Observations and Sample of Recent Trades: AEB, BIF, FHN, HOPE, MSPRA

Economy: 

According to the BLS, the U.S. economy added 312K jobs last month. Average hourly earnings rose 11 cents and have increased 3.2% over the past year. The average work week increased by .1 of an hour. The prior two months were increased by 58K. The unemployment rate rose to 3.9%, but that was due in large part to a 419K increase in the labor force. Employment Situation Summary This was a strong report. Brian Wesbury summary.pdf 

U.S. gains 312,000 jobs in 10-month high that shattered Wall Street forecasts - MarketWatch

December private payrolls rise 271K vs. 178K est.: ADP/Moody's

U.S. manufacturers expand at slowest pace in 15 months as business confidence wanes, IHS Markit finds - MarketWatch

Bad omen for economy? Manufacturers grow at slowest pace in two years, ISM finds - MarketWatch

Powell says Fed 'will be patient' with monetary policy as it watches how economy performs Some talking heads attribute the market's rebound last Friday to statements made by Chairman Powell. (e.g. Cramer: The Fed may have just set the Trump rally back on its course) Powell has recently made substantially similar statements, and I found nothing new in his statements last Friday. 

Cramer is just one of many who view a 2.25% to 2.5% federal funds rate as far too high, notwithstanding the fact that this range is far below normal for past expansion cycles and was gradually reached from a zero bound range with unemployment near 60 year lows and real GDP growth over 2% every year since 2012 except for the 1.88% growth rate in 2016. US Real GDP Growth Rate by Year 

Civilian Unemployment Rate-St. Louis Fed

Effective Federal Funds Rate-St. Louis Fed

Bank Prime Loan Rate-St. Louis Fed

Real Gross Domestic Product-St. Louis Fed

Longer Term Chart

Real Gross Domestic Product Growth Rates by Quarter- St. Louis Fed

My current thinking is that the FED will raise the FF rate by .25% in the first half and then cut the rate back to the current level in the 2020 first half.

At most, I would expect two .25% increases this year rather than three which was the expectation contained in the last dot plot.

The Bond Ghouls are expecting no hikes this year, with the odds at 25.4% that there will be a rate decrease on or before the December meeting and only a 5% chance of a .25% hike before year end. Countdown to FOMC: CME FedWatch Tool The probability of a decrease from the current level on or before the January 2020 meeting is at 37.1%.

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Markets and Market Commentary: 

I would attribute the market's rebound last Friday to the strong jobs report and China's decision to add economic stimulus through lowering bank reserve requirements. 

The action of China's central bank will free up about $116B in capital for future loans. China slashes banks' reserve requirements again as growth slows | Reuters I view this as a risky form of economic stimulus since it increases the risk of bank insolvency. 

China's banks have had and many continue to have non-performing loans as a percent of total loans far in excess of an average U.S. bank. PwC CN: China's ballooning debt: Is it time to address it?; China Banks Bad Loans Surge Most on Record Amid Deleveraging-Bloomberg; Fresh Doubts Raised on China's Bad-Loan Data-Bloomberg

Wharton's Jeremy Siegel says stocks will return up to 15%

Everyone can now rest easy: Trump says stocks will rise once trade battle settled, calls last month's market decline a 'glitch'

Blackstone's Byron Wien sees S&P 500 up 15% this year to new highs

If this is a ‘proper’ bear market, stocks ‘are only at the beginning of the selloff: SocGen - MarketWatch

Citi’s Levkovich cuts S&P 500 target as sentiment enters panic mode - MarketWatch

Apple cuts holiday sales forecast on iPhone and China weakness, stock falls 8% - MarketWatch

Goldman Sachs says Apple will have to cut 2019 numbers

Wall Street on Apple after warning on iPhones sales and China; Apple’s ‘darkest day’ in iPhone era triggers flood of price target cuts by analysts - MarketWatch

Bristol-Myers to buy Celgene in a $74 billion deal

I am one day short of declaring a Trigger Event and have not started the day count over. One close below 20 in the VIX before one more close over 26 will restart the day count. 

Last year, there were two near Trigger Events. That indicates to me a market on a razor's edge. 

Since I was buying stocks and stock funds during the recent high volatility period, or what I simply call "buying into the volatility", I will likely be selling some recently bought positions when the VIX returns to multiple day movement below 20 accompanied by a move in SPX back to a range between 2,600 and 2,632. 

I view SPX 2,632, a former support line busted with gusto in early December, as likely to provide strong overhead resistance that may need some major positive catalyst to pierce, such as a new trade deal with China viewed by sophisticated investors as extremely favorable to U.S. businesses. 


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Trump: 

Demagogue Don asserted that he would keep the nine departments shut for years unless the Democrats agreed to spend $5B on the Duck's wall. 

Then, in almost the same breath, Petulant Don said that he had to power to spend those funds with no authorization from Congress, but preferred to keep the government in partial shutdown for years with hundreds of thousands of employees without a paycheck. Trump threatens years-long shutdown for his wall as GOP support begins to fracture 

House Democrats vote to reopen government and deny Trump wall money, defying veto threat

Retired four-star Gen. Stanley McChrystal says Trump is dishonest, immoral

Garry Kasparov on Our Dear and Great Leader: "Unlike the alleged leader of the free world, I prefer to speak from authority. Despite his claims of expertise on everything from foreign policy to campaign finance laws, every time Trump speaks off-script, the truth is revealed. He’s a Russian matryoshka doll of ignorance, with numerous layers of cluelessness wrapped up inside a total lack of self-awareness." Donald Trump, master revisionist: What he said about Afghanistan, and what it says about him - NY Daily News

Romney says Trump causes dismay around the world

McCaskill says GOP senators privately believe Trump is 'nuts' 

Trump falsely claims Mexico is paying for wall, demands taxpayer money for wall in meeting with Democrats

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1. Small Ball- REGIONAL BANK BASKET STRATEGY GATEWAY POST:

With the recent decline in interest rates, and the stubbornly low net interest margins, regional bank stocks have entered a bear market which is reflected in the SPDR S&P Regional Banking ETF (KRE) chart. 

That does not prevent me from buying, but does dictate that I use the small ball strategy when making purchases. 

KRE hit a 52 week high at $66.04 on 6/7/18. 

The KRE closing price, when I first bought the 10 HOPE and 10 FHN discussed below, was at $50.71, or a 23.21% decline from that 52 week high. 

HOPE  hit a 52 week high at $19.48 (3/12/18) and was off -30.75% from that high at my purchase price of $13.49 and -40% when I bought another 10 shares at $11.69 shortly thereafter.   

Why bother trying to catch falling knives when the current herd consensus is predicting no positive change in the earnings outlook? 

Two reasons are concrete and another is mushy. 

The concrete reasons relate to valuation and dividend yield. 

The mushy reason has to do with unpredictable changes in the herd consensus opinion. 

It was only a few months ago that investors were worried about interest rates rising too fast and KRE responded by hitting a new all time high. 

When that opinion was tested by a very mild reversal in the upward interest rate trend, regional banks were crushed by more than 20%. This last reaction may prove to be an overreaction to a few data points suggesting a recession in 2019, though the reasonable prediction IMO remains no recession with about 2% real GDP growth. I am continuing to anticipate that net interest margins will be constrained throughout 2019 due to the flat yield curve. An investor in this sector does not want to see NIM remaining under pressure as non-performing loans and charge-offs accelerate to normal recession type levels.   

A. Bought 10 FHN at $14.59 and 10 at $12.62-Used Commission Free Trade: 

Quote: First Horizon National Corp. (FHN)

Closing Price Last Friday: FHN $13.81 +0.42 +3.14% 

FHN SEC Filings

FHN Consensus Analyst E.P.S. Estimates

On the day after this 10 share purchase, Morgan Stanley issued a report maintaining a hold rating and set a price target of $18. I would be pleased to see that price. 

1 Year Chart: Bear Market trend

Current Position: 45 shares

Maximum Position: 100 shares

Average Cost Per Share: $14.69

Dividend: Quarterly at $.12 per share

Dividend Yield at Average Total Cost: 3.27% 

Last Ex Dividend: 12/13/18 

Last Discussed: Item # 3.B. Bought 25 FHN at $15.56-Used Commission Free Trade (11/4/18 Post) 

I discussed the third quarter's earning report in that post and have nothing to add. 

B. Bought 10 HOPE at $13.49 and 10 at $11.69-Used Commission Free Trades: 

Quote:  Hope Bancorp Inc. Stock Quote

Closing Price Last Friday: HOPE $12.46 +$0.19 +1.55% 

HOPE SEC Filings

HOPE Consensus Analyst E.P.S. Estimates (as of 12/10/18):
2018: $1.46
2019: $1.47
P/E at $13.49 Market Price Using the Consensus 2019: 9.18

Consensus E.P.S. Estimates as of 12/26:
2018: $1.45
2019: $1.47
P/E at $11.69 Using 2019 E.P.S. = 7.95

HOPE 1 Year Chart: Bear Market trend

As with other major beneficiaries of the reduced federal corporate income rate, HOPE will lose the Y-O-Y boost to earnings in 2019 compared to 2018 over 2017. The bank will need to do better than the estimated 2019 $.01 increase in E.P.S. Y-O-Y. 

Maximum Position: 130 Shares in this Account + shares purchased with dividends (20 shares remaining, raised from 120 share limit due to price decline, valuation and dividend yield) 

Purchase Restriction: Small Ball Rule. 

Average Cost Per Share This Account: $16.13

Highest Cost Lot in Current Chain: 30 shares at $17.65 (will be sold when and if there is a profit to be harvested)

Dividend: Quarterly at $.14  ($.56 per share annually) 

Last Ex Dividend Date: 10/25/18 

Dividend Yield at Average TC Per Share = 3.47%

Dividend Reinvestment: Yes 

Last Sell Discussions: Item #3.C. SOLD 20 HOPE at $17.91-Used Commission free trade  (8/26/18 Post); Item 1.A. Sold  50 HOPE at $19 (11/4/17 Post)

Last Substantive Buy Discussion: Item # 3.A.Bought 10 HOPE at $14.7 and 10 at $14-Used Commission Free Trades (11/7/18 Post)

I discussed the third quarter earnings report in that post and have nothing to add. 

2. Short Term Bond/CD Ladder Strategy: 

Purchases: $4K

A. Bought  1 Northern States Power 2.2% First Mortgage Bond Maturing on 8/15/20: 

I now own 2 bonds. 

Finra Page: Bond Detail (prospectus not linked)

Definitive Prospectus Supplement

Issuer: Wholly owned subsidiary of Xcel Energy Inc. who does not guarantee the notes

Security: First Lien on substantially all assets 

Credit Ratings:

Bought at a Total Cost of 98.632
YTM at TC Then at 3.054%
Current Yield at TC = 2.23%

B. Bought 1 Treasury .75% Coupon Maturing on 7/15/19: 
YTM = 2.539%

I now own 2 bonds. 

This is a filler in my short term ladder.

C. Bought 1 Wisconsin Energy 2.45% SU Maturing on 6/15/20:

I now own 3 bonds. 

FINRA Page: Bond Detail (prospectus linked)

Issuer: The issuer's new name is WEC Energy Group Inc.  (WEC).
WEC Analyst Estimates

WEC Energy Group posts third-quarter results

Credit Ratings:

Bought at a Total Cost of 98.763
YTM at Total Cost Then at 3.31%
Current Yield at TC = 2.4807%

D.  Bought 1 McDonalds 2.2% SU Maturing on 5/26/20-In A Roth Account: 

I now own 4 bonds with the other 3 held in taxable accounts. 

Finra Page: Bond Detail (prospectus linked)

Issuer: McDonald's Corp.  (MCD)
MCD Analyst Estimates
McDonald's Reports Third Quarter 2018 Results

Credit Ratings:

Bought at Total Cost of 98.794
YTM at TC then at 3.067%
Current Yield at TC =  2.2269%

3. Added to the Stock CEF BIF-Bought 20 BIF at $10.55 and 30 at $10.18-Used Commission Free Trades:

Quote: Boulder Growth & Income Fund  (BIF)

Holdings

BIF SEC Filings

Current Position: 150 Shares

Maximum Position: 300 Shares

Purchase Restriction: Small Ball Rule

Average Total Cost Per Share: $10.59 

Data Date of  20 Share Purchase: 12/10/18
Net Asset Value Per Share: $12.69
Market Price: $10.53
Discount: -17.02%

Data Date of 30 Share Purchase: 1/4/19
Net Asset Value Per Share = $12.36
Market Price: $10.23 
Discount: -17.23%

Sourced: Boulder Growth & Income, closed-end fund summary-CEF Connect

Dividends: Quarterly at $.102 per share (recently revised from monthly payments)

Next Ex Dividend Date: 1/23/19 

Dividend Reinvestment: Yes at greater than a 10% discount to net asset value per share

Last Sell Discussion: Item # 3.B. Eliminated BIF: Sold 116+ (2/16/17 Post) 

Last Discussed: Item # 3 Bought 100 BIF at $10.73 (11/25/18 POST) 

I have nothing to add to that recent post. 

4. Added 50 MSPRA at $18.89 ($1 IB Commission): 

Quote: Morgan Stanley Non-Cumulative Series A Preferred Stock 

Closing Price Last Friday: MS-PA $19.47 +$0.21 +1.09% 

Issuer: Morgan Stanley (MS) 

MS Analyst Estimates 
MS-PA One Year Chart: Bear Trend, possible bottom in $18.5 to $19 range.

This is an average down from a recent purchase: Item # 2.A. Bought 50 MSPRA at $20.7 (12/2/18 Post) 

MSPRA is an equity preferred stock that pays non-cumulative and qualified dividends at the greater of 4% or .7% above the 3 month Libor rate on a $25 par value. Prospectus 

Advantages and Disadvantages of Equity Preferred Floating Rate Securities

The dividends are qualified and non-cumulative.  

This kind of security would become worthless in a bankruptcy.  

I would anticipate that this security will decline in price when alternative fixed coupon preferred stocks are falling in price and increasing in yield up to the point when the rise in short term interest rates triggers and increase in the coupon rate with an expectation of further increases.  

This kind of security provides some problematic inflation protection coupled in the same security with some deflation/low intermediate term interest rate protection.   

Chart: 3-Month London Interbank Offered Rate (LIBOR) 

Starting Point: January 1986

Maximum and Current Position: 100 shares

Average Cost per share = $19.81

Trading Profits to date = $2,121.95

5. Income Generation Aegon Hybrids: 

A. Bought 50 AEB at $19.31  ($1 IB Commission): 

Quote:  AEGON N.V.  Floating Perpetual Capital Stock (AEB)

Closing Price Last Friday: AEB $20.43 +$0.73 +3.71% 

My Category: Advantages and Disadvantages of Equity Preferred Floating Rate Securities

Security Description: AEB is a hybrid security that pays quarterly "dividends" for a U.S. taxpayer at the greater of 4% or .875% above the 3 month Libor rate on a $25 par value. 

3-Month London Interbank Offered Rate (LIBOR) Chart-St. Louis Fed 

The minimum rate of 4% has been the applicable coupon since I first bought this security in 2008. 

This unusual security is a junior bond on the balance sheet and in effect an equity preferred stock for regulatory capital purposes. 

AEB's potential perpetual character makes it analogous to U.S. equity preferred stocks, but it is superior in Aegon's capital structure to equity preferred stocks. 

The hybrids rank below all senior debt. Distributions have been treated as qualified dividends for U.S. taxpayers in the past, but would be classified as interest in European countries. Quantumonline still shows the qualified rate as still being applicable for U.S. taxpayers. 

Aegon may call this security at anytime now. The optional redemption would be at the $25 par value plus accrued and unpaid dividends. 

Prospectus 

Alternate to Libor: The Libor rates will end in 2021.  The scandal-hit libor rate used to set mortgages will end in 2021

It is unclear to me at this time whether the alternate rate will work or produce a similar result to the Libor rate setting. I seriously doubt that I will own this security for very long, as shown by my trading history.  
 
Prior Trade Discussions: 

Item # 2 Sold 50 AEB at $25.23 (9/7/17 Post)(profit snapshot = $166.46)-Bought at $21.9 and discussed here 

Item # 4 Sold 50 AEB at $21.28 (5/3/14 Post)(profit snapshot = $49.98) 

Item # 2 Sold 100 AEB at $18.42 (10/4/11 Post)(profit snapshot = $1,142.51)

Item # 3 Sold 100 AEB at $18.2635 ROTH IRA-Average Total Cost $6.05 (9/19/11 Post)(profit Snapshot = $1,213.76) 

Item # 4  Sold 50 AEB at $21.69 (10/11/2010 Post)(profit snapshot = $81.11)-Item # 3 Bought 50 AEB at $19.74 in Regular IRA (8/20/2010 Post) 

Item # 2 SOLD 100 of 300 AEB at 19.72 (8/16/2010 Post)(profit snapshot 150 Shares at $772.04) 

Buy of 50 AEB at $4.8 (2/23/2009) 

Buy of 50 $5.5 (10/8/2008 Post) 

Realized Gains to Date: $3,425.86  

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.