Observations and Sample of Recent Trades: CHIQ, I-BOND, RMT

Economy: 

The Atlanta FED revised its 2nd quarter real GDP growth estimate to 2.1% last Friday from 1.4% on 6/7/19. GDPNow - Federal Reserve Bank of Atlanta There is no legitimate reason for a .25% federal funds rate cut next month notwithstanding Donald's bloviations. The problem in the U.S. economy now has nothing to with interest rates which are extremely low by historical standards. 

Nonetheless, the Bond Ghouls are predicting a .25% cut next month: 

87.5% Probability of at least a .25% cut on or before the July meeting

Countdown to FOMC: CME FedWatch Tool

The retail sales report for May was positive. US Retail Sales May 2019: Post Broad Rise, April Revised to Gain - Bloomberg

A Morgan Stanley reading on the economy collapses by the most ever (The MS Business Conditions index fell to 13 from 45, the largest one month drop in its history)

Goldman Sachs says the Fed won't cut rates this year As previously discussed, a cut now will do more harm than good. It will confiscate spending income from the Saving Class and signal to consumers and businesses that all is not well which in turn acts to restrain spending and increase hoarding. 

The Economy Looks Good on Main Street — and That’s Bad for Bonds

Larry Kudlow says the US economy will maintain 3% pace even without a China trade deal If that is the case, why does the FED need to cut the Federal Funds rate? Why is Kudlow and Trump demanding a significant decrease in the FF rate.

Oil jumps on reports of tanker incident in Gulf of Oman off Iran coast (6/13); Trump administration blames Iran for oil tanker attacks in Middle East Tensions with Iran have risen persistently after Trump pulled the U.S. out of the nuclear treaty last year.

Social Security Is Staring at Its First Real Shortfall in Decades - The New York Times (Without a fix, SS funds will be depleted within 15 years requiring a 20% across the board decrease in distributions to retirees. About 1/2 of retirees rely on SS for most of their retirement income, Census Bureau July 2017 Report.PDF; The 2019 OASDI Trustees Report; Social Security and Medicare Funds Face Insolvency, Report Finds - The New York Times

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Markets and Market Commentary: 


Paul Tudor Jones says Fed rate cuts are coming and this is what investors should do

A recession shock could wipe 30% off U.S. stocks, warns Oxford Economics - MarketWatch

Investors say 'this time it's different' and that worries Howard Marks (contains a list of herd opinions that this time is different)

It’s game over for the Fed as the central bank’s credibility crumbles - MarketWatch I would agree that central bankers have managed to make a mess of things by failing to normalize interest rates several years ago. 

The consequence is the creation of an (1) unprecedented global debt bubble nearing $250 trillion, which will burst sooner or later, (2) records in wealth inequality, (3) perpetual confiscation of income from the Savings Class, (4) persistently low inflation, (5) a massive misallocation of resources into unproductive assets, (6) bubbles in risk assets, and (7) anemic growth even during economic expansions. The cure for the above is to double down on, and to extend in time extremely abnormal monetary policies. 

Trump likes EU fines against Big Tech, wants some of that money

Trump Renews Attacks on Fed, Putting Central Bank in a Bind - The New York Times As reflected in CNBC's recent interview, Donald seemed upset IMO that the FED is an independent body.  

In China, for example, Trump claimed that the "head of the FED in China is President Xi" and "he can do whatever he wants". Donald believes that the should have the same powers as China's President. CNBC Transcript: President Donald Trump Speaks with CNBC's Joe Kernen on CNBC's "Squawk Box" Today Donald complained that the Fed members "are not my people", meaning that they do not implement his orders. 

Of the five FED members, Donald has nominated four including the current FED Chairman. The 12 regional banks select their own Presidents. That needs to change so that the Duck can select people who do whatever he wants. 

The Bond Ghouls are predicting that the FED will cut the FF rate by at least .5% this year, which will look suspicious to a lot of people given the political pressure.  

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Trump: 

Donald stated that he would accept information from foreign governments about his 2020 political opponent without alerting the FBI. Trump: 'I think I'd take' damaging 2020 info rival from foreign agents It is  a crime for a candidate to accept a something of value from a foreign government or citizen during a campaign. 52 USC 30121: Contributions and donations by foreign nationals It is not clear yet whether a person could be convicted of violating that statute by accepting information which is valuable.  

Trump disagreed with the current FBI director that he had to inform the FBI of any such contact.  'I think I’d take it': In exclusive interview, Trump says he would listen if foreigners offered dirt on opponents: ABC; Trump says he’d consider accepting information from foreign governments on his opponents - The Washington Post

Trump Assailed for Saying He Would Take Campaign Help From Russia - The New York Times Donald is not concerned that a foreign government would be trying to swing a U.S. election in his favor which is not news to anyone other than your average Trumpster.  

After receiving abundant criticism for inviting foreigners to interfere in U.S. elections, Donald called his sycophants at Fox and Friends and said of course he would alert the FBI. The highlights from Trump's 50-minute birthday "Fox & Friends" call - Axios  

Trump says he's still considering slapping sanctions on Nord Stream 2 (this is a pipeline running from Russia to Germany)

Trump wants NASA to go to Mars, not the moon Trump affirmed his support for NASA's moon mission on 5/13/19. A few days later, Trump tweeted that “NASA should NOT be talking about going to the Moon.”  

Chao created special path for McConnell’s favored projects Donald's Transportation Secretary, Elaine Chao, is married to Senator McConnell. Chao did what she could to help her husband win re-election.  Ms Chao's family owns a shipping company. A ‘Bridge’ to China, and Her Family’s Business, in the Trump Cabinet - The New York Times So, again, when is Donald going to start draining the D.C. swamp? It is hilarious to hear the Trumpsters chant "Drain the Swamp" at the never ending MAGA rallies. The Swamp Creature in Chief and his minions have created the biggest swamp in D.C. probably in U.S. history with only Warren Harding's administration in the 1920s coming close. (e.g. Teapot Dome scandal - Wikipedia)

Deported U.S. veterans: ICE doesn't know how many it has removed, GAO says - The Washington Post 

Trump's Dubious Claims About China - FactCheck.org

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1. Added 50 RMT at $8.03-Used Commission Free Trade:

Quote: Royce Micro-Cap Trust Inc. (RMT)

Sponsor's Page: Royce Micro-Cap Trust (RMT)

RMT Royce Micro Cap Trust CEF-Morningstar

SEC Filings: RMT

Last Discussed: Item # 1.A. Bought 100 RMT at $8.5-Used Commission Free Trade(2/23/19 Post)

Current Position: 150 shares plus shares bought with the dividend. I received the $.17 per share quarterly dividend on all shares. 

Last Ex Dividend 6/12/19: $.17 per share (shortly after this last purchase)

Quarterly dividends will fluctuate based on the criteria set out in RMT's managed distribution plan as described in this press release:

Royce Micro-Cap Trust, Inc. (NYSE-RMT) Declares Second Quarter Common Stock Distribution of $0.17 Per Share

Dividend Reinvestment: Yes

Historical Dividends:

Data Date of Purchase (6/6/19):
Net Asset Value Per Share: $9.02
Market Price: $8.04
Discount: -10.86

Sourced from RMT Royce Micro Cap Trust-CEF Connect

RMT Net Realized Gains to Date: $2,461.36

I current have no purchase restrictions. 

I will be discussing in subsequent posts adding other income producing CEFs. I am being coerced into some light buying using some of the proceeds from maturing bonds and CDs where yields have been plummeting as of late. 

Two of the purchases, which will be discussed, are 200 shares of CBRE Clarion Global Real Estate Income Fund and 100 shares of the Nuveen Real Asset Income & Growth Fund. Both pay dividends monthly. 

IGR CBRE Clarion Global Real Estate CEF Connect
JRI Nuveen Real Asset Inc & Growth CEF Connect


2. Intermediate Term Bond Basket Strategy-Gradual Selling Mode Continues: 

A. Sold 2 Kellogg 2.65% SU Maturing on 12/1/23: 

Profit Snapshot: +$39.36

Item # 5.B. Bought Back 2 Kellogg 2.65% SU at a TC of 96.7  (3/25/18 Post) 

I had bought back at a 96.7 TC the two bond lot that had previously been sold at 99.7: Item # 1.A. (10/5/17 Post)

FINRA Page: Bond Detail

Issuer: Kellogg Co.  (K) 

K | Kellogg Co. Analyst Estimates 

Sold at 99.52

YTM at 99.52 = 2.764%

3. Short Term Bond/CD Ladder Basket Strategy:

$12K in Adds

A. Bought 2 SmartBank 2.4% CDs (monthly interest payments) Maturing on 12/16/19 (6 month CDs):

Rated 4 stars at Bankrate: SmartBank Reviews and Ratings - Bankrate.com

B. Bought 10 Enerbank 2.4% CDs (monthly interest payments) Maturing on 6/7/21 (2 year CD):

This purchase was made in my Vanguard taxable account. The source of funds was the Vanguard Federal MM fund, my sweep account, that had a slightly lower current yield of 2.33% as of 5/30/19. VMFXX - Vanguard Federal Money Market Fund | Vanguard 

The average maturity of that fund is 47 days. 

The yield has been moving down with short term rates and would fall further with a cut in the federal funds rate. 

This is my first CD purchase in a Vanguard account, where the minimum purchase amount is $10K. 

The reason for this purchase is to lock in a rate that may end up being higher than the MM yield over all or most of the next two years.

This bank currently has a 5 star rating from Bankrate: EnerBank USA Reviews and Ratings - Bankrate.com

Enerbank is a wholly owned subsidiary of CMS Capital that is owned by CMS Energy. CMS Energy Q/E 3/31/19; CMS Energy Corp. (CMS); CMS Energy Announces First Quarter Earnings Of $0.75 Per Share; Reaffirms 2019 Guidance

4. Bought $5K I-Bond in my Treasury Direct Account:

The I-Bond is an inflation protected savings bond issued by the U.S. treasury. These bonds can be purchased online directly from the treasury after opening a treasury direct account. TreasuryDirect - Home

Individual - Series I Savings Bonds

I discussed the basic terms of this I-Bond in this post: Buying IBonds Through Treasury Direct - South Gent | Seeking Alpha

See also, May Savings Bond Rates - I Bond Fixed Rate Remains at 0.50%

For I-Bonds bought from 5/1/19 through October 31, 2019, the fixed coupon rate is .5% which is better than the .1% when I last purchased an I-Bond. The semi-inflation component adds .7% to the coupon which brings the current composite rate for 6 months to 1.9%.

Individual - Series I Savings Bonds Rates & Terms: Calculating Interest Rates

The fixed coupon of .5% will remain constant. The inflation component resets every six months "on the first business day of May and on the first business day of November), based on changes in the non-seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) for all items, including food and energy."

Interest income is added to the principal amount and is not taxable until (1) the bond is redeemed or (2) the bond matures or (3) ownership is transferred to another person. Individual-Tax Considerations for I Bonds This is different from buying a TIP in a taxable account where accrued interest is taxable each year and there is no right to defer recognition. Individual - TIPS: Tax Considerations  

"Interest is earned on the bond every month. The interest is compounded semiannually:  twice a year, the interest the bond earned in the previous six months is added to the bond's principal value; then, interest for the next six months is calculated using this adjusted principal. Individual - Series I Savings Bonds

The I-Bond can not be cashed for 1 year. It can be cashed thereafter but 3 months of interest is lost when cashing within 5 years. Unless redeemed early, IBonds mature in 30 years. 

I will probably cash out of the I-Bond bought in 2016 after the expiration of 5 years. 

For comparison purposes, I took a snapshot of a purchase order, which was not entered for a five year TIP taken on 6/12/19. The original par value was $5,000 which had been increased to $5,330.67 due to the inflation accretion to principal since issuance. The price of the bond was at 99.375. The current yield is not computed off that number, since the price will be adjusted by the 1.07284 inflation factor. (99.375 x. 10 = $993.75 per $1K par value bond x. 5 bonds = $4,968.75 x 1.07284 inflation factor = Cost Basis of $5,330.67 for 5 bonds. 

Theoretically, if I had bought this bond, which I would not do, I would capture that premium of $330.67 when the bond matures in 2024 (or earlier if sold prior to maturity), provided CPI does not decline sufficiently to take away part of that number which is not likely.

The $1K par value TIPs will receive a decrease in the principal amount when the six month CPI rate is negative. 

For the I-BOND, a negative inflation number over 6 months can reduce  or eliminate the fixed coupon rate, depending on the percentage decline, but will not reduce the existing principal amount of the bond.  Individual - Series I Savings Bonds Rates & Terms: Calculating Interest Rates  

The coupon is .1235% for this $1K par value TIP bond maturing in 5 years.  

This illustrates to me that the I-Bond, with its fixed rate of .5%, is better investment than the 5 year TIP. 

That does not mean that either are good investments. 

Both are properly categorized as low return investments. 

Low return investments may carry little or no credit risk but may nonetheless be the riskiest investments possible for the average American household when taken to high levels and maintained over long periods of time. The risk in those cases is that the investment pile would end up substantially lower than what is necessary. 

At a 2% annual rate, it takes 35 years for money to double before inflation and taxes take their bite.  The Rule of 72 (with calculator) - Estimate Compound Interest

5. Restarted Small Ball Buy "Program" in CHIQ-Bought 10 at $14.87 (commission free ETF for Vanguard customers): 

Quote: Global X MSCI China Consumer Discretionary ETF Overview

Closing Price Last Friday: CHIQ $14.87 -$0.12 -0.80% 

Sponsor's Webpage: MSCI China Consumer Discretionary ETF

Expense Ratio: .65% 

Last Elimination: Item # 2.D. Eliminated CHIQ-Sold 71+ shares at $16.04-Commission Free for Vanguard Brokerage Customers (profit snapshot +$94.59). 

The last small ball "purchase program" started with a 50 share buy at $15.46 (9/27/18) and ended with a 10 share buy at $12.8. Item # 3.B. Bought 10 CHIQ at $12.8 (1/27/19 Post). I received the annual dividend, which was $.3516 per share on the 50 share purchase. 

When playing small ball, I view the CHIQ trading history to be successful since I captured the annual dividend, sold at a profit, and started another buy program at a price lower than the previous initial purchase. 

Purchase Restriction: Small Ball Rule (each purchase has to be at the lowest price in the chain)

Maximum Position: 100 Shares 

Current Position: 10 shares 

Needless to say, China stocks have an above average risk level even when there is no ongoing tariff war with the U.S., and the Chinese economy is slowing. The parabolic growth in middle class Chinese consumers is a plus. China Theme #1: Growing Middle Class – William Blair Funds – Blog; 

At least some of the negativity is expressed already in this ETFs performance over the past year: CHIQ Total Returns

This ETF is currently rated 2 stars by Morningstar: CHIQ Global X MSCI China Consumer Discretionary ETF Analysis & Quote | Morningstar

6. Portfolio Management-Cash Flow for the 6/15/19- Fidelity Account:

The bond interest payments come from 1 and 2 bond lots.

The two National Rural and a Goldman Sachs $1K par value bonds pay interest monthly. The Duke Energy 2025 SU, 1 bond lot, pays quarterly. 

Several of the bonds included in the following snapshots are issued by electric utility companies (American Electric, Dominion, DTE, Duke, Southern, Wisconsin Power) and equity REITs (Highwoods, Lexington, Liberty, Ventas)

I had one early redemption, a Scripps Network 2.75% SU maturing on 11/15/19. The issuer had to make a $2.8 make whole payment in addition to accrued interest. The Scripps Network bonds are now obligations of Discovery Inc.

Optional redemptions are not welcomed now since the alternatives for reinvestment are less desirable than the redeemed bond.

While interest and dividend payments are made throughout the month, they are concentrated on the 1st, 15th and last day of each month. Tennessee Municipal bonds make their semi-annual interest payments on the 1st.

7. Portfolio Management-Tax Free Municipal Bonds:

In my 6/8 post, I included snapshots of my Tennessee municipal bonds held in my Fidelity account. 

The following snapshots include those bonds held in my Schwab account. I also own them in my Vanguard taxable account.

I own Tennessee municipal bonds only since I am familiar with the territory and am comfortable with the credit risk issues. 

A secondary reason is that the interest payments are not subject to Tennessee's Hall Income Tax on dividends and interest payments. There is no state income tax on earned income. The Hall Income Tax is being phased out and will be at a 2% rate this year (after standard deduction and many exceptions) and will be eliminated altogether after 2020.

I focus only on high quality bonds. The general idea is to generate a constant cash flow that aggregates about $10K per year. The weighted average tax free yield based on total cost is 3%.

Some purchases were made at more than par value, while others were made at discounts. 

If all of Tennessee Municipal bonds held in the 3 taxable accounts were held to maturity or early optional redemption, the profit on the bonds would be near $4K.

The unrealized profit numbers are a function of several variables, including the time to optional redemption, the likelihood of an optional redemption based on current forecasts, and the price originally paid (e.g. level of interest rates when purchased) Some of these bonds were bought when interest rates were not that much higher than now. 

Currently, the larger unrealized profit percentages originate from bonds bought at deep discounts to par value and longer maturities. 

The deep discount to par value generally results from a low coupon and a relatively long time to maturity or optional redemption. Unrealized gains in those bonds will evaporate quickly with a spike in longer term interest rates.

Municipal bonds trade in 5 bond lots. 

These bonds are not liquid and would be hard to sell. 

Wilson County General Obligation (GO): Rated at AA+

Harpeth Valley Utility District: Rated at AA+

This bond would be priced higher without an optional redemption date in 2022. The bond is being priced now as if the issuer will call at par at that time which is reasonable. I bought at a premium to par value. This was a current tax free yield hog purchase. 

City of Knoxville and Knox County GO:

The City of Knoxville bonds are secured by some type of utility revenues (water, wastewater, electric).

The largest unrealized gain in this bunch is currently $517.7 and originates from a $5K par value bond secured by sewer revenue that has a 2.5% coupon and a 2034 maturity date. 

The other City of Knoxville bonds are secured by sewer, electric or water revenues and are not general obligations of the City. 

Tennessee is a public power state. Cities own their own distribution systems and purchase power from the Tennessee Valley Authority. 

The one Knox County GO is rated at Aa1 Moody's /AA+ S & P. 

City of Knoxville Revenue Bond Ratings:

Electric: Aa2 Moody's/AA S & P 
Water:  Aa1 Moody's/AAA S & P
Sewer: Aa2 Moody's, AA+ S & P 

Tennessee Housing Development:

Rated at Aa1 Moody's/ AA+ by S & P :

Tennessee GO bonds are rated Aaa/AAA. Moody's assigns Aaa to Tennessee's GO bonds, Series 2018; outlook stable - Moody's

Ranking the States by Fiscal Condition-Tennessee Ranked at # 3 

Nashville Airport Authority,  Metropolitan Nashville -Davidson County GO, and Vanderbilt University issued through Nashville Agency: 

Nashville includes all of Davidson County. Nashville GO bonds are rated at Aa2 by Moody's/AA by S & P.  

The Vanderbilt University bond, rated at Aa1-AAA, becomes tax free under existing tax law since it is issued by the Health and Facilities Board of the Metropolitan Government of Nashville and Davidson County. Vanderbilt pays interest to that municipal agency which in turn forks over the cash to the bond owners. The bond owners can only look to Vanderbilt for payment. This kind of private activity bond may at some point lose its tax exempt status, though any such future legislation may exclude existing bonds from that status change.  

{The Vanderbilt baseball team, currently ranked #2 in the nation, is playing Louisville tomorrow in the College Baseball World Series}

The Nashville Metropolitan Airport Bond is not an obligation of the Metro government but is secured by airport revenues. This bond is rated at A1/A+, the lowest rating in my Tennessee Municipal bond portfolio.  

Rutherford County Water: 

Rated at AAA 

Sumner County GO:

Rated at AA+ 

Maury County GO: 

Rated at Aa2 

Davidson, Maury, Rutherford, Sumner and Wilson counties are located in Middle Tennessee, an economically robust area. Region’s GDP growth again tops 4% | Nashville Post; Our Region | Nashville Area Chamber of Commerce; Nashville Area Has The 4th Strongest Economy In America Report

I live in Williamson County, rated at AAA, which also borders Nashville, and I own GO bonds issued by the county in other taxable accounts. Williamson County has two cities, Franklin and Brentwood, that have AAA ratings. Forbes ranks Williamson County in top 10 richest counties in U.S.; The 10 Richest Counties In America 2017 – Forbes

As noted earlier, there is no state income tax and property taxes are low compared to other areas. I view the lack of a state income tax as a positive for municipal governments for the simple reason that taxpayers have more cash available to pay local property taxes and utility bills.  

Tennesseans would view a vote to adopt a state income tax on earned income to be a self-evident hanging offense. 

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.