Wednesday, December 12, 2018

Observations and Sample of Recent Trades: BHK, CA:DIR.UN, ELC, GDO, HTGX, SUNS

Economy

The Federal Reserve released its third quarter report on household wealth: Z-1 Release.pdf The Fed estimated that household wealth increased to $109 trillion while household debt increased at a 3.4% annual rate in the third quarter. Consumer credit increased at a 5.4% annualized rate. Mortgage debt rose at a 3.1% rate excluding charge-offs. The U.S. debt increased at a 6.8% annualized rate. 


Based on 2016 data, the lowest 70% of households controlled about 6.3% of household wealth while the top 1% owned 38.6% of the wealth. U.S. wealth distribution in 2016 | Statistic 


Income inequality has been widening since the early 1970s. A Guide to Statistics on Historical Trends in Income Inequality | Center on Budget and Policy Priorities The GOP's tax reform is far more likely to increase that inequality rather than to decrease it. The income inequality has been rising irrespective of the party controlling the federal government. 




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Markets and Market Commentary

The rally yesterday morning was probably due to this tweet from Donald: 




Is Donald hyping the actual results, or is he just trying to goose the market which he regards as a report card on his performance?

I am anticipating that China would throw some bones to the U.S. with some meat on them, as discussed in an earlier post.  


I mentioned in an earlier post that China would likely reduce the current 40% tariff on U.S. auto imports, which would primarily benefit Mercedes and BMW who manufacture in the U.S. for export to China. Trump’s car tariff deal with China is better for other countries-Vox 


This is apparently in the works. China to slash tariffs on U.S. auto imports to 15% - MarketWatch 

That reduction, if implemented, only eliminates the 25% surcharge, at least for the time being, that was imposed as part of China's retaliation against U.S. tariffs.  

U.S. car companies have operations in China. Ford did cease importing cars made in China into the U.S. due to U.S. tariffsChina Trade War: Trump Tariffs Just Killed Ford Imports From China The U.S. tariffs on steel and aluminum imports has hurt U.S. manufacturers. 

Another morsel would be an announcement that more soybeans and other products would be bought. 


None of those concessions would have any meaningful or lasting impact on the U.S. economy IMO. 


To have any meaningful impact on the U.S. economy, as distinguished from the stock market, there would have to be a substantive agreement on major points of contention that have held up a new trade deal to date. 
Trade deal with China could be elusive until bitter end of negotiating period 


After enticing the Stock Jocks into a rally mode, the Duck then had a boisterous meeting with Pelosi and Schumer in front of the cameras that erased all of the early morning gains and sent stocks plummeting. Political dysfunction and government shutdown threats are not what investors want to see on TV. 


The S & P consequently nosed dived from an intra-day high of 2,674.35 down to 2,621.3 before recovering some to close down just .94 points at 2,636.78. Once again, the 2,632 line held but just barely again.  


Trump's full Oval Office exchange with Nancy Pelosi and Chuck Schumer, annotated - The Washington Post


Demagogue Don said he would be "happy" to shut down the government unless the Democrats agree to add $5B in funding for the wall. Trump, Pelosi and Schumer have on-camera shouting match as wall talks break down5 Takeaways From Trump’s Meeting With Pelosi and Schumer  


Fact check: Trump constructs false, misleading claims about his border 'wall'The false claims that Trump keeps repeating - Washington PostTrump Makes Misleading Border Wall Claims Before and After Meeting With Democrats - The New York Times

Trump claimed that the military "will build the remaining sections” if the Democrats failed to fund the construction. If that was possible, why would Donald be happy to shut the government down without the Democrats agreeing to a specific line item for $5B. Clarity and consistency of thought is a bridge too far for the Duck. 


As explained in a prior post, the Democrats need to take away the wall issue to some degree. That opinion is a political one, rather than one based on the merits or lack thereof of the wall.  


Generally, after much posturing and reality TV showmanship aimed at partisans from both tribes, some kind of arrangement will be worked out, possibly after a temporary partial government shutdown, that will kick the can a few more months into the future. 


One problem with a dysfunctional and tribalized government is that rational and reasonable compromises, where both sides give up something they would prefer not to give in exchange for something they want, become unnecessarily difficult or impossible.      


Donald's "charm" is not going to work on the Democrats. Reporter says Trump 'stormed out' of Oval Office after Dem meeting

Government shutdowns in the United States - Wikipedia (just a growing sign of dysfunction)


Bear market is here, brace for 20% plunge: Ned Davis Research


Goldman Sachs cuts outlook for Fed hikes, thinks the market is still wrong

Yellen warns of another potential financial crisis Of course there is the potential for another major financial crisis. It is important to keep in mind that the Near Depression was caused in large part by excessive debt and the improvident granting of loans to buy assets far in excess of their fair market value. What was the cure for the excess accumulation of debt leading up to the 2008 financial crisis? The world's response was to accumulate vast amounts of new debt.  


Regional banks and small cap stocks, which I view as leading indicators for a downturn in the U.S. economy, are showing no signs yet of mounting a rebound. 


Russell 2000 1 Year Chart:  Closed at 1,440.13 yesterday 




200 Day at 1612
100 Day at 1620+
  50 Day at 1538

RUT 1,440.55 -2.54 -0.18% : Russell 2000 - Yahoo Finance


KRE SPDR S&P Regional Banking ETF 1 Year Chart- Yahoo Finance


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Tidbits: AT& T, DX, GMRE, HTGC-HTGX 


GMRE initiated after the close yesterday a public offering of common stock. Global Medical REIT Inc. Commences Common Stock Public Offering I recently eliminated my common stock position: Item #4.A. Sold 98+ GMRA at $9.41 (11/28/18 Post Depending on how far the stock declines in response to this offering, I may consider repurchasing some shares. I am not interested in restarting a position over $8.5. 


Last GMRE Buy Trades Item # 1.A. Bought 10 GMRE at $7.19 and 10 at $6.77-Used Commission Free Trades (3/8/18 Post)


Closing Price Yesterday: GMRE $9.54 -$0.10 -1.04% 


Dynex Capital, Inc. Announces Change to a Monthly Common Dividend Distribution Commencing 2019 While I prefer a monthly dividend payment over a quarterly one, the change in the distribution schedule does not alter the fundamentals. MREITs remain under pressure due in large part to net interest margin compression and the difficulties in hedging when interest rate movements are volatile. I own a small position in the common shares and am near break-even on a total return basis based on yesterdays closing price: DX $6.22 +$0.28 +4.71% 


Citi: Buy AT&T stock as the telecom giant turns things around I have an ongoing small ball buying program for AT & T, with the last purchase being at $29.23. The next purchase will have to be at a lower price. I will probably buy 5 shares, using a commission free trade, when and if the price sinks below $29. I currently own 56+ shares at an average total cost per share of $32.47. I am reinvesting the dividend. A less favorable article about this company was published yesterday at CNBC: Verizon made the right decision not to be big on media

AT & T's stock rose initially yesterday but ended the day down: T $29.70 -$0.21 -0.70% I view the trading range of $29.58 to $30.67 yesterday to be primarily based on the SPX movement where there was a good rally in the morning that reversed and ended down for the day.  

Hercules Announces Its Intention to Fully Redeem its 6.25% Notes due 2024 I discussed buying this baby bond in my last post. Item # 3.A. Bought 50 HTGX at $24.9 ($1 IB Commission) I mentioned in that post the possibility of a redemption, but noted that I did not care since my purchase was below par value. 

Hercules will redeem 1/2 of the remaining notes on 1/14/19 and the remainder on 2/4/19. The redemption price will be the $25 par value plus accrued and unpaid interest through, but "excluding" the redemption dates. 


Hercules Capital (HTGC) will then have two exchange traded bonds remaining: (1) the recently issued 6.25% SU bond maturing in 2033 and a (2) 5.25% SU bond maturing in 2025. 


Hercules Capital Inc. 5.25% Notes due 2025 (HCXZ)Hercules Capital Inc. 6.25% Notes due 2033 (HCXY) 


I do not own either of those bonds and am currently uninterested in both of them. I have not owned the common shares for several years. 


With a dividend yield close to 10.63% based on yesterday's closing price of  $11.66, I would buy the common over the two exchange traded bonds when and if forced upon penalty of death to choose between the common shares or one of the bonds.  

I have maintained for years that HTGC did not deserve its premium price to net asset value per share. Maybe that will change. 


HTGC is currently internally managed. 


The Board and management put a scare into shareholders last year by attempting to go from the current internal management to external management which would benefit the managers rather than the stockholders. Hercules Announces Special Meeting of Stockholders to Approve an Investment Advisory Agreement With Hamilton Advisers LLC  The plan was dropped, at least for now, but that move still hangs over the stock IMO. Hercules Capital Rebounds After Dropping Plan for New Structure - Barron's


Item # 5 Sold 100 HTGC at $10.8(2/7/12 Post)(profit snapshot $99.42)-Item # 1 Bought 100 HTGC @ $9.7 (1/26/12 Post)Item # 5 Sold 165+ HTGC at $8.67 (7/7/2009 Post)(profit snapshot = +$228.52); Sold 100 HTGC at $10.64 (5/29/12 Post) Item # 4 Bought 100 HTGC at $10.35-ROTH IRA (4/5/12 Post)(profit snapshot +$15.15: liquidated to buy the HTGC senior unsecured bond HTGZ which was later fully called by Hercules); Sold 50+ HTGC  in Regular IRA (4/5/2010)(profit snapshot = $40.52)

5 year HTGC Historical:

2013 NAV Per Share = $10.51/ 2017 at $9.96
10-k at page 69 

Note the dividend cut in 2009 and again in 2010:


Annual Average Total Return 5 Years: +2.21% (start 12/11/13 and end on 12/11/18)-DRIP Returns Calculator | Dividend Channel

I have emphasized many times here my goal with BDCs which is easier said than done. The goal is simply to earn a total return in excess of the dividend yield which the buy and hold investor during that five year period failed to do.  


I have an eye on the common shares since the NAV was reported at $10.38 as of 9/30/18, so the premium is narrowing some due to that rise and a decline in the share price. 10-Q at page 3HTGC 1 Year Chart That combination de-risks the stock some. The company has a $.31 per share quarterly dividend and did pay a 2 cent special dividend for the current quarter. Hercules Capital Announces Supplemental Cash Distribution of $0.02 per Share for the Third Quarter of 2018 The regular dividend penny rate was last raised to $.31 from $.28 effective for the 2013 4th quarter or five years ago. 


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Trump


Trump's Exaggerated 'Conflicts of Interest' Claims - FactCheck.org


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Cohen and Manafort Sentencing Reports:


Mueller flashes some cards in Russia probe, but hides his hand


Prosecutors’ Narrative Is Clear: Trump Defrauded Voters. But What Does It Mean? Donald is a fraud machine.


Done With Michael Cohen, Federal Prosecutors Shift Focus to Trump Family Business


Donald claimed that
the Cohen sentencing report, prepared by prosecutors in the Southern District of NY and not by Mueller's team, totally exonerated him: 


Someone may need to inform the Duck that "Individual 1" is none other than Don the Con. Prosecutors Say Trump Directed Illegal Payments During Campaign - The New York Times 



Read the two Michael Cohen sentencing memos - Axios


In the next to the last sentence, the SDNY federal prosecutors state clearly that Trump committed a felony and would be indicted by them but for the DOJ policy that it would not seek an indictment against a sitting President.


Mueller: Cohen spoke with Russian seeking ‘political synergy’ with campaign - The Washington Post "Synergy" sounds like a Wall Street fancy word for collusion. 


5 big takeaways from the new Michael Cohen and Paul Manafort filings There are a large number of redactions in the documents, so more information will be on the way later. 


Both reports contain suggestions that Mueller is building an obstruction of justice and subordination of perjury claims against either Trump and/or one or more associates. 


One of the impeachment charges against Nixon was "condoning" and “acquiescing in” false testimony. 




Article 1: Watergate Articles Of Impeachment


Donald does not know what is in the redacted portions of these sentencing reports or the information submitted under seal. Nonetheless, the Duck declared that the reports show there was no evidence of collusion and consequently Donald wants to end the Mueller probes. Trump calls for Mueller probe to end following Manafort, Cohen court filings 


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1. Small Ball-Income Generation:  

A. Bought 100 BHK at $12.11-Used Commission Free Trade




Quote: BlackRock Core Bond Trust (BHK)


Closing Price Yesterday: BHK $12.35 +$0.02 +0.16% 

Data on Date of Purchase:

Closing Market Price: $12.11
Closing Net Asset Value Per Share: $13.43
Discount: -9.83%
Average Discounts:
1 YR -8.27%
3 YR -7.41%
5 YR -8.39%

Sourced: BHK BlackRock Core Bond, closed-end fund CEF Connect


Scroll to General Risk Discussion for Leverage Closed End Bond Funds: Update For Closed End Fund Basket Strategy As Of 8/14/15 - South Gent | Seeking Alpha


Fund Sponsor WebsiteCore Bond Trust | BHK


Dividend: Monthly at $.065 per share ($.78 annually)


Dividend Yield at $12.11 = 6.441%


Last Ex Dividend Date: Today 12/12/18 (after purchase)


Current Position: 100 shares

Maximum Position: 200 Shares + Shares Bought with Dividends


Purchase Restriction: Small Ball Rule with two 50 share lot purchases


As of 10/31/18:


Credit Quality:



Duration = 9.23 years

Updated: Duration—What an Interest Rate Hike Could Do to Your Bond Portfolio | FINRA.org


Get to know your bond fund: Duration | Vanguard


Leverage = 29.37%


Leverage is accomplished currently through reverse repurchase agreements, see pages 94-95.


Last SEC Filed Report (period ending 8/31/18)BLACKROCK CORE BOND TRUST


Unrealized Appreciation as of 8/31/18: $4.698+M



Sell Discussions

Item # 1 Sold Remaining BHK at $13.07 Update For CEF Basket Strategy As Of 3/21/16 - South Gent | Seeking Alpha (profit snapshot = $28.17)


Item # 4 Sold 200 of 300 BHK at Update For CEF Basket Strategy As Of 2/26/16 - South Gent | Seeking Alpha (profit snapshot = $47.43)


Pared Interest Rate Risk Exposure In Roth IRA: Sold 300 ACG At $7.81 And 200 BHK At $13.86 - South Gent | Seeking Alpha (profit snapshot = $99.55)


Item # 1 Sold 200 BHK at $13.86-Taxable Account-Completes BHK Transition to Roth IRA (1/14/15 Post)(profit snapshot = $75.23)-Item # 1 Bought 200 BHK at $13.4 (8/23/14 Post) 


Sold All of the Bond CEF BHK at $14.058 (2/21/12 Post)(profit snapshot = $68.3)


Total BHK Trading Profits: $318.68


B. Bought 15 GDO at $15.17 and 15 at $14.99-Used Commission Free Trades




GDO is a leveraged world bond CEF that is currently scheduled to liquidate its assets in December 2024. 



Current Position: 210+ shares

Maximum Position300 Shares + shares purchased with Dividends 

Purchase Restriction: Small Ball Rule  

Due to the persistent share price declines and widening discount to net asset value per share, I increased each purchase to 15 shares from the previous rate of 10 shares. 

Some of the selling is probably due to individual investors bailing and harvesting tax losses. 

Average Cost Per Share: $16.2

Dividends: Monthly at $.101 per share ($1.21 annually)

Last Ex Dividend Date: 11/21 (day after first 15 share purchase and before second)

Next Ex Dividend Date: 12/20/18

Dividend Yield at a Total Cost per share of $16.2 = 7.47%


Dividend Reinvestment: Yes 

Data Date of Purchase (11/20/18)
Market Price: $15.11
Net Asset Value Per Share: $17.17
Discount: -12%
Average Discounts: 
1 YR -8.3%
3 YR -7.99%
5 YR -9.15%

Data Date of Purchase on 11/23

Market Price: $14.98
Net Asset Value Per Share: $17.1
Discount: -12.4%

GDO Page at CEFConnect

I generally prefer to buy a CEF when the current discount to net asset value per share is greater than the 1, 3 and 5 year average numbers. The flip side is to consider selling a position when the following are present: (1) the discount substantially narrows below those numbers; (2) the net asset value per share has gone up since my purchase(s); and (3) several dividends have been paid. 


C. Bought 10 SUNS at $15.78; 10 at $15.68 and 10 at $15.3-Used Commission Free Trades





Quote: Solar Senior Capital Ltd.

Closing Price Yesterday: SUNS $15.57 -$0.07 -0.45% 

Last DiscussedItem # 3.B. Bought 20 SUNS at $16.3 and 10 at $15.81 (10/31/18 Post)


Chart: Weak since early October


I would attribute the weakness in October to the volatility and downside action in the stock market.


Staring in November, BDCs with floating rate loans have been under pressure due to increased concerns about a slowing economy next year and a change in the herd consensus about the future course of short term interest rates.


The new consensus is that the FED will not be raising rates as much as previously believed by the Bond Ghouls.


Current Position in this Account: 90+ Shares


Average Cost Per Share: $16.12

Highest Cost Lot: 30 shares at $16.62 (8/27/18) 

Maximum Position in this Account: 100 shares


Dividend: Monthly at $.1175 per share  ($1.41 annually)


Last Ex Dividend:  11/20/18


Dividend Yield at Average Total Cost Per Share = 8.75%

New 52 Week LowSUNS $14.90 (intra-day on 12/6/18) 


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

Solar Senior Capital Ltd. Announces Quarter Ended September 30, 2018 Financial Results; Declares Monthly Distribution of $0.1175 Per Share for November 2018  


NII = $.36 per share

Dividends: $.3525 per share




Net Asset Value Per Share as of 9/30/18: $16.81


Discount to NAV Per Share at Average Total Cost = - 4.1%


2. Short Term Bond/CD Ladder Basket Strategy

A. Bought 1 Treasury 2.25% Coupon Maturing on 3/31/20

YTM = 2.782%



I now own 2 bonds. 


B. Bought 1 Nextera Capital 2.4% SU Bond Maturing on 9/15/2019




I now own 3 bonds. I also own 2 Nextera Capital 2.7% SU bonds maturing on the same day. For this last purchase, the 2.4% coupon provided me with a higher YTM than the 2.7% coupon bond and was also available in a 1 bond lot amount. 


FINRA Page: Bond Detail (prospectus linked)


Issuer: Wholly Owned Subsidiary of NextEra Energy Inc. (NEE) who guarantees the notes


NEE Analyst Estimates


Credit Ratings: 




Bought at a Total Cost of 99.444

YTM at TC Then at 3.114%
Current Yield at TC = 2.4134%

C. Bought 1 Wells Fargo 3.25% CD (monthly interest payments) Maturing on 12/14/21 (3 year CD)




3. Long Term Bond Basket Strategy-First Mortgage Bonds


A. Added 10 ELC at $21.37:




Quote: Entergy Louisiana LLC  First Mortgage Bonds 4.875% Series due 2066 Stock Quote


Closing Price Yesterday: ELC $21.69 +$0.09 +0.41% 

Current Position: 60 shares


Maximum Position: 100 shares 


Average Cost Per Share: $22.86


Yield at TC Average Cost Per Share = 5.33%


Interest Payments: Quarterly 


Last Ex Interest Date: 11/29/18 (after this purchase)



Details:

PAR VALUE:  $25

Interest Payments: Quarterly at $.304688 per share
Yield at a $21.37 Total Cost Per Share = 5.7%   
Trades Flat 
Optional Call: On or after 9/1/2021 at par value plus accrued and unpaid interest
Maturity Date if Not Called: 9/1/2066 (OG will not be among the living)
Credit Ratings: A2/A
Prospectus 
Security: First Lien on substantially all Entergy Louisiana Assets 

Last PurchaseItem # 4.A. Added 20 ELC at $22.04 (12/17/18 Post)

Chart: Downhill since last August 2018



Entergy 2017 Annual Report (Energy Louisiana operations are discussed starting at page 326)

I also own first mortgage bonds issued by Entergy Louisiana that have $1K par values. I last discussed a purchase here: Item # 3.B. Bought 1 Entergy Louisiana 3.3% First Mortgage Bond Maturing on 12/1/2022  (4/23/18 Post)

4. Equity REIT Common and Preferred Stock Basket Strategy:


A. Bought 100 CA:DIR.UN at C$9.75 (C$1 IB commission):




Quotes:


CAD Priced Units: DIR.UN

USD Priced Units: DREUF (Grey Market-Dark with no bid/ask quotes and some brokers charge special fees to execute orders)

Closing Price Yesterday: DIR-UN.TO C$9.92 +C$0.06 +0.61% 

WebsiteDream Industrial REIT


This Canadian REIT owns 222 industrial properties with 20.1M square feet of gross leasable space and has been expanding into the U.S. Portfolio | Dream Industrial REITDream Industrial REIT Announces Continued U.S. Expansion and Acquisition of Montreal Logistics Facility 


Distributions: Monthly at C$.05833 (C$.7 per unit annually)


Yield at C$9.75 = 7.18%


Last Ex Dividend: The monthly dividend goes ex late in the month.




Dream Industrial REIT November 2018 Monthly Distribution


The last ex dividend date was on 11/29/18 with a payment date on 12/14/18.  


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




DIR_Q3-2018_Full-Report_Final.pdf


The FFO per share number was lower in this quarter, compared to the 2017 third quarter, due to share offerings and a reduction in leverage. Page 2: Dream Industrial Real Estate Investment Trust's (DREUF) CEO Brian Pauls on Q3 2018 Results - Earnings Call Transcript | Seeking Alpha



Prior Trade Snapshots:

I eliminated my position in the IB account earlier this year:



2018 DIR.UN +C$389
I also eliminated the position in my Fidelity account, selling 700 units at a CAD profit but at a USD realized loss of $6.68.



When Fidelity computes the profit in USDs, the gain is reported with the symbol DREUF, which is the USD priced units traded on the U.S. Grey Market. I bought and sold those shares in Toronto.


This security has been primarily an income play for my Canadian Dollar stash.


Canada will withhold a 15% dividend tax. I have been able to recover all foreign dividend taxes through a foreign tax credit using IRS Form 1116. It takes me about an hour to compile the information necessary to fill out that form which is burdensome. 


Claiming Foreign Taxes: Credit or Deduction? | Charles Schwab ("If your foreign tax credit is more than $300 for a single filer ($600 for married couples filing jointly), you will have to prepare Form 1116 to get the credit.") 


Last Equity OfferingDream Industrial REIT Completes $144 Million Equity Offering (6/29/18)("announced equity offering of units of the Trust ("Units”) at a price of $10.35 per Unit (the “Offering”). The syndicate of underwriters, led by TD Securities Inc., elected to exercise its over-allotment option in full, resulting in a total of 13,915,000 Units being issued today for total gross proceeds of $144,020,250.")


Dream Industrial REIT Reports Strong 2017 Financial Results, 140 bps Improvement in Occupancy Year-Over-Year and Successful Expansion Into U.S. Class A Industrial Market 


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. 

6 comments:

  1. Doug Kass: " The dividend yield on the S&P is about 1.8% compared to a one month Treasury note rate of 2.35%, a six month note yield of 2.54% and a one year note yield of 2.68%. Goodbye T.I.N.A. (‘there is no alternative’) to C.I.T.A. (‘cash is the alternative’). In terms of valuations, too many look at Non GAAP earnings (15-16x forward EPS) and ignore the record difference between Non GAAP and GAAP which would move the price earnings ratio to close to 20x. As well price to book, price to sales, market capitalization to GDP and Shiller cyclically adjusted P/E ratio speak (graphic) volumes about the degree of overvaluation today. "

    ReplyDelete
  2. One human characteristic that needs to be effectively addressed is confirmation bias.

    Confirmation bias prevents voters and investors from acquiring material information that is required to make an informed judgment.

    Instead, the focus is search wide and far for information that merely confirms pre-existing opinions that were formed with inadequate or no effort to acquire and understand relevant information. Unreliable information is used in that process, and any accurate data is invariably cherry picked or misinterpreted due to a myopic focus that excludes other material information.

    The U.S. economy and stock market are not capable of being assessed with a few isolated data points and an approach driven by confirmation bias.

    You see that lack of balance in several websites and missives.

    I see no advantage to viewing a glass as almost perpetually full of radioactive waste.

    The U.S. stock market now is being pulled and push by a variety of positive and negative economic forces.

    What we are seeing now may be the end game of the bull move since March 2009 or may end up as being just another buying opportunity in a long term secular bull market that still has room to run. I would not make a declaration ruling out either option now.

    Most of the U.S. economic data is positive, but negative undercurrents are present in important sectors like new construction. Then there are trade concerns that may or may not be resolved. It is also important to keep in mind that the republicans have not repealed normal economic cycles by giving tax cuts to corporations and the uber wealthy. The current expansion will soon be ten years old which is long by any historical standard.

    My main concern remains potential financial instability and another cycle of forced deleveraging that may result due to excessive debt levels. About 2/3rds of U.S. corporate debt will need to be refinanced over the next five years. A lot of that debt was used for non-productive purposes (e.g. stock buybacks, dividend increases) and consequently will not generate future earnings to service the debt. Then there is debt used to acquire businesses at inflated prices that later required huge write-downs since the acquisition will never generate the profits anticipated.

    I question the belief that the cure for a financial crisis caused by excessive debt is to accumulate vast amounts of new debt.

    If you want something to worry about, worry about whether the world is only making matters worse with this approach in that the next financial crisis will result in the incineration of dollars measured in the tens of trillions rather than trillions.

    The world has probably added close to $90 trillion in new debt since 2007. McKinsey and Company estimated that additional debt at $57 billion through the 2014 second quarter for developed economies and the 2013 4th quarter for China:

    https://www.mckinsey.com/featured-insights/employment-and-growth/debt-and-not-much-deleveraging

    The "global debt bomb" has grown to $247 trillion by the end of last year.

    See WP opinion column by Robert Samuelson published on 7/15/18:

    https://www.washingtonpost.com/opinions/the-247-trillion-global-debt-bomb/2018/07/15/64c5bbaa-86c2-11e8-8f6c-46cb43e3f306_story.html?utm_term=.97ca18041616

    As Samuelson notes, spending borrowed money can be stimulative until it is not. Then the accumulation of too much debt becomes deflationary as was the case in 2008:

    "Debt can either stimulate or retard economic growth, depending on the circumstances. Now we’re approaching a turning point, according to Hung Tran, the IIF’s executive managing director. If debt growth is not sustainable, as Tran believes, new lending will slow or stop. Borrowers will have to devote more of their cash flow to servicing existing debts."

    ReplyDelete
  3. The U.S. stock market faded into the close today.

    SPX fell about 35 points from the intraday high to close up 14.29 or .54%, near the low for the day.

    If the market had remained open for another 30 minutes, I suspect that the close would have been negative, possibly by more than -.5%.


    S&P 500 Index
    2,651.07 +14.29 +0.54%
    DAY RANGE 2,650.26 - 2,685.44

    My focus continues to be on generating more income by using a significant portion of proceeds from maturing short term bonds and CDs to buy higher yielding assets. Those assets include longer dated $1K par value bonds, potentially long term exchange traded bonds and equity preferred stocks, REITs, BDCs, and CEFs. In a possibly masochistic nip and tuck, I am buying in small lots regional bank stocks that were for the most part sold at significantly higher levels earlier this year or last year.

    I am also benefiting in rolling over lower yielding short term bonds and CDs bought over a year ago, where similar term securities can be bought at 50%+ higher yields than the maturing ones. The 1 year treasury bill was at .89% on 1/3/17, 1.83% on 1/2/18 and 2.7% today. So my cash flow would be rising steadily even without reaching for higher yields with less safe securities than a treasury bill or a short term FDIC insured CD.

    ReplyDelete
  4. The ECB has decided to end its 4 year old QE program but left it open end as to when it would cease reinvesting the proceeds from maturing bonds:

    https://www.reuters.com/article/us-ecb-policy/ecb-stops-its-printing-presses-even-as-growth-concerns-rise-idUSKBN1OB2YD

    Importantly, the ECB also decided to keep its -.4% benchmark rate in effect through at least next summer.

    https://www.ecb.europa.eu/press/pr/date/2018/html/ecb.mp181213.en.html

    The end of its QE program had been telegraphed and consequently there was no meaningful impact on the EUR/USD exchange rate.

    https://www.marketwatch.com/investing/currency/eurusd

    The German 10 year bond has not budged from its .282% yield.

    https://www.marketwatch.com/investing/bond/tmbmkde-10y?countrycode=bx

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  5. I corrected some information in this post relating to my ownership stake in SUNS. I own in my Fidelity account 90+ shares rather than 70 and the average cost per share in that account is lower than previously indicated at $16.12.

    I noted in this post and in several prior ones that a developing bear market in U.S. regional banks and U.S. small cap stocks can be a leading indicator for an upcoming economic downturn and/or a bear market in major U.S. stock indexes.

    Both regional banks and small cap stocks are continuing to show greater weakness than SPX and are accelerating their movements into their already formed bear markets.

    iShares Russell 2000 ETF (IWM)
    $143.05 -$1.77 (-1.22%)
    52 Week Range 141.45 - 173.39
    As of 1:56PM EST

    SPDR S&P Regional Banking ETF (KRE)
    $49.69 -$1.13 (-2.22%)
    Day's Range $49.66 - $51.02
    As of 1:56PM EST

    S&P 500 2,644.77 -6.30 (-0.24%)
    As of 1:57PM EST

    PG is propping up the DJIA after Merrill Lynch upgraded the stock to buy.

    The Procter & Gamble Company (PG)
    $96.25 +$2.22 (+2.36%)
    As of 1:58PM EST.

    ReplyDelete
  6. I have published a new post.

    https://tennesseeindependent.blogspot.com/2018/12/observations-and-sample-of-recent_16.html

    ReplyDelete