 billion. IBM returned $2.1 billion to shareholders through $1.4 billion in dividends and $0.6 billion in gross share repurchases. At the end of September 2018, IBM had $1.4 billion remaining in the current share repurchase authorization." 

Recent News

IBM To Acquire Red Hat, Completely Changing The Cloud Landscape And Becoming World's #1 Hybrid Cloud Provider

IBM to acquire Red Hat in deal valued at $34 billion

IBM Buying Open Source Specialist Red Hat for $34 Billion | WIRED

How the cloud wars forced IBM to buy Red Hat for $34 billion | ZDNet 

At the time of this announcement, the cash purchase price was close to 1/3rd of IBM's market cap.

Red Hat - We make open source technologies for the enterprise

The impressions that I have about this acquisition are that it is expensive and smacks of desperation.

My main observation is that this kind of expensive acquisition occurs when management failed to anticipate a major sea change in its business, tried to play catch up, came up short in that endeavor and then tried to remedy the situation by buying market share at an expensive price.

A properly managed IBM would have had a #1 or # 2 market share in cloud computing that was developed internally. Instead, IBM's share was at #5 before it announced the Red Hat acquisition. Alibaba passes IBM in public cloud market share Amazon's cloud service is at # 1. Why is Amazon at # 1, an internet retailer, and IBM at # 5? It is a question of vision and a lack thereof. 

Roundup Of Cloud Computing Forecasts And Market Estimates, 2018

IBM CEO: Red Hat is a 'game-changer,' makes us 'No. 1 in hybrid cloud'

The price is at 10 times revenue.

IBM will pause its share repurchases in 2020 and 2021 to help pay for this cash  acquisition.

Over the past several years, IBM has curtailed its share buybacks;

Share Buybacks:  

2011: $15B

2014: $13.7B
2015: $ 4.6B     
2016: $ 3.5B
2017: $$4.3B

E.P.S. growth has been manufactured higher by those share buybacks rather than by revenue and net income increases. 

5 Year Operating History

Page 147:  IBM_Annual_Report_2017.pdf

COTY, which is discussed below, may be more challenged than IBM and is viewed even more disfavorably by investors IMO. 

B. Added 10 COTY at $9.8-Used Commission Free Trade:

Quote: Coty Inc. Cl A (COTY)

Closing Price Yesterday: COTY $8.62 -$0.53 -5.79% 


Coty Key

I might receive more satisfaction drinking a gallon of castor oil spiked with a quarter of vinegar or delivering a hundred lashes to my back.

Still, I am sticking with my small ball buying program until I hit 100 shares. Earlier in the year, I sold COTY shares for more than $20. Item 2.C. Sold 10 COTY at $21.46 (2/19/18 Post)Item 1.D. Sold 20 COTY at  $20.89 (1/28/18 POST)

Current Position: 80+ Shares

Maximum Position: 100 Shares + Shares bought with dividends

I will probably buy the remaining 20 shares when and if the price sinks into the $7.5 to $8 range. 

Purchase Restriction: Small Ball Rule

Average Cost Per Share: $13.3

Highest Cost Lots in Current ChainItem # 2.B.  10 COTY at $16.47 (5/3/18 Post)

Dividend: Quarterly at $.125 per share or $.5 annually (needs to be cut or eliminated IMO with the savings applied to debt reduction)

The company did declare that regular dividend for the 4th quarter:

Dividend Yield at Total Average Cost =  3.76%

Dividend Reinvestment: Yes

Next Ex Dividend Date: 11/29

Last DiscussionItem # 1.B. Bought 10 COTY at $12.35 and 10 at $11.76 (8/19/18 Post)

Last Earnings Report: Q/E 9/30/18

This report was issued after the last 10 share buy. Coty laid another egg. I would describe COTY as a company with turnaround potential that is not yet showing up in the numbers.

Coty Inc. Reports First Quarter Fiscal 2019 Results | Business Wire

Cash flow and debt remain troubling:

COTY is blaming supply disruptions for some of its current problems:

When I read about this problem, I viewed it as primarily or at least possibly related to incompetent management. COTY later replaced its CEO: Coty Announces New CEO and Board Changes 

The new CEO bought $20.1M in Coty shares on 11/14. 

This report reaffirms my maximum position of no more than 100 shares plus shares purchased with dividends, but will not cause me to refrain from buying 20 more shares at lower prices to hit that maximum number.

C. Re-Entry into FENY-Bought 10 at $18.77 and 5 at $17.9 (commission free ETF at Fidelity)

Quote: Fidelity MSCI Energy Index ETF

Closing Price Yesterday: FENY $17.92 -$0.64 -3.45% 

Sponsor's WebpageFENY | ETF Snapshot - Fidelity (expense ratio .084%)

Current Position: 15 shares

Maximum Position: 100 shares

Purchase Restriction: Small Ball Rule 

Last Sell DiscussionsItem # 4.A. Eliminated FENY-Sold 60 shares at $18.83 (10/26/17 Post)(profit snapshot=$127.78); Item #1.A. Bought 50 FENY at $17.85 (7/19/17 Post)Item # 5 Sold 50 FENY at $27.81 (8/6/14)(profit snapshot $115.96)-Item # 2 Bought 50 FENY at $25.49 (3/10/14 Post)

Note the FENY price decline from that 2014 purchase. The energy stock sector has not recovered from the drop in crude oil prices that started in 2014 and ended in February 2016. 

The data shows that the price was at $76.4 per barrel on 10/3/18 and at $55.63 yesterday. Cushing, OK WTI Spot Price FOB (Dollars per Barrel)

2. Short Term Bond/CD Basket Strategy:

A. Bought 1 Ventas 2.7% SU Bond Maturing on 4/1/2020:

I now own 5 bonds.

FINRA Page: Bond Detail (prospectus linked)

Issuer: Ventas Inc. (VTR)

Issuer Website: Ventas REITOur Portfolio

Ventas Reports 2018 Third Quarter Results

Ventas SEC Filings
2017 Annual Report (debt discussed starting at page 110)

Credit Ratings:

Bought at a Total Cost of 99.15

YTM at TC Then at 3.336%
Current Yield at TC = 2.7231%

B. Bought 1 Wells Fargo 3.1% CD (monthly interest payments) Maturing on 11/30/2020 (2 year CD):

C. Bought 2 Ingersoll-Rand Luxembourg Finance 2.625% SU Bonds Maturing on 5/1/2020:

FINRA Page: Bond Detail (prospectus linked)

Issuer: Wholly owned indirect subsidiary of Ingersoll-Rand PLC (IR) who guarantees the notes

IR Analyst Estimates
Ingersoll Rand Reports Strong Third-Quarter 2018 Results

Welcome to Ingersoll Rand

IR SEC Filings
2017 Annual Report

Credit Ratings:

Moody's at Baa2

Bought at a Total Cost of 98.917

YTM at TC Then at 3.396%
Current Yield at TC = 2.6537%

3. Small Ball-Income Generation:

A. Bought 20 QQQX at $21.63:

This starts a small ball buying program for this stock CEF.

Closing Price Yesterday: QQQX $21.44 -$0.11 -0.51% 

QUOTE: Nuveen NASDAQ 100 Dynamic Overwrite Fund

QQQX Nuveen NASDAQ 100 Dynamic Overwrite CEF-Morningstar (rated 5 stars at the time of purchase)

QQQX is a non-leveraged CEF that uses a buy-write strategy and attempts to "substantially replicate" the Nasdaq 100 index with less volatility and to enhance total returns through selling call options.

NASDAQ 100 Index (NDX)

NDX Chart

NDX Components

Sponsor's PageQQQX - Nuveen Nasdaq 100 Dynamic Overwrite Fund | Closed-End Fund | Nuveen

SEC Filed Shareholder Report for the Period Ending 6/30/18: Nuveen NASDAQ 100 Dynamic Overwrite Fund (list of holdings starts at page 42)

The total cost of investments as of 6.30/18 was $304.7+M with a market value at $861.8+M (page 47)

Data Date of Purchase (10/30/18):

Closing Net Asset Value Per Share: $22.15
Closing Market Price: $21.64
Discount: -2.3%
Average Historical Price v. NAV Per Share
1 Yr:  +6.04%
3 Yr:  +  .18%
5 Yr:   -1.15%

QQQX Page at CEF Connect

Top Ten Holdings as of 9/30/18:

The stock holdings are concentrated in the Nasdaq 100 stocks but the fund owned 171 stocks as of 9/31/2018. The fund owns some positions that are not components of that index.

Over the past 10 years through 10/26/18, the average annual total return was 18.17%, handily beating the S & P 500. For me, that kind of over performance over a decade is not comforting when taking a new position. 

Nuveen NASDAQ 100 Dynamic Overwrite Fund (QQQX) Total Returns

Distributions: Quarterly at $.42 per share ($1.68 annually)

Dividend Yield at $21.63 = 7.77%

Last Ex Dividend Date: 9/13/18

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.