Saturday, February 9, 2019

Observations and Sample of Recent Trades: AEB, GWX, NMFC

Economy

Last Thursday, Larry Kudlow threw some cold water on the belief that a trade deal with China was near completion. Larry Kudlow: 'Pretty sizable difference' in China trade talks 

New White House message on China is that there’s a long way to go before striking trade deal - MarketWatch


On the same day, Trump stated that he would not be meeting with China's President prior to the March 1 deadline. 


While that deadline may be extended without further tariffs being applied, the statement does suggest a lack of progress in the negotiations. 

The US and China don't even have a trade deal draft yet as deadline approaches


Previously, Trump was more upbeat on a deal when stocks were in a tailspin. There are still a large contingent of investors who believe him, even when it is apparent that he is attempting to manipulate them into buying stocks. 


The EU revised lower its estimate for Euro GDP growth to 1.3% from the previous forecast of 1.9%. I view the revised forecast as somewhat optimistic. 




Sourced from European Economic Forecast Winter 2019 (Interim)


The Bank of England also slashed its growth forecast. EU, BOE cut growth forecasts; US-China trade weighs


Fragile global economy could tip, Roubini warns - MarketWatch

++++

Markets and Market Commentary:

The stock market had a barely negative response last Thursday and Friday to the barrage of negative news items. 

A late day rally on Friday even turned SPX positive for the day. I would describe the reaction to Thursday's news items as non-existent. The market can easily fluctuate more on a no news day. 

The stock market dip? Keep buying, says Bank of America Merrill Lynch - MarketWatch This opinion may be the majority one. The belief underlying the opinion is that Trump has to work out a trade deal with China soon or risk defeat in 2020. The problem with that opinion is that China knows that Trump is vulnerable in 2020. It would not help Trump to work out a deal that is widely viewed as capitulation. That could leave him in a worse position. And, China is aware of that as well.    


Buffett's Betas

The German 10 year bond fell below .1% last Friday. Germany 10 Year Government Bond -MarketWatch The U.S. 10 year rose in price and declined in yield to about 2.64%. 

Rates & Bonds - Bloomberg

The recent decline in interest rates have made CDs unappealing. It is hard now to find a maturity where a CD yield is higher than the comparable maturity and far more liquid treasury. 

Treasury rates have been moving down. For example, the two year treasury note topped out near 3% last November and closed last Friday at 2.46%. U.S. 2 Year Treasury Note Interactive Charts - MarketWatch The 10 year treasury was near 3.25% last November and closed last Friday at 2.63%+. U.S. 10 Year Treasury Note Interactive Charts - MarketWatch 

Since the FED has not reduced the federal funds rate and did increase it by .25% last December, the treasury bills (1 month to 1 year) have held their yields from last November, but have started to drift down some recently, with the great
er percentage declines being in the 6 month and 1 year bills. The 1 year bill topped at 2.74% last November and closed last Friday at 2.54%.  

2018 Daily Treasury Yield Curve Rates
2019 Daily Treasury Yield Curve Rates

I will probably participate in the 1 year bill auction scheduled for Tuesday, 2/26/19. That bill auctions once a month. The amount will be somewhere between $2K and $6K, using proceeds from maturing CDs. In my Schwab account, I have $3K in CDs maturing on 2/19.  

Spreads between higher quality corporate bonds and comparable maturity treasuries have narrowed, making the corporates less appealing as treasuries become even more unappealing as real return vehicles. 

While I will be discussing several corporate bond purchases that have already been made in upcoming posts, there will be fewer purchases and possibly a net decrease in my overall weighting as I sell some recent purchases into the rally. 

I am not buying any CDs with proceeds from maturing ones. Most of those proceeds are being redirected into short term treasury bill purchases, hoping for an upswing in short term rates later this year or early next year which is, at best, a possibility now rather than a probability.   

While I had some hope prior to last December that interest rates would gradually move to normal levels, that is not going to happen this year. 

The Stock Jocks are back to claiming that they have the only game in town. 

++++++

Trump:  

Contrary to the baseless allegations made by Donald, the House investigations into his past conduct will have no impact on the economy. House Expands Russia Inquiry as Pelosi Declares Democrats Will Not Be Cowed

Is there any republican Congressman or Senator who accepts climate science or does anything other than dismiss it?  I am not aware of one who would publicly take this report seriously: 2018 Fourth Warmest Year in Continued Warming Trend, According to NASA | NASA ("The past five years are, collectively, the warmest years in the modern record."); Undeniable warming: The planet’s hottest five years on record in five images - The Washington Post2018 Was Earth's Fourth-Hottest Year On Record, Scientists Say : NPR  


Republican members of congress or the Senate would be tarred and feathered in a primary when and if one of them stood by climate science. Climate Science | Climate Central If they accepted climate science, then the natural question would be what are you going to do about it, and that is the one they collectively do not want to answer. 

Republicans push back at first climate hearings | TheHillClimate Science Returns to Capitol Hill | WIRED

A running list of how President Trump is changing environmental policy-National Geographic 

T-Mobile executives seeking merger approval booked more than 52 nights at Trump’s hotel — more than previously known - The Washington Post

+++++++

1. Eliminations:

A. Sold 50 AEB at $22.72:



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

Closing Price Last Friday: AEB $22.24 +$0.17 +0.77% 

Profit: $168.48



Stocks, Bonds & Politics:Item # 5.A. Bought 50 AEB at $19.31 (1/5/19 Post)

AEB Trading Profits To Date: $3,583.34 (prior trades at $3,425.86-small lot trading)

Security Description

Categories: Advantages and Disadvantages of Equity Preferred Floating Rate SecuritiesAegon Hybrids

Par Value: $25
Issuer Optional Redemption: At anytime
Coupon: 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. 

Lowest Prices Paid = $4.8 and $5.5  

Buy of 50 AEB at $4.8 (2/23/2009)Buy of 50 $5.5 (10/8/2008 Post) 

Largest Gains

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



B. Sold 60 NMFC at $13.96 and 50 at $13.94


60 at $13.96-Used Fidelity Commission Free Trade
50 at $13.94-History Snapshot in Schwab Account
Quote: New Mountain Finance Corp. (NMFC)
Website: New Mountain Finance Corporation
SEC Filings
10-Q for the Q/E 9/30/18 (investments listed starting at page 7)

Profit Snapshots: $42.77





Closing Price Last Friday: NMFC $13.95 +$0.06 +0.43% 


Last DiscussedItem # 1.C. Added 10 NMFC at $12.6 Used Commission Free Trade (1/13/19 Post)

Last Sell DiscussionItem # 1 A. Sold 50 NMFC at $14.06 (8/19/18 Post)-Item # 1.A. Bought 50 NMFC at $12.84 (3/5/18 Post)

As with all BDCs, the goal is to collect the dividends and to escape at whatever profit may be available. 


Net Asset Value Per Share (relatively stable for a BDC) but below 2013-2014 levels):

9/30/18:   $13.58 10-Q at page 3 

New Mountain Finance Corporation Announces Financial Results for the Quarter Ended September 30, 20186/30/18:   $13.57
3/31/18:   $13.60 10-Q at page 3
12/31/17: $13.63
12/31/16 $13.46
9/30/15   $13.73
12/31/14 $13.83
9/30/14   $14.33
12/31/13 $14.38
6/30/13   $14.32

12/31/12 $14.06 Sourced from 10-Qs

Rationale: I am trimming my BDC allocation. The current stagnation in Libor rates partly undermine the rationale for buying BDC with floating rate loans. Prices have bounced up as well over the past month or so.  


I am also focusing on selling BDC stocks where the current market price exceeds the last reported net asset value per share, which is the case for NMFC, or is within a low single digit percentage below the last reported net asset value per share. 


The second lien exposure makes the Old Geezer nervous when the expansion cycle for the economy started in June 2009. 


I have seen a significant number of those second lien loans made by BDCs go sour during the economic expansion. 

And, for an individual investor, there is no adequate way to identify the loans that will likely go into default and potentially into a zero recovery before the major write-down occurs.  

I will discuss a second lien loan made by another BDC, CM Finance Inc. that went from a $20M loan to a zero valuation in the last quarter. The borrower was current on interest payments until the 2018 third quarter, so reviewing the earning press release for the second quarter, which asserted that no loans were on non-accrual, would not have jolted the investor to focus on the one loan loan among many made to private companies. 

Re-Entry: Given this BDC's exposure to second lien debt, I am reducing my re-entry price to a greater than 10% discount to the last reported net asset value. That number was $13.58 for the Q/E 9/30/18. Using that number, the reentry price would have to be lower than $12.22. 


Trading Profits: $55.43


More of My Thoughts:  


Since I started trading NMFC, I have found it difficult to realize a capital gain when the shares are bought within a  5% discount to the last reported net asset value per share or at a premium. 


The goal is to achieve a total return in excess of the dividend yield. To have a better chance at realizing that objective, I need to lower my entry prices. 


There are downsides to a BDC's dividend:


(1) The dividend will frequently represent all or almost all of the net investment income; and, in some cases, will exceed net investment income. Thus, capital is not being retained to grow the business which requires share and debt issuances to raise capital. 


(2) The dividend is supported by loans to high risk private companies that are unlikely to receive better terms from banks. 


(3) There will be defaults in those loans and work-outs that result in a net loss of assets over time. It is the exception to find a BDC whose net asset value per share is less than 10% lower than its initial net asset value per share. As capital is incinerated, the BDC is less capital available to generate income without incurring more debt or issuing more stock which can be dilutive when sold at a price lower than NAV per share or not available as a practical matter when the market price is too far below that value.

When the focus is too much on the dividend yield, or what I call the shiny object, the investor will frequently lose sight of a poor total return compared to a broad stock index fund. 


Over the past five years through 2/4/19, NMFC has had an acceptable annual average total return of 9.52%. DRIP Returns Calculator | Dividend Channel That indicates to me a total return that is somewhat less than the dividend yield which is not bad for a BDC. PSEC, an undesirable BDC IMO, had a 2.97% annual average total return over the same 5 year period.  


The overall better historical return for NMFC, compared to most other BDCs, has probably caused me to pay up for the shares which I am going to quit doing. 


Other Sell Discussions

I have put some buy and sell prices in bold letters to illustrate the problem.  



Item # 8 Sold Highest Cost NMFC Lot at $15.37 (9/14/2014 Post)($2.99 profit on the shares + 7 quarterly dividend payments/sold lot on 9/11/14)-Item # 4 Bought 50 NMFC at $15.03 in the Roth IRA (5/29/13 Post)

SOLD 100 of 150 NMFC at $14.4773 ($3.79 profit on the shares + 7 dividend payments)


Item # 1 Sold Remaining 50 Shares of NMFC at $14.63 ($5.88 profit on the shares)

Other Buy Discussions


Item # 5 Bought 100 NMFC at $14.28-Taxable Account (6/22/13 Post)


Item # 3 Added 50 NMFC at $14.2-Roth IRA (4/26/14 Post)

2. Short Term Bond/CD Ladder Basket Strategy:

Purchases $4K 


In my short term ladder, I am starting to buy more bonds maturing in the 1 to 3 year time frame.  

A. Bought 2 JP Morgan 2.55% SU Maturing on 3/1/2021


Finra Page: Bonds Detail




Credit Ratings: 

Fitch has a AA- rating on the senior unsecured debt. Fixed Income Information | JPMorgan Chase & Co.

Bought at a Total Cost of 98.889
YTM at Total Cost = 3.099%
Current Yield at TC = 2.5786%

B. Bought 2 EBAY 2.875% SU Maturing on 8/21/21



One way that I manage my corporate bond portfolio is to roll my maturities from several issuers. 

This is my current EBAY senior unsecured bond position, with prices furnished by a third party service as of 1/23/18. 




I am rolling between $4K to $6K in EBAY bonds. 

I have $4K coming due on 8/1/18. 


The next maturity is a two bond lot maturing on 6/5/20. 

When I receive the $4K in principal, I will consider either keeping the position at $4K or rolling $2K out of $4K in proceeds into another EBAY bond. 

Depending on the available yields, I might buy another 2 bonds maturing on 6/5/20 or 2 more maturing on 8/21/21 or later. The decision will also be based on my then current view of the credit risk. 

A August 2021 maturity is as far as I want to go out in time presently.

EBay shouldn't spin out businesses, it should go private: Baird - MarketWatch

EBay downgraded at Morgan Stanley on concerns of deterioration-MarketWatch

EBay stock soars 8% after Elliott Management suggests plan to fix 'prolonged underperformance' - MarketWatch

FINRA Page: Bond Detail (prospectus linked)


Issuer: eBay Inc.  (EBAY)

EBAY Analyst Estimates

Credit Ratings: 




Fitch Affirms eBay at 'BBB'/'F2'; Outlook Stable (2/1/19)

Bought at a Total Cost of 99.233
YTM at TC Then at 3.196%
Current Yield at TC = 2.8972

3. Small Ball Commission Free ETFs

A. Bought 10 GWX at $29.87- Commission Free for Vanguard Customers




Quote: SPDR S&P International Small Cap ETF Overview

This is my first purchase of this ETF. The next add will be at less than $28.9. 


Maximum Position: 50 shares

Purchase Restriction: Small Ball Rule using commission free trades available at Vanguard 

It was selected based on three criteria: (1) it has underperformed U.S. small caps; (2) diversification and (3) a possible downtrend forming in the U.S.D. vs. emerging market currencies after a long period of dollar strength. 


I would not bother to research any of the companies owned by this ETF 


Sponsor's Page: GWX: SPDR S&P International Small Cap ETF

Expense Ratio = .4% 

Number of Holdings as of 2/4/19 = 2,321

Price to Book = 1.07

P/E = 13.32 

4. Intermediate Term Bond/CD Ladder Basket Strategy


A. Sold 1 Diageo Capital 2.625% SU Maturing on 4/29/23:




FINRA Page: Bond Detail

Profit: +$13.18


Sold at 98.6
Proceeds at 98.5
YTM at 98.6 = 2.979%

Discussed Buy at Item # 5.B. (3/8/18 Post)

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.

14 comments:

  1. The delay tactic worked. The market used to roil every time tariffs were mentioned. Now there's no deal, no indication anything good will happen, and the market yawned.

    We saw Trump negotiate on the wall. No reason to think he'll do better with a bunch of experienced politicians in an authoritarian state.

    I wonder if the market will care if SC's report comes out and it's the worst of what's possible?

    ReplyDelete
    Replies
    1. Land: I do not believe that the Stock Jocks care about what happens to Trump, as long as he does not contribute to a Democrat sweep in 2020. Then there will be a blowback into stock prices, since there would be, at a minimum, some increases in corporate taxes and far more regulations

      Delete
    2. So the focus will be on tax laws and regulations.

      Actually that makes sense. Bull markets are hard to kill; took a long time to believe the banking underbelly was rotten and that was very directly economic in 2007.

      Delete
    3. Land: I start the consumer Age of Leverage in 1985 based on a long term chart of household debt to disposable income. The increases in consumer borrowings thereafter contributed substantially to GDP growth as did deficit spending by the federal government. Spending borrowed money gooses growth. It took about 22 years for that build-up in consumer credit to reach a point where a catalyst could cause widespread and deep consumer loan defaults. The event that started the ball rolling was substantial increases in mortgage debt on top of everything else that ended up causing households to default on mortgages and consumer credit debt since there was no other way to service those obligations. A recession can then aggravate the problem as people lose their jobs and have maybe a month's savings left to make debt service payments.

      It is odd to listen to those who support a balance budget amendment to the Constitution when the federal deficit is running at about a trillion per year. That supports GDP growth though with diminishing returns due to the size of the economy. If Congress could cut $1 trillion from spending, which is of course impossible for them to do, the result would be catastrophic for an economy dependent on deficit spending by consumers and governments.

      Delete
    4. So now we've got lower corporate taxes, to stimulate the economy... with debit for individuals that's at high risk of any small set back. And gov't debt. So any tax rises or effective-rises through regulations will shift the economy.

      Will also help to remove trump & stop some of the ridiculous spending such as on a shutdown...

      A mess on both problems.

      Delete
  2. Coty Inc. (COTY)
    $11.17 +$1.51 (+15.59%)
    As of 9:38AM ES
    https://finance.yahoo.com/quote/COTY?p=COTY

    Coty is one of my losers that is making a strong move up since closing at $7.06 on 2/7/19:

    https://finance.yahoo.com/quote/COTY/history?p=COTY

    The first price spurt occurred on 2/8 after Coty's earning report that showed progress was being made addressing supply chain issues under new management. The Board also declared the regular quarterly dividend which was in doubt to last year's earnings. The dividend will be ROC.

    https://www.businesswire.com/news/home/20190208005083/en/

    Today's spurt is due to JAB announcing that it would boost its already large stake by 150M shares. This would take their position from 40% to 60%. Might as well take the company private IMO.

    https://www.thestreet.com/investing/coty-shares-surge-as-jab-plans-to-boost-stake-14862660

    I am near break-even at the moment, owning 82+ shares acquired under a small ball trading strategy.

    The problem was that I went back to the well once too often after selling COTY in two round-trips at over $20 early last year.

    ReplyDelete
  3. Replies
    1. Land: No, I will keep COTY based on the hope that new management can fix its problems that resulted in stock price carnage last year. That will continue for as long as I see progress.

      I am reinvesting the dividend.

      Using my small ball trading rules, I sold 10 COTY at $21.46 (2/19/18 Post) and 20 at $20.89 (1/28/18 Post).

      I have lowered my exit point from $20+ to $16+.

      Delete
    2. I see... thanks for the explanation and insights.

      Delete
  4. Ares Capital Corporation (ARCC)
    $17.18 +$0.58 (+3.49%)

    https://finance.yahoo.com/quote/ARCC?p=ARCC&.tsrc=fin-srch

    In the past, I expressed an opinion that ARCC was the best of breed among externally managed BDCs.

    The pop today is due to an earnings report; a 1 cent increase in the regular quarterly dividend and a 8 cent per share special dividend spread out over 4 quarters at 2 cents per quarter.

    The trend for BDCs over the past several years has been to cut their dividends or to hold them steady. Dividend increases in any amount have been the exception.

    ARCC reported net investment income of $.48 per share.

    https://www.businesswire.com/news/home/20190212005310/en/

    ARCC has not filed its 10-Q yet. I suspect that there was a significant write-down in the same second lien loan made to Trident that hit CMFN. I will discuss that loan in my next post which highlights IMO a major problem with BDCs.

    Book value per share was reported at $17.12 up from 16.65 as of 12/31/17. That value was at $17.16 as of 9/30/18:

    Page 3
    https://www.sec.gov/Archives/edgar/data/1287750/000128775018000025/arccq3-1810q.htm

    ReplyDelete
  5. SPX did manage to close a slither above its 200 day SMA line today using a 1 year chart. That index is further above its 50 and 100 day SMA lines. All of that is positive, provided the index can create more distance above the 200 day SMA line before turning south. It would be a negative IMO to see a plunge below this week.

    ReplyDelete
    Replies
    1. I remembered and was looking for this comment on the other prior blog. Here it is! It did create more distance above 200 before turning south. Though now it's turning closer to it.

      Delete
  6. New Mountain Finance Corp.
    $13.67 -0.21 -1.51%
    https://www.marketwatch.com/investing/stock/nmfc

    I discussed selling my small position in this post.

    Today's decline was mild in response to a share offering priced to the public at $13.57.

    https://www.businesswire.com/news/home/20190212005462/en/

    The decline would have been greater if the external managers did not take steps to bring the proceeds above net asset value.

    This was done in part by paying the underwriters discount of $.42 per share out of their pockets.

    Without that adjustment, the proceeds would have been below net asset value per share.

    With concessions made by the external managers, the proceeds number was raised to $13.75 according to the press release which would be slightly above the last reported net asset value per share of $13.58 as of 9/30/18. To be accurate however, that number needs to be reduced by the expenses paid by the corporation in connection with the offering which can amount to several hundred thousand generally speaking.

    BDC shareholders have not appreciated as of late capital raises at a discount to net asset value per share, which explains why the external managers are eating the offering costs by paying the underwriters' discount or are simply avoiding stock offerings at below net asset value per share. TPVG's managers did the same in a recent stock offering.

    There is a conflict between BDC external managers and shareholders when an offering is dilutive. The managers are paid in part on assets (a base management fee on assets + an incentive fee), including assets purchased with debt, so the incentive is to add more assets through stock and bond offerings irrespective of whether that makes sense to the public shareholders.

    ReplyDelete
  7. I have published a new post:

    https://tennesseeindependent.blogspot.com/2019/02/observations-and-sample-of-recent_13.html

    ReplyDelete