Wednesday, December 26, 2018

Observations and Sample of Recent Trades: AGNC, AHTPRI, ARGD, HTPRD, IRM

Economy

The New York FED's economic model is now predicting a 2.48% increase in GDP for the current quarter and 2.1% for the 2019 first quarter. Nowcasting Report - FEDERAL RESERVE BANK of NEW YORK


Trump tariffs would make a 'steel slat' border wall much more costly

It is important to keep the current Federal Funds rate in historical perspective: 




The current FF range will not have any negative impact on economy. The FED has only moved the rate up to historically abnormal levels. The current level is still extremely low given the current U.S. unemployment rate and GDP growth. 


And, interest rates from two to thirty years have declined over the past three months. 2018 Daily Treasury Yield Curve Rates The ten year treasury yield, for example, was at 3.23% on 10/5/18 and closed at 2.74% last Monday. 


The market is not declining based on interest rates, but on a reset in earnings expectations that investors now believe were too high. That is partly due to the Stock Jocks going from pricing no recession risk over the next 18 months to a meaningful risk of a recession. 


Donald will blame anyone other than himself for the stock market's slide. 


Chairman Powell has just become a convenient whipping boy for Demagogue Don: 



It is my opinion that Donald is the one who is ignorant and unwilling to learn.  

While the Trumpsters believe that Don the Con is competent and a "Stable Genius", I believe that a growing number of investors are viewing him for what he is, an incompetent, impulsive, delusional, belligerent, mean spirited and ignorant leader who knows no boundaries in creating chaos. 


That realization hit a crescendo over the past week IMO, since it was no longer possible to pretend, except for the brain dead, that Donald was anything other than what he is.  I believe the market would do better or at least stabilize if Donald just shut up rather than reminding everyone daily that he is an incompetent, impulsive, ignorant and lying demagogue. 

  
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Markets and Market Commentary

The S & P 500 joined the Nasdaq Composite and Russell 2000 in bear market territory with last Monday's close at 2,351.1. That is 20% below its recent 52 week high of 2,940.91. 


S&P 500 Enters Bear Market-Worst Christmas Eve Decline in U.S. History 


The DJIA closed last Monday at 21,792.2, down 19.41% from its recent 52 week high at 26,951.81.


I would just call it a bear stock market, hopefully a cyclical one that corrects excesses of the run up since the 2016 election before resuming an uptrend. 


The two year treasury note closed at a 2.557% last Monday. The 200 day SMA line is at a 2.62% yield. U.S. 2 Year Treasury Note Interactive Chart I am not interested in buying that note at auction at less than a 2.8% yield. 


This is noteworthy. David Tepper is buying stocks after market's worst week in a decade


Without actually totalling up the numbers, recent common stock and stock fund buying has probably increased my stock allocation by 1%.  


‘Robin Hood of Wall Street’ says be wary of Trump’s advice to buy stock-market dip - MarketWatch


The technical bounce that’s ready to drive the S&P 500 back to 2,700 - MarketWatch

Bridgewater's Jensen forecasts 'near-recession-level growth' in 2019 | ReutersWorld’s biggest hedge fund says stocks aren’t pricing in ‘near-recession’ U.S. growth next year - MarketWatch I disagree with that assertion as a too broad over statement. There are sectors in the market that have priced a garden variety recession within 12 months. Regional bank and small cap stocks are two examples. Those sectors could continue to decline in price since bear markets frequently overshoot to the downside. Those sectors, which are already in bear markets with greater than 20% declines, could go lower based on fundamental factors, rather than internal dynamics of the market and investor behavior, with a deeper and/or longer lasting than normal recession. They would implode again in price with a Near Depression or another Great Depression.  

Buckle up: PNC's Jeff Mills sees another scary market ride in 2019


Investing: Global bear market just starting, worst to come in 2019


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Trump


President Trump has made 7,546 false or misleading claims over 700 days - The Washington Post (12/21/2018) I really had no idea that any human could publicly lie so much. Yet 69% of republicans view Donald as honest. 

National (US) Poll - September 10, 2018 - U.S. Voters Believe Anonymous | Quinnipiac University Connecticut  

Russian Efforts to Install Trump as President:


On a bipartisan basis, the Senate Intelligence Committee employed independent research firms to examine the data relating to Russian interference in the 2016 election. 


Those researchers found that the Russians were actively involved in helping Donald defeat his republican challengers in the primaries and to defeat Hillary in the general election. 


One conclusion was that Russia attempted to suppress turnout from African American and Bernie Sanders voters. 


"The voter suppression effort was focused particularly on Sanders supporters and African-Americans, urging them to shun Mrs. Clinton in the general election and either vote for Ms. Stein or stay home."


Russian Effort to Influence 2016 Election Targeted African-Americans - The New York Times republished by MSN at Russian Effort to Influence 2016 Election Targeted African-Americans


“What is clear is that all of the messaging clearly sought to benefit the Republican Party — and specifically Donald Trump,” the report says. “Trump is mentioned most in campaigns targeting conservatives and right-wing voters, where the messaging encouraged these groups to support his campaign. The main groups that could challenge Trump were then provided messaging that sought to confuse, distract and ultimately discourage members from voting.”


Trump has admitted targeting African Americans in order to suppress their support for Hillary. Russia’s Voter Suppression Operation Echoed Trump Campaign Tactics - Bloomberg


New report on Russian disinformation, prepared for the Senate, shows the operation’s scale and sweep - The Washington Post


Russian disinformation teams targeted Robert S. Mueller III, says report prepared for Senate 


Trump of course targets Mueller in his own false information campaign. 



++++++

Donald hires only the best people according to no less an authority than Donald himself. 


After being rebuked as an incompetent President by the outgoing Defense Secretary Jim Mattis, Donald installed two months early Patrick Shanahan as the acting Defense Secretary. 


Mr. Shanahan has no military experience and almost no experience with foreign policy. He was a former Boeing executive who reached the Senior Vice President level after 30 years with that company.    


Rather than leading, Trump will be throwing red meat to the reactionaries for as long as he is President. ‘This is tyranny of talk radio hosts, right?’: Limbaugh and Coulter blamed for Trump’s shutdown  


Giuliani stumbles into admitting Trump’s hush money payments were probably illegal


GOP State Senator and former Co-Chairman's of Trump's Campaign in Georgia, who drove 'deportation bus' to sanctuary cities, has been indicted on insurance fraud charges


+++++++

1. Equity REIT Common and Preferred Stock Basket Strategy:

A. Bought 50 HTPRD at $20.11-In a Roth IRA Account:




Quote: Hersha Hospitality Trust 6.5% Cumulative Preferred Series D Stock


Closing Price Last Monday: HT-PD $20.20 -$0.15 -0.74% 

I discussed this purchase in a previous comment.  

Last Discussions:

Item # 1.A. Bought 50 HTPRD at $22.3-Used Schwab Commission Free Trade  and Item # 1.B. Bought 50 HTPRD at $21.34-In a Roth IRA Account (11/11/18 Post)





Security Description:
Par Value: $25 Final Prospectus Supplement
Optional Call Date: On or after 5/31/21
Cumulative Dividends: Yes
Stopper Clause: Yes  
Dividends: Paid Quarterly
Last Ex Dividend Date: 9/28/18 
Next Ex Dividend Date: 12/28/18
Maturity Date: Potentially perpetual subject to issuer's call right
Qualified Dividends: No, pass through entity; Hersha Hospitality Trust Announces Dividend Classification for 2017

Average Cost Per Share Roth IRA Account: $20.865


Dividend Yield at TC Cost Per Share This Account: 7.79%


B, Bought 30 AHTPRI at $21.86-Used Commission Free Trade:




QUOTE: Ashford Hospitality Trust 7.5% Preferred Series I


Closing Price Last Friday: AHT-PI $19.30 -$0.79 -3.93% 

Last Discussed: Item # 2.A Bought 50 AHTPRI at $23.69-Used Schwab Commission Free Trade  (6/21/18 Post)


In that post, I stated that an additional purchase was unlikely given the heightened credit risk of this issuer.


The yield become sufficiently tempting that I went ahead and bought 30 more shares. I may add another 20 shares, using a commission free trade, when and if the price sinks below $20. I will likely sell the 50 share lot bought at a total cost of $23.69 for whatever profit may exist hereafter.


I view this REIT as excessively leveraged given the cyclicality of the hotel business. AHT is externally managed by Ashford Inc. See, 2017 Annual Report at pages 18-21 regarding conflicts of interest


Current Position: 80 Shares (two accounts) 


Maximum Position: 100 Shares (one more 20 share purchase using a commission free trade allowed)

Security Description:


Issuer: Ashford Hospitality Trust Inc (AHT)-A HOTEL REIT

Prospectus
Par Value: $25
Optional Call by Issuer: At par value plus accrued and unpaid dividends on or after 11/17/22
Capital Structure: Senior only to common stock
Stopper Clause: Yes (enforces preferred shareholders superior claim to cash vs. common shareholders only)
Dividends: Quarterly, Cumulative and Non-Qualified (pass through entity)
Dividend Yield at TC of $21.86 (TC 30 share buy) =  8.58%
Next Ex Dividend Date: 12/28/18 

Last Earnings Report: 9/30/18


Ashford Reports Third Quarter Results

10-Q for Q/E 9/30/18  (note the debt listed starting at page 20; debt at $3.894+B; list of hotels starting at page 58)

CEO Douglas Kessler on Q3 2018 Results - Earnings Call Transcript | Seeking Alpha


Hotel REITs are considered to be economically sensitive, more so than other REIT sectors other than possibly REITs that own office buildings in secondary markets with low barriers to entry. 


C. Sold 10 IRM at $33.91-Used Commission Free Trade:




Quote: Iron Mountain Inc. (IRM)


Closing Price Last Monday: IRM $30.64 -$1.49 -4.64% 

Profit Snapshot: $12.24




I sold my highest cost lot purchased at $32.69: Item 2.C. Bought 10 IRM at $32.69 and 10 at $31.95-Used Commission Free Trades  (3/19/18 Post)


I recently bought two 5 share lots at $30.65 and $30.3. Item # 3.B (11/4/18 Post)(last quarterly report discussed in that post) 


Current Position: 25+ shares

Average Cost Per Share: $31.21


Maximum Position: 100 shares


Purchase Restriction: Small Ball Rule (the lowest price paid in the chain is currently at $30.3) The next purchase would be buy back the 10 share lot sold at $33.91 somewhere between $29.5 and $30. 


Dividend: Quarterly at $.611 per share or $2.444 annually (Raised 4% and announced in 2018 third quarter report)


Last Ex Dividend Date: 12/14/18


Dividend Yield at TC: 7.83%


Trading Profits to Date: $412.4


Last Sell Discussions:


Item # 3 Sold 50 IRM at $33.82-Update For Equity REIT Basket Strategy As Of 4/6/16 - South Gent | Seeking Alpha (profit snapshot= +$398.06)-Item # 3. Bought 50 IRM at $25.7Update For Equity REIT Basket Strategy As Of 1/11/16 - South Gent | Seeking Alpha


The following trade was made before IRM became a REIT: Item # 2 Bought 50 IRM at $21.76 (9/29/2010 Post)(sold 10/20/2010 after earnings warning with a  +$2.1 realized gain): 




2. Short Term Bond/CD Ladder Basket Strategy

Purchases:$5K 

Most of the dollars for purchases continue to flow into high quality short term bonds and CDs.  


A. Bought 3 Treasury Bill (6 months at auction) Maturing on 6/13/19:

IR= 2.546%



Interest = $37.61


Treasury Bills, defined as maturities of 1 year or less, are auctioned without coupons. The interest is the difference between par value and the price paid at the auction. In this case, par value is $1,000 per bond. I bought 3 bonds for $2,962.39 and will receive $3,000 on 6/13/19. The difference is $37.61 which will be classified as interest income. 


Auction Results:




B. Bought 2 CVS 2.25% SU Maturing on 8/12/19:




I now own 4 bonds.


FINRA Page: Bond Detail (prospectus linked)


Issuer: CVS Health Corp. (CVS)

CVS Analyst Estimates

CVS Health Completes Acquisition of Aetna, Marking Start of Transforming Consumer Health Experience (10/28/18)("Under the terms of the transaction, each outstanding share of Aetna common stock is being exchanged for $145.00 in cash and 0.8378 shares of CVS Health common stock").


Judge softens his stance that CVS may have to halt Aetna integration - MarketWatch


Credit Ratings:




The debt increase resulting from the Aetna acquisition caused Moody's to downgrade the debt from BBB+. Rating Action I do not regard that action to be relevant for this short term bond.


Bought at a Total Cost of 99.6
YTN at TC Then at 2.857%
Current Yield at TC = 2.259%

For a bond with only one more semi-annual payment before maturity and the final interest payment, I do not view the current yield as important. I will receive a semi-annual payment in February and will recoup then the accrued interest of $15 paid to the seller plus an additional 64 days or so of interest. The final semi-annual payment will occur on 8/12/19.


I used the $2K received on 12/10 from this maturing CD to fund this CVS bond purchase:



15 month Pacific Premier Bank  1.45% CD (monthly interest)  
At the time of purchase, the YTM on a treasury treasury maturing on 8/15/19 for a 2 bond purchase was 2.577%:


Current Yield for 2 Bonds = .7593%/YTM Higher Due to the Discount to Par
3. Long Term Bond Basket Strategy-Potentially Long Duration Senior Unsecured Baby Bonds

A. Bought 70 ARGD at $24.93




I now own 100 shares in this account and 50 shares in a Roth IRA. 

My previous buy in this account was discussed here: Item # 1.A. Bought 30 ARGD at $25.33-Used Commission Free Trade  (7/25/18 Post) 

I bought this lot on the quarterly ex interest date which allowed me to buy at price lower than the $25 par value. 

Security DescriptionFinal Prospectus Supplement

Issuer: Argo Group U.S.


GuarantorArgo Group International Holdings Ltd. (ARGO)

ARGO Analyst Estimates
ARGO SEC Filings
ARGO 2017 Annual Report (risk discussion starts at page 14; bond discussion starts at page F-45

Last ARGO Earnings ReportQ/E 9/30/18  


2017 ARGO Annual Report 


Capital Structure Placement: Senior Unsecured Bond


Interest Payments: Quarterly at $.40625 per share  (.065% x. $25= $1.625 annually)


Trades: Flat (whoever owns the security on the ex interest date receives the entire interest payment with no accrued interest paid to the bond seller)


Average Total Cost = $25.1 


Yield at $25.1 (assuming no call): 6.474%


Par Value: $25


Optional Call Date: At par value plus accrued and unpaid interest whenever issuer chooses


Maturity: Unless redeemed early at issuer's option, the bond matures on 9/15/42;


Interest Rate Risk: Asymmetric in favor of issuer


Bond Rating: According to Quantumonline, the bond has a BBB- rating from S & P.


Last Ex Interest Date: 11/29/18


Current Position: 150 Shares  


Maximum Position: 150 Shares


Last Round-Trips (prior symbol was AGIIL):


Item # 4 Sold 100 AGIIL (9/25/17 Post)(profit snapshots = $30.09)-South Gent's Comment Blog # 8: Bought 50 AGIIL at $24.98 (bought back 50 shares sold at $26.69 in May 2016) and Item # 5. Bought 50 AGIIL at $24.6 in IB Account-Update For Exchange Traded Bonds And Preferred Stock Basket Strategy As Of 1/22/16 - South Gent | Seeking Alpha



During that 2013 price plunge, I did buy some shares. Item # 6 Bought 50 AGIIL at $20.2 (December 2013 Post) I sold that lot at $24.21: Item # 2 Sold 50 AGIIL at $24.21-Roth IRA (6/28/14 Post)(profit snapshot=$186.48 plus two quarterly interest payments totaling $40.62; total return 22.33% in about 6 months)
Another 50 share lot was bought in October 2013: Item # 3 Bought: 50 AGIIL at $21.11 (10/13/2013 Post). I sold the lot bought in October 2013 at $24.48: Item # 2 Sold: 50 AGIIL at $24.48 (6/7/14 Post)(profit snapshot=$152.58; total return of $193.2 or 18.17% in about 7 months).

Trading Profits to Date$369.15


I do not anticipate generating a profit on my 100 shares held in this taxable account. 


The general idea is to be content with a 6.47+% income distribution for as long as it lasts. 


If the bond is called at par value, I will lose about $10 on the security. 


It is possible that I may be able to sell the 100 share lot profitably after collecting several interest payments.  


For awhile now, this security has trended up in price over its $25 par value as the time period shortens to the next quarterly ex interest date. This may continue to occur unless there is a meaningful upward spike in longer term interest rates. 


If there is a meaningful decline in interest rates, the issuer may be tempted to call.    
4. Eliminations:

A. Sold 50+ AGNC at $17.83+:


Closing Price Last Monday: AGNC $17.24 -$0.21 -1.20% 


Quote: AGNC Investment Corp.




Profit Snapshot:  +$5.46  (will receive one more monthly dividend in cash)





Item 1.B. Bought Back 50 AGNC at $17.63-Used Commission Free Trade (11/14/18 Post)


I am going to quit while I am ahead on this MREIT. I discussed the reasons in the perviously linked post.


AGNC Realized Gains To Date $389.9 ($384.44 prior transactions)


AGNC Investment Corp. Declares Monthly Common Stock Dividend of $0.18 per Common Share for November 2018 and Announces Estimated Tangible Net Book Value of $16.94 per Common Share as of October 31, 2018


Subsequent to my disposition, AGNC announced its $.18 per share monthly dividend and a tentative net asset value per share of $16.76 as of 11/30/18: AGNC Investment Corp. Declares Monthly Common Stock Dividend of $0.18 per Common Share for December 2018 and Announces Estimated Tangible Net Book Value of $16.76 per Common Share as of November 30, 2018


I have been fortunate so far in harvesting dividends and adding to my total returns through profitable trading. I do not want to push my luck any further. 


I did note, however, that JPM upgraded AGNC Investment to overweight from neutral on 12/20/18. The price target was increased to $18 from $17.5. I do not have a copy of that analyst report. 


5. Intermediate Term Bond/CD Ladder Basket Strategy:


A. Bought 1 Boston Properties L.P. 3.125% SU Maturing on 9/1/23-In a Roth IRA Account:




I now own 3 bonds with 2 owned in this Roth IRA account. 


FINRA Page: Bond Detail (prospectus linked)


Issuer: Operating Entity for Boston Properties Inc. (BXP who guarantees the notes.


Boston Properties Announces Third Quarter 2018 Results of $0.77 GAAP EPS and $1.64 FFO Per Share


BXP 2017 Annual Report (debt listed starting at page 154; note there is a 3.85% SU note maturing earlier in 2013)


Recent Bond IssueBoston Properties Prices $1.0 Billion Offering of 4,5% SU Green Bonds Maturing in 2028 (11/13/18)


Bought at a Total Cost of 96.7 (with $2 Vanguard Commission)

YTM at TC Then at 3.896%
Current Yield at TC = 3.2316% (tax free in the Roth IRA)

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. 

22 comments:

  1. Hi!

    I seem to remember that you wrote about preferreds during an earlier nosedive. Care to do it again?

    I'm especially curious about something like SB-C, taking into account:
    the possibility of a call next year,
    the possibility of a recession next year,
    the coming IMO sulfur emissions cap.

    Thanks,
    D.

    ReplyDelete
    Replies
    1. D: I have been nibbling on equity preferred stocks and have been discussing those buys.

      For me, the shipping company preferred stocks are too risky and I avoid them.

      The riskiest ones that I have been buying are the Hotel REIT preferred stocks. I discussed AHTPRI in this post and added 20 to that one today at $18.52 using a commission free trade. I have also bought HTPRD mentioned in this post and 50 shares of the high risk BHRPRD at around $20 which I have not yet discussed. BRRPRD was just sold to the public about 30 days ago at $25.

      With further downdrafts in price, I will be adding in small increments to some higher quality ones as well.

      As I noted in a recent comment, I view equity preferred stocks with some disfavor.

      Delete
  2. Hello South Gent,

    Thank you for your detailed answer on my last question about earnings. I see today with the Dow up slightly and the S&P up trivially or flat that the Vix is in the fourth day of a possible trigger event..
    I wondered assuming the market meanders around here for the Standard & Poor's index to remain near this level and in the next three days, the Vix remains above 26 whether it makes more sense to get out of stock positions before waiting for a possible run back to 20.?

    In your previous writings I honestly can't remember what kind of S$P numbers that in percentage terms on average that the S and P rises when the Vix may go back to 20.

    I wondered if you thought in this case, it would be more prudent to perhaps get out near the end of the seventh day if the Vix remains elevated.

    I understand that the "talking head" is calling this a buying opportunity but like I said yesterday maybe this is wrong and the herd is correct.

    I also wonder if since Monday is only 1/2 day
    that probably not everyone is around that this may give a false signal.

    Thanks for your input and all your help over the years.

    ReplyDelete
    Replies
    1. G: I do not know the future, but can only assign possibility percentages to future scenarios which change as more data is received and digested.

      I do not view a recession as likely in 2019, but that prediction can change based on risks that are currently known (e.g. trade war) or unknowable in advance.

      An investor needs to be able to deal with uncertainty and to understand their pain tolerances. There is nothing unusual in the scheme of things about a 20% decline in the stock market. I am simply at a point in my life where I would prefer to avoid a 20% decline on all of my brokerage assets.

      I mentioned in a recent post my belief that the market was oversold and due for a robust bounce. So far, the rallies have been sold but maybe that will soon change. I would not arrive at a judgment based on a one or two days of a counter move up but on something with more duration.

      Personally, I have been buying into the volatility spikes, though in measured amounts using the small ball purchase rules and commission free trades. I added 10 share of AT & T, for example, at $26.95 earlier today, but I am only up to 71+ shares with that purchase.

      My main problem now is that I have run out of cash to buy stocks in my Fidelity account, where I have commission free trades.

      I will move more money into that account when I need more free trades which will not happen for another 6 months or so. I now have to wait for proceeds from maturing bonds and CDs in that account to provide more cash. I will receive 4K in proceeds over the remaining days of 2018 and then $16K between 1/1/19 and 1/15/19. Maybe the market will oblige me by going down more as the money is paid into the account.

      I am not inclined to sell stocks now. I may consider selling some recently bought stocks and stock ETFs on a SPX move closer to 2,632 which was the main support line broken decisively in early December:
      https://www.marketwatch.com/investing/index/spx/charts

      The current downturn reminds me more of a course correction in an ongoing long term secular bull market than the start of a long term bear market. Cyclical bear markets within the context of long term secular bull markets can be sharp, scary and relatively quick. There was a 22% plunge on one day in October 1987 as I mentioned in this post but that was just a nasty course correction in an ongoing bull market that continued for another 12+ years. I tried to buy near the close that day, but had to wait until the next day since the tape was 2 hours behind and limit orders were not being accepted by my only broker at the time.

      I have been looking this morning at some bonds that I might consider selling.

      Last Monday may prove to be a panic selling bottom that was caused in part by continue tax loss selling and low investor participation on the buy side.

      I am not using the VIX Model to time exits since I was already in my bunker waiting for incoming before this decline started. That is in part due to the significant gains realized since March 2009.

      I really can not give you any advice on what to do now. I can only tell readers what I am doing and why. It is of course difficult to time the market.

      Delete
  3. I continued to do some light buying during the morning today, spending about $2K, but that tapered off by early afternoon.

    I am not a big fan of wild stock markets which is what we are experiencing now.

    S&P 500
    2,467.70 +116.60 (+4.96%)

    CBOE Volatility Index (VIX)
    30.41-5.66 (-15.69%)
    Day's Range 29.59 - 36.20
    52 Week Range 8.92 - 50.30

    There was a time during the morning that SPX gave up its gains and went into the negative territory.

    A robust bounce was expected, but the timing was unpredictable.

    The question now is whether there will be a non-temporary follow through.

    There are stocks that are not being priced rationally based on expected 2019 earnings. Many of those stocks are regional banks that are selling for single digit P/Es and dividend yields over 4% and 5%.

    Hope Bancorp, Inc. (HOPE), which I own and bought today, hit a new 52 week low at $11.37 today.

    https://finance.yahoo.com/quote/HOPE/?p=HOPE

    The current E.P.S. estimate for next year is $1.47, just two cents above the 2018 estimate.

    Yet at $11.37, the P/E based on next year's consensus is only 7.73 with a dividend yield at that price is about 4.92%.

    The problem is the uncertainty of future earnings.

    Investors have to cope with that uncertainty in this stock or any other.

    Macro economic factors that impact earnings have generally been favorable for almost a decade but that will change for the worse. The only questions are when and how much.

    The consensus earnings estimate for HOPE would be reasonable once I assume that the economy just muddles through 2019 with about 2% real GDP growth with a continued relatively flat yield curve. IMO, that is a reasonable prediction at the moment.

    Going significantly above or below those economic assumptions creates more or less value in the stock at its current price.

    BDCs are another sector that is pricing a near recession risk into current prices. None of the currently depressed sectors, where price declines far exceed major index declines, are pricing a major recession and a slow recovery therefrom.

    ReplyDelete
  4. Hello SG, I don't know whether you have seen this article in the Wall Street Journal

    https://www.wsj.com/articles/behind-the-market-swoon-the-herdlike-behavior-of-computerized-trading-11545785641?mod=searchresults&page=1&pos=1

    Apparently, 85% of all trades are controlled by machines, passive algorithms etc. The article states that many of the trading mechanisms use momentum as part of their performance or action.

    The question I have is whether or not ( this being a reason for market volatility and fear due to massive swings , whether this also in your opinion changes the Vix asset allocation model.

    A prescient quote from the article
    "The bouts of automated selling have landed in a market ill-prepared for it."

    Also apparently, for reasons I do not understand in the article there is a statement that there is diminished to liquidity across all markets including S and P futures. I am not sure about S&P options.

    The questions I have specifically are

    1 if you think this volatility and automated trading coupled with the loss of liquidity can cause a market plunge by itself and actually cause a recession?

    2 Are the signals used in the past like the Vix asset allocation model no longer accurate?

    I saw an interview with Stan Druckenmiller. He stated, because of the algorithms in the market, he can no longer read market signals.

    https://www.youtube.com/watch?v=G-MlrpoMig0

    thanks

    ReplyDelete
  5. G: That is a long interview with Stan Druckenmiller which I will watch tonight. He is one of the money managers whose opinions are worth knowing.

    It is certainly possible that HFT algorithms and abnormally low interest rates have distorted price signals. The answer to your question is that I am not sure whether or not those distortions have impacted the signals given in my Vix Model.

    A stock market plunge can be a contributing cause to a recession in that it incinerates money and causes consumers to lose confidence and to become more cautious about spending.

    There have been plunges in the stock market that have not led to recessions. An example would be the October 1987 crash.

    I thought that this article was worthwhile and may help you make decisions:

    https://www.marketwatch.com/story/that-massive-one-day-stock-market-rebound-was-a-suckers-rally-2018-12-27?mod=bnbh

    One of the suggestions is to never dollar cost average during a bear market which is something that I do and am doing now in small lots using commission free trades.

    There are good reasons to do it and not to do it.

    I do think it is important for anyone averaging down to be able to cope psychologically with losses that grow and to have the financial capability of withstanding the losses for a potentially long period of time without being forced to sell at an inopportune time.

    Know thyself, and recognize that the future is uncertain when doing asset allocations. Stocks are important in an asset allocation for most households but they obviously have risks of extended and brutal downturns. Many investors will buy high and sell out at the worst times so it is important to reign in the fear and greed urges that is hard wired in all of us.

    It would be reasonable to predict now wild swings in the market. Investors are unsettled and fearful which are two emotions that are captured by the VIX and the Unstable Vix Pattern. There is no stability and nothing that contributes to the calming effect necessary to sustain a cyclical bull market.

    ReplyDelete
  6. I thought today's snapback was impressive.

    After hitting 33.61 at 1:35 C.S.T, the VIX turned down.

    https://www.marketwatch.com/investing/index/vix

    The decline in the VIX coincided with the start of an SPX rally into the close.

    https://www.marketwatch.com/investing/index/spx

    Those moves coincided with a move up in the ten year yield, though the yield did end the day down some.

    U.S. 10 Year Treasury Note
    2.776% -0.031%
    Last Updated: Dec 27, 2018 at 4:52 p.m. EST
    https://www.marketwatch.com/investing/bond/tmubmusd10y?countrycode=bx

    I continued to do some light buying in beaten down sectors. The focus today was on regional bank stocks.

    I did use some CADs to buy 50 shares of HMMJ:CA at C$13.95:

    https://www.marketwatch.com/investing/fund/hmmj?countrycode=ca

    https://www.horizonsetfs.com/hmmj

    Hopefully, this will start my third successful trade in that security. About all that I can say now is that this purchase price was the lowest one yet.

    See HMMJ:CA Trade Snapshots at
    https://tennesseeindependent.blogspot.com/2018/09/observations-and-sample-of-recent_12.html

    As shown therein, I last sold 50 HMMJ at C$23.29 (9/10/18). I pay a C$1 commission to trade up to 100 shares at IB.

    There really is not anything other than a study of mass psychology that can help one move in and out of marijuana stocks.

    After the bell I noticed that Green Growth made an offer to acquire Aphria (APHA), one of the stocks owned by this ETF:

    https://www.marketwatch.com/story/aphris-stock-soars-as-pot-producer-receives-takeover-bid-2018-12-27

    https://globenewswire.com/news-release/2018/12/27/1678670/0/en/Green-Growth-Brands-Announces-Intention-to-Launch-Takeover-Bid-for-Aphria-Inc.html

    APHA has some issues as I previously discussed in a comment.

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  7. Hello SG,

    I have never seen such a last few days. Whether this is algorithmic trading or just shaking out the shorts and week hands,

    I'm writing to ask you about the Vix asset allocation model. Depending on the next two days, it appears that the Vix could end up below 26.

    If the Vix goes below 26 on Monday will that obviate your Vix trigger event.

    As you have said there are a lot of conflicting elements in the bull/bear story of a looming recession in 2020 versus lowering of price earnings ratio even with perhaps earnings deceleration.and Lower long-term rates and perhaps a rebound in the housing market

    I did look on SeekingAlpha and see that your links to the Vix trigger event have been removed or are no longer available.

    I wondered what you thought of this tremendous volatility, and if the Vix ends above 26 on Monday and fulfills your criteria for a trigger event, if you could spend a little time re-discussing or republishing your previous thesis on this event

    Thanks a lot, G

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    Replies
    1. G: There has been nothing removed by me at SeekingAlpha. Articles are now behind SA's pay wall but you should be able to read my instablogs.

      https://seekingalpha.com/instablog/434935-south-gent/4308586-trigger-event-vix-asset-allocation-model-8-31-15

      That TE was resolved by a movement back into a Stable VIX Pattern by July 2016:

      http://seekingalpha.com/instablog/434935-south-gent/4898841-update-portfolio-positioning-management-7-24-16

      https://seekingalpha.com/instablog/434935-south-gent/3373095-vix-asset-allocation-model

      A move below 26 does not restart the Trigger Event day count unless the movement below that level persists and then falls back below 20 which will restart the count. So you could have a few days in the 20-26 range and then another burst above 26 that would add onto the existing day count.

      For the time being, I would just try to relax. This is going to be a wild period for stocks with no known end to it.

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    2. That was super helpful. I had an old summary I'd written for myself that was unclear. And for some odd reason, didn't have the links in it. (I remember adding them, so odd.)

      These links worked, and I was able to read up on the model.

      By my count there's been 5 days over 26. So in the next 2-3 days it needs to resolve to under 20 or to low 20s and headed to under 20. Or this is a trigger event.

      The question is whether this was a singular panic event. Or it's a new mind set of worry.

      I can't figure out what the intense panic was over. So I can't fathom a guess.

      I see you've (SG), credited to re-valuation back to realistic earnings expectations. If so, this could turn out to be a once and done pattern.

      If it's over the WH's prime occupant's instability, that will obviously continue. There's cracks but not a lot of indication that market participates are more aware. On the support poll, I read the link to Gallup. The theory I've heard is that the % of people associating with GOP is down, and that's why those remaining are at that same high % of support. The Gallup article doesn't mention this. So maybe they didn't adjust for it in their methods. And the results are deceivingly high.

      I was wondering if in your readings, you'd found info on what reasons big money sellers that are moving the market, are giving for their selling? I've seen countless articles on worries. But not a connection back to what the actual sellers are saying.

      This was such a surprisingly intense sell down, that'd it'd be good to know. The chart moves look like after catastrophe events in 2000 and 2007, even though the VIX has barely bunged upward. (Only recently hitting over 26.)

      It's so nice to see something calm, but thoughtful about what's happening. (Not head in sand calm.)

      Thanks!! I hope all is very well with you!

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    3. T: The comments sound like Land of Milk and Honey.

      I have been buying into the volatility spike, focusing on stocks and sectors that had declined significantly more than the major indexes and where valuations made no sense unless a major recession was on the near horizon.

      Regional bank stocks for example had been sold down to single digit P/Es with many providing yields over 5%. The selling in that sector has been relentless. Hopefully, the sector will produce some gains after tax loss selling season is over.

      My current opinion is that the sharp downturn is a valuation reset based on a now anticipated synchronized global slowdown in growth (not a recession) next year and increased concerns about a highly unstable U.S. President.

      I am anticipating that SPX 2,632 will act as a ceiling in the ongoing counter-move up. Piercing the 200 day SMA line to the upside would be a positive and would be evidence that the sharp and abrupt decline was more in the nature of a panic attack.

      Using a 1 year Yahoo Finance chart, the SPX 200 day SMA line closed yesterday at 2,747,22. So that is a long way up.

      The Day Count on the Trigger Event is at 5 days with 2 more closes over 26 necessary. Since there have been at least 2 closes over 30 and SPX has already fallen more than 5% below its 200 days SMA line, I am requiring only 7 days. There was a near TE back in February that started with a surge from 17.31 to 37.21 on 2/5/18. There were 2 days over 30 but the count ended at 5 days.

      https://finance.yahoo.com/quote/%5EVIX/history?p=%5EVIX

      The reason for the all of this pickiness is cut down on false signals by tailoring the model to past history.

      If there is a TE, then there has been a Recovery Period after all previous TEs when the Stock Jocks make a charge and the VIX returns to below 20 movement and SPX makes a significant move up as the VIX spike turns back down.

      The key points for me now are whether the SPX 2,632 level proves to be an overhead resistance and whether the SPX can fight its way back over its 200 day SMA line. Until those positive signals are given, and there is a return to persistent stable movement below 20 in the VIX, I will remain extremely cautious.

      Delete
    4. I didn't realize I have that recognizable fingerprint...! Wonder what gave me away. I am indeed. I'd signed in, and the "reply-as" box had that Lomah moniker. But it kept reporting an error. So, I signed out, signed back into the exact same account with the exact same info, and it gave this moniker. And it's working. I decided not to argue with google.

      I have today as day 6 at VIX $28.34. So Monday or Wed will be very telling.

      I didn't realize Feb 2018 had come that close. I felt from beginning to end, like a regular old correction. So I'm not surprised it didn't form a TE.

      I have far too much powder. I also didn't think to check the model, and was "buying on the way down" in Oct into Nov, indices and individual stocks. By Dec I just stopped, in awe of every day's moves down. The other day I bought some SPY at $241.20.

      My thought is:
      - Sell that recent SPY around 2620 support.
      - Then for the rest either there's no TE and the market climbs, and I'll sell those new buys then
      OR
      - There's TE and I'll wait for the hopefully-appearing recovery period, VIX under 20 to sell.
      - If market goes straight to a crash, with all of my buys in tow plus my prior positions... I'd still have plenty of powder for a lower point. (Due to prior poor decisions to get out, but now, might as well enjoy it.)

      I'd love to buy more here for the trade upward, but it's too close to that 2620 for comfort. Except if I find beaten down QUALITY LONG term buys, that I want.

      I noticed you've adjusted the model slightly to narrow it's accuracy. That seems good. I can almost see now the sense that it's measuring the human reaction - whether it was a blimp, or it's got more underlying distress showing up. Though it's a purely mechanical method.

      I've had some success with activism and election support this year, including going outside my comfort zone, and even seeing it make a difference in some concrete cases. I am looking forward to hearings come new year.

      I picked up varying amounts of CRM,Garmin, Nike, Square, LMT, LAZ, VZ TXN, WMT (just before a bad ER), and maybe something(s) else.

      I was expecting today to end up & VIX down under 26, making it less clear. But it sure didn't. I can't guess whether Monday will complete the TE or by then the market mood will shift a lot. A lot may depend on the weekend's "tweeting."



      Delete
  8. I have published an update on portfolio management. I have not included in that post a discussion of the Vix Model:

    https://tennesseeindependent.blogspot.com/2018/12/update-for-portfolio-management-as-of.html

    ReplyDelete
  9. In backtesting, once a TE's happened, has a catastrophic phase always happened?

    Feb 2016 met the TE, but then recovery period was under 15 not under 20, and went back to stable phase without a catastrophic phase.

    Were there others times?

    ReplyDelete
    Replies
    1. Ms. T:

      The TE in August 2015 went into a Recovery Period and then a Stable Vix Pattern which is a continuous movement below 20. The Unstable VIX Pattern was quickly resolved by the SVP.

      I would note that there have been 3 serious spikes in volatility starting in August 2015 which is worrisome.

      And 2 of those spikes have occurred in 2018.

      I believe those spiking patterns so close together is a cause for concern, particularly the two this year, and suggests to me at least the need for caution now.

      As to a Catastrophic Event, they will occur in the UVP.

      While I normally define the CE as a 45%+ decline over a relatively short period, the October 1987 crash was preceded by a Trigger Event and a Recovery Period using the volatility data for the S & P 100 which was then the only volatility data available. The spike in volatility during that 1987 crash was higher than the level achieved in 2008 with VWO spiking to 150.19.

      https://tennesseeindependent.blogspot.com/2009/05/more-on-vix-model-what-it-does-not.html

      There was a TE in October 1989 that was confirmed in January 1990 using the VXO data.

      Depending on how one defines Catastrophic Event, that UVP preceded a recession and about a 20% decline in SPX as I recall. So that would be another UVP that did not have a Catastrophic Event as I am defining it. The subsequent SVP was the longest.

      http://tennesseeindependent.blogspot.com/2009/05/vix-and-s-p-compared-1990-to-1997.html

      The recession started in July 1990 and ended in March 1991.

      There is no volatility data prior to 1986. If there was such data, I would expect to see that the 1929 crash was preceded by a TE and UVP with volatility spiking as high as the 1987 crash. I am less sure about when a UVP would have formed in the 1966 to 1982 long term secular bear market but only suspect that the 1974 Catastrophic Event occurred during what would have been a UVP if volatility data was available.

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    2. So it's been a mixed bag of reactions.

      Some TE's were followed by CE, 2000, 2007.

      One with a modest 20% drop BUT an economic recession, 1989's.

      And 1987's by a correction and recovery, even though the volatility was relatively high.

      Same with Aug 2015 (right, TE was in 2015, even though I have the worries storied under Feb 2016).

      I wonder if anything more can tell whether a CE is likely after entry into UVP?

      The frequency of two spikes this year is good point.

      Instability in gov't from the top, is a likely big contributor. And that's not going to disappear that quickly.

      For one thing, this all seemed approximate to Mattis's announcement, and his no longer there to stop black swan "incidents" which in turn can effect investments.

      Delete
    3. The 2000-2002 Catastrophic Event was ultimately caused by piercing a valuation bubble. I do not see that bubble in valuations now.

      The VIX movement in 1999 never confirmed the strong stock market rally that year indicating it was not sustainable and was in fact fake induced my delusions from an Alternate Reality.

      Also, there were two long and high volatility periods preceding that Catastrophic Event, one being the 1997 Asian Contagion period and the other starting in August 1998 caused by the same problems and aggravated by the Long Term Capital fund demise. Those problems were also the first warning shot of the problems caused by excessive debt, a problem that has become more serious since 1997 and has led and will lead to more frequent and severe bouts of global economic and market instability.

      A major slowdown in global growth and a worldwide recession may be the match that lights the fuse for the next global debt bomb.

      The market may be reacting in the coming months to that possibility. What happens when all of that debt needs to be financed during a recession? Trillions will have to be refinanced in the next five years. Will the next global recession result in the next financial crisis?

      IMO, it is a question of when, not whether, there will be another implosion and massive forced deleveraging.

      Recovery from the last Near Depression, caused largely by excessive and improvidently great debt, was financed in major part by issuing $80 or so trillion in new debt, which will only make the next deleveraging cycle for more severe than the last one. When looking back ten or so years from now, that solution will be judged as extremely improvident and idiotic. Spending borrowed money in increasing amounts will have an end game.

      It is possible that the eras of garden variety and shallow recessions, where the economic downturn is relatively shallow and the recovery back to pre-recession growth number is relatively quick, may be an historical artifact from the past.

      Recessions now have the capability of turning into longer and deeper periods of economic contraction due to massive debt defaults and an inability or serious difficulty, depending on the borrower, refinancing the extremely large pile of debt as it matures. The credit spigot is turned off for marginal credit borrowers who have not defaulted. Those conditions can lead to a financial crisis, a multitude of bank failures, and those generally result in deeper downturns and far longer recoveries than the garden variety recession.

      So maybe the answer lies in identifying when the rot underneath the surface, which was easily identifiable but not fully understood in 2007, is about to devour the real economy again.

      Delete
    4. Interesting answer.

      Also that this was a run to cover, over an unexpressed, maybe not fully conscious sense of worry over debt vs higher rates... feels right. It fits the events better than other worries that would have been milder & more intermittent drawdowns.

      Couple a vague but sure sense of worry based on current "leadership," and it makes some sense.

      Depressing. And likely to take a while to impact. Quite a while with quite a few tricks. Increased productivity from technology may pull humans out before it implodes. Tech is currently mostly taking away jobs & increasing need for debt.

      In my view, that rot will not have immediate effect to this particular TE and cycle. ...since it's not really conscious yet. The sense of leadership chaos seems more immediate. So I'll play it that way. With an eye kept on this problem.

      Delete
  10. The chart in here is interesting. It indicates this was likely a fast enough slide that it's a correction not crash-bound.
    https://www.marketwatch.com/story/this-still-looks-like-just-a-stock-market-correction-not-something-worse-2018-12-26

    It matches with what the VIX model is identifying in past iterations, -- namely the difference between a short (even if steep) panic, and a more sustained level of worry that (in the past) has been how the crash-bound or at least longer term corrections have appeared.

    It's also interesting that it's coming from perma-bear Mark Hulbert, as an indication not to worry here?

    Any thoughts?

    ReplyDelete
    Replies
    1. T: The fast and abrupt decline from new highs is more of a short term correction and bear market within an ongoing long term secular bull market than the start of a new long term secular bear market. The analogy that I made in a recent comment is to the October 1987 crash that occurred during the August 1982 to March 2000 long term secular bull market when the SPX average annual total return even with cyclical bear markets and corrections was over 15% in excessive of the average annual inflation rate.

      Even if that proves to be the correct prognosis, the losses can exceed what has already happened, particularly when the next recession becomes a reality rather than just a feared event. And, there can be a prolonged period of churn as there was after the 1987 crash before a powerful upturn resumes.

      There are also some talking heads that claim the sharp rally off the recent low is what is more normal in a long term secular bear market. I view that as an incorrect observation for a 20% bear market but can be true after a Catastrophic Event like the 1929-1932 crash or the 1974 crash where there were strong count-trend rallies out of the rubble, but the category of a long term bear market did not change.

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    2. It seems to bode well for this to be a correction, or correction and churn.... without a catastrophic event/crash.

      I had a similar impression.
      The rally was like those counter-rallies, but it didn't seem either here or there to mean anything different than what was already obviously known. It didn't turn a bull market, with a correction or more, into a bear by counter rallying.

      Delete