Observations and Sample of Recent Trades: BTZ, DOC, HTGX, NYMTN, NYMTO

Economy: 

U.S. adds 179,000 private-sector jobs in November: ADP - MarketWatch; ADP National Employment Report | November 2018 This was in line with expectations.

The BLS reported that payroll employment increased by 155K in November. The prior two months were revised down by $12K. The average work week decreased by .1 hour which is significant given the size of the labor force. That decline in the work week is equivalent to 370,000 workers being laid off. The Slowdown Cometh - Barron's Average hourly wages increased 6 cents to $27.35. Average hourly wages increased  3.1% Y-O-Y. The labor participation rate was unchanged at 62.9%. The percentage of the labor force working part time involuntarily rose to 3% from 2.8% which is a negative development. Employment Situation Summary 

The U-6 rate rose .2 to 7.6%. Table A-15. Alternative measures of labor underutilization  

The consensus forecast was for a 190K increase. U.S. gains 155,000 jobs in November and unemployment rate stays at 3.7% - MarketWatch; Softer-than-expected jobs report called uninspiring by economists - MarketWatch

I would note that the unemployment rate is a lagging indicator. What are leading, lagging and coincident indicators? The economy could be softening, and headed for a recession, but the unemployment rate would still be falling:

Civilian Unemployment Rate-St. Louis Fed

The 3.1% Y-O-Y increase in average hourly wages is the largest since 2009. The shrinkage in the unemployment rate does provide workers with more leverage on pay. 

The ISM Manufacturing PMI index for November rose to 59.3 from 57.7 in October. ISM Manufacturing November 2018 The new orders component surged 5.7 to 62.1. 

Construction spending declined in November by .1% and has been decreasing some since May 2018. The November number was up 4.9% Y-O-Y: Construction Spending; U.S. construction spending falls for third month in October | Reuters

Construction spending topped out in February 2006 and started to turn down substantially before the Near Depression. The last bottom did not occur until February 2011: 

Total Construction Spending-St. Louis Fed

Beige Book report shows economy still solid as workers gain greater power - MarketWatch; The Fed - Beige Book - December 5, 2018

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Markets and Market Commentary: 

Dow tumbles more than 500 points, wipes out gain for the year to cap wild week on Wall Street

The YTD total return for the S&P 500 ETF (SPY) is currently at +.06%.

The S & P 500 index is currently below its 50, 100 and 200 day simple moving average lines using a YF one year chart. S&P 500 

As of last Friday's close, SPX is down 307.83 from it 52 week intra-day high or 10.47% which technically qualifies as a correction so far. 

OPEC and allies agree to cut oil production

The two year treasury note has been drifting down in yield after closing at 2.98% on 11/8/18: 2018 Daily Treasury Yield Curve Rates

Fed’s Williams: ‘Strong’ outlook for 2019 calls for continued interest-rate hikes - MarketWatch

November jobs report could spark a major market sell-off: Invesco (the concern is that wage growth will contribute to inflationary pressures)

GE is a buy but with a 'strong stomach': Aswath Damodaran

Self-proclaimed 'stubborn bull' sees Santa rally wiping out losses

Stocks will rally into 2019 despite 'horrific' sentiment: Wells Fargo

3 charts suggest housing ‘bubble trouble’ with a tech meltdown ‘yet to come’ - MarketWatch

Brace for a 15% plunge in S&P 500 next year if the Treasury yield curve fully inverts - MarketWatch  

Economic Forecasts with the Yield Curve (San Francisco Fed Paper-3/5/18)(every recession in the past 60 year has been preceded by a yield curve inversion) 

Altria to invest $1.8 billion in cannabis company Cronos Group

China's November export, import growth shrinks, showing weak demand | Reuters

China's Copper Imports Slump as Economy Slows and Trade Stalls - Bloomberg

China calls on Canada to free Huawei CFO or face consequences | Reuters

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Trump:

So, what happened to the migrant caravan invasion, a national emergency unparalleled in U.S. history? 

Tillerson says Trump directed him to do things that violate the law

Rex Tillerson on Trump: ‘Undisciplined, doesn’t like to read’ and tries to do illegal things - The Washington Post All of those are great qualifications for high office in TrumpWorld.  

Donald Trump, Who Only Hires the ‘Best People,’ Slams Rex Tillerson As ‘Dumb As a Rock’ and ‘Lazy As Hell’

Carnival Barker Don does not respond well to legitimate criticism, no matter how mild it may be: 

Donald and the Crown Prince: 

Kushner pushed Trump administration officials to inflate value of Saudi arms deal; Jared Kushner pushed to inflate Saudi arms deal to $110 billion: Sources - ABC News 

Intercepts Solidify C.I.A. Assessment That Saudi Prince Ordered Khashoggi Killing - The New York Times

U.S. senators conclude the Saudi crown prince ordered journalist’s killing - MarketWatch; C.I.A. Briefing on Khashoggi Solidifies Senators’ View of Prince Mohammed’s Complicity - The New York Times (Lindsey Graham (R-SC): “I think he’s complicit in the murder of Mr. Khashoggi to the highest level possible.”; Senator Corker said that a jury would convict the Crown Prince in 30 minutes when presented with the CIA's evidence); Saudi crown prince 'ordered, monitored' killing of Khashoggi, Senator Corker R-TN) says-CNN 

With CIA head a no-show, Pompeo and Mattis cast doubt on Saudi crown prince's role in Khashoggi murder - ABC News

Some would argue that the Secretary of State Pompeo is just being a good soldier by attempting to toe Trump's line of maybe the Crown Prince was involved and maybe he was not. I view Pompeo as hurting his own credibility by echoing Trump who has none or what is more appropriately called "negative credibility", a rare condition that requires the listener to assume that the speaker is not telling the truth until proven otherwise.    

Pompeo Questions the Value of International Groups Like U.N. and E.U. - The New York Times

It is important to keep in mind that Pompeo was just a congressman from Kansas before the Duck elevated him to high office. The Koch Brothers Get Their Very Own Secretary of State | The Nation; Koch Brothers' Congressman Seeks To Block Efforts to Prevent Chemical Catastrophe 

Washington Post: Saudi gov paid for rooms at Trump hotel - CNN; Saudi-funded lobbyist paid for 500 rooms at Trump’s hotel after 2016 election - The Washington Post 

Yep, the Duck is going to Drain the Swamp.

Donald and Russia Sanctions: 

During 2015, when Donald was actively pursuing a Trump Tower deal in Moscow, he was asked by Maria Butina, currently sitting in a federal prison for failing to register as a Russian agent, whether Donald supported sanctions against Russia. 

Donald said no since he knew that he could get along with Putin:   

Maria Butina, explained: accused Russian spy tried to sway US politics through NRA - Vox; 

Maria Butina is the (alleged) spy the Trump administration asked for: USA Today 

FBI investigating whether Russia funneled cash to NRA to aid Trump's campaign | McClatchy Washington Bureau; 

Kremlin Used NRA to Help Trump in 2016, Senate Report Says; 

Senate Report at page 21 .pdf

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Wisconsin Republicans Approve Bills Stripping Power From Incoming Democratic Governor - The New York Times As noted in my last post, the Wisconsin state districts are heavily gerrymandered in favor of the republicans. Democrats won 54% of the Wisconsin state house vote but only captured 36% of the seats. When the republican incumbent governor Scott Walker lost his reelection bid, the republicans voted to strip away powers from the Democrats elected to statewide office. All of the foregoing republican actions are designed to undermine democracy. 

Similar actions are being taken by the republicans in Michigan after a Democrat was elected to replace the incumbent republican governor. North Carolina wrote the playbook Wisconsin and Michigan are using to undermine democracy - Vox; Michigan Republicans vote to strip power from incoming Democrat 

My approach to this kind of anti-democratic actions would be to vote against anyone who committed the act, regardless of the party. Democracy and democratic principles have to be enforced for the greater good. Republicans are doing whatever they can to undermine those principles now.   

Republicans routinely claim voter fraud without any evidence that fraud has in fact occurred, other than possibly a handful of votes out of millions. Those factually unsupported claims are then used as justifications to suppress voter turnout among traditional democrat voters. 

Republican officials had early warnings of voting irregularities in North Carolina - The Washington Post (the warning, which was ignored by republicans, was that the same voting irregularities occurred when Mark Harris defeated the incumbent republican congressman in the primary)

After the same illegal activity happened again in the general election, resulting in a thin margin for Harris against his Democrat challenger, national republicans have had nothing to say, even though there is actual evidence of voting fraud. What can possibly explain their deafening silence,  I wonder? That is not a hard question to answer.

The Democrats have now gained 40 seats in the House as the 21st California District was called for the Democrat who defeated a GOP incumbent. Democrats gain 40 House seats, as NBC projects TJ Cox wins California's 21st District  

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Donald has appointed the former Fox and Friends host Heather Nauert to be the U.S. ambassador to the U.N. Trump says he'll name Heather Nauert as next U.S. ambassador to the U.N. - CBS News Her diplomatic experience is limited to a brief stint as spokesperson for the State Department. One "minor" gaff in that capacity was Nauert's assertion that D-Day was an example of America's strong relationship with Germany. D-Day is example of America's 'strong relationship with German government', Trump State Department spokeswoman says | The Independent Maybe she can find North Korea on a map. Let's hope so. As I have heard the Trumpsters say many times, Donald hires only the best people. 

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1. Small Ball-Income Generation: 

A. Bought 30 NYMTO at $23.47-Used Commission Free Trade: 

Quote: New York Mortgage Trust Inc. 7.875% Cumulative Preferred Series C.  Stock (NYMTO) 

Closing Price Last Friday: NYMTO $23.13 +$0.03 +0.13% 

ISSUER: New York Mortgage Trust Inc. (An MREIT)

Current and Maximum Position: 30 shares (viewed as risky)

General Discussion of MREIT Preferred Stock Risks: Item # 2.A. (4/11/17 Post) 

NYMTO 5 Year Chart : Highlights the risk, as the price plummeted to $17.13 in late December 2015 probably due to perceptions about credit risk  

Prospectus

Par Value: $25

Issuer Optional Call: On or after 4/22/2020  

Dividends: Paid Quarterly/Non-qualified/Cumulative 

Yield at a TC per share of $23.47 = 8.39%

Stopper Clause: Yes  (see snapshot below)

NYMTO Stock Chart 

NYMT SEC Filings

NYMT 2017 Annual Report (risk factor summary starts at page 12 and ends at page 37)

NYMT 10-Q for the Q/E 9/30/18

B. Bought 30 NYMTN at $22.90 ($1 IB Commission):

Quote: New York Mortgage Trust Inc. Series D Preferred Stock (NYMTN)

Closing Price Last Friday: NYMTN $22.65 +$0.03 +0.13% 

Prospectus

Maximum Position: 50 shares (an additional 20 shares may be bought at less than $21)

This is another equity preferred issue from New York Mortgage.

Fidelity will not permit its customers to buy fixed-to-floating rate securities online and will not offer an explanation that makes any sense explaining their rationale. If you try to enter an order, you will receive this message: 

NYMTN is a fixed-to-floating rate equity preferred stock that pays cumulative and non-qualified dividends. As with other fixed-to-floating preferred stocks, the issuer reserves the right to redeem on or after the date the security transitions to a floating rate.

And, as with other exchange traded preferred stocks that may pay a floating rate, Fidelity does not allow their customers to buy them online. A Fidelity customer can buy NYMTO but not NYMTN. Try and buy a fixed-to-floating rate preferred stock at Fidelity and you will be stymied.

Security Description: 

Prospectus 

Par Value: $25
Issuer Right to Redeem: On or After 10/15/2027 generally with two exceptions
Dividends: Quarterly, Cumulative and Non-Qualified
Fixed Rate: 8% prior to 10/15/2027
Floating Rate: 3 Month Libor + 5.695% on and after 10/15/2027 unless issuer exercises its right to redeem at par value

It is interesting that this fixed-to-floating rate preferred stock has a higher current yield than the fixed rate coupon from the same issuer. 

One explanation is that the yield differential is just irrational. 

Assuming the differential has a rational explanation, then other possible reasons include the following: 

(1) a concern that the issuer may redeem the fixed rate coupon security on or after 4/22/20, whereas NYMTN  has call protection until 10/15/27;  

(2) over the long term, a concern about the Libor alternate rate mechanism; and/or 

(3) a concern that alternate rate mechanism will provide a lower rate than the fixed coupon for a potentially perpetual security when the issuer fails to exercise its optional call rights. 

Current Dividend Yield at $22.9 = 8.73%

Next Ex Dividend Date: 12/28/18

Dividend Stopper Clause: Yes

This clause in a preferred stock prospectus enforces the preferred shareholder's superior claim to claim vs. the common shareholder.  The common share cash dividend would have to be eliminated before the preferred share cash dividend could legally be deferred by the issuer.

Alternative Rate with No Libor Quote: The Libor rates will end in 2021. LIBOR Is Going Away—How Do We Transition $350 Trillion of Debt and Derivatives? I am not certain how the alternate rate provision will work.  

C. Bought 50 BTZ at $11.58-Used Commission Free Trade:

BTZ is a leveraged bond CEF. Using short term borrowings to buy bonds has been a bad strategy for over a year now.

Quote: BlackRock Credit Allocation Income Trust (BTZ)

Closing Price Last Friday: BTZ $11.66 +$0.05 0.43%

Sponsor's Website: BlackRock Credit Allocation Income Trust | BTZ

Dividends: Monthly at the current rate of $.067 per share

BlackRock Credit Allocation Income Trust (BTZ) Dividend Date & History - Nasdaq

Distribution Dates and Amounts Announced for Certain BlackRock Closed-End Funds

Last Ex Dividend Date: 11/14

Next Ex Dividend Date: 12/12

Dividend Yield at $11.58 =  6.94%

Dividend Reinvestment: Yes for as long as the discount to net asset value per share is greater than 10%

Data Date of Purchase (11/19/18):
Net Asset Value Per Share $13.49
Market Price: $11.54
Discount: -14.46%
Average Discounts:
1 YR -12.27%
3 YR -10.94%
5 YR -11.67%

Sourced: BTZ BlackRock Credit Alloc Income-CEF Connect

As of 10/31/18:

Leveraged at 32.92%
Number of Bonds Owned: 854
Effective Duration: 5.13 Years
Get to know your bond fund: Duration | Vanguard

Credit Quality:

Current Position: 50 Shares

Maximum Position: 200 shares + shares purchased with dividends

Purchase Restriction: Small Ball Rule

Last Elimination: Sold 103+ at $13.4+ Roth IRA (5/8/17 Post)(trading snapshots since 2010 = +$870.93)

BTZ BlackRock Credit Allocation Inc CEF Quote | Morningstar (rated 4 stars at time of purchase)

BTZ YTD Total Return Through 11/19/18 = -8.51% 

With the recent decline in interest rates, the total YTD return has improved to -7.56% as of 12/7/18. 

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

I eliminated all of my leveraged bond CEFs in 2016 and 2017 due to the developing Triple Whammy: (1) cost of short term borrowing rises; (2) bond values go down due to a rise in interest rates, including the bonds bought with borrowed money; and (3) the discount to net asset value expands due to (1) and (2) as individual investors sell and buyers want larger discounts and higher yields to compensate for elevated risks.     

It is not a good idea to buy assets going down in price with borrowed money whose cost is going up. That comment may earn me a Nobel Prize in Economics. 

The rising cost of short term borrowings also narrows the interest spread between the cost of borrowing and the yield on the bonds bought with borrowed money. That will have a negative impact the dividend penny rate. 

Perhaps, with good management, that negative impact on the sustainability of the dividend can be offset by trading up for higher bond yields, using primarily proceeds from maturing securities, without sacrificing credit quality, due to overall increase in interest rates.  

BTZ has not supported its dividend recently with ROC. If income is insufficient to cover the dividend, I would anticipate that this fund will cut the dividend.  

2. Short Term Bond/CD Ladder Basket Strategy: 

A. Bought 1 Bank of New York 2.3% SU Bond Maturing on 9/11/19:

FINRA Page: Bond Detail (prospectus not linked)

Issuer: Bank of New York Mellon Corp. (BK)
BK Analyst Estimates

BNY Mellon Reports Third Quarter 2018 Earnings of $1.08 Billion or $1.06 Per Common Share

Credit Ratings:

Bought at a Total Cost of 99.597 (includes $1 commission)
YTM at TC Then at 2.819%
Current Yield at TC = 2.3093%

B. Bought 3 Treasury 54 day T Bills at Auction Maturing on 1/22/19:
IR= 2.355%

Auction Results:

C. Bought 1 Morgan Stanley 2.8% SU Maturing on 6/16/2020:

I now own 2 bonds.

FINRA Page: Bond  Detail (prospectus linked)

Issuer: Morgan Stanley (MS)
MS Analyst Estimates

Earnings Press Release for the Q/E 9/30/18

2017 Annual Report SEC Form 10-K

MS SEC Filings (note the constant flow of bond offerings)

I will keep my overall exposure to MS debt small and will buy mostly short term maturities, keeping in mind what happened in 2008. 

My next MS SU bond maturing is on 12/7/18. 

The next maturities are on 2/1/19, 3/22/19, and 10/22/19. 

At the moment, I am not concerned about credit risk, but that can change quickly.

Credit Ratings:

Bought at a Total Cost of 99.242 (paid 99.142)
YTM at TC Then at 3.306%
Current Yield at TC = 2.8214%

3. Intermediate Term Bond/CD Ladder Basket Strategy:

A. Bought 50 HTGX at $24.9 ($1 IB Commission):

Quote: Hercules Capital Inc. 6.25% Senior Unsecured Notes due 2024

Closing Price Last Friday: HTGX $25.01 +$0.02 +0.08% (at least it went up)

Category: Exchange Traded Baby Bonds
Issuer: Hercules Capital Inc.  (HTGC), a BDC
Prospectus
Par Value: $25
Optional Redemption: On or after 7/30/17 at par plus accrued and unpaid interest
Interest Payments: Quarterly
Last Ex Interest Date: 10/12/18
Maturity Date:  7/30/24  (unless redeemed early at the issuer's option)
Yield at $24.92 TC = 6.27%

I still own 32 shares of HTGX in a Roth IRA account. This bond has been subject to two partial redemptions. I originally owned 100 HTGX in that account. 

Last September, Hercules sold a 6.25% SU bond maturing in 2033. Hercules Capital Closes Public Offering of $40.0 Million 6.25% Notes due 2033 The Company expects to use the net proceeds from this offering (i) to fund investments in debt and equity securities in accordance with its investment objective, (ii) to make acquisitions, (iii) to retire certain debt obligations (which may include the 6.25% Notes due 2024), and (iv) for other general corporate purposes. (emphasis added) 

The 2033 bond has the same coupon as the 2024 bond so Hercules does not save any money by redeeming the 2024.  

When making this kind of purchase at a total cost less than par value, I really do not care whether the issuer calls at par value plus accrued and unpaid interest. In a best case scenario, I may make a few bucks on the shares after collecting several interest payments. The primary, and almost exclusive purpose, for buying this baby bond is to generate income in excess of what I am receiving on short term instruments. 

I previously owned another Hercules exchange traded senior unsecured bond that was fully called by the issuer. Item # 1.G. 176 Shares of HTGZ Redeemed by Hercules (1/27/18). In anticipation of that redemption, I sold some shares at a price in excess of par value. Item # 6 Sold 152 HTGZ Observations and Sample Trades (1/24/17 Post) That one had also been subject to at least one partial redemption before being fully redeemed early by the issuer. It had a 7% coupon and a 4/30/19 maturity. HTGZ: Partial Call (3/28/15 Post)

Hercules also has two $1K par value bond that trade in the bond market: 4,625% SU Maturing on 10/23/22; 4,375% SU Maturing on 2/1/22

Last Earnings Report: Hercules Capital Reports Third Quarter 2018 Financial Results

Fidelity will not allow its customers to purchase this exchange traded baby bond online. If you try to place an order, you will receive this message:  

I can assure everyone that banging your head against the wall is far more rewarding than trying to change Fidelity's order prohibitions. No other broker that I use restricts online purchases. 

This problem goes back over 5 years and encompasses a large number of exchange traded bonds and preferred stocks.  

4. ELIMINATIONS:

A. SOLD Remaining DOC at $17.1-Used Commission Free Trade:

Profit Snapshot: +$69.5

Quote: Physicians Realty Trust (DOC)
2017 Annual Report

Last Substantive Discussion:  Stocks, Bonds & Politics:Item # 3.A. Sold 103 DOC at $16.92 (8/19/18 Post) I discussed the second quarter earnings report in that post. Physicians Realty Trust Reports Second Quarter 2018 Financial Results

Last Buy Discussions: Item # 2.A. Bought 15 DOC at $14.5 (4/19/18); Item 1.C. Added 5 DOC at $14.7 (3/12/18 Post)

DOC Trading Profits to Date: $381.68 ($312.16 in prior trades with the largest gain being $237.96 on a 100 share lot sold in 2015)

Trading snapshots in Gateway Post: Equity REIT Common and Preferred Stock Basket Strategy

I will want a price less than $15 before restarting a position build.

Last Earnings Report: 9/30/18

Physicians Realty Trust Reports Third Quarter 2018 Financial Results 

Note the big difference between FFO and FAD or Funds Available for Distribution.

FAD Per Share: $.24
FFO Per Share: $.28
Dividend Per Share: $.23

Arguably, the dividend is already too high given the FAD per share number. I doubt that the quarterly dividend will be raised by 1 cent per share (or higher) in 2019 or 2020. I am consequently anticipating at the current time extremely anemic dividend growth at best. The last raise was from $.225 to $.23 effective for the 2017 third quarter. Docreit: Dividends The quarterly rate was $.225 in the 2014 first quarter. Between the first quarter of 2014 through 2018 (five years), the dividend has increased by only 2.22% over a five year period and is bumping up even now against the FAD per share number.  I am not impressed.

Debt as of 9/30/18: $1.522+ B (discussed starting at page 24)

Last Stock Offering (6/2017): 20M Shares at $20.4 + greenshoe

I would say that another offering is overdue for this REIT.

The REIT does have an ATM program and has sold 425,989 shares this year through 9/30/18 at a weighted average cost of $17.66. Page 13 10-Q for the Q/E 9/30/18

Last Note Offering (12/2017): $350M 3.95% SU Bonds Maturing in 2028  

Disclaimer: I am not a financial advisor but simply an individual investor who has been managing my own money since I was a teenager. In this post, I am acting solely as a financial journalist focusing on my own investments. The information contained in this post is not intended to be a complete description or summary of all available data relevant to making an investment decision. Instead, I am merely expressing some of the reasons underlying the purchase or sell of securities. Nothing in this post is intended to constitute investment or legal advice or a recommendation to buy or to sell. All investors need to perform their own due diligence before making any financial decision which requires at a minimum reading original source material available at the SEC and elsewhere. A failure to perform due diligence only increases what I call "error creep". Stocks, Bonds & Politics: ERROR CREEP and the INVESTING PROCESS Each investor needs to assess a potential investment taking into account their personal risk tolerances, goals and situational risks. I can only make that kind of assessment for myself and family members.