Observations and Sample of Recent Trades: ABDC, DXPRB, SCM

Economy:

The jobs report for January was better than the consensus expectation. The BLS estimated that the economy added 304K jobs, with the consensus at 170K. Employment Situation Summary The average work week was unchanged at 34.5 hours. Over the past year, hourly earnings have risen 3.2%. The numbers for October and November combined were revised down by 70K. Overall, this was a good report.  

Home price growth skids to a 4-year low, Case-Shiller says - MarketWatch

Consumer sentiment in January falls to worst level since Trump election - MarketWatch
++++++

Markets and Market Commentary:

Friday's action in the bond market reversed the decline in yields from last Thursday. Regional banks, which underperformed SPX on Thursday, outperformed on Friday. Equity REITs which outperformed on Thursday underperformed on Friday. 

Closing Prices Friday 2/1/19: 

S & P 500 2,706.53  +2.43  +0.09%  

IEF $104.10 -$0.34 -0.33%: iShares 7-10 Year Treasury Bond ETF 
KRE  $53.42 $0.46 +0.87%: SPDR S&P Regional Banking ETF 
VNQ 82.84 -$0.57 -0.68%  VANGUARD REIT ETF 

I would simply note that the movement in interest rates over the past several weeks will have no material impact on the bank and equity REIT operational performance. Traders simply react as if these inconsequential daily moves have significance because others will react in the same way. Bank net interest margins are still under pressure and mortgage rates for  REITs, primarily at or near five year terms, have not changed much either.  

Caixin China manufacturing PMI falls in January - MarketWatch (48.3, indicating contraction); Economy: China reports Caixin Markit manufacturing PMI for January

Report Link:Caixin China General Manufacturing PMI (Eng) 

Construction spending ticks up, led by housing - MarketWatch (up 4.5% for the 11 month period ending last November Y-O-Y):

Since I view it as likely that the stock market will be in a broad trading range this year, and has moved closer to the top of that range after the strong January upswing, I have pared or eliminated some positions, though the amounts are immaterial. I have also lightly pared my intermediate bond portfolio by selling some bonds maturing in the 2022 to 2026 range. 

Both the Stock Jocks and the Bond Ghouls are positioned for no FED rate hikes and no meaningful change in inflation and inflation expectations. When the herd tilts so far in one direction, history has frequently upset the consensus. 

I do anticipate that the FED will at a minimum be on hold through June. 

Two rate hikes of .25% is still a possibility later this year, assuming a trade deal with China is executed, the economy and inflation grow above the consensus forecast, and inflationary pressures build in the economy. It is all fluid, nothing is written in concrete no matter how much concrete is poured around future predictions. 

++++

Trump:

Trump Calls His Intelligence People ‘Naive’ Only Donald has the wisdom and knowledge to properly assess and gather intelligence about Iran and North Korea. Only Donald can form opinions on such matters, which he will convey in twits to the faithful who regard him as a truthful Stable Genius whose opinions are facts passed to him by a burning bush.

After blasting his intelligence chiefs, Trump then claimed that the fake news media had created out of thin air the differences between Trump's opinion and the consensus opinions of the professionals. 

Trump disagrees with his own intelligence team. We catalog the differences | PolitiFact

Donald will lie even when there is a transcript and tape that proves that he is lying.

Trump claims his intel chiefs were 'misquoted' when they publicly broke with him - POLITICO

++

Exclusive: Trump EPA won't limit 2 toxic chemicals in drinking water 

'Whistleblower' in White House security clearance office gets suspended (the career security persons opposed giving Jared Kushner the top secret security clearance which was overruled by a Trump acolyte Carl Kline); Kushner's top-secret security clearance was rejected twice: report | TheHill Klein has overruled the professional staff at least 30 times. 

++++

Donald and the Narcissistic Personality Disorder: 

The Fake News President checks all of the boxes for narcissistic personality disorder. 

Does Trump Suffer from Narcissistic Personality Disorder? | Psychology Today; 

The Populist Appeal of Trump's Narcissism | Psychology Today; 

Narcissistic personality disorder - Symptoms and causes - Mayo Clinic; 

Free Narcissistic Personality Disorder Test 

This is just one of his mental disorders. 

++++

More on My Ancestors:

Opinion | A Hillbilly and a Survivalist Show the Way Out of Trump Country - The New York Times

Amazon.com: The Son Also Rises: Surnames and the History of Social Mobility (The Princeton Economic History of the Western World Book 49)(recommended by a reader) 

With some exceptions, my ancestors were stuck in a cycle of subsistence living for centuries until my grandparents decided to move from Hickman County Tennessee to Nashville, TN.

The move landed the tribe of seven in a rented house located on Elkins Avenue.

Down the street lived a family who had this highly disciplined and detailed oriented 100% left brain dominant personality, who married my mother in late November 1941, just in time for WWII:

1939

My father became successful even though he had barely graduated from high school, finishing the required courses only because it was necessary as a precondition to marrying my mother. His school interests ended with the shop class.

A significant part of his success was due to this Golden Gloves fight: 

1938 Tennessean Newspaper

My father is pictured on the left. The paper called the guy on the right the "east side smoothie" which captured his essence. 

In that bout, my father met his lifelong business partner whose strengths were my father's weaknesses:     

7/20/1961 Tennessean

Since his father was a roofer, and everyone had to work, my dad learned about construction working for his father.

Upon returning to the states after his WWII service still in one piece, he started to build himself the first house located on Nebraska Avenue, near where he grew up. He did all of the work including framing, electrical, plumbing and roofing. 

My Mother's handwriting (very proud of the upward mobility)

He would build two more houses in that area, known as Sylvan Park, selling both for a profit, before moving to a more prestigious area known as Green Hills where he built this home in 1950, now valued at $500K by Zillow: 1818 Shackleford Rd, Nashville, TN 37215 | Zillow

When I was going through his personal effects after he passed, I found old receipts like this one, showing a property tax of $102.5 for this dwelling that he built for about $5K all-in.

And, this was the next house that he built in 1954, which now looks just like it did when I lived there in the 1950s:

By that time, he was not building the homes with his own hands. 

The next new home build would be in 1963.

So several events were necessary for their children to have a better chance at financial success.

My grandparents had to abandon the multi-generational lack of mobility that had resulted in decades of subsistence living and then fortuitously rent a house on Elkins Avenue where she met a man who was driven and smart.

So their sons went to private schools in Nashville (University School of Nashville and Montgomery Bell Academy), received their B.A. decrees from prestigious universities and secured advanced professional decrees thereafter, then rinse and repeat as the cycle is broken.

I did not know anything about 99% of my ancestors, but these pictures tell the story:

This is a picture of 2 great-grandparents, farmers like the others in Hickman County, with my maternal grandmother second from the right:

Maternal Grandmother is the young girl

What is amazing about that picture is the father and mother were born in 1858 and 1861 respectively and were in their late 30s when this picture was taken. My grandmother was born in 1901. Life would just wear you down quick.

I have previously displayed this 1900 photo, just more of the same:

Clan: Circa 1900

These people were hard working and intelligent. 

If there was a camera in 1800, and the clan posed in their Sunday best for a similar picture, the result would be about the same, though it is possible that the drapes hanging out of the window were an  improvement. 

Once the strong barriers are removed to upward mobility, including race and sex discrimination, then the individual has a far better chance to succeed. There is certainly no shortage of people in this world who have enormous potential but who never come close to realizing it due to the many barriers placed before them coupled with a focus just on survival.

I do believe that there are more opportunities now in the U.S. for economic advancement. Still a large percentage of the population, possibly around 50%, are stuck in a long standing cycle of subsistence living. 

In the 2014 FED survey of household finances, a question was asked whether the household could pay for an unexpected $400 expense. 47% of the households replied no unless they borrowed money or sold something. Report on the Economic Well-Being of U.S. Households in 2014  

While there are examples of downward mobility, those households are mostly in the same or similar economic circumstances as prior generations, just adjust the $400 sum by past inflation. 

And, as my last word on the subject, I have discovered that I have more Native America DNA than Elizabeth Warren. It was not unusual for southerners to marry Native Americans or to have children with African Americans. My 7x great grandmother was a member of the Saponia tribe. Saponi Indians - North Carolina History Project There is some Cherokee as well. I will be declaring my candidacy for President in the privacy of my own bathroom next week. 

+++++

1. Elimination and Pares-Small Ball BDC Trading:

The goal with any BDC purchase is to realized a total return in excess of the dividend yield, no matter how small.

The trading system for this disfavored asset category is to buy and average down in small lots and to profitably sell the highest cost lot when and if I have the opportunity to do so, irrespective of the profit. 

Small ball trading is a risk reduction technique used for high risk securities, including all BDC stocks. 

A. Sold 50 ABDC at $6.92:

History:

Quote: Alcentra Capital Corp. (ABDC)

Profit Snapshot: $28.86

I sold the highest lot purchased first. Item # 1.B. Bought 50 ABDC at $6.24 (10/10/18 Post)

This reduced my average cost per share to $5.81, increased my dividend yield, reduced my risk in a deservedly hated BDC, and fulfilled my objective of realizing a total return in excess of the dividend yield.

Last Discussed: Stocks, Bonds & Politics: Item 1.B. Bought 50 ABDC at $5.65(11/25/18 Post) At that point, I was paying Schwab's $4.95 commission. 

Last Dividend: Quarterly at $.18 ($.72 annually)

Last Ex Date: 12/28/18

Dividend Yield at Total Average Cost Per Share = 12.39%

Dividend Reinvestment: Yes, given the huge discount to net asset value

Last Reported Net Asset Value Per Share (as of 9/30/18): $11.08

That is an increase from $11.01 as of 6/30/18  and stable with the $11.09 number as of 12/31/17. 2017 Annual Report (risk summary starts at page 26)

Last Earnings Report: Alcentra Capital Corporation Announces Third Quarter 2018 Financial Results - Nov 5, 2018

I have nothing to add to my previous discussions. While this BDC may have stopped the bleeding, its past history has earned it my "deservedly hated designation".  

B. Eliminated SCM Sold Remaining 32+ Shares at $14.22-Used Commission Free Trade:

Quote: Stellus Capital Investment Corp. (SCM)

Profit Snapshot: $78.09

Trading Profits to Date (all small lots): $540.24 ($462.15 in prior trades)

Last Substantive Buy Discussion: Item # 1.C. (11/25/18 Post)

Last Reported NAV Per Share (Q/E 9/30/18) = $14.29

Last Sell Discussions: Item # 1.A. Sold Highest Cost Lot-50 Shares at $12.63 (5/3/18 Post)(profit snapshot = $34.24); Item 2.B. Sold 100 SCM at $14.23 (2/27/17 Post)(profit snapshot=$285.96); Item # 2 Sold 100 SCM at $13.02 (1/12/17 Post)(profit snapshot= $141.96)

Last Earnings Report: Stellus Capital Investment Corporation Reports Results for its third fiscal quarter ended September 30, 2018

"As of September 30, 2018, our portfolio included approximately 54% of first lien debt, 34% of second lien debt, 5% of unsecured debt and 7% of equity investments at fair value.  Our debt portfolio consisted of 90% floating rate investments (subject to interest rate floors) and 10% fixed rate investments." (emphasis added) 

As previously stated, I am concerned about the level of second lien and unsecured debt. 

Dividends: Monthly at  $.1133 per share ($1.36 annually-rounded)

Dividend Yield at Sell Price: 

Risk Summary: SEC Form 10-K pages 29-56!

2. Short Term Bond/CD Ladder Basket Strategy:

Purchases: $7 K

A.  Bought $7K 3 Month Treasury Bills at Auction Maturing on 5/2/19:
IR = 2.423%

Auction Results:

3. Intermediate Term Bond/CD Ladder Basket Strategy:

A. Sold 2 AT & T 3.95% SU Maturing on 1/15/2025-In A Roth IRA Account:

Profit Snapshot:

The yield spread between 2 and 6 year AT & T senior unsecured bonds has narrowed. The general idea is to redirect the proceeds into a shorter term bond, capturing most of the current yield and/or yield to maturity of this bond.

I also have concerns about AT & T gigantic debt load. One way that I deal with that concern is to shorten the weighted average duration of my AT & T bonds.

AT & T laid another egg in its 4th quarter earnings report released last week. AT&T's wireless customer growth slows, revenue misses estimates | Reuters

This kind of report justifies my small ball approach for the stock and strict limitations on my dollar exposure. 

Closing Price In Response to the Release (1/30/19): T $29.37 -$1.33 -4.33% 

4. Bought 50 DXPRB at $23.77-Used Commission Free Trade: 

Quote:  Dynex Capital Inc. 7.625% Cumulative Preferred Series B Stock 

Closing Price Last Friday: DX-PB $23.70 -$0.05 -0.19% 

Current and Maximum Position:  50

Security Description: 

Prospectus
Par Value: $25
Issuer: Dynex Capital Inc. (DX 
Issuer SEC Filings
Coupon: 7.625%
Dividends: Quarterly, Non-Qualified and Cumulative 
Last Ex Dividend Date: 12/28/18
Yield at Total Cost = 8.02% 
Optional Call Date: At anytime now 
Dividend Stopper: Yes (company must eliminate a cash dividend to common shareholders before deferring the preferred stock dividends)

I have a small position in the common stock. 

Last Substantive Discussion: Item # 1.C. Bought 50 DX at $6.35 Used Commission Free Trade (10/3/18 Post) 

Given the leverage of mortgage REITs and their business models, I view their equity preferred stocks to be among the most dangerous in the preferred stock universe. 

Based on that opinion, and my classification of equity preferred stocks as a disfavored asset class, I will keep my exposure small and will trade the positions for small gains.   

I generally discuss the risk of MRETI preferred stocks in Item # 2 (4/11/17 Post). 

Dynex 2017 Annual Report (risk summary starts at page 8 and ends at page 23)

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.