Wednesday, December 19, 2018

Observations and Sample of Recent Trades: FDUS, GNL, METPRA, PRPFX, SGP:AU

Economy

The government reported that retail sales, seasonally adjusted, increased .2% in November compared to October and were up 4.2% over November 2017. Retail Sales.pdf

Markit reported that the December flash estimate for its U.S. Services Business Activity Index fell to an 11 month low at 53.4


Empire State factory index slumps in December - MarketWatch


The stocks of public companies that are U.S. centric and economically sensitive are in bear markets. Regional bank stocks and BDCs are two of those sectors. The signal being sent is that a recession is likely within 12 months. Stock investors frequently end up forecasting recessions that do not happen in the expected time frame. 


Junk bond investors are not confirming that signal IMO. 


The junk bond ETF JNK has underperformed a similar duration treasury ETF since 10/1/18, but JNK's current yield and spread to comparable duration treasuries are not consistent with the recession forecast imbedded in BDCs price performance over the same period. 


SPDR Bloomberg Barclays High Yield Bond ETF Stock Chart 


U.S. junk bond spread over Treasuries narrows to post-crisis low | Reuters (10/4/18)



ICE BofAML US High Yield Master II Option-Adjusted Spread | FRED | St. Louis Fed


I would consequently regard the economic signals sent by economically sensitive stocks and junk bonds as inconsistent. 


The junk bonds owned by the JNK fund are generally publicly traded in the bond market. While I do not have a count, most of them are senior unsecured bonds and do have credit ratings.  



JNK Credit Quality Breakdown
The loans owned by BDCs are issued by private companies and those will be unrated by the credit agencies.  BDCs do own senior secured loans that may place the BDC in a better bankruptcy recovery position than the senior unsecured debt owned by junk bond funds. That is a general statement and would require a company specific analysis to know whether a particular secured loan is better than a rated unsecured junk bond. The weightings of first and second lien loans owned by BDCs do have a wide variance among them. 

We do know that the VanEck Vectors BDC Income ETF currently provides about twice the yield of JNK which does not appear consistent with the types of investments owned by those two funds. And there is no shortage of BDC stocks now that provide over 12% yields.   


BIZD - VanEck Vectors BDC Income ETF 


The main difference between BIZD and JNK at the moment is that the Bond Ghouls set the junk bond prices while panicky individual investors largely set BDC stock prices. 

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Markets and Market Commentary

Stock investors, you have now been warned for the last time - MarketWatch


Pimco advises investors to keep their ‘powder dry’ ahead of synchronized global slowdown - MarketWatch 


Most of my brokerage cash is in the Vanguard Prime Money Market fund. 


Another way that I keep "powder dry" is by having a constant stream of both maturing bonds and CDs and cash flow from interest and dividend payments. I can then aggregate those amounts and redeploy based on my assessments of the risk-reward balance for particular securities and asset classes on a continuing basis. 


JPMorgan, BofA Detect Hints of a U.S. Recession Looming in 2019 - Bloomberg JPM estimates a 35% chance of a recession next year, up from 16% in March. 

Goldman Sachs: Get defensive for 2019 as recession fears rise


When recession fear talk spreads, the fear can contribute to causing a recession as businesses become more cautious and reduce their hiring and expenditures and consumers tighten their belts some.   


More than half of S&P 500 stocks are now in a bear market - MarketWatch


The S&P 500’s lower low warns that the worst is yet to come - MarketWatch


Jeffrey Gundlach says the S&P 500 is headed to new lows: 'Pretty sure this is a bear market'


Goldman says U.S.-China not likely to reach trade deal by March and more tariffs are coming

Here’s more evidence that stocks are now facing a bear market - MarketWatch


U.S. banks quietly pull back from riskiest loans amid recession fears | Reuters


Boeing raises its dividend 20%, boosts buyback plan to $20 billion



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Tidbits: AT & T, CBGD

TCG BDC, Inc. (CBGD) Declares Special Dividend of $0.20 per Share | TCG BDC, Inc.


AT&T Increases Quarterly Dividend 2 Percent (as expected) 


Goldman downgrades Walgreens' stock to rare 'sell,' shares fall (12/14/18) I own 4 Walgreens 2.7% SU bonds maturing on 11/18/19: Bond Detail. I also own 2 Walgreens 3.3% SU bonds maturing on 11/18/21 discussed in Item # 2.C below. Bond Detail 


I sold during a bond rally last year 2 Walgreens 3.45% SU bonds maturing on 6/1/26.  



2017 Walgreens 2026 SU Bonds +$34.04
Item # 1.C. Sold 2 WBA 3.45% SU Bonds at 100.727 (7/12/17 Post)-Item # 1.D. Bought 2 Walgreens 3.45% SU Bonds Maturing in 2026 at a TC of 98.925(5/17/17 Post); 2026 Bond Detail

I have not owned the common stock in several years. Walgreens Boots Alliance Inc. (WBA) 


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S & P 500 Actual and Forecasted GAAP and NON-GAAP Earnings as of 12/13/18

This data is taken from S & P's website: S&P 500® - S&P Dow Jones Indices

Click "Additional Information Tab" and then "Index Earnings". The download will be into Excel. If that software is not on your computer, nothing will be downloaded. 



As Reported = GAAP
Operating Earnings = Non-GAAP

For the 12 months ending 6/30/18, the GAAP earnings were $125.48 and non-GAAP earnings were $140.37.  

For the 12 months ending on 12/31/19, the GAAP forecast is currently at $157.47  with the non-GAAP at $173.49. I view the future forecasts as overly optimistic which is almost always the case for future estimates. 

For example, in a July 2016 Instablog, I compared the actual and forecasted number for 2015. This is an excerpt from that blog:  



Update For Portfolio Positioning And Management As Of 7/24/16 - South Gent | Seeking Alpha

The S & P 500 closed yesterday at 2,546. Using the forward estimated 2019 GAAP earnings, the SPX P/E would be 16.16. The forward estimated 2019 P/E using the NON-GAAP forward estimates is 14.68.


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Portfolio Management


The focus continues to
be preservation of capital + cash flow generation. The following snapshots show the cash flow received last Monday in my Fidelity taxable account and further illustrates the capital preservation objective: 








The bonds referenced in the preceding snapshots are investment grade. 


It is important to me that both a bond or FDIC insured CD promise to make interest and  principal payments on certain dates. For as long as the FDIC and the bond issuers remain solvent, I am assured of receiving a guaranteed return on my investment that can be calculated precisely when the investment is made.  


Of the bonds listed, three make monthly interest payments: two bonds issued by the National Rural Utilities and one by GS (1 bond).  


There are two CDs that make monthly interest payments in these snapshots: Bridgewater (1 CD) and MB Financial (2).  


I also received $4K in redemption proceeds. 


A constant flow of proceeds from maturing securities allows me to redirect those funds into the same or different asset classes depending on my assessment of the then current risk/reward taking into account my investment objectives. Another reason is to mitigate interest rate risk that exists for as long as interest rates are rising.  


There are only three common stocks included in those snapshots and all are high dividend payers: Apple Hospitality (AAPL), Global Net Lease (GNL) and Terraform Power (TERP). I own AAPL in three other accounts and TERP in one other account. 


GNL and AAPL are equity REITs that make monthly dividend payments. The GNL purchase is discussed in Item # 1.B. below.  


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Fidelity's Persistent Mispricing of Tennessee Municipal Bonds

In the account section of my brokerage account, a value is assigned to bonds that do not reflect their true market value. Brokers use a third party to price the bonds. Whatever criteria is used by those third party services, the result is a systematic undervaluation of virtually all bonds that I own. 

Pricing for municipal bonds is generally far worse than corporate bonds. 

For example, I own the Knoxville Tennessee Electric 3% maturing on 7/1/2039 in my Fidelity account, priced today at 88.006 in my account section. The par value price would be 100 (pricing is at 1/10th of the actual $1K per bond par value)



Anyone who sold that bond at 88 would need to have a guardian appointed to handle their financial affairs. 

The security for this bond is the electric revenue for Knoxville's electric service. Tennessee is a public power state. My electric service is provided by the Nashville Electric Service, and TVA generates and transmits the power to municipally owned distribution systems or to customer owned distribution cooperatives.  

This bond pays tax exempt interest. The 20 year treasury bond closed yesterday at a 2.96% yield or below the tax free yield of this bond when bought at its par value of 100. 

So, you may be thinking that this municipal bond is rated at best BBB or lower to deserve that 88 price. The bond is rated AA+ by S & P which rates U.S. government debt at the same level. S&P Affirms U.S. Rating, Sees Last Minute Debt Fixes Continuing - Bloomberg If S & P is rating both the municipal bond and U.S. treasuries correctly, then the municipal bond price would need to be over 100 rather than 88 given its tax free interest payments.   

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Trump:

That was awkward — at world’s biggest climate conference, U.S. promotes fossil fuels


It is a tribute to Donald Trump to note that he is 72 old and has managed so far to avoid criminal prosecution for his misdeeds.  


Federal prosecutors probing Trump inauguration spending -WSJ


Maybe Donald is draining the swamp some that he created, but more swamp creatures are likely to emerge as replacements. Zinke to leave Interior amid scandals - POLITICOTrump's Interior Chief Zinke to Step Down Amid Ethics Probes 

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Just More Trump Fraud and Dishonest Dealings


As the Trumps Dodged Taxes, Their Tenants Paid a PriceTrump family tax schemes artificially inflated New York rents: NYT - Vox
Here’s a Name to Remember: All County Building Supply & Maintenance 

According to this article, the Trumps set up a phony corporation called All County Building Supply & Maintenance that was owned by Donald, his three siblings and a cousin. 


All County Building was ostensibly a purchasing agent for Fred Trump's buildings, but Fred Trump and his executives continued to perform all of the purchasing activities. 


The vendors received their checks from All County and then All County would be reimbursed by the Trump Apartment buildings with an extra 20% to 50% added in the reimbursement. 


"Because All County performed no real work, the transfer of money through the corporation was essentially a gift that evaded the 55 percent tax in place at the time, tax experts told The Times."


More importantly from my perspective, the phony transactions allowed the Trump Apartments, which were rent controlled, to jack up the rents based on the phony costs, hurting the middle class families who lived in them. 


Here Are the Trump Projects Where Ivanka and Her Dad Misled Buyers— ProPublica


Ivanka and Donald Trump Jr. Were Close to Being Charged With Felony Fraud— ProPublica


As it closes, Trump Foundation accused of 'shocking' illegalities | MSNBCA.G. Underwood Announces Stipulation Dissolving Trump Foundation Under Judicial Supervision, With AG Review Of Recipient Charities  | New York State Attorney General


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The Republicans and Insurance Coverage for Pre-Existing Conditions:


The republicans have done everything possible to repeal and gut Obamacare including the consumer protection provisions and the coverage for pre-existing conditions.


Their latest salvo involved a constitutional challenge filed by 20 republican controlled states. 


Those republican controlled states filed the lawsuit challenging the constitutionality of Obamacare in a federa
l district court that is probably the most likely one to rule in their favor. The judge selected by the republicans was federal district court judge Reed O’Connor who presides in Forth Worth, Texas.  


As expected, Judge O'Connor, a republican, came through for the republicans and held that the main provisions of Obamacare, including the one protecting those with pre-existing conditions, were unconstitutional. 


I found O'Connor's reasoning to be less than convincing, ridiculous is a better word, but there is no reason to go into that here.  (see e.g.
Legal experts rip judge’s rationale for declaring Obamacare law invalid - The Washington Post Opinion | What the Lawless Obamacare Ruling Means - The New York TimesThe ruling finding the Affordable Care Act unconstitutional is raw judicial activism and impossible to defend - The Washington PostWhile he is called a "conservative" by the media, O'Connor is just another radical reactionary who are being appointed in droves by republican presidents.  


The Trump Administration is not defending the law and is instead agreeing with the republican states that filed this constitutional challenge. 


Since the 20 republican controlled states and the Trump administration are on the same side, several Democrat controlled states intervened to defend against this latest republican attack on pre-existing insurance coverage and consumer protection provisions. Those intervenors will appeal to the Fifth Circuit Court of Appeals. The case may end up back in the Supreme Court. 


It is important to note that Josh Hawley, who defeated the democrat incumbent in Missouri, signed the complaint challenging the constitutionality on behalf of Missouri. During his campaign, Hawley claimed that he would protect coverage for pre-existing conditions that he sought to eliminate with his court challenge. Republicans Are Suddenly Running Ads on Pre-existing Conditions. But How Accurate Are They? - The New York Times  


The republicans who engaged in these fraudulent promises about continuing affordable insurance for those with pre-existing conditions point to a House resolution that insurance protection for pre-existing conditions should remain as proof of their sincerity on this issue.  H.Res.1066 - 115th Congress (2017-2018): Expressing the sense of the House of Representatives that protections for individuals with pre-existing conditions should be retained in law regardless of further amendments to, or the repeal of, the Patient Protection and Affordable Care Act. | Congress.gov | Library of Congress The resolution has not even passed the House (just buried in a referral to a committee) and would not have the force of law even if it did pass the House. 


If O'Connor's decision stands as is, about 17 million Americans will lose health insurance coverage including those who acquired their insurance through the Medicaid expansion and those who are receiving assistance through subsidies.  Donald called this "Great News":  



The republican alternative only contained an illusion about protecting those with pre-existing conditions. They gave with one hand and then took it away elsewhere in their bill as I discussed in a previous post. Pre-existing conditions: Does any GOP proposal match the ACA? | PolitiFact      
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A. Bought 400 SGP:AU at AUD$3.69 (A$6 commission at IB):




This brings me up to 1000 shares and reduces my average total cost per share to A$4.07. 

Previous Round-TripsItem # 1 Sold 500 SGP:AU at A$4.4 (10/30/17 (profit snapshot = AUD$63); Item # 2 Sold 500 SGP:AU at AUD$4.71(5/11/17 Post) (profit snapshot = AUD$99)

Trading Profits to Date: AUD$162 

Dividends: Semi-Annually

Dividend Yield7.18% at A$3.69 based on 2018 full year at A$.265 per share, up from A$.255 paid in 2017

The company is currently targeting a A$.276 distribution for the current fiscal year which would raise the yield to 7.48% at A$3.69. 


Last Ex Dividend Date:  6/28/18

Stockland Interactive Charts: The shares started to slid from A$4.3+ in mid-August for no particular reason that I could discern. 

Even though I owned 600 shares prior to this 400 share purchase, and I was aware of receiving both semi-annual dividend payments on that lot, I have not been paying much attention to this position. 

After noticing the share price, I read the most recent reports and noted that the A$3.69 market price was significantly below the A$4.18 tangible book value per share as of 6/30/18.  

The last earnings report looked okay so I averaged down with a 400 share buy.   



Last Earnings Report: Q/E 6/30/18 (also end of fiscal year)


B.  Bought 50 GNL at $20.13 and 10 at $19.47-Used Commission Free Trades




The 50 shares were bought before the monthly ex dividend date. The 10 share lot was bought on the ex dividend date. 


Closing Price Yesterday: GNL $18.76 +$0.29 1.57% 

Quote: Global Net Lease (GNL)


Website: Global Net Lease


GNL SEC Filings


2017 Annual Report


Management: External


Summary of Management Compensation and Terms:




"At September 30, 2018 the Company's portfolio consisted of 336 net lease properties located in seven countries and comprises 26.2 million rentable square feet leased to 106 tenants across 42 industries." 


"99.5% leased with a remaining weighted-average lease term of 8.6 years"


"92% of portfolio rent with contractual rent increases based on square footage"


"53% U.S. and 47% Europe (based on annualized straight-line rent)"


"55% Office, 36% Industrial / Distribution and 9% Retail (based on an annualized straight-line rent)"


Recent Share Offerings


Global Net Lease, Inc. Announces Pricing of Offering of Common Stock (11/28/18 Press Release)("underwritten public offering of 4,000,000 shares of common stock at a public offering price of $20.20 per share. In addition, GNL has granted the underwriters a 30-day option to purchase 600,000 additional shares of common stock."); Prospectus


There was a decline on my day of purchase due to a share offering. 


The company is IMO engaged in too many stock offerings. The prior offering was just 3 months prior to the last one. 


"On August 20, 2018, GNL completed the issuance and sale of 4,600,000 shares of common stock (including 600,000 shares issued and sold pursuant to the underwriters' exercise of their option to purchase additional shares in full) in an underwritten public offering at a price per share of $20.65. The gross proceeds from the offering were $95 million."


Global Net Lease, Inc. Announces Pricing of Offering of Common Stock (8/16/18 Press Release)


Dividend: Monthly at $0.1775 per share (annualized rate of $2.13 per share)


Global Net Lease, Inc. Announces Common Stock Dividend for Fourth Quarter 2018


Dividend Yield at $20.02 Total Cost Per Share10.64%


Last Ex Dividend Date: 12/12/18


Global Net Lease, Inc. (GNL) Dividend Date & History - Nasdaq


Current Position: 60 Shares


Maximum Position: 150 Shares 


Purchase Restriction: Small Ball Rule 


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


Global Net Lease Announces Operating Results For Third Quarter 2018



Cash Flow Calculations: 

Other News


Global Net Lease Provides Update on Third Quarter Acquisition Activity


Operating Expenses and Tenant Reimbursements10-Q for the Q/E 9/30/18 at page 46




2. Short Term Bond/CD Ladder Basket Strategy:

A. Bought 3 Six Month Treasury Bills Maturing on 6/6/19 (at auction)

IR=  2.562%


Auction Results: 



B. Bought 2 Kroger 3.3% SU Bonds Maturing on 1/15/21




I have 4 Kroger bonds maturing on 1/15/19. I am redeploying 1/2 of the expected proceeds into this 1/15/21 maturity. At the current time, I have only $7K in maturing bonds during January 2021 including this Kroger 2 bond purchase.  


Finra Page: Bond Detail (prospectus linked)


Issuer:  Kroger Co. (KR)

KR Analyst Estimates
Kroger Reports Second Quarter 2018 Results (Q/E ENDING 8/18)
Kroger Reports Third Quarter 2018 Results

Credit Ratings: 




Bought at a Total Cost of 99.389

YTM at TC Then at  3.602%
Current Yield at TC = 3.32%

C. Bought 2 Walgreens 3.3% SU Bonds Maturing on 11/18/21




FINRA Page: Bond Detail (prospectus linked)


Issuer: Walgreens Boots Alliance Inc. (WBA) 

WBA Analyst Estimates 
Walgreens Boots Alliance Reports Fiscal Year 2018 Results 

WBA Annual Report for the F/Y Ending 8/31/18 (debt listed and discussed starting at page 79)


Credit Ratings: 




Fitch Affirms Walgreens Boots Alliance at 'BBB'; Outlook Stable (10/12/18)


Bought at a Total Cost of  98.9 (with a $1 per bond commission)

YTM at Total Cost Then at 3.697%
Current Yield at TC = 3.3367%

I compared the bond prices at Vanguard and Fidelity before entering this order. 



Vanguard 6 available (2 minimum order) at 98.863
Fidelity 6 available (2 minimum order) at 98
It is clear to me that both brokers were quoting the lot offered by the same seller. I do not know whether Vanguard was juicing the ask price by .863 or whether Vanguard was using an intermediary that juiced the ask price by that amount. Vanguard would also charge $2 more in commission to buy a 2 bond lot. I would have been charged $10.63 more to place this order through Vanguard. This is one reason why I use several brokers. 

I also own 4 Walgreens 2.7% SU bonds that mature in November 2019: Bond Detail


3. Bought 50 METPRA at $22.58 ($1 IB COMMISSION):




QUOTE: MetLife Inc. Floating Rate Non-Cumulative Preferred Series A.


Category: Advantages and Disadvantages of Equity Preferred Floating Rate Securities


Security Description:

Prospectus
Coupon: Greater of 4% or 1% above the 3 month Libor Rate
Par Value: $25
Issuer: MetLife Inc. (MET)
Optional Call: At par value plus accrued and unpaid dividends-anytime now at issuer's option 

STOPPER CLAUSE: Yes



Alternative Rate Mechanism:



Last Ex Dividend: 11/29/18 (shortly after purchase of first 50 share lot)


This security is still paying its minimum coupon rate of 4%. Since I first bought this security, the 1% spread over the 3 month Libor rate has not been greater than the 4% minimum coupon. 


Maximum Position: 100 shares (will consider averaging down in the $17 to $19 range)


Trading Profits to Date$1,909.14


Links to Prior Trades:


Item # 1 Sold 100 METPRA at $24.95 (7/9/12 Post)(profit snapshot = $1,283.99)


Item # 1 Sold 50 METPRA at $23.27 in Regular IRA-Total Cost Per Share $13.26 (9/13/11 Post)(profit snapshot = $492.52)


Item # 1 Pared METPRA Sold 50 at $18.3 (8/31/2009 Post)(profit snapshot = $117.97)


There was one round-trip in 2009 that was apparently not discussed here:



2009 METPRA 50 Shares +$14.72
This type of security provides some problematic inflation protection through the Libor float while at the same time addressing the abnormally low interest rate scenario through the minimum coupon of 4%.  

4. Income Generation-BDCs:


A. Bought 50 FDUS at $13.87 and 30 at $12.63:





Quote: Fidus Investment Corp.
Company Website: Fidus
SEC FILINGS

Closing Price Yesterday:  FDUS $12.64 -0.01 -0.08% 

Chart: 




Last Substantive DiscussionItem # 1.C. Bought 50 Fidus at $14.43-Used Commission Free Trade (6/14/18 Post)


FDUS 1 Year Chart: Bear Market Trend Since early September 2018 (standard for BDCs) 


Regular Dividend: Quarterly at $.39 per share ($1.56 annually per share)


Special Dividend: $.04 per share


Last Ex -Dividend: 12/6/18  (after 50 share purchase and before 30 share purchase)


Both the regular and special dividend were ex dividend on 12/6 with a 12/21 payment date. FDUS has made a number of special dividend payments: 
Fidus Investment Corporation (FDUS) Dividend Date & History - Nasdaq


Dividend Yield11.23%  (excludes special dividends)


Dividend Yield with Special Dividend: 11.52% (assumes one 4 cent annually)


Dividend Reinvestment: Yes


Average Total Cost Per Share = $13.89


Current Position: 130 shares + Shares purchased with dividends


Maximum Position: 200 shares (raised from 100 shares due to price decline)


Discount to Net Asset Value at $13.89 = -15.36% Using 9/30/18 value


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


Fidus Investment Corporation Announces Third Quarter 2018 Financial Results 


Net Asset Value Per Share = $16.41 as of 9/30/18




"The weighted average yield on debt investments was 12.6% as of September 30, 2018."


"As of September 30, 2018, the fair value of our investment portfolio totaled $668.5 million and consisted of 65 active portfolio companies and one portfolio company that has sold its underlying operations."


"As of September 30, 2018, five debt investments bore interest at a variable rate, which represented $44.8 million of our portfolio on a fair value basis, and the remainder of our debt portfolio was comprised of fixed rate investments."


"As of September 30, 2018, we had debt investments in two portfolio companies on non-accrual status, which had an aggregate cost and fair value of $22.0 million and $9.1 million, respectively."


The two non-accruals are Restaurant Finance and K2 Industrial Services with the later being added to non-accrual status in the third quarter. 


Fidus Investment's (FDUS) CEO Ed Ross on Q3 2018 Results - Earnings Call Transcript | Seeking Alpha


10-Q for the Q/E 9/30/18 (investments listed starting at page 7)


10-K for 2017: (risk summary starts at page 33 and ends at page 59).  


Historical Net Asset Value Per Share (highly unusual increase since IPO)


9/30/18:  $16.41

3/30/18   $16.28
12/31/17  $16.05
12/31/16  $15.76 
12/31/15  $15.17
12/31/14  $15.16
12/31/13  $15.35
12/21/12  $15.32
IPO at $15 June 2011

5. Intermediate Term Bond/CD Ladder Basket Strategy


A. Bought 1 Vodafone 2.5% SU Bond Maturing on 9/26/22:



I now own 2 bonds. 

FINRA Page: Bond Detail (prospectus linked)


Issuer: Vodafone Group PLC ADR (VOD)

VOD Analyst Estimates 
Investors

Credit Ratings:  




I view the YTM as high for that credit ratings which suggests IMO that the Bond Ghouls are rating the credit one notch lower. The issue is probably related to the pending acquisition of Liberty Global's cable businesses in the Czech Republic, Germany, Hungary and Romania. 


Fitch Affirms Vodafone at 'BBB+'/Stable on Announced Liberty Global Transaction


Bought at a Total Cost of 95.094

YTM at TC Then at 3.896%
Current Yield at TC = 2.629

6. ADDED $100 to PRPFX at $36.4 and $100 at $35.75





Quote Permanent Portfolio I Class: Overview 

Sponsor's Website: The Permanent Portfolio Family of Funds




I added these amounts after the annual dividend was paid: 



Last Discussed: Item # 4.C. (10/28/18 Post);  Item # 2.B. (12/21/17 Post)


Last SEC Filed Shareholder Report


Trading Profits to Date: $898.7


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.

20 comments:

  1. Hello southgent,

    Thank you for continuing to write your blog. It is very instructive and helpful.


    I wondered what you thought of the Fed language today. And how much they will try to soothe the market after the rate raise. I'm fairly new to the markets and don't have the experience you do, but I have never seen a soft landing. I do not expect one this time.

    It is clear that many stocks are now in a bear market. It seems very odd that US centric companies are the ones in a bear market. It looks like a company like FedEx, could well be a leading indicator of the worldwide recession. FedEx notes a weakening Chinese economy and a major downturn in Europe.

    I wondered if you had thought about Europe as the politically unstable and financial cause of a worldwide recession. With a hard Brexit and so much political unrest in Europe .

    I wondered what you thought of the odds of worldwide recession this year leaking into the United States.

    . I know we had talked in the past about the dilemma of where to get income. And the dividend investors conundrum. I have solved this for the moment by selling into strength and following some of your bond suggestions, so I want to thank you for that.

    If you could answer about your thoughts on the odds of a recession and your worst case scenario next year for the S&P.

    I realize these are just guesstimates, but I have learned a lot from your thinking out loud.

    I noticed also the tremendous debt bubble in both governmental and barely investment-grade companies which have not turned a profit. I can't remember the percentage of Russell 2000 companies that are not profitable, but I know it is very high.

    My concern is a debt bubble popping in these nonprofitable companies and its consequences in 2019.

    Any thoughts on the above questions and comments would be very helpful


    thank you

    ReplyDelete
    Replies
    1. G: The most important aspect of the corporate debt burden is that most of the debt was not used to grow the businesses but to increase dividends and to fund share buybacks. While those activities will generally increase E.P.S. and the profitability of options liberally granted to management in an economic expansion for most companies, they do not increase net income and may become burdensome or even unserviceable for many companies during a recession and certainly a depression.

      The debt remains and will have to be refinanced over and over again, probably at higher rates, while the net income and total cash flow numbers used to service that debt are not boosted by the non-productive uses of the borrowed funds.

      There is a worldwide slowdown underway, but so far it is more of a slower growth from higher and unsustainable numbers which is particularly true IMO for the U.S. real GDP numbers for the 2018 second and third quarter.

      GDP in EU area (countries who use the Euro) slowed to 1.6% Y-O-Y in the third quarter and 1.8% in the EU28:

      https://ec.europa.eu/eurostat/documents/2995521/9437650/2-07122018-AP-EN.pdf/eadec005-b37c-42e2-a8e7-a8bfc2e74f1d

      As I stated in this blog, I do not view the current earnings estimates for the S & P 500 next year to be realistic. I still expect an overall higher number compared to 2017, and no recession next year unless the trade war with China escalates after the current three month truce. I would be satisfied now with 5% earnings growth in 2019 vs the actual 2018 number.

      There can be a substantial decline in the stock market that is simply based on a reset of valuations. While there was a recession in 2000-2002, most of the loss in the SPX was due to a valuation reset from clearly bubble valuations. The recession was dated as starting in March 2001 and ending in December 2001:

      https://www.nber.org/cycles.html


      That 50% reset in prices in 2000-2002 still left the the S & P forward non-GAAP P/E higher than the modern average level.

      The odds of a rate hike this afternoon has gone down some. I do believe that the FED should hike since a failure to do so now could send recession fears spiraling up. The FED could alleviate those fears by hiking .25% and then soft pedaling the likelihood of future increases some and talking positively about the economy. We will find out soon enough so there is no reason to speculate now.

      While there is a lot of hand wringing about interest rates now, I view that as more psychological than real and likely to be self-serving when uttered by money managers and the uber rich who want historically abnormal interest rates to continue until the end of days since that juices their returns.

      Delete
  2. "Anyone who sold that bond at 88 would need to have a guardian appointed to handle their financial affairs."

    Conversely, would anyone who bought that bond at $88 be getting an incredibly good deal?

    Cui bono?

    ReplyDelete
    Replies
    1. Cathie: Compared to the 20 year treasury, it would be a good deal to buy that municipal bond at 88.

      However, with the usual ifs, ands, and buts caveats, both the 20 treasury and the 2039 Knoxville Electric Revenue bonds may end up being terrible investments over the life of the bonds.

      With my Tennessee Municipal bonds, I am just working myself up to $10K per year in tax free income. I am currently at $8,274 in tax free interest per year. The earliest maturity is in 2026.

      I am not in a trading mode for municipal bonds and have not sold any. Unlike the corporate bonds that I own, they would be tough to sell due to a lack of liquidity.

      With a bad recession or worse, I may elect to sell at least one holding provided the profit is enticing enough.

      Delete
    2. Thanks, that is pretty much the same conclusion I came to...the long duration and lack of liquidity are problematic.

      I imagine these tax free municipal bonds are scattered throughout many bond funds funds offered by Fidelity (and other brokers), and are subject to whatever mysterious algorithms govern their trading activities.


      Delete
  3. The FED did raise the FF range by .25% to 2.25% to 2.5%, but the policy statement and dot plot was not dovish enough.

    The majority did reduce its rate hike expectation to two .25% hikes from three. The market is still looking for one as more likely than not.

    Dot Plot:

    https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20181219.htm

    FED Statement:

    https://www.federalreserve.gov/newsevents/pressreleases/monetary20181219a.htm

    ReplyDelete
  4. The stock market has broken through all arguable support levels. I can not look at the market internals, which are awful, and point to anything that says the bottom is near.

    Today was particularly ugly in that the bulls were sucked into a morning rally and were then gored in what I would describe as panic selling in the afternoon.

    What is odd about today is that the VIX did not confirm the market's downturn:

    CBOE Volatility Index
    25.38-0.20 (-0.78%)
    https://finance.yahoo.com/quote/%5EVIX?p=^VIX

    That number is still elevated and could pop higher at anytime.

    This non-confirmation at least suggests that today was a temper tantrum thrown in response to the FED's monetary policy announcement.

    What was the FED to do exactly to appease the Stock Jocks. It was not realistic for the FED to go from anticipating 3 quarter point hikes next year to 1 or none.

    The FED remained positive on the economy.

    What if the FED has said that the economy is sinking into the abyss and the next action will be to cut rates?

    I have turned off the reinvestment of most mutual fund dividends last year before the year end distributions. That includes all of my Vanguard and T.Rowe Price mutual funds. For those funds, I am keeping the option as payment in cash which is a slightly bearish move for me.

    I received yesterday the annual dividend paid by the Vanguard Health fund in cash and redirected $250 of that amount back to buy shares at today's close.

    High quality bonds continue to be the asset class that is working and that is what I mostly own.

    iShares 7-10 Year Treasury Bond ETF
    $103.26 +0.36 +0.35%

    The longest duration treasury ETF had the largest percentage gain today among treasury ETFs:

    PIMCO 25+ Year Zero Coupon U.S. Treasury Index ETF
    $114.13 +$2.5271 +2.26%
    https://www.marketwatch.com/investing/fund/zroz

    Duration: 27.4 years
    http://www.pimcoetfs.com/Funds/Pages/PIMCO25+YearZeroCouponUSTreasuryIndexFund.aspx?WT.svl=fund_nav

    A treasury stripped of a coupon has a longer duration than a treasury with the coupon maturing at the same time. Semi-annual cash interest payments reduce the duration for the later.

    General Mills did buck the downtrend today after reporting earnings:

    General Mills Inc.
    $38.55 1.85 5.04%

    But the stock is giving up that gain in after hours trading so far:

    https://www.marketwatch.com/investing/stock/gis

    I have been adding to my position with small odd lot purchases using commission free trades. The last buy was 5 shares at $36.75.

    U.S. 10 Year Treasury Note
    2.775% -0.044%
    Last Updated: Dec 19, 2018 at 4:46 p.m. EST
    https://www.marketwatch.com/investing/bond/tmubmusd10y?countrycode=bx

    U.S. 2 Year Treasury Note
    2.646%
    https://www.marketwatch.com/investing/bond/tmubmusd02y?countrycode=bx

    U.S. 5 Year Treasury Note (inversion with the 2 year)
    2.627 %
    Last Updated: Dec 19, 2018 4:47 p.m. EST
    https://www.marketwatch.com/investing/bond/tmubmusd05y?countrycode=bx


    U.S. 3 Year Treasury Note (flat with the 5 year, inverted to the 2)
    2.622%

    https://www.marketwatch.com/investing/bond/tmubmusd03y?countrycode=bx

    ReplyDelete
  5. FSIC and CCT completed their merger with FSIC being the surviving corporation. The new name for this BDC is "FS KKR Capital". The ticker symbol has been changed as well to FSK.

    https://www.prnewswire.com/news-releases/fskkr-announces-closing-of-merger-of-fs-investment-corporation-and-corporate-capital-trust-300768935.html

    https://finance.yahoo.com/quote/FSK?ql=1&p=FSK

    ReplyDelete
  6. Just bad JUJU. On a more positive note, there is only one trading day left in the week.

    The market accelerated to the downside after Donald asserted that he would not sign the temporary funding bill passed in the Senate yesterday.

    https://www.cnbc.com/2018/12/20/ryan-says-trump-will-not-sign-senate-passed-bill-to-avoid-government-shutdown.html

    Nothing much worked today, including treasuries.

    Precious metals managed a bounce but who cares about an untradable tiny bounce in a long term secular bear market.

    The electric utility sector had several stocks move higher.

    E.G.
    American Electric Power Company (AEP) +$ 77.62 +$0.76

    Duke Energy Corporation (DUK) $ 88.14 +$0.91

    Entergy Corporation (ETR) $87.34 +$0.50

    There were some isolated green arrows in several exchange traded first mortgage bonds, preferred stocks and leveraged bond CEFs.

    Some regional banks had fractional gains but who cares when their prices have already been mauled well into bear market territory.

    BDCs are being beaten into smithereens. The concern underlying that bear trend is recessionary fears that are also negatively impacting U.S. centric businesses as shown in the relative performance of the Russell 2000 and regional banks compared to SPX over the past several months.

    iShares Russell 2000 ETF (IWM)
    $131.78 -$2.22 (-1.66%)
    52 Week Range $130.23 - $173.39

    IWM's 52 week high was hit intra-day on 8/31/18. The decline from that recent high to today's close is 24%.

    The VIX movement did confirm the down day in SPX.

    CBOE Volatility Index
    28.38 +2.80 (+10.95%)
    https://finance.yahoo.com/quote/%5EVIX?ql=1&p=^VIX

    I now have Day 1 in my Trigger Event count.

    Historically, there was a return in the VIX to below 20 after a TE that provided a better opportunity to sell than during the heightened volatility period. I just call that return a "recovery period" as the bulls mount a charge.

    Another trading technique that I have used in the past was to step up buying when the VIX accelerates to over 30 in anticipation of selling when the VIX returns to below 20 movement. That may or may not work. It did not work for example after Lehman's failure in September 2008, when there was already an ongoing Unstable Vix Pattern. The VIX went into the 30s and then launched into outer space during October which was the buy event rather than the movement into the 30s.

    I am about 90% in cash, investment grade corporate bonds, treasuries and very high quality Tennessee Municipal Bonds. So I can take a few gambles with incoming cash flow.

    I did not do much today other than to sell one long standing position to reap a profit which I will mention in my next post.

    I will invest a few bucks on these down days without fail in Fidelity's Total U.S. Stock Market Index fund (FZROX), a NTF fund for Fidelity customers, which has a zero expense ratio and no minimums.

    I would note that the Stock Jocks frequently price a recession risk that does not happen in the time frame contemplated by them. Several sectors in bear market territory already price a garden variety recession developing next year.

    ReplyDelete
  7. My 2025 Ford bonds are now @87.50, that's why, under your posts, I only put $15K into these bonds, I think you said Ford did suspend their dividends on common stock, so I am hoping they do that again before the default on bonds
    CUSIP:

    34540TKG6

    ReplyDelete
  8. You own a Ford Motor Credit ("FMC") bond.

    I will have some exposure to that issuer but will keep the maturity period much shorter. I currently own 1 FMC 2.4% SU bond maturing on 3/20/20 and 1 FMC 2.8% SU maturing on 6/20/22. I have passed on buying more.

    Ford will eliminate its common stock dividend when under serious financial strain or possibly to preserve an investment grade rating on its debt. The last elimination lasted about 5 years starting in 2006.

    https://seekingalpha.com/symbol/F/dividends/history

    Before eliminating it, there were several cuts starting in 2000 going from a quarterly rate of $.48 to $,05 for the 2006 third quarter which then went to zero before restarting at $.05 in the 2012 first quarter. This information is available to everyone on the internet.


    "Ford Credit also has a support agreement with Ford, which requires Ford to make capital contributions to Ford Credit if Ford Credit's leverage ratio (defined as net debt to equity) were to be higher than 11.5x."
    https://www.fitchratings.com/site/pr/10031508
    Fitch at BBB

    My fixed income portfolio, now at around 90% of the total, consists of FDIC insured CDs and investment grade bonds, with the bonds weighted in treasuries, Tennessee Municipal bonds (none rated lower than A- and most rated AA to AAA), and investment grade corporate bonds rated BBB+ or better. I have ventured down to BBB and BBB- but have done so sparingly.

    ReplyDelete
  9. South Gent,

    Re. "I am about 90% in cash, ...." that is a new and enviable level of defensive asset allocation in this volatile market and I thought I had a pretty high level of cash allocation. Having been following your blog for a long time I should have known better.

    ReplyDelete
    Replies
    1. Y: My most important change was to allocate into short term bonds and CDs using a ladder strategy that has an average of $40K per month in proceeds from maturing securities. That process started in 2017 and has been documented here.

      Some months between now and January 2021 have a few thousand less than $40+K in maturities and a few has more than $60K like the current month, but those light months will be filled with some proceeds from maturing securities. That continuous flow in proceeds is the most important adjustment that I have made. It adds to cash flow from interest and dividend payments which was the primary source of stock purchases between 9/2008 and 2/2009. This constant and continuous flow of cash allows me to reallocate back into risk assets at a measured pace since I do not know when the declines will end.

      This reallocation back into stocks will be slow.

      For example, I eliminated VEIRX last June raising $48.7K+ in proceeds this year.

      1. Eliminated Position in the Vanguard Equity Income Fund Admiral (VEIRX) Mutual Fund
      https://tennesseeindependent.blogspot.com/2018/07/observations-and-sample-of-recent_5.html

      Some proceeds were raised out of that fund in the late months last year.

      I eliminated the Vanguard Equity Income investor class shares (VEIPX) in 2016:

      Item # 3
      https://seekingalpha.com/instablog/434935-south-gent/4866986-update-portfolio-positioning-management-4-1-16

      I pared VEIPX during the First Recovery Period after the last Trigger Event, selling more recently purchased and higher cost shares:

      Scroll to B. Some Trigger Event Motivated Sells: 1. Pared Vanguard Equity Income Fund Position:

      https://seekingalpha.com/instablog/434935-south-gent/4457166-update-portfolio-management-positioning-10-24-15

      I will go back into VEIPX at some point, possibly soon, with a $3,000 starting investment. The closing price today was at $31.28

      https://www.marketwatch.com/investing/fund/veipx

      I still view the current decline as relatively mild given my historical experience.

      At the present time, I am buying small lots using the small ball rule mostly in sectors that are already in bear markets. I am not having to wait long to buy at lower prices. All of this is highly disciplined; and I have no illusion about capturing tops or bottoms.

      Delete
    2. Y: I mentioned in this August 2018 post that my stock position had been reduced to 10% of my assets held in brokerage accounts:

      https://tennesseeindependent.blogspot.com/2018/08/update-for-portfolio-positioning-and.html

      See my comment to Cathie's question in that post.

      Delete
  10. South Gent,

    I think I am prepared for the storm that is coming (but not as well prepared as you are). Do you think this one will ever amount to the scale like the one in 2008-2009?

    ReplyDelete
    Replies
    1. Y: At the moment, I view the stock market decline as a garden variety valuation reset that takes some of the fluff out of future earnings forecasts. Look at the 2019 forecasts that I reproduced in this blog which are bizarre IMO.

      However, there is simmering below the surface the potential for something worse than 2008 resulting from another forced deleveraging cycle that incinerates far more capital than previously thought possible.

      My crystal ball does not see that happening anytime soon, but alas the future is unpredictable with the certainty that we would like to have and which would make us feel comfortable.

      One can only identify the actual and potential problems, assign probabilities to future scenarios, keep an open mind that allows the assimilation of new information, and stay informed about what is happening in the real world (as distinguished from the stock market) that may require changes in the near term forecasts.

      Delete
  11. The Nasdaq Composite joined the Russell 2000 in bear market territory after flirting with that designation yesterday.

    CBOE NASDAQ 100 Volatility Index
    33.87 + 2.87 +9.26%

    The day count for a Trigger Event classification is now at Day 2:

    CBOE Volatility Index
    30.11 +1.73 +6.10%
    https://www.marketwatch.com/investing/index/vix

    DJIA Volatility Index
    28.19 +1.53 +5.74%

    The movement in these volatility indexes is consistent with the declines in those stock indexes.

    Perhaps the Stock Jocks have come to a realization that Donald may not be the best President in U.S. history who will be taking the U.S. economy into a perpetual growth machine.

    The spike in volatility today did cause me to throw more cash into risk assets than the previous down days. I probably went over $3K with common stock and stock fund shotgun purchases using commission free trades, but most of the redeployment involved REIT equity preferred stock purchases. One purchase was 70 shares in GMREPRA at $22.75, bringing my total position up to 100 shares which is also the maximum position. I mentioned when discussing the GMRE common stock elimination that I may use the proceeds to buy the preferred stock which has a superior claim to cash.

    Global Medical REIT Inc. 7.5% Cum. Redeem. Pfd. Series A
    $22.95 -$0.5464 -2.33%
    DAY RANGE 22.42 - 23.75
    52 WEEK RANGE 22.03 - 25.87

    I view this equity preferred stock to be preferable at the moment to the common shares but both are risky IMO. It is not helpful to the preferred shareholder for the common dividend to exceed free cash flow or to be close to that number.

    Even though this preferred stock is viewed as equity capital in the capital structure, and is traded flat like a common stock, it has more in common with a bond than the common stock. Sure, the preferred stock is potentially perpetual with no fixed maturity date, and is junior to all bonds in the capital structure. The fixed coupon however is bond like as is the issuer's inability to cut or eliminate the preferred dividend.

    Nonetheless, during times of market stress for common stocks, as now, preferred stocks will act more like the common shares even though their owners have no equity interest in the business but only a superior claim to cash compared to the common shareholder. The dividends are also cumulative and can not be cut but only deferred after the company ceases paying cash dividends to common shareholders.

    High quality bonds did manage fractional gains.
    $103.22 +$0.09 +0.09%
    iShares 7-10 Year Treasury Bond ETF

    https://www.marketwatch.com/investing/fund/ief

    I did not view the comments made by the N.Y. FED President this morning as reflecting a change in FED policy announced earlier in the week. The Stock Jocks thought for a brief time that there was something new and different but that was just an illusion.

    ReplyDelete
  12. South Gent,

    "... equity preferred stock to be preferable at the moment to the common shares but both are risky ....". I have read many times your past blogs on the preferred to stay away from most, except a few with appreciation potentials. In this market I sell puts to acquire the high yielding equities that I like at lower price. I can't always catch the bottom, but I get paid to wait.

    is today your Day2 in the VIX Model day count? I'd like to focus on your VIX model to help me navigate the coming storm.

    ReplyDelete
    Replies
    1. Y: I will flip small positions in the REIT equity preferred stocks, viewing them with some disfavor. The total profit is just over $8K with multiple small trades starting in 2008:

      snapshots at
      https://tennesseeindependent.blogspot.com/2009/06/reit-cumulative-preferred-links-in-one.html

      I do not regard them as anything other than trading vehicles where the goal is a total return in excess of the dividend yield.

      The preferred stock does not represent an equity interest in the business, which is a negative IMO, and the priority in the capital structure is below all bonds and mortgages.

      Still for a GMREPRA, the dividend is better protected than the common share dividend. while providing a similar yield, which is why I prefer it now to the common shares.

      It has been about five years since I was able to buy some with appreciation potential other than the convertible preferred EPRPRC which I have now sold.

      During the interest rate spike in 2013, a number of them fell to 20% or so discounts to their $25 par values.

      The higher yielding ones from better issuers have been redeemed and replaced with 6% or lower coupons. Those will require even more depreciation in price before hitting an 8% current yield.

      To hit 8%+ now with an equity REIT stock, it is necessary to assume more than normal levels of risk which is the case for my 70 share purchase of GMREPRA at $22.75.

      I recognize that I may become an involuntary long term holder in my recent buys. The prices for REIT preferred stocks will behave badly during spikes in intermediate term interest rates and/or highly volatile conditions in the stock market. The later is responsible for the price slides starting in October with the repercussions actually being more serious than the earlier spike this year in intermediate term interest rates.

      On the Vix Day Count, today was Day 2 in the Trigger Event Count. (see discussion in my prior comment).

      In the past there has been a Recovery Period after Trigger Events when the market rallies and the VIX falls back below 20. Most of the time the move back up has a similar result as the Charge of the Light Brigade in that it looks inspiring until the slaughter starts. The Recovery Period after the August 2007 TE is just one example.

      The Recovery Period, usually short in time, has provided in the past better opportunities to lighten up than the period during the TE. The Model, however, is agnostic on whether one will occur in the future, noting only they have occurred in the past.

      I am doing very light buying into the volatility spike. If there is a return to below 20 movement, I may lighten up some on what I have been buying recently.

      I have $17K in maturities next week and about $3K of that sum will be redeployed into stock or sector weakness. The rest will be rolled over into 6 month treasury bills starting in early January 2019 and $1K or $2K into the 1 year T Bill auction on 12/31/18.

      Delete
  13. I have published a new post:

    https://tennesseeindependent.blogspot.com/2018/12/observations-and-sample-of-recent_23.html

    ReplyDelete