Thursday, January 18, 2018

Observation and Sample of Recent Trades: CSCO, DOC, Junk Bonds, VEIRX/The GOP as the 21st Century Version of the 19th Century Know Nothing Party

Economy

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Bitcoin drops 28% below $10,000 on Coinbase; ethereum crashes 30% in 24 hours: CNBC 

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Portfolio Management


Cash Flow-One Day in Fidelity Account




This collection is noteworthy for the $13K in proceeds received from maturing CDs and short term bonds. 


The general strategy for the short term bond/CD ladder basket strategy is based on my opinion that short term rates will continue to rise throughout 2018, caused by at least two .25% increases in the federal funds rate.


The constant stream of maturities enables me to reinvest the proceeds at higher rates provided rates continue to rise. The allocation to this strategy is now at extreme overweight levels.   


On 1/16/18, I reinvested only $2K of the $13K in redemption proceeds. I bought at a total cost of 100 an investment grade bond maturing in June 2018 that has a 1.75% coupon issued by Beam. 
Bond Detail Beam was acquired by Suntory Holdings, a Japanese beverage company, in 2014
.


With the decline in equity REIT stocks, I have started to buy in very small amounts some REIT stocks. I discuss one such purchase in Item #2.A. below. 


The Vanguard REIT ETF (VNQ) shows no signs yet of stopping its decline that started in mid-December:




At least the ETF's yield is going up. 


Vanguard brokerage customers can buy this ETF commission free and I have owned it in my accounts there. Buying 10 shares is something that I may do and then average down with 5 or 10 share purchases since there are no commission costs that would impact returns for small lot purchases. 


Sponsor: Vanguard REIT ETF 

Expense Ratio: .12%
155 Stocks
All fund holdings

Most of my VNQ trades are not discussed. I did find a brief mention in two SA Instablogs where I discussed selling 10 share:  Item # 3 Sold at $83.36 Update For Equity REIT Basket Strategy As Of 3/21/16 - South Gent | Seeking Alpha; Item # 3 Sold 10 VNQ at $80.74: Update For Equity REIT Basket Strategy As Of 11/5/15 - South Gent | Seeking Alpha


See generally: Update For Equity REIT Basket Strategy As Of 7/24/15 - South Gent | Seeking Alpha


The Bank of Canada raised its benchmark rate by .25% to 1.25% and is concerned about what Donald may do with the NAFTA treaty. 
Bank of Canada increases overnight rate target to 1 1/4 per cent - Bank of Canada


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TRUMP:

I do believe that revulsion to Trump is growing substantially. A poll released yesterday showed 49% of Americans were "strongly opposed" to Trump. 




Both the strongly oppose and approve numbers have been moving in the wrong direction for Donald. 


Another wake up call for the GOP is their loss in a state senate special election in Wisconsin. Democrats win Wisconsin state Senate seat in a district Trump won by 17 points - Vox


The next special election of import is for Pennsylvania's 18th congressional district special election. This district located in rural Western Pennsylvania has been a safe one for the GOP since it was redrawn in 2002. The incumbent, Tim Murphy, a family values republican, decided to resign after it was disclosed that he had an affair and allegedly asked his lady friend to have an abortion. Pro-Life Congressman Tim Murphy Announces Retirement After He Allegedly Asked Mistress to Get an Abortion | PEOPLE.com  

National (US) Poll - January 17, 2018 - U.S. Voters Split On Whether Trump is Stable | Quinnipiac University Connecticut (47% say he is not stable)


Trump’s ‘Fake News Awards’ flop, as site crashes - MarketWatch


McConnell says Senate will consider immigration deal "as soon as we figure out" what Trump supports - CBS News


Bannon talked with Priebus, Spicer about Trump Tower meeting: Axios


Trump instructed Bannon that he can not testify in the House Russian investigation: Bannon hit with Hill subpoena after declining to answer key questions during House hearing - CNNBannon subpoenaed by House committee after refusing to answer questions-NBC News 


An 8 year old could pass the "cognitive" test given to Donald. What's the Montreal Cognitive Assessment mental test Trump took?-NBC News This test will indicate whether and individual has dementia. That exam is not a psychological test designed to detect mental illnesses. Donald is not suffering from dementia.  


Trump's history of breaking decorum with remarks on race, ethnicity - NBC News


GOP Access to FBI Files Rattles Agents Caught in Political Fight - Bloomberg


Watchdog: Foreign regimes, others spend big at Trump properties to 'curry favor' - NBC NewsForeign governments, candidates, trade groups spent at Trump properties: report: Reuters


How a Trump SoHo Partner Ended Up With Toxic Mining Riches From Kazakhstan - Bloomberg


U.S. Navy veteran's mom denied visa to attend son's funeral in Arkansas - CBS News (the mother was from Vietnam)

Former Senator and Secretary of Defense Chuck Hagel stated in an interview that Trump is an embarrassment and "is doing great damage to our country internationally". Hagel added that Trump is "intentionally dividing the country and the world". Hagel says Trump 'an embarrassment'-journalstar.com


Fox News shelved Stormy Daniels-Trump story before election - Jan. 16, 2018


Trump Falsely Claims His Approval Among Black Americans Has Doubled - The New York Times


Trump's Phony 'Fake News' Claims - FactCheck.org


Trump wrongly faults Obama for London embassy move | PolitiFact


Wife of man deported after 30 years in U.S.: "There's nothing ICE can do to shut me up" - CBS News


John McCain tells Trump to stop attacking press - CBS News


EPA eases path for new chemicals, raising fears of health hazards - NBC News


He Leaked a Photo of Rick Perry Hugging a Coal Executive. Then He Lost His Job. - The New York Times


Trump accuses Russia of helping North Korea evade sanctions: Reuters


Porn star Stormy Daniels described affair with Donald Trump in 2011 magazine interview - NBC News


Stormy Daniels Confirms She Had an Affair With President Donald Trump - In Touch Weekly

Did Donald Trump pay porn star Stormy Daniels to keep quiet about an affair?

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Trump and The White Nationalists


Our Homeland Security Chief Kirstjen Nielsen had to be told that Norway was a predominantly white country. When asked whether Trump referred to African nations as shitholes "or a substantially similar word", Ms. Nielson did the Perdue/Cotton dodge and testified "I did not hear that word used". The way for her to get fired is to provide direct evidence that Donald is a racist. Booker slams DHS secretary's 'amnesia' on Trump's reported 'shithole' comment - CNN 


The Backlash Continues on Trump's "S**thole" Comments: The Daily Show - YouTube


"Three White House officials said Perdue and Cotton told the White House that they heard "shithouse" rather than "shithole," allowing them to deny the president's comments on television over the weekend. The two men initially said publicly that they could not recall what the president said." Inside the tense, profane White House meeting on immigration


Trump, Cotton Perdue viciously attacked Senator Durbin's credibility based on Perdue and Cotton allegedly hearing "shithouse" rather than "shithole". There is no doubt in my mind that Trump, Cotton and Perdue intentionally misled the public. 

  
Graham: 'My memory hasn't evolved' on meeting where Trump referred to 'shithole countries' - NBC News Graham is clearly referring to Senators Perdue and Cotton who first said they did not recall. 

Trump: ‘I am the least racist person you have ever interviewed’ - TODAY.com  


After Trump, Senators Cotton Perdue and General Kelly blew up the bipartisan immigration deal in favor of one that has no chance of passage, Trump blamed Senator Durbin for Trump's rescission of the DOCA protections: 




It is standard operating procedure for Trump to blame others for what he has done. 


According to Donald, the Democrats are to blame for Donald's rescission of the DACA protections and for his unwillingness to accept a District Court decision to allow those protections to remain in place: DOJ seeking Supreme Court review of ruling that blocked Trump's DACA wind-down - POLITICO 


In polling, about 70% of Americans are in favor of DACA. The base of the republican party is opposed which explains why Trump is trying to repeal it. Poll: Most Americans support DACA | TheHill.


Most Americans support DACA, but oppose border wall - CBS News poll - CBS News

Nation Tracker: Americans weigh in on Trump immigration remarks, first year in office - CBS News


Poll: 48% of Americans think Trump's 'shithole' remarks were racist His remarks were consistent with a very long history of racist remarks and actions. Donald Trump’s Racism: The Definitive List - The New York Times Where did the racists, particularly those from the south, go after leaving the Democrat party in droves, starting with the passage of the Civil Rights Act of 1964, which was filibustered by southern Democrats, and later accelerated under Nixon's southern strategy?  They became republicans of course. 


Changes in the Electoral Map and the GOP's Movement To the Far Right


Back in the 1960s, the GOP was split into what would be viewed as a a left of center wing dominated by the Northeast and most everyone else who was far right (e.g. Barry Goldwater Nomination 1964 vs. Rockefeller Republicans).  


The moderate/liberal wing, which is now kaput, voted for environmental legislation, Medicare, Medicaid and the the Civil Rights laws in the 1960s. 


The Goldwater wing voted against Medicare and Medicaid (favored by most Southern Democrats), though there were exceptions, and was more opposed to labor unions. There was scattered opposition against the Civil Rights laws as well. Goldwater's libertarian streak led him to a pro-choice position, and he was opposed to the growing influence of evangelicals in the GOP.  


TO PASS H.R. 6675, THE SOCIAL SECURITY AMENDMENTS OF 1965. -GovTrack.us (for example, both senators from Delaware were republicans and voted for Medicare as did the GOP senators from Maine, New York, New Jersey, New Hampshire, Hawaii) The south would soon lose the Democrat senators who voted for Medicare. 


HR. 7152. Civil Rights Act of 1964 PASSAGE. -- GovTrack.us (Goldwater voted no)


The Clean Air Act of 1970 passed the senate with no senator in opposition. Environmental policy is partisan. It wasn’t always.-The Washington Post


The moderate and liberal GOP wing members have joined the Democrats. The Democrats have shifted to the left, with the potential to swing far to the left with a Presidential candidate like Bernie Sanders, and the GOP has shifted to the far right already. 


1960 Presidential Election: 





2016 Presidential Election: 





In New England, there is only one GOP Senator left, Susan Collins, and one House member, Bruce Poliquin, both from Maine. 
Poliquin only Republican from New England in U.S. House - Lewiston Sun Journal


GOP House representatives are a dying breed in other blue states like California, New Jersey, New York, Oregon, and Washington where I would expect about a 50% attrition in the remaining GOP congressional seats in 2018. That will be partly due to their votes on limiting the state tax deduction to $10K (state and local income taxes + property taxes)

The Democrats have started to make inroads into the South and currently have the ability to win presidential elections and senate seats in Virginia, North Carolina and Florida. Arkansas and Tennessee may in time flip back to the Democrats. 


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Jeff Flake isn’t just comparing Trump to Stalin. He’s comparing Republicans to Stalin’s enablers. - The Washington Post


I would agree that virtually all national republican politicians are Trump enablers. They nurture and protect him. Except for Senators Flake and Senator Corker, who will not be running for re-election, and Senator McCain, republicans in the House, Senate and throughout the administration lack any will and backbone to forcibly challenge even the most outrageous and divisive Trump comments, and unfortunately many have shown instead a willingness to lie for him. 


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The Modern Day GOP as the Reincarnation of the Know Nothing Party from the 19th Century:  


The GOP has been remade in Trump's image. It has the 21st century  version of the Know Nothing party in every way. 


I have made that claim  many times here and elsewhere, a line of thought explored ably in Paul Krugman's most recent column. Know-Nothings for the 21st Century-The New York Times 

The prejudices of that party were directed at immigrants from places like Ireland and Italy and those of the Jewish and Catholic faith. Just substitute different countries of origin and religious faiths for the modern equivalent party. The Know Nothings delved in outlandish conspiracy theories as well and embraced ignorance as a virtue. How the 19th-Century Know Nothing Party Reshaped American Politics | History | Smithsonian


There is some truth to these H.L. Mencken's statements:





Sourced: H. L. Mencken Quotes - BrainyQuote


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1. Profit Taking: Sold 50 CISCO at $40.84:





Profit Snapshot: +885.28





Quote: Cisco Systems Inc. (CSCO)

Non-GAAP E.P.S. Estimates: CSCO Analyst Estimates

Cisco's Transition Leads To Bank Of America Upgrade | Benzinga


I was satisfied with my total return and have no financial reason to hold onto any position in hopes of further financial gains. Those two reasons are the primary ones justifying my decision to sell this small lot.


One secondary reason originated from reading analyst reports. Several analysts have a 12 month price target less than $40.84.


Another secondary reason is revealed by a long term chart and my trading history with this stock.


In 2010-2012, I bought shares at $18.7, $19.95, $20.39 and $22.45. 
Item # 2 Bought Back 50 CSCO at $19.95 (February 2012)
Item # 3 Added 50 CSCO at $18.7 (9/27/12 Post)

The share price went over $70 in 2000 and has not come close to that level over the past 17 years. 


Lastly, CSCO's heyday was in the 1990s when it had limited competition for its primary products and demand was busting at the seams. The competitive landscape is much different now. 

2. Equity REIT Common and Preferred Stock Basket Strategy:


A. Averaged Down-Bought 50 Shares of DOC at $16.55:




HomePage


Dividends: Quarterly at $.23


The stock went ex dividend for its quarterly distribution on 1/2/2018. I will not receive that dividend for this 50 share lot. I will on my other 50 share lot position bought at $17.48.


Dividend Yield: 5.56% at TC of $16.55 


Chart: Bear Trend.


A one year chart shows a persistent downtrend in price since the stock closed at $21.8 on 6/26/17. Physicians Realty Trust Interactive Chart The company has paid since that close three dividends of $.23 per share.


Empire Building As a Major Negative: I would attribute the decline to empire building, broadly defined as a long series of acquisitions funded by new stock offerings and debt issuances that end up negatively impacting the stock's performance.


Physicians Realty Trust Announces Year-to-Date Investment Activity of $1.4 Billion (12/21/17 Press Release)


When I last discussed this company, I mentioned this problem in relation to DOC's recent property purchases, noting that I would have sold those properties at the low capitalization rates. Item # 1.B. Bought 50 DOC at $17.48 (10/9/17 Post) I will now be looking to sell that 50 share lot when and if the price exceeds $18. I am not reinvesting the dividend for any stock owned in my IB trading account.


The company believes that a lot more translates into a lot better. The market is telling management that more of what you have been doing lately is counter-productive and will lead to poor shareholder total returns. I have made repeatedly the same observation about the Board and management of Medical Properties Trust (MPW).


I also pointed out in the preceding linked post that the current dividend rate is bumping up against the FAD per share number. In that prior discussion, I discussed DOC's earnings report for the 2017 second quarter. Generally, I do not want to see the FAD payout ratio over 90%, preferably under 85%. DOC is close to 100%.  


Last Earnings Report:


Here are the relevant numbers for the third quarter: Physicians Realty Trust Reports Third Quarter 2017 Financial Results




Note the tremendous increase in the share count since 9/30/16 and the strait-line rent adjustment which removes non-cash revenues from the FFO number. 


While funds available for distribution increased to $42.811M from $32.887M, the share count went from 138.8+M to $183.3M. FAD per share was $.2336 in the 2017 third quarter, a slither above the $.23 quarterly dividend rate, and $.2369 per share in the 2016 third quarter. This is what I mean by bigger is not mean better.


My expectations for this stock are not high, unless there is a fundamental change in direction by the Board and Management away from empire building to improving FAD. The recent price decline makes it more likely that I can achieve a modest and satisfactory to me total return.

For as long as the policy remains empire building, I will trade the stock. I would sell my highest cost lot now when and if the price exceeds $18.


REITs that own medical office buildings, particularly those located near hospitals, are probably the less sensitive REIT sector to economic downturns.


I do not share Brad Thomas' favorable opinion of this REIT. Hit The Buy Button And Put This REIT On Snooze Control - Physicians Realty Trust (NYSE:DOC) | Seeking Alpha He, as usual, concentrates on FFO. This stock has potential IMO, however, when and if it substantially dials back its empire building mode. 


Physicians Realty Trust Announces Ratings Upgrade to BBB- from Standard & Poor’s Ratings Services


Note the repetitive stream of stock offerings: 


Physicians Realty Trust Announces Closing of Public Offering of Common Shares (7/5/17 Press Release)

Physicians Realty Trust Announces Closing of Public Offering of Common Shares (3/17/17 Press Release)


Physicians Realty Announces Pricing of $350.0 Million of 3.950% Senior Unsecured Notes Due 2028 (11/28/17)

Physicians Realty Trust Announces 2016 Tax Reporting Information ($.367528 per share of the total paid in 2016 was classified as return of capital) 

3. Short Term Bond/CD Ladder Basket Strategy

A. Bought 1 Paccar 1.65% SU Bond Maturing on 2/25/19


FINRA Page: Bond Detail

Issuer: Paccar Financial, wholly owned by Paccar Inc. (PCAR) 

Paccar however does not guarantee the notes: 

Sourced: Prospectus for Medium Term Notes,

Credit Ratings: 

Bought at a Total Cost of 99.761
YTM at TC Then at 1.845%
Current Yield at TC =  1.654%

B. Bought 2 Sysco 1.9% SU Bonds Maturing on 4/1/19:




FINRA Page: Bond Detail


Issuer: Sysco Corp. (SYY)

SYY Analyst Estimates
Sysco Reports First Quarter Fiscal 2018 Results

Credit Ratings:




Moody's changes Sysco's outlook to stable, affirms A3 long-term rating and Prime-2 short-term rating


Bought at a Total Cost of 99.979

YTM at TC Then at 1.916%
Current Yield at TC = 1.9004%
Bought at 99.879

C. Added 1 Treasury .75% Coupon Maturing on 9/30/18:

YTM At 1.612%



D. Added 1 Treasury 1.25% Coupon Maturing on 12/15/18:

YTM at 1.705%



E. Bought 2 Goldman Sachs 2.3% SU Bonds Maturing on 12/13/19:




FINRA Page: Bond Detail (prospectus linked)


Issuer: Goldman Sachs Group Inc.  (GS)

GS Analyst Estimates
Form 10-Q for the Q/E 9/30/17

Credit Ratings:




Bought at a Total Cost of 99.957

YTM at TC Then at 2.322%
Current Yield at 2.301%

When I bought this bond, this is what CD rates looked like:





This list includes a 2% GS CD that pays interest semi-annually-same as the bond. This bond is liquid with $2.5B in principal amount outstanding. The bond is less safe than the CD however. In a bankruptcy, I would generally estimate that GS senior unsecured debt would receive somewhere near $.2 on the dollar after a long BK proceeding where interest is not paid. I am basically using the Lehman Brothers example.

There may be liquidity for the bond even after a BK filing depending on the then existing circumstances.


F. Bought 1 Mountain Commerce 1.4% CD (monthly interest) Maturing on 4/27/18:




Holding Company: Mountain Commerce Bancorp Inc.  (MCBI)

Mountain Commerce Bancorp, Inc. Announces Strong Earnings for Third Quarter 2017

This bank has a 4 star rating from Bankrate: Mountain Commerce Bank Bank Reviews and Ratings - Bankrate.com


G. Bought 1 Capital One 2.1% CD (semi-annual interest payments) Maturing on 12/20/19 (2 year CD):






H. Bought 1 Merrick Bank 1.75% CD (monthly interest payments) Maturing on 12/28/18 (1 year CD):




I. Bought 1 DTE Energy 1.5% SU Bond Maturing on 10/1/19:




FINRA Page: Bond Detail


Issuer: DTE Energy Co.

DTE Analyst Estimates
DTE Energy reports third quarter 2017 results, raises guidance

Credit Ratings:




Moody's downgrades DTE to Baa1, affirms utility subsidiaries, outlook stable


Bought at a Total Cost of 98.747

YTM at TC Then at 2.221%
Current Yield at 1.519%

J. Bought 1 More DTE 1.5% SU Bond Maturing on 10/1/19 (different account with more cash available):




See Item I above


Bought at a Total Cost of 98.702

YTM at TC Then at 2.249%
Current Yield 1.5197%
Paid 98.602

K. Bought 2 Bank of China 1.4% CDs Maturing on 2/28/18:




4. Junk Bonds:


As I have discussed in the past, junk bonds IMO do not currently offer yields sufficient to compensate for their default risk. I am no longer playing in that sandbox given the junk bond yields now. My recent one bond Qwest Capital purchase was the rare exception. Item # 4 Bought Back 1 Qwest Capital 7.75% SU Bond Maturing on 2/15/31 at a TC of 87.861 (YTM then at 9.392%)


Another problem that may enhance the credit risk of several junk bond issuers is the new cap on interest deductions for corporations at 30% of income before interest, taxes, depreciation and amortization (EBITDA). That cap lasts between 2018-2021. Thereafter, the cap becomes more restrictive at 30% of income before taxes and interest only (EBIT). The limit on deductibility will become more prevalent staring in 2022 when the 30% will be 30% of a smaller number.


Conference Report Limits on Interest Deductions - Tax Foundation


I have no idea how may junk bond issuers have interest expenses exceeding that either cap, but I suspect there are a bunch. For those companies who will be subject to those two caps, and will lose the deductibility of some or all interest payments, the risk of default can become acute or potentially catastrophic.


In my last foray into junk territory,  I was buying trash in a junk bond ladder that actually worked out just fine after taking into account the crash and burns.


My weighted average current yield was over 10%, sometimes hitting as high as 15%+ depending on the mixture, with several bonds rated with the letters Caa1, Caa2 and the lowest rungs of the B letters.


This was a snapshot of the ladder from late in 2011 which does not show current yield but only average yield to worst at 15.153%:





I had a large number of profitable trades and calls above par value for bonds bought at deep discounts to par. Those profits offset my losses.


Among those bonds, I sold a bond after a BK proceeding and almost broke even, and I made a profit in a rare example where the bond became more valuable than its par value as the firm emerged from BK.


I have also lost almost all of  the principal amount in 4 cases, all being 1 bond positions in General Maritime, Quicksilver Resources (sold out profitably except for 1), Reddy Ice and Colt Defense. The BK of Colt Defense resulted in receiving a different bond at about 1/10th the principal amount of the original $1K in principal amount bond and which pays interest in kind rather than in cash. I may yet suffer a wipe out on what's left of my original 1 bond position. My principal amount for that new Colt bond is currently at $121.  


And I took losses on bonds issued by Kodak and Edison Mission though a successful trade after a BK filing reduced my losses in EM bonds significantly. 


My more recent loss in Linn Energy bonds originated from a less meaningful foray into junk E & P bonds after crude started to crash where my loss on the Linn bonds gobbled up profits on several bonds. I was successful trading the Linn bonds twice and then fell into loss territory on my third try.  


In short, given the BK risk, I need to be compensated well to assume the heightened default risk which is just not the case now. 




BofA Merrill Lynch US High Yield Effective Yield | FRED | St. Louis Fed





BofA Merrill Lynch US High Yield CCC or Below Effective Yield | FRED | St. Louis Fed





BofA Merrill Lynch US High Yield B Effective Yield | FRED | St. Louis Fed


Next time, I hope to lower the number of defaults by avoiding the riskiest issuers. 


5. Pared VEIRX: Sold $1K at $79.92


I will sell $1K when this position exceeds $51K in value. I am receiving all dividends paid in cash. 


One Year History: Dividends and Pares




The $1K pare strategy was adopted in February 2017 and replaced the previous $3K.  


This is obviously not an "all or nothing" strategy but a controlled burn. 


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.