Economy:
Donald claims that he negotiated a great trade deal with Mexico to replace what he characterized as the worst trade deal ever negotiated in world history.
As far as I can tell, the deal is tentative and it does not resolve the outstanding U.S. tariffs on Mexico's steel and aluminum exports to the U.S. It also remains to be seen whether Canada will agree to the same terms.
In short, the hullabaloo last Monday may prove to be premature.
Besides some additional protection for U.S. intellectual property, the major substantive change, which takes the deal into the best one negotiated in world history, is the requirement that 75% of auto parts must be manufactured in the NAFTA region up from 62.5% in the current treaty. U.S., Mexico reach NAFTA deal, turning up pressure on Canada | Reuters So that additional 12.5% removes the potential NAFTA revised agreement from the worst ever negotiated in world history to the most "incredible" according to the Duck. The U.S. retreated from is insistence on a five year sunset clause.
This change is aimed at low cost producers of auto parts, primarily China, that are shipped to North America and then assembled into a final product.
Goldman Sachs had this observation: “We do not expect the revised terms to have substantial macroeconomic effects in the U.S. if they do take effect.” Trump Nafta 2.0 May Leave His Job, Deficit Pledges Unfulfilled - Bloomberg
The economist for Cox Automotive noted that the automobile parts revision would likely result in slightly more production in North America but would also push prices higher. “In the end, they may produce a little more here, but sell a little less.”
There are issues with Canada including those that involve Canadian tariffs on dairy products that could scuttle Canada's participation in a three party agreement. The question is whether Donald will push the Canadians too far.
Assuming Canada goes along, the NAFTA agreement will receive minor revisions that will have at best minimal positive impact on the U.S. economy. The main benefit is that a final revised NAFTA agreement among the three countries removes the threat of an expanded trade war beyond what is already currently in effect.
Americans haven’t been this confident in the economy since the 1990s Internet boom - MarketWatch
Donald claims that he negotiated a great trade deal with Mexico to replace what he characterized as the worst trade deal ever negotiated in world history.
As far as I can tell, the deal is tentative and it does not resolve the outstanding U.S. tariffs on Mexico's steel and aluminum exports to the U.S. It also remains to be seen whether Canada will agree to the same terms.
In short, the hullabaloo last Monday may prove to be premature.
Besides some additional protection for U.S. intellectual property, the major substantive change, which takes the deal into the best one negotiated in world history, is the requirement that 75% of auto parts must be manufactured in the NAFTA region up from 62.5% in the current treaty. U.S., Mexico reach NAFTA deal, turning up pressure on Canada | Reuters So that additional 12.5% removes the potential NAFTA revised agreement from the worst ever negotiated in world history to the most "incredible" according to the Duck. The U.S. retreated from is insistence on a five year sunset clause.
This change is aimed at low cost producers of auto parts, primarily China, that are shipped to North America and then assembled into a final product.
Goldman Sachs had this observation: “We do not expect the revised terms to have substantial macroeconomic effects in the U.S. if they do take effect.” Trump Nafta 2.0 May Leave His Job, Deficit Pledges Unfulfilled - Bloomberg
The economist for Cox Automotive noted that the automobile parts revision would likely result in slightly more production in North America but would also push prices higher. “In the end, they may produce a little more here, but sell a little less.”
There are issues with Canada including those that involve Canadian tariffs on dairy products that could scuttle Canada's participation in a three party agreement. The question is whether Donald will push the Canadians too far.
Assuming Canada goes along, the NAFTA agreement will receive minor revisions that will have at best minimal positive impact on the U.S. economy. The main benefit is that a final revised NAFTA agreement among the three countries removes the threat of an expanded trade war beyond what is already currently in effect.
Americans haven’t been this confident in the economy since the 1990s Internet boom - MarketWatch
++++++
Market and Market Commentary:
A number of investors justify their non-participation or early exit based on the stock market's elevated Shiller 10 P/E ratio. Some investors are just naturally predisposed to bearishness and will become increasingly agitated as a bull market leaves them further behind.
This ratio takes the S & P 500 earnings for the past ten years and adjusts them for inflation.
This is a link to an interactive chart: Shiller PE Ratio and CAPE Calculator for Any Timeframe The ratio stood at 33.29 as of 8/27/18 with the mean ratio at 16.56 using data going back to 1870. Shiller PE Ratio
I have in the past discussed this ratio at some length, focusing on its problems as a timing indicator. Since Shiller introduced the ratio in 1988, the ratio has been over its median number about 99% of the time. While investors can be irrational for periods of time, it is not rational IMO to claim that they have been irrational for the past 30 years.
Shiller PE: Problems Behind The Broken CAPE Tool
I also have issues with the data used to arrive at a historical median number.
I do not discount the ratio entirely, but view it just as one among many stock market valuation metrics.
I recall several pundits arguing that it was too early to buy stocks in March 2009 since the Shiller P/E was at 15 and prior bottoms occurred closer to 5.
I recall some investors saying that a decline below 10 would cause them to buy stocks again, and they are still waiting for that signal. Shiller opined in February 2009 that he would wait for a fall below 10, which I discussed in a blog at that time.
And, there has been no shortage of investors who justified their non-participation in the bull run since March 2009 based on the higher than normal Shiller P/E 10 ratio.
The indicator is not worthless as a timing indicator since it did present the investor with excellent sell signals in 1929 and 2000.
Prior to the 1980s, the DJIA and S & P 500 indexes were weighted in companies that were more cyclical.
The older components that dominated those indexes were also capital and labor intensive.
Think about the differences: General Motors vs. Google, General Electric vs. Microsoft, Amgen vs. United Technologies (UTX), Priceline (now called Booking Holdings) vs. Alcoa, Ebay vs. Norfolk Southern, Facebook vs. Ford, or Apple vs. Exxon.
REITs, which have low GAAP earnings, were not included in the S & P 500 for most of the period staring in 1870. Several of them are now in the S & P 500 (AIV, AMT, ARE, AVB, BXP, CCI, DLR, DRE, EQIX, EQR, ESS, EXR, FRT, HCP, HST, IRM, KIM, MAA, MAC, PLD, PSA, O, REG, SBAC, SLG, SPG, UDR, VNO, VTR, WELL, and WY) The first REIT joined the S & P 500 in 2001. WY was a member of the S & P 500 prior to that date but only became a REIT recently.
Another major recent trend is that far more high margined pharmaceutical and medical device companies have been increasingly dominant in that major stock index since 1980.
Operating Profit Margins TTM S & P 500 Components:
AbbVie 36.57%
Amgen 45.89%
Biogen 48.01%
BMY 26.12%
Celgene 32.11%
Gilead 46.65%
Illumina 27.55%
Medtronic 23.44%
Merck 17.52%
Pfizer 28.72%
Stryker 22.01%
Vertex 19.73%
General Motors 5.56%
Ford Motor 3.48%
The same would be true for technology companies:
E.G.
AAPL 26.6%
AMAT 28.35%
BKNG 24.92%
CSCO 25.54%
EBAY 22.92%
FB 49.05%
GOOG 24.48%
INTC 30.89%
MSFT 31.77%
ORCL 35.95%
PAYX 38.08%
XLNX 31.49%
In the links above, GAAP profit margin is also provided and would generally be lower than the operating profit margins.
Since 2011, profit margins have generally been at twice the historical norm. That is in large part a reflection of higher margined and less cyclical businesses becoming more prominent in the major stock indexes. This naturally causes a debate whether the profit margin surge in recent years is sustainable. Standing at the Margin Peak, the Only Stock Direction Is Down - Bloomberg
The current Shiller P/E also still includes the Great Recession and the abnormally slow recovery period thereafter. What happened in 2008 was not a garden variety recession and consequently it distorts the Shiller 10 P/E far more than a normal recession where the recovery is rapid.
There has also been meaningful changes in GAAP accounting standards and the data used in the Shiller P/E does not adjust for those differences.
One of the most important changes was FAS 142 which was introduced in 2001. Prior to that change, companies had to amortize goodwill over time, which resulted in a periodic non-cash deduction from earnings. FAS 142 eliminated that deduction altogether. Instead of deducting this non-cash expense, companies are required to test it and other intangible assets for impairment. Fixing the Shiller CAPE: Accounting, Dividends, and the Permanently High Plateau | PHILOSOPHICAL ECONOMICS
Changes in how earnings are calculated result in an apples to oranges kind of comparison between the present and the past.
Another problem is that the stock market is forward looking, far more concerned about the next ten years than the past ten.
Lastly, the Shiller P/E does not adjust for periods of relatively high or low interest rates and inflation or importantly an anticipated long period of benign inflation numbers which are now predicted in the TIPs- the break-even inflation rates:
10-Year Breakeven Inflation Rate -St. Louis Fed (currently predicting an annual average CPI rate of 2.11% over the next ten years)
20-year Breakeven Inflation Rate-St. Louis Fed (currently at 2.1%)
The so called FED valuation model is the only one that is based on interest rates. Breaking Down The Fed Model; Fed's Stock Valuation Model Monthly/Weekly One flaw is that this model may be flashing a green light due to central bank manipulation of interest rates used in the model to abnormally low levels. Interest rates would be higher without CB manipulation.
A number of investors justify their non-participation or early exit based on the stock market's elevated Shiller 10 P/E ratio. Some investors are just naturally predisposed to bearishness and will become increasingly agitated as a bull market leaves them further behind.
This ratio takes the S & P 500 earnings for the past ten years and adjusts them for inflation.
This is a link to an interactive chart: Shiller PE Ratio and CAPE Calculator for Any Timeframe The ratio stood at 33.29 as of 8/27/18 with the mean ratio at 16.56 using data going back to 1870. Shiller PE Ratio
I have in the past discussed this ratio at some length, focusing on its problems as a timing indicator. Since Shiller introduced the ratio in 1988, the ratio has been over its median number about 99% of the time. While investors can be irrational for periods of time, it is not rational IMO to claim that they have been irrational for the past 30 years.
Shiller PE: Problems Behind The Broken CAPE Tool
I also have issues with the data used to arrive at a historical median number.
I do not discount the ratio entirely, but view it just as one among many stock market valuation metrics.
I recall several pundits arguing that it was too early to buy stocks in March 2009 since the Shiller P/E was at 15 and prior bottoms occurred closer to 5.
I recall some investors saying that a decline below 10 would cause them to buy stocks again, and they are still waiting for that signal. Shiller opined in February 2009 that he would wait for a fall below 10, which I discussed in a blog at that time.
And, there has been no shortage of investors who justified their non-participation in the bull run since March 2009 based on the higher than normal Shiller P/E 10 ratio.
The indicator is not worthless as a timing indicator since it did present the investor with excellent sell signals in 1929 and 2000.
Prior to the 1980s, the DJIA and S & P 500 indexes were weighted in companies that were more cyclical.
The older components that dominated those indexes were also capital and labor intensive.
Think about the differences: General Motors vs. Google, General Electric vs. Microsoft, Amgen vs. United Technologies (UTX), Priceline (now called Booking Holdings) vs. Alcoa, Ebay vs. Norfolk Southern, Facebook vs. Ford, or Apple vs. Exxon.
REITs, which have low GAAP earnings, were not included in the S & P 500 for most of the period staring in 1870. Several of them are now in the S & P 500 (AIV, AMT, ARE, AVB, BXP, CCI, DLR, DRE, EQIX, EQR, ESS, EXR, FRT, HCP, HST, IRM, KIM, MAA, MAC, PLD, PSA, O, REG, SBAC, SLG, SPG, UDR, VNO, VTR, WELL, and WY) The first REIT joined the S & P 500 in 2001. WY was a member of the S & P 500 prior to that date but only became a REIT recently.
Another major recent trend is that far more high margined pharmaceutical and medical device companies have been increasingly dominant in that major stock index since 1980.
Operating Profit Margins TTM S & P 500 Components:
AbbVie 36.57%
Amgen 45.89%
Biogen 48.01%
BMY 26.12%
Celgene 32.11%
Gilead 46.65%
Illumina 27.55%
Medtronic 23.44%
Merck 17.52%
Pfizer 28.72%
Stryker 22.01%
Vertex 19.73%
General Motors 5.56%
Ford Motor 3.48%
The same would be true for technology companies:
E.G.
AAPL 26.6%
AMAT 28.35%
BKNG 24.92%
CSCO 25.54%
EBAY 22.92%
FB 49.05%
GOOG 24.48%
INTC 30.89%
MSFT 31.77%
ORCL 35.95%
PAYX 38.08%
XLNX 31.49%
In the links above, GAAP profit margin is also provided and would generally be lower than the operating profit margins.
Since 2011, profit margins have generally been at twice the historical norm. That is in large part a reflection of higher margined and less cyclical businesses becoming more prominent in the major stock indexes. This naturally causes a debate whether the profit margin surge in recent years is sustainable. Standing at the Margin Peak, the Only Stock Direction Is Down - Bloomberg
The current Shiller P/E also still includes the Great Recession and the abnormally slow recovery period thereafter. What happened in 2008 was not a garden variety recession and consequently it distorts the Shiller 10 P/E far more than a normal recession where the recovery is rapid.
There has also been meaningful changes in GAAP accounting standards and the data used in the Shiller P/E does not adjust for those differences.
One of the most important changes was FAS 142 which was introduced in 2001. Prior to that change, companies had to amortize goodwill over time, which resulted in a periodic non-cash deduction from earnings. FAS 142 eliminated that deduction altogether. Instead of deducting this non-cash expense, companies are required to test it and other intangible assets for impairment. Fixing the Shiller CAPE: Accounting, Dividends, and the Permanently High Plateau | PHILOSOPHICAL ECONOMICS
Changes in how earnings are calculated result in an apples to oranges kind of comparison between the present and the past.
Another problem is that the stock market is forward looking, far more concerned about the next ten years than the past ten.
Lastly, the Shiller P/E does not adjust for periods of relatively high or low interest rates and inflation or importantly an anticipated long period of benign inflation numbers which are now predicted in the TIPs- the break-even inflation rates:
10-Year Breakeven Inflation Rate -St. Louis Fed (currently predicting an annual average CPI rate of 2.11% over the next ten years)
20-year Breakeven Inflation Rate-St. Louis Fed (currently at 2.1%)
The so called FED valuation model is the only one that is based on interest rates. Breaking Down The Fed Model; Fed's Stock Valuation Model Monthly/Weekly One flaw is that this model may be flashing a green light due to central bank manipulation of interest rates used in the model to abnormally low levels. Interest rates would be higher without CB manipulation.
In summary, there have been a lot of changes since 1870 which have accelerated in the last 3 decades that calls into question the reliability of the median Shiller P/E as a valuation metric.
Still, the ratio is unusually high which is a caution light. How high is it compared to the past? Until someone adjusts for accounting changes in how earnings are computed and excludes the REIT sector altogether due to its distortion effects, I can not even begin to answer that question.
+++++
Trump:
Trump and John McCain:
Trump managed to cause a conflagration over his response to John McCain's death. How difficult could it be for the Duck to write a tweet praising McCain and to lower the WH flag to half-staff.
Trump rejected plans for a White House statement praising McCain - The Washington Post
The tradition is to lower the U.S. flag until after the burial of a prominent U.S. politician, but Trump ordered the flag raised again after a brief period.
It took two days for Trump to tweet some praise. Initially, he tweeted condolences and included only a picture of himself.
Only after massive negative blowback, including from the American Legion and the Veterans of Foreign Wars, Trump did what any other President would have done.
Trump retreated when the American Legion stood up for McCain
Donald Trump’s Response to John McCain’s Death Reminds Us Just How Petty He Is | The New Yorker
Just prior to McCain's death, Trump signed the John S. McCain National Defense Authorization Act without mentioning McCain. Trump signs McCain defense measure, doesn't thank McCain - CNN
Trump is not remorseful in his refusal to call McCain a war hero. While McCain was rotting in a North Vietnamese jail after being shot down and captured, Trump's contribution to the war effort involved avoiding sexually transmitted diseases. Donald Trump Calls Avoiding STDs His 'Personal Vietnam' | PEOPLE.com Trump got out of serving in the military due to alleged "bone spurs". John McCain mocks Donald Trump’s deferment ‘bone spurs’; McCain hits Trump where it hurts, attacking 'bone spur' deferments in Vietnam - The Washington Post
++
Trump's Knowing Fabrications Involving Imran Awan:
Mr. Awan entered into a plea agreement last July admitting to making a false statement on a loan application. At one time Awan had worked for the DNC. The republican controlled Justice Department made it quite clear to the Teflon Don that there was "no evidence" that Mr. Awan had "illegally removed House data from the House network or from House Members’ offices, stole the House Democratic Caucus Server, stole or destroyed House information technology equipment, or improperly accessed or transferred government information, including classified or sensitive information."
That DOJ statement was made to rebuke the conspiracy theories previously hatched by "conservatives" and given credence by Don the Con in a tweet published in June.
Trump and John McCain:
Trump managed to cause a conflagration over his response to John McCain's death. How difficult could it be for the Duck to write a tweet praising McCain and to lower the WH flag to half-staff.
Trump rejected plans for a White House statement praising McCain - The Washington Post
It took two days for Trump to tweet some praise. Initially, he tweeted condolences and included only a picture of himself.
Only after massive negative blowback, including from the American Legion and the Veterans of Foreign Wars, Trump did what any other President would have done.
Trump retreated when the American Legion stood up for McCain
Donald Trump’s Response to John McCain’s Death Reminds Us Just How Petty He Is | The New Yorker
Just prior to McCain's death, Trump signed the John S. McCain National Defense Authorization Act without mentioning McCain. Trump signs McCain defense measure, doesn't thank McCain - CNN
Trump is not remorseful in his refusal to call McCain a war hero. While McCain was rotting in a North Vietnamese jail after being shot down and captured, Trump's contribution to the war effort involved avoiding sexually transmitted diseases. Donald Trump Calls Avoiding STDs His 'Personal Vietnam' | PEOPLE.com Trump got out of serving in the military due to alleged "bone spurs". John McCain mocks Donald Trump’s deferment ‘bone spurs’; McCain hits Trump where it hurts, attacking 'bone spur' deferments in Vietnam - The Washington Post
++
Trump's Knowing Fabrications Involving Imran Awan:
Mr. Awan entered into a plea agreement last July admitting to making a false statement on a loan application. At one time Awan had worked for the DNC. The republican controlled Justice Department made it quite clear to the Teflon Don that there was "no evidence" that Mr. Awan had "illegally removed House data from the House network or from House Members’ offices, stole the House Democratic Caucus Server, stole or destroyed House information technology equipment, or improperly accessed or transferred government information, including classified or sensitive information."
That DOJ statement was made to rebuke the conspiracy theories previously hatched by "conservatives" and given credence by Don the Con in a tweet published in June.
“I’ll tell you that somebody made a better deal. Awan, the IT guy for Schultz. Congresswoman Schultz. He had all the information on Democrats. He had all the information on everybody. He went to jail holding the hands of the Justice Department and the FBI. They sat there together. They were smiling and laughing, and he got nothing. And he stole money, and he had more information on corruption of the Democrats than anybody, and they don’t even have his computers and his servers. They just gave him, you saw that. It was on your show. They gave him nothing, nothing.”
The 36 most outrageous lines in Donald Trump's Fox News interview- CNN And over 40% of U.S. voters just love the guy.
Trump and North Korea:
Remember when the Duck had a hizzy fit when non-Trumpsters made fact based critical observations about his "deal" with North Korea. He even called those mentioning any fact based criticism as being "almost treasonous" and the "biggest" enemies of the people. Trump says news coverage of North Korea summit is "almost treasonous"
By fact based observations, I am referring to obvious and incontrovertible points, except to those in the Duck's cult which includes luminaries like Sean Hannity, that I summarized in this June 2018 post (scroll to "Trump Trusts Kim")
The critiques that caused Donald to throw multiple public temper tantrums were based on the wide differences between the claims made by Lying Don and what was actually in the four corners of the agreement as well as the hard concessions given by Donald (e.g. ceasing joint exercises with SK) for the nebulous commitments made by NK. I do not have a problem with the Duck trying to negotiate with NK provided there are grown ups present.
The nuclear disarmament negotiations have not been going well from the start which has been apparent for several weeks now. I have been referring to developments in this blog.
Donald has now canceled a planned trip to NK by Secretary Pompeo due to a lack of progress.
Trump calls off Pompeo’s North Korea visit, citing a lack of progress on denuclearization - The Washington Post; Trump calls off Pompeo North Korea trip, blasts China
++
Trump and the Tools Used by Demagogues-Whataboutism and Conspiracy Theories:
The Duck wants to deflect attention away from his own travails into what about Hillary. When doing so, Donald makes knowingly false or misleading accusations against Hillary, who is invariably referred to as "Crooked", without providing any proof. This is some of the Duck's venom spewed last Saturday:
Don the Con is once again repeating as a fact a debunked conspiracy theory.
Clinton's Emails, Weiner's Laptop and a Falsehood - FactCheck.org
QAnon-believing conspiracy analyst meets Trump in the White House - CNN
+++
Kudlow says White House ‘taking a look’ at regulating Google searches - MarketWatch Donald did not like what came back after googling his name so it is time to launch a federal investigation into why:
Trump is now claiming that Facebook, Twitter and Google are conspiring against him. All of those firms are headed for big trouble. Trump: Facebook, Twitter, Google 'have to be careful'
The Google search results are not manipulated or rigged to show a preponderance of "liberal" media outlets when searching for "Trump News".
Part of Trump's problem results from the expansive definition of liberal as including any outlet that engages in responsible journalism.
In what is now republican orthodoxy, the non-"Left Wing Media" consists only of those media companies that bow and scrap to Donald, repeat GOP talking points without analysis, and above all never contradicts a GOP talking point with actual facts. In this warped perspective, Alex Jones' Infowars website is viewed as slightly right of center.
The foregoing describes exactly what one would expect from an authoritarian regime.
Trump privately revived the idea of firing Sessions this month, according to people familiar with the discussions
Trump Organization CFO Granted Immunity by Prosecutors in Cohen Investigation
Trump and North Korea:
Remember when the Duck had a hizzy fit when non-Trumpsters made fact based critical observations about his "deal" with North Korea. He even called those mentioning any fact based criticism as being "almost treasonous" and the "biggest" enemies of the people. Trump says news coverage of North Korea summit is "almost treasonous"
By fact based observations, I am referring to obvious and incontrovertible points, except to those in the Duck's cult which includes luminaries like Sean Hannity, that I summarized in this June 2018 post (scroll to "Trump Trusts Kim")
The critiques that caused Donald to throw multiple public temper tantrums were based on the wide differences between the claims made by Lying Don and what was actually in the four corners of the agreement as well as the hard concessions given by Donald (e.g. ceasing joint exercises with SK) for the nebulous commitments made by NK. I do not have a problem with the Duck trying to negotiate with NK provided there are grown ups present.
The nuclear disarmament negotiations have not been going well from the start which has been apparent for several weeks now. I have been referring to developments in this blog.
Donald has now canceled a planned trip to NK by Secretary Pompeo due to a lack of progress.
Trump calls off Pompeo’s North Korea visit, citing a lack of progress on denuclearization - The Washington Post; Trump calls off Pompeo North Korea trip, blasts China
++
Trump and the Tools Used by Demagogues-Whataboutism and Conspiracy Theories:
The Duck wants to deflect attention away from his own travails into what about Hillary. When doing so, Donald makes knowingly false or misleading accusations against Hillary, who is invariably referred to as "Crooked", without providing any proof. This is some of the Duck's venom spewed last Saturday:
Don the Con is once again repeating as a fact a debunked conspiracy theory.
Clinton's Emails, Weiner's Laptop and a Falsehood - FactCheck.org
QAnon-believing conspiracy analyst meets Trump in the White House - CNN
+++
Kudlow says White House ‘taking a look’ at regulating Google searches - MarketWatch Donald did not like what came back after googling his name so it is time to launch a federal investigation into why:
Trump is now claiming that Facebook, Twitter and Google are conspiring against him. All of those firms are headed for big trouble. Trump: Facebook, Twitter, Google 'have to be careful'
The Google search results are not manipulated or rigged to show a preponderance of "liberal" media outlets when searching for "Trump News".
Part of Trump's problem results from the expansive definition of liberal as including any outlet that engages in responsible journalism.
In what is now republican orthodoxy, the non-"Left Wing Media" consists only of those media companies that bow and scrap to Donald, repeat GOP talking points without analysis, and above all never contradicts a GOP talking point with actual facts. In this warped perspective, Alex Jones' Infowars website is viewed as slightly right of center.
The foregoing describes exactly what one would expect from an authoritarian regime.
Trump privately revived the idea of firing Sessions this month, according to people familiar with the discussions
Trump Organization CFO Granted Immunity by Prosecutors in Cohen Investigation
Trump admin intentionally slowing FBI vetting of refugees, ex-officials say
Trump warns evangelical ministers of 'violence' if Democrats win midterms: report - MarketWatch
Trump warns evangelical ministers of 'violence' if Democrats win midterms: report - MarketWatch
+++
1. Small Ball-Income Generation:
A. Bought 50 of CPTA at $8.69-Used Commission Free Trade at Schwab:
Schwab recently granted me 30 free trades and this is the first one used in that grant.
Closing Price Yesterday: CPTA $8.71 +$0.01 +0.06%
Quote: Capitala Finance Corp. (CPTA)
Capitala SEC Filings
This is a deservedly disliked and externally managed small cap BDC that has been destroying capital and cutting its dividend as of late.
Possibly, a turnaround may be in motion with a different approach that focuses on first lien debt rather than second lien, other subordinated debt and equity investments.
I have not owned this stock in the past due to the external managers being in what I call Master of Disaster mode, though not as bad as several other externally managed BDCs.
Dividend: Monthly at $.0833 per share ($1 per year)
Capitala Finance Corp. Announces Distributions
The monthly dividend has been cut 3 times since it was at $.2067 as of December 2015.
Capitala Finance Corp. (CPTA) Dividend Date & History - NASDAQ.com
Dividend Yield at a TC of $8.69 = 11.5%
Last Ex Dividend Date: 8/22/18
2017 Annual Report (risk summary starts at page 31 and ends at page 62)
5 Year Financial History:
Note the major slide in net asset value per share from $20.71 as of 12/31/13 to $13.91 as of 12/31/17. That is a 32.83% decline in net asset value per share in 4 calendar years.
It is hard to believe that people actually expect to be paid anything for that kind of performance.
When you see that level of asset destruction, it is not surprising to see the BDC's market price to be at a substantial discount to net asset value per share. Investors want a big cushion.
Net Asset Value Per Share: $13.71 as of 6/30/18
Discount at a Total Cost of $8.69: -36.45%
This only looks like a bargain and would be a bargain provided the external managers cease incinerating assets.
IPO Priced at $20 per share in September 2013: Prospectus
Last Earnings Report: Q/E 6/30/18
"As of June 30, 2018, our portfolio consisted of 43 companies with a fair market value of $483.3 million and a cost basis of $426.7 million. First lien debt investments represented 50.9% of the portfolio, second lien debt investments represented 6.6% of the portfolio, subordinated debt investments represented 16.6% of the portfolio, and equity/warrant investments represented 25.9% of the portfolio, based on fair values at June 30, 2018. On a cost basis, equity investments comprised 13.5% of the portfolio at June 30, 2018. The weighted average yield on our debt portfolio was 11.4% at June 30, 2018, compared to 12.0% at March 31, 2018."
"At June 30, 2018, we had debt investments in three portfolio companies on non-accrual status with a fair value and cost basis of $25.8 million and $31.9 million, respectively. Non-accrual loans, on a fair value and cost basis, represent 5.3% and 7.5%, respectively, of the portfolio at June 30, 2018."
Capitala Finance Corp. Reports Second Quarter 2018 Results
CEO Joseph Alala on Q2 2018 Results - Earnings Call Transcript | Seeking Alpha
I have the following observations:
Note the high percentage of payment-in-kind ("PIK") income which is not cash interest but interest paid by adding to the principal amount outstanding. Maybe the company will survive to pay ps
Note the $22.622M in realized losses. "During the quarter, the Company realized losses on Cedar Electronics Holding Corp. ($20.6 million), CableOrganizer Acquisition, LLC ($1.6 million), and Caregiver Services, Inc. ($0.5 million), partially offset by other gains totaling $0.2 million." Book value was not impacted since most of the losses had already been written down in prior quarters. Net asset value per share increased to $13.71 from $13.66 as of 3/31/18.
Net investment income, which includes PIK, was reported at $.26.
The company is expected a profit due to a pending sale of Western Windows Systems to PGT Innovations (PGTI)("Based on the sale price, we anticipate $23.3 million in proceeds which includes full repayment of our debt at $10.5 million and $12.8 million for our equity which had a cost basis of $3 million, producing over a 4x return on our equity investment." Earnings Call Transcript | Seeking Alpha) That acquisition was completed on 8/13/18: PGT Innovations Completes Acquisition of Western Window Systems; PGT Innovations to Acquire Western Window Systems to Expand Product Portfolio in Premium Indoor/Outdoor Window and Door Category; Acquisition Also Provides Expansion into New Geographic Markets And Expands Adjusted EBITDA Margins
Subsequent to my purchase, CPTA did announce that he had exited its Western Windows Systems investment. Capitala Group Announces Portfolio Exits Totaling $36.6 Million ("On August 13, 2018, the Company exited its investment in Western Window Systems, a designer and manufacturer of moving glass walls and windows. Proceeds from the exit totaled $23.3 million; $10.5 million for full repayment of the senior secured debt investment, and $12.8 million for the Company’s equity investment. This generated a realized gain of $9.8 million for Capitala.")
The company also announced that it had sold its secured loan in Kelle's Transport Services, receiving $13.3M. The investment was carried on the balance sheet at $13M as of 6/30/18 with a $16.968M cost:
Page 12 10-Q
Tax Status of Dividends (Mostly non-qualified but devoid so far of ROC through 2017):
2. Short Term Bond/CD Ladder Basket Strategy:
A. Bought 50 of CPTA at $8.69-Used Commission Free Trade at Schwab:
Schwab recently granted me 30 free trades and this is the first one used in that grant.
Closing Price Yesterday: CPTA $8.71 +$0.01 +0.06%
Quote: Capitala Finance Corp. (CPTA)
Capitala SEC Filings
This is a deservedly disliked and externally managed small cap BDC that has been destroying capital and cutting its dividend as of late.
Possibly, a turnaround may be in motion with a different approach that focuses on first lien debt rather than second lien, other subordinated debt and equity investments.
I have not owned this stock in the past due to the external managers being in what I call Master of Disaster mode, though not as bad as several other externally managed BDCs.
Dividend: Monthly at $.0833 per share ($1 per year)
Capitala Finance Corp. Announces Distributions
The monthly dividend has been cut 3 times since it was at $.2067 as of December 2015.
Capitala Finance Corp. (CPTA) Dividend Date & History - NASDAQ.com
Dividend Yield at a TC of $8.69 = 11.5%
Last Ex Dividend Date: 8/22/18
2017 Annual Report (risk summary starts at page 31 and ends at page 62)
5 Year Financial History:
Note the major slide in net asset value per share from $20.71 as of 12/31/13 to $13.91 as of 12/31/17. That is a 32.83% decline in net asset value per share in 4 calendar years.
It is hard to believe that people actually expect to be paid anything for that kind of performance.
When you see that level of asset destruction, it is not surprising to see the BDC's market price to be at a substantial discount to net asset value per share. Investors want a big cushion.
Net Asset Value Per Share: $13.71 as of 6/30/18
Discount at a Total Cost of $8.69: -36.45%
This only looks like a bargain and would be a bargain provided the external managers cease incinerating assets.
IPO Priced at $20 per share in September 2013: Prospectus
Last Earnings Report: Q/E 6/30/18
"As of June 30, 2018, our portfolio consisted of 43 companies with a fair market value of $483.3 million and a cost basis of $426.7 million. First lien debt investments represented 50.9% of the portfolio, second lien debt investments represented 6.6% of the portfolio, subordinated debt investments represented 16.6% of the portfolio, and equity/warrant investments represented 25.9% of the portfolio, based on fair values at June 30, 2018. On a cost basis, equity investments comprised 13.5% of the portfolio at June 30, 2018. The weighted average yield on our debt portfolio was 11.4% at June 30, 2018, compared to 12.0% at March 31, 2018."
"At June 30, 2018, we had debt investments in three portfolio companies on non-accrual status with a fair value and cost basis of $25.8 million and $31.9 million, respectively. Non-accrual loans, on a fair value and cost basis, represent 5.3% and 7.5%, respectively, of the portfolio at June 30, 2018."
Capitala Finance Corp. Reports Second Quarter 2018 Results
CEO Joseph Alala on Q2 2018 Results - Earnings Call Transcript | Seeking Alpha
I have the following observations:
Note the high percentage of payment-in-kind ("PIK") income which is not cash interest but interest paid by adding to the principal amount outstanding. Maybe the company will survive to pay ps
Note the $22.622M in realized losses. "During the quarter, the Company realized losses on Cedar Electronics Holding Corp. ($20.6 million), CableOrganizer Acquisition, LLC ($1.6 million), and Caregiver Services, Inc. ($0.5 million), partially offset by other gains totaling $0.2 million." Book value was not impacted since most of the losses had already been written down in prior quarters. Net asset value per share increased to $13.71 from $13.66 as of 3/31/18.
Net investment income, which includes PIK, was reported at $.26.
The company is expected a profit due to a pending sale of Western Windows Systems to PGT Innovations (PGTI)("Based on the sale price, we anticipate $23.3 million in proceeds which includes full repayment of our debt at $10.5 million and $12.8 million for our equity which had a cost basis of $3 million, producing over a 4x return on our equity investment." Earnings Call Transcript | Seeking Alpha) That acquisition was completed on 8/13/18: PGT Innovations Completes Acquisition of Western Window Systems; PGT Innovations to Acquire Western Window Systems to Expand Product Portfolio in Premium Indoor/Outdoor Window and Door Category; Acquisition Also Provides Expansion into New Geographic Markets And Expands Adjusted EBITDA Margins
Subsequent to my purchase, CPTA did announce that he had exited its Western Windows Systems investment. Capitala Group Announces Portfolio Exits Totaling $36.6 Million ("On August 13, 2018, the Company exited its investment in Western Window Systems, a designer and manufacturer of moving glass walls and windows. Proceeds from the exit totaled $23.3 million; $10.5 million for full repayment of the senior secured debt investment, and $12.8 million for the Company’s equity investment. This generated a realized gain of $9.8 million for Capitala.")
The company also announced that it had sold its secured loan in Kelle's Transport Services, receiving $13.3M. The investment was carried on the balance sheet at $13M as of 6/30/18 with a $16.968M cost:
Tax Status of Dividends (Mostly non-qualified but devoid so far of ROC through 2017):
Maturities in September 2018
SU = Senior Unsecured Bond
MI = Monthly Interest Payments
9 Nextera Capital 1.649% SU Maturing 9/1/18 (various purchase dates)
2 Wells Fargo 1.4% CDs MI 9/4 (18 month CDs)
2 Gilead 1.85% SU 9/4 (bought January 2018)
3 Treasury 4 Week Bills 9/6 1.905% (bought at auction)
1 Goldman Sachs 1.55% CD 9/6 (9 month CD)
2 Peoples United 1.85% CDs 9/6 (3 month CD)
5 Lake City Bank 1.5% CDs 9/7 MI (1 Year CDs)
2 Compass Banks 1.45% CDs 9/14 (1 Year CD)
1 Premiere Bank 1.5% CD 9/14 MI (10 month CD)
4 Treasury 1% 9/15/18
2 Abbott Laboratories 2% SU 9/15 (bought February 2018)
2 Toronto Dominion 1.45% SU 9/16 (bought )
2 Washington Federal 1.45% CDs 9/17 MI (11 month CDs)
2 Northpointe 1.85% CDs 9/18 MI (5 month CDs)
2 Bank of Hope 1.45% CDs 9/18 MI (1 Year CDs)
2 Bank of China 1.5% CDs 9/20 (1 Year CDs)
2 Compass Bank CDs 1.5% CS 9/21 (1 year CDs)
2 Compass Bank CDs 1.5% CS 9/21 (1 year CDs)
1 Volunteer Bank 1.5% CD 9/21 (11 month CD)
1 Wex Bank 1.6% CD 9/21 (9 month CD)
2 Franklin Synergy 1.45% CDs 9/26 MI (1 Year CDs)
2 Bar Harbor 1.45% CDs 9/28 MI (15 month CDs)
2 Compass Bank 1.5% CDs 9/28 (1 Year CDs)
2 Mainsource 1.45% CDs 9/28 MI (1 Year CDs)
3 Treasury .75% 9/30
1 Treasury 1.375%
$61K
I have been buying more Nextera Capital bonds to replace the 9 that mature on 9/1/18. These bonds can generally be bought in 1 bond lots. I currently own the following 7 bonds: 2.3% Maturing on 4/1/19 (4); 2.7% Maturing on 9/15/19 (2); 2.4% Maturing on 9/15/19 (1).
I have been buying more Nextera Capital bonds to replace the 9 that mature on 9/1/18. These bonds can generally be bought in 1 bond lots. I currently own the following 7 bonds: 2.3% Maturing on 4/1/19 (4); 2.7% Maturing on 9/15/19 (2); 2.4% Maturing on 9/15/19 (1).
A. Bought 2 Merrick Bank 2.35% CDs (monthly interest payments) Maturing on 8/21/19:
Merrick has a 5 star rating from Bankrate: Merrick Bank Reviews and Ratings - Bankrate.com
B. Bought 1 Ventas Realty Partnership 2.7% SU Bond Maturing on 4/1/2020-In a Roth IRA Account:
I now own 3 bonds with the other two held in taxable accounts.
FINRA Page: Bond Detail (prospectus linked)
Issuer: Operating Subsidiary of Ventas Inc. (VTR) who guarantees the bonds
Ventas Reports 2018 Second Quarter Results
Recent Bond Offering: Ventas Announces Pricing of Senior Notes Offering (8/6/18) ("priced a public offering of $750 million aggregate principal amount of 4.400% Senior Notes due January 15, 2029 (the “Notes”) at 99.954% of the principal amount. The Notes are being issued by Ventas Realty, Limited Partnership (“Ventas Realty”), a wholly owned subsidiary of the Company, and will be guaranteed, on a senior unsecured basis, by the Company.")
Credit Ratings: See Confirmation for Moody's and S & P
Fitch Rates Ventas' Senior Unsecured Notes 'BBB+' (8/6/18)
Bought at a Total Cost of 99.485 (with $2 Vanguard Commission)
YTM at TC Then at 3.027%
Current Yield at TC = 2.714%
The source of funds to pay for this purchase was the Vanguard Prime Money Market fund that then had a 2.06% yield. I anticipate that the current yield of this bond will not be surpassed by that money market rate prior to 2019 second quarter and that assumes a .75% rise in the federal funds rate from current levels. And I view it as no better than 50/50 that the MM yield will exceed 3.027% prior to this bond's maturity on 4/1/20. The FED will IMO likely pause raising the FF rate after increasing it another .75% for several quarters.
C. Bought 1 Treasury 2.5% Coupon Maturing on 6/30/20:
YTM at 2.581%
I have just started buying treasuries maturing in 2020.
I have recently focused my attention on treasuries with greater than 2% coupons that can be bought at below par value.
I currently own just 5 treasuries maturing in 2020.
I still regard the 2 year treasury as the sweet spot on a risk/reward basis since that maturity captures most of the 10 year treasury yield with far less interest rate risk due to its 8 year shorter maturity.
When I bought this 2 year note in the secondary market, the ten year treasury was trading with a 2.85% yield. Given what I believe will be the federal government's deteriorating fiscal position, and its need to flood the market with parabolically growing increases in new debt issuances, it is hard for me to now foresee interest rates declining over the next 2 to 10 years. The most likely outcome based on what I now know is that rates will have to rise to attract enough investors to feed the beast. The end game is now in motion.
D. Bought 2 Fifth Third Bancorp 2.875% SU Bonds Maturing on 7/27/20:
FINRA Page: Bond Detail (prospectus linked)
Issuer: Fifth Third Bancorp (FITB)
FITB Analyst Estimates
Fifth Third Announces Second Quarter 2018 Net Income to Common Shareholders of $563 Million, or $0.80 Per Diluted Share
Credit Ratings:
Fitch Downgrades Fifth Third Bancorp to 'A-'; Outlook Stable (10/3/17)
Bought at a Total Cost of 99.744
YTM at TC Then at 3.011%
Current Yield at 2.8824%
I have bought and sold several times FITB's common stock. I believe this is my first FITB bond purchase. I have been favoring as of late investment grade corporate bonds maturing in about two years where I can pick up a greater YTM compared to the ten year treasury. This purchase was made at a time when the ten year treasury was trading with 2.85% YTM.
Credit Ratings: See Confirmation for Moody's and S & P
Fitch Rates Ventas' Senior Unsecured Notes 'BBB+' (8/6/18)
Bought at a Total Cost of 99.485 (with $2 Vanguard Commission)
YTM at TC Then at 3.027%
Current Yield at TC = 2.714%
The source of funds to pay for this purchase was the Vanguard Prime Money Market fund that then had a 2.06% yield. I anticipate that the current yield of this bond will not be surpassed by that money market rate prior to 2019 second quarter and that assumes a .75% rise in the federal funds rate from current levels. And I view it as no better than 50/50 that the MM yield will exceed 3.027% prior to this bond's maturity on 4/1/20. The FED will IMO likely pause raising the FF rate after increasing it another .75% for several quarters.
C. Bought 1 Treasury 2.5% Coupon Maturing on 6/30/20:
YTM at 2.581%
I have just started buying treasuries maturing in 2020.
I have recently focused my attention on treasuries with greater than 2% coupons that can be bought at below par value.
I currently own just 5 treasuries maturing in 2020.
I still regard the 2 year treasury as the sweet spot on a risk/reward basis since that maturity captures most of the 10 year treasury yield with far less interest rate risk due to its 8 year shorter maturity.
When I bought this 2 year note in the secondary market, the ten year treasury was trading with a 2.85% yield. Given what I believe will be the federal government's deteriorating fiscal position, and its need to flood the market with parabolically growing increases in new debt issuances, it is hard for me to now foresee interest rates declining over the next 2 to 10 years. The most likely outcome based on what I now know is that rates will have to rise to attract enough investors to feed the beast. The end game is now in motion.
D. Bought 2 Fifth Third Bancorp 2.875% SU Bonds Maturing on 7/27/20:
FINRA Page: Bond Detail (prospectus linked)
Issuer: Fifth Third Bancorp (FITB)
FITB Analyst Estimates
Fifth Third Announces Second Quarter 2018 Net Income to Common Shareholders of $563 Million, or $0.80 Per Diluted Share
Credit Ratings:
Fitch Downgrades Fifth Third Bancorp to 'A-'; Outlook Stable (10/3/17)
Bought at a Total Cost of 99.744
YTM at TC Then at 3.011%
Current Yield at 2.8824%
I have bought and sold several times FITB's common stock. I believe this is my first FITB bond purchase. I have been favoring as of late investment grade corporate bonds maturing in about two years where I can pick up a greater YTM compared to the ten year treasury. This purchase was made at a time when the ten year treasury was trading with 2.85% YTM.
3. Small Ball Buys-Precious Metals:
A. Added 10 SLV at $13.81:
This security is currently trading commission free for all Fidelity customers.
Quote: iShares Silver Trust Overview
Current Position: 50 shares
Average Cost Per Share: $14.89
Highest Cost Lot in Chain: 30 shares at $15.4: Item # 2.C. (5/3/18)
Maximum Position: 100 shares
Purchase Restriction: Small Ball Rule
SLV Chart: Long Term Secular Bear Market since May 2011
4. Intermediate Term Bond/CD Ladder Basket Strategy:
A. Sold 1 AvalonBay Communities 2.95% SU Bond Maturing on 5/11/26:
Profit Snapshot: $14.48
Item # 3.B. Bought 1 AVP SU at a Total Cost of 93.328 (5/17/18 Post)
FINRA Page: Bond Detail
Issuer: Avalonbay Communities Inc. (AVB)
Sold at 94.876
YTM at 94.876 = 3.719%
Proceeds at 94.776
In a post a few weeks ago, I included snapshots of my 2017 bond trades in my Fidelity account. Item # 5 I included all maturing bonds and bond trades in those snapshots but there were some non-bond trades that had to be clipped out. Looking at the snapshots again, I see that I failed not cut out one Canadian reset equity preferred trade (Enbridge issue) which realized a +US$1,458.25.
Some of the gains are from maturing bonds bought at a discount. Most are intermediate term bonds sold into a bond rally. Given the trend in interest rates this year, I will have far fewer trades but more realized gains from maturing short term bonds bought at discounts to par value.
One goal is to profitably sell intermediate term corporate bonds into bond rallies and then to buy the same bonds back at a purchase price less than my prior purchase. That trading strategy is based on a current opinion that intermediate term interest rates will continue to trend up but that there will be bond rallies along the way.
The main goal with the short and intermediate term bond/CD ladders is to increase interest income over time which has been easy to do with a persistent rise in short term interest rates. One key management goal will be to transition into more intermediate term bonds with the proceeds of maturing short term bonds and CDs as short term rates top out and turn back down probably in response to a recession when the FED starts to decrease the federal funds rate.
A. Added 10 SLV at $13.81:
This security is currently trading commission free for all Fidelity customers.
Quote: iShares Silver Trust Overview
Current Position: 50 shares
Average Cost Per Share: $14.89
Highest Cost Lot in Chain: 30 shares at $15.4: Item # 2.C. (5/3/18)
Maximum Position: 100 shares
Purchase Restriction: Small Ball Rule
SLV Chart: Long Term Secular Bear Market since May 2011
4. Intermediate Term Bond/CD Ladder Basket Strategy:
A. Sold 1 AvalonBay Communities 2.95% SU Bond Maturing on 5/11/26:
Profit Snapshot: $14.48
Item # 3.B. Bought 1 AVP SU at a Total Cost of 93.328 (5/17/18 Post)
FINRA Page: Bond Detail
Issuer: Avalonbay Communities Inc. (AVB)
Sold at 94.876
YTM at 94.876 = 3.719%
Proceeds at 94.776
In a post a few weeks ago, I included snapshots of my 2017 bond trades in my Fidelity account. Item # 5 I included all maturing bonds and bond trades in those snapshots but there were some non-bond trades that had to be clipped out. Looking at the snapshots again, I see that I failed not cut out one Canadian reset equity preferred trade (Enbridge issue) which realized a +US$1,458.25.
Some of the gains are from maturing bonds bought at a discount. Most are intermediate term bonds sold into a bond rally. Given the trend in interest rates this year, I will have far fewer trades but more realized gains from maturing short term bonds bought at discounts to par value.
One goal is to profitably sell intermediate term corporate bonds into bond rallies and then to buy the same bonds back at a purchase price less than my prior purchase. That trading strategy is based on a current opinion that intermediate term interest rates will continue to trend up but that there will be bond rallies along the way.
The main goal with the short and intermediate term bond/CD ladders is to increase interest income over time which has been easy to do with a persistent rise in short term interest rates. One key management goal will be to transition into more intermediate term bonds with the proceeds of maturing short term bonds and CDs as short term rates top out and turn back down probably in response to a recession when the FED starts to decrease the federal funds rate.
Disclaimer: I am not a financial advisor but simply an individual investor who has been managing my own money since I was a teenager. In this post, I am acting solely as a financial journalist focusing on my own investments. The information contained in this post is not intended to be a complete description or summary of all available data relevant to making an investment decision. Instead, I am merely expressing some of the reasons underlying the purchase or sell of securities. Nothing in this post is intended to constitute investment or legal advice or a recommendation to buy or to sell. All investors need to perform their own due diligence before making any financial decision which requires at a minimum reading original source material available at the SEC and elsewhere. A failure to perform due diligence only increases what I call "error creep". Stocks, Bonds & Politics: ERROR CREEP and the INVESTING PROCESS Each investor needs to assess a potential investment taking into account their personal risk tolerances, goals and situational risks. I can only make that kind of assessment for myself and family members.
