Gundlach estimates that there is a 40% to 45% chance of a recession within the next six months and 65% within one year. Bond king Jeffrey Gundlach: 'I am certainly long gold' The Stock Jocks assign a zero percent possibility to a recession within 18 months IMO based on current stock market levels.
Empire State Manufacturing Index just saw its biggest drop in 18 years The reference is to the New York Fed's Empire Manufacturing Index which fell to -8.6% from +17.8 last month. A reading below zero indicates contraction. New orders collapsed by 22 points to -12.
Stock investors are convinced that a .5% to 1% cut in the FF rate over the next 12 months or so will be the magic elixir, when mixed with the tax cuts, that drives the U.S. economy to 3+% real GDP growth with less than 2% inflation until the end of days. We shall see in the fullness of time.
In my opinion, the current problem with the U.S. economy has nothing to do with interest rates.
Nonetheless, the Stock Jocks believe that the FED can alter the current economic course by cutting the federal funds rate.
In addition to the decline in interest rates yesterday, the Stock Jocks were encouraged by Donald's tweet that he would be having an extended discussion with China's President at the G-20 meeting. U.S., China rekindle trade talks ahead of Trump-Xi G20 meeting - Reuters There was an immediate leap of faith that something positive and concrete will happen at this meeting.
Empire State Manufacturing Index just saw its biggest drop in 18 years The reference is to the New York Fed's Empire Manufacturing Index which fell to -8.6% from +17.8 last month. A reading below zero indicates contraction. New orders collapsed by 22 points to -12.
Stock investors are convinced that a .5% to 1% cut in the FF rate over the next 12 months or so will be the magic elixir, when mixed with the tax cuts, that drives the U.S. economy to 3+% real GDP growth with less than 2% inflation until the end of days. We shall see in the fullness of time.
In my opinion, the current problem with the U.S. economy has nothing to do with interest rates.
Nonetheless, the Stock Jocks believe that the FED can alter the current economic course by cutting the federal funds rate.
In addition to the decline in interest rates yesterday, the Stock Jocks were encouraged by Donald's tweet that he would be having an extended discussion with China's President at the G-20 meeting. U.S., China rekindle trade talks ahead of Trump-Xi G20 meeting - Reuters There was an immediate leap of faith that something positive and concrete will happen at this meeting.
Trump Tariffs Are Short-Term Pain Without Long-Term Gain, Economists Say
China prepared for long trade fight with the U.S.: party journal - Reuters
Trump 'perfectly happy' to slap further tariffs on China: Wilbur Ross
India to impose retaliatory tariff on 28 U.S. goods from Sunday: government statement - Reuters
China is not sounding like it will take a knee anytime soon: US-China trade: Beijing wants world to think Washington will back down Their current approach may be simply to wait for the Duck to fold first.
U.S. firms say China tariffs will raise costs, see few sourcing alternatives - Reuters
The Rate Cut the Economy Doesn’t Need — but the Markets Do - Barron's (subscription publication). The Stock Jocks really do not "need" a rate cut since the economy does not need one now.
What is the reason when the economy has a 3.6% unemployment rate, 2%+ real GDP growth and CPI hovering around 2%.
The current FF range is 2.25% to 2.5% with the FED clearly indicating that no increase is in sight. That is not a problem for the real economy. Lowering the rate to 1.5% is not going to help either. Interest rates are already ridiculously low by any historical standard.
E.G.
Chart 10-Year US Treasury Note Yield Since 1790 Through 2014- Business Insider
10 Year Treasury Rate - 54 Year Historical Chart | MacroTrends
30 Year Treasury Rate - 39 Year Historical Chart | MacroTrends
I would note that the 10 year treasury yield was higher during the Great Depression than now.
The 10 year did sink below where it is now during another period of Fed manipulation that started after WWII and ended in 1950 with inflation numbers running hot. Before the Accord: U.S. Monetary-Financial Policy, 1945-51
Yields are cratering
Rates & Bonds - Bloomberg
If the FED does not give the Stock Jocks at least a .5% cut this year, they will surely throw a temper tantrum (hissy fit may be a better phrase). Making stocks the only game in town for investors is the main objective.
Don the Authoritarian is considering demoting (or possibly firing) Chairman Powell unless the FED gives into his demands for lower rates.
Trump on demoting Fed Chair Jerome Powell: 'Let's see what he does';
White House Explored Legality of Demoting Fed Chairman Powell - Bloomberg;
On eve of critical Fed meeting, Trump suggests he might remove Chair Jerome H. Powell - The Washington Post
China prepared for long trade fight with the U.S.: party journal - Reuters
Trump 'perfectly happy' to slap further tariffs on China: Wilbur Ross
India to impose retaliatory tariff on 28 U.S. goods from Sunday: government statement - Reuters
China is not sounding like it will take a knee anytime soon: US-China trade: Beijing wants world to think Washington will back down Their current approach may be simply to wait for the Duck to fold first.
U.S. firms say China tariffs will raise costs, see few sourcing alternatives - Reuters
The Rate Cut the Economy Doesn’t Need — but the Markets Do - Barron's (subscription publication). The Stock Jocks really do not "need" a rate cut since the economy does not need one now.
What is the reason when the economy has a 3.6% unemployment rate, 2%+ real GDP growth and CPI hovering around 2%.
The current FF range is 2.25% to 2.5% with the FED clearly indicating that no increase is in sight. That is not a problem for the real economy. Lowering the rate to 1.5% is not going to help either. Interest rates are already ridiculously low by any historical standard.
E.G.
Chart 10-Year US Treasury Note Yield Since 1790 Through 2014- Business Insider
10 Year Treasury Rate - 54 Year Historical Chart | MacroTrends
30 Year Treasury Rate - 39 Year Historical Chart | MacroTrends
I would note that the 10 year treasury yield was higher during the Great Depression than now.
The 10 year did sink below where it is now during another period of Fed manipulation that started after WWII and ended in 1950 with inflation numbers running hot. Before the Accord: U.S. Monetary-Financial Policy, 1945-51
Yields are cratering
Rates & Bonds - Bloomberg
If the FED does not give the Stock Jocks at least a .5% cut this year, they will surely throw a temper tantrum (hissy fit may be a better phrase). Making stocks the only game in town for investors is the main objective.
Don the Authoritarian is considering demoting (or possibly firing) Chairman Powell unless the FED gives into his demands for lower rates.
Trump on demoting Fed Chair Jerome Powell: 'Let's see what he does';
White House Explored Legality of Demoting Fed Chairman Powell - Bloomberg;
On eve of critical Fed meeting, Trump suggests he might remove Chair Jerome H. Powell - The Washington Post
+++++
Markets and Market Commentary:
The German 10 year bond closed at a -.32% yield yesterday. Germany 10 Year Government Bond Overview The U.S. 10 year looks juicy in comparison at a 2.06% yield.
The yield curve remains inverted starting at the 3 month treasury bill through the 10 year treasury note, notwithstanding the decline in short term rates.
The 3 month treasury bill has the highest yield through the 10 year treasury note.
The German 10 year bond closed at a -.32% yield yesterday. Germany 10 Year Government Bond Overview The U.S. 10 year looks juicy in comparison at a 2.06% yield.
The yield curve remains inverted starting at the 3 month treasury bill through the 10 year treasury note, notwithstanding the decline in short term rates.
The ‘Buffett Yardstick’ may be signaling the worst risk-reward setup ever - MarketWatch The valuation yardstick discussed is the value of the U.S. stock market to GDP. Using that valuation measure, the analyst predicts that stocks will have a zero rate of return over the next 10 years with dividends reinvested: ' “In all, long-term investors are risking roughly a 60% decline to try to capture a 0% rate of return over the coming decade in the stock market, one of the worst risk-to-reward setups in history,” This Is One Of The Worst Risk/Reward Setups In History – The Felder Report
Buffett Indicator: The percent of total market cap relative to Gross National Product? (As of 6/12/19, "the Total Market Index is at $ 29698.7 billion, which is about 141.1% of the last reported GDP." Using this valuation measure, the "US stock market is positioned for an average annualized return of -1.9%, estimated from the historical valuations of the stock market", which includes dividends." Fair value is a ratio between 75%-90%).
I would emphasize that most traditional valuation measures, including the "Buffett Indicator" and the Shiller CAPE P/E ratio, have been flashing danger signals for years.
The proponents of those valuation measures may crow during the next market meltdown but they have been eating crow for years.
Those valuation measures may be more valuable in timing an entry point during a catastrophic market decline.
Trump’s trade war has cost the market trillions; we’ll get half back, says JPMorgan-MarketWatch The JPM analyst argues that it would be "rational" for Donald to settle the China trade conflict before the 2020 election. If the disputes are not settled and a recession occurs before the election, too many voters will call it the Trump recession precipitated by his tariff wars. Therefore, it would be "rational" to settle the conflict before that actually happens. The JPM analyst believes that a settlement would translate into a quick 5% or so rally in the stock market and a 10% to 20% rally in "value and high beta" names.
Broadcom slaps down hopes for a second-half rebound in chips - MarketWatch
I would emphasize that most traditional valuation measures, including the "Buffett Indicator" and the Shiller CAPE P/E ratio, have been flashing danger signals for years.
The proponents of those valuation measures may crow during the next market meltdown but they have been eating crow for years.
Those valuation measures may be more valuable in timing an entry point during a catastrophic market decline.
However, the primary reason for a bull market remaining "overvalued" for extended periods, using those valuation indicators, may also be the reason that causes or contributes significantly to a Catastrophic Event and/or onset of a long term bear market.
The seeds for a long term bear market are generally planted during the bull cycles. That was the case in the 1982-2000 long term secular stock bull market when GDP and earnings growth were fueled in significant part by spending borrowed money.
The First Age of Leverage in the U.S. started in the early 1980s. Spending increasing amounts of borrowed money energized the long expansion cycles and kept them going. It took about 22 years for the U.S. consumer debt expansion to implode.
The seeds for a long term bear market are generally planted during the bull cycles. That was the case in the 1982-2000 long term secular stock bull market when GDP and earnings growth were fueled in significant part by spending borrowed money.
The First Age of Leverage in the U.S. started in the early 1980s. Spending increasing amounts of borrowed money energized the long expansion cycles and kept them going. It took about 22 years for the U.S. consumer debt expansion to implode.
The culprit for a new long term bear market would most likely be excess spending fueled by exponential growth in debt which was the cause of the last one as well.
The U.S. government is fueling GDP growth now by spending close to $1 trillion per year more than its revenues, roughly the amount of the federal government's total debt in 1979.
Growth funded by increasing amount of government and/or consumer debt will juice GDP growth and corporate earnings and that may continue for an extended period.
The traditional valuation measures have not been working IMO due in large part to the unparalleled growth in spending fueled by parabolic increases in debt coupled with extended periods of extremely abnormal central bank monetary policies that keep interest rates far below normal historical levels.
The traditional valuation measures have not been working IMO due in large part to the unparalleled growth in spending fueled by parabolic increases in debt coupled with extended periods of extremely abnormal central bank monetary policies that keep interest rates far below normal historical levels.
It is certainly possible, even likely, that market historians will look back in 20 or so years and conclude that the traditional valuation measures did not give the right signal, until it was too late, due to the economic distortions created by excessive deficit spending as well as extremely abnormal central bank policies maintained for well over a decade.
When an economy becomes as large as the U.S., even a trillion dollars of deficit spending per year will only move the growth needle up some. Even more debt will have to be added to have the same GDP impact.
And, in a final note, the debt rubber band could be pulled a long way starting in the early 1980s since government and consumer debt were both at reasonable levels.
The U.S. consumer total debt to disposable income ratio was within the long term range of about 60% to 65% in 1985. The bubble burst when the ratio crossed 130% which took a very long time. The ratio now is near 100% or about where it was in 2001.
100*Households and nonprofit organizations; debt securities and loans; liability, Level/Disposable Personal Income | FRED | St. Louis Fed And, the decline in interest rates, particularly on mortgage debt, have lowered debt service costs. Household Debt Service and Financial Obligations Ratios
In short, the traditional valuation measures can not be relied upon to time the market and may remain at elevated levels for as long as interest rates remain well below historical norms and spending increasing amounts of borrowed central bank created "funny money" has only positive economic consequences.
Shiller P/E Ratio: Where Are We with Market Valuations? (historical mean at 16.1); Shiller PE Ratio and CAPE Calculator on the S&P 500, Plus History - DQYDJAnd, in a final note, the debt rubber band could be pulled a long way starting in the early 1980s since government and consumer debt were both at reasonable levels.
The U.S. consumer total debt to disposable income ratio was within the long term range of about 60% to 65% in 1985. The bubble burst when the ratio crossed 130% which took a very long time. The ratio now is near 100% or about where it was in 2001.
100*Households and nonprofit organizations; debt securities and loans; liability, Level/Disposable Personal Income | FRED | St. Louis Fed And, the decline in interest rates, particularly on mortgage debt, have lowered debt service costs. Household Debt Service and Financial Obligations Ratios
In short, the traditional valuation measures can not be relied upon to time the market and may remain at elevated levels for as long as interest rates remain well below historical norms and spending increasing amounts of borrowed central bank created "funny money" has only positive economic consequences.
Trump’s trade war has cost the market trillions; we’ll get half back, says JPMorgan-MarketWatch The JPM analyst argues that it would be "rational" for Donald to settle the China trade conflict before the 2020 election. If the disputes are not settled and a recession occurs before the election, too many voters will call it the Trump recession precipitated by his tariff wars. Therefore, it would be "rational" to settle the conflict before that actually happens. The JPM analyst believes that a settlement would translate into a quick 5% or so rally in the stock market and a 10% to 20% rally in "value and high beta" names.
Broadcom slaps down hopes for a second-half rebound in chips - MarketWatch
++++
Trump:
President Trump has made 10,796 false or misleading claims over 869 days - The Washington Post
Demagogue Don is well on his way to making more false statements during his first term than all prior Presidents combined multiplied by at least 10.
Since honesty is a conservative value, is the modern day GOP a conservative party? In answering that question, ask yourself first why Donald, who is clearly and obviously a lying authoritarian demagogue who manipulates voters through engendering fear and hate, enjoys a 90% approval rating among republicans.
According to most republicans, the Bond Spur Bloviator is both honest and a role model for their children. (question # 2, 66% of republicans view Donald as honest; question #11, 54% believe the Duck is a good role model for their children: National (US) Poll - March 5, 2019 - 64 Percent Of U.S. Voters Say | Quinnipiac University Connecticut) 97% of Democrats and 75% of independents say no to the role model question. Donald is of course the antithesis of a good role model.
Trump Warns of Epic Stock Market Crash If He's Not Re-Elected I think that he is predicting a repeat of what happened in Bush's 8th year as President.
Trump says supporters might ‘demand’ that he serve more than two terms as president
Demagogue Don is well on his way to making more false statements during his first term than all prior Presidents combined multiplied by at least 10.
Since honesty is a conservative value, is the modern day GOP a conservative party? In answering that question, ask yourself first why Donald, who is clearly and obviously a lying authoritarian demagogue who manipulates voters through engendering fear and hate, enjoys a 90% approval rating among republicans.
According to most republicans, the Bond Spur Bloviator is both honest and a role model for their children. (question # 2, 66% of republicans view Donald as honest; question #11, 54% believe the Duck is a good role model for their children: National (US) Poll - March 5, 2019 - 64 Percent Of U.S. Voters Say | Quinnipiac University Connecticut) 97% of Democrats and 75% of independents say no to the role model question. Donald is of course the antithesis of a good role model.
Trump Warns of Epic Stock Market Crash If He's Not Re-Elected I think that he is predicting a repeat of what happened in Bush's 8th year as President.
Trump says supporters might ‘demand’ that he serve more than two terms as president
++++
1. Bought 50 of the BDC SCM at $13.6 ($1 IB commission):
Quote: Stellus Capital Investment Corp. (SCM)
Closing Price Yesterday: SCM $14.05 -$0.03 -0.21%
2018 Annual Report risk factor summary starts at page 31 and ends at page 59)
Last Elimination: Item # 1.B. Sold 32+ SCM at $14.22-Used Commission Free Trade (2/2/19 Post)(profit snapshot = $78.09)
SCM Trading Profits to Date = $540.24 (all small lots)
Last Substantive Buy Discussion: Item # 1.C. (11/25/18 Post)
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)
The goal is simply to earn a total return in excess of the dividend yield.
Dividend: Monthly at $.1133 ($1.36 annually rounded)
SCM is not currently covering this dividend with interest income and does not expect to do so this year. However, realized capital gains on investments will be sufficient, according to the company, to cover the dividend payment this year:
"we will likely not fully cover the dividend from net investment income over the next few quarters as we work to invest additional capital raise during the quarter. This would be consistent with our previous equity offering in April 2017. We do expect, however, to more than cover the dividend for the year from the realized . . . long-term capital gains"(Emphasis added; Page 2 Stellus Capital Investment Corporation (SCM) CEO Robert Ladd on Q1 2019 Results - Earnings Call Transcript | Seeking Alpha)
Dividend Yield at $13.6 = 10%
Last Common Stock Offering: Last March, SCM sold 2,750,000 shares to underwriters at $14.43 per share with the standard greenshoe option. The external management company paid the underwriters' discount of $935,000 or $.34 per share. Prospectus The greenshoe allotment was partially exercised resulting in another 202,149 shares of common stock being sold.
Historical Net Asset Values Per Share (relatively stable for a BDC):
3/31/19: $14.32
12/31/18: $14.09
12/31/17: $13.81
12/31/16 $13.69
12/31/15: $13.19
12/31/14: $13.94
12/31/13: $14.54
November 2012: IPO at $15 ($14.46 after underwriters discount)
Five Year Historical Results Through 2018:
Page 61 2018 Annual Report
Last Earnings Report: Stellus Capital Investment Corporation Reports Results for Its First Fiscal Quarter Ended March 31, 2019
Net investment income was reported at $.34 per share. However, this number does not include a $1.2M accrued incentive fee which reduces the per share income GAAP NII number to $.27 per share. SCM generated $10.2 million in long term capital gains ($.63 per share) from equity investments during the quarter, and had realized $2+M in realized gains during the second quarter up to the date of the conference call. Pages 1-2- Earnings Call Transcript | Seeking Alpha
"As of March 31, 2019, our portfolio included approximately 61% of first lien debt, 28% of second lien debt, 5% of unsecured debt and 6% of equity investments at fair value. Our debt portfolio consisted of 91% floating rate investments (subject to interest rate floors) and 9% fixed rate investments." (emphasis added)
The problem with coupons that pay a spread over 1 or 3 month Libor rates now is that those short term rates are coming down and may fall further, which is a negative for BDCs that have a preponderance of floating rate loans.
3-Month London Interbank Offered Rate (LIBOR), based on U.S. Dollar | FRED | St. Louis Fed (already starting to roll over after topping out last December)
Libor floors, which are generally around 1%, provide some downside protection from falling short term Libor rates.
Three loans were on non-accrual as of 3/31/19. Those loans were to Refac, Grupo, and Wise. The loan to Wise had almost been completely written down as of 3/31/19:
Wise:
Refac:
Grupo:
Pages 7, 10 and 10: 10-Q for the Q/E 3/31/19
Asset Quality According to Management:
10-Q for the Q/E 3/31/19
1. Bought 50 of the BDC SCM at $13.6 ($1 IB commission):
Quote: Stellus Capital Investment Corp. (SCM)
Closing Price Yesterday: SCM $14.05 -$0.03 -0.21%
2018 Annual Report risk factor summary starts at page 31 and ends at page 59)
Last Elimination: Item # 1.B. Sold 32+ SCM at $14.22-Used Commission Free Trade (2/2/19 Post)(profit snapshot = $78.09)
SCM Trading Profits to Date = $540.24 (all small lots)
Last Substantive Buy Discussion: Item # 1.C. (11/25/18 Post)
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)
The goal is simply to earn a total return in excess of the dividend yield.
Dividend: Monthly at $.1133 ($1.36 annually rounded)
SCM is not currently covering this dividend with interest income and does not expect to do so this year. However, realized capital gains on investments will be sufficient, according to the company, to cover the dividend payment this year:
"we will likely not fully cover the dividend from net investment income over the next few quarters as we work to invest additional capital raise during the quarter. This would be consistent with our previous equity offering in April 2017. We do expect, however, to more than cover the dividend for the year from the realized . . . long-term capital gains"(Emphasis added; Page 2 Stellus Capital Investment Corporation (SCM) CEO Robert Ladd on Q1 2019 Results - Earnings Call Transcript | Seeking Alpha)
Dividend Yield at $13.6 = 10%
Last Common Stock Offering: Last March, SCM sold 2,750,000 shares to underwriters at $14.43 per share with the standard greenshoe option. The external management company paid the underwriters' discount of $935,000 or $.34 per share. Prospectus The greenshoe allotment was partially exercised resulting in another 202,149 shares of common stock being sold.
Historical Net Asset Values Per Share (relatively stable for a BDC):
3/31/19: $14.32
12/31/18: $14.09
12/31/17: $13.81
12/31/16 $13.69
12/31/15: $13.19
12/31/14: $13.94
12/31/13: $14.54
November 2012: IPO at $15 ($14.46 after underwriters discount)
Five Year Historical Results Through 2018:
Last Earnings Report: Stellus Capital Investment Corporation Reports Results for Its First Fiscal Quarter Ended March 31, 2019
Net investment income was reported at $.34 per share. However, this number does not include a $1.2M accrued incentive fee which reduces the per share income GAAP NII number to $.27 per share. SCM generated $10.2 million in long term capital gains ($.63 per share) from equity investments during the quarter, and had realized $2+M in realized gains during the second quarter up to the date of the conference call. Pages 1-2- Earnings Call Transcript | Seeking Alpha
"As of March 31, 2019, our portfolio included approximately 61% of first lien debt, 28% of second lien debt, 5% of unsecured debt and 6% of equity investments at fair value. Our debt portfolio consisted of 91% floating rate investments (subject to interest rate floors) and 9% fixed rate investments." (emphasis added)
The problem with coupons that pay a spread over 1 or 3 month Libor rates now is that those short term rates are coming down and may fall further, which is a negative for BDCs that have a preponderance of floating rate loans.
 |
| 3 Month Libor January 2015 to 6/18/19 |
Libor floors, which are generally around 1%, provide some downside protection from falling short term Libor rates.
Three loans were on non-accrual as of 3/31/19. Those loans were to Refac, Grupo, and Wise. The loan to Wise had almost been completely written down as of 3/31/19:
Wise:
Grupo:
Pages 7, 10 and 10: 10-Q for the Q/E 3/31/19
Asset Quality According to Management:
10-Q for the Q/E 3/31/19
2. Intermediate Term Bond Ladder Basket Strategy:
A. Sold 2 Voya 3.125% SU Maturing on 7/15/24:
Profit Snapshot: +$8
This was a less than optimal buy. On the purchase date, the ten year treasury yield closed at a 2.26% yield. Daily Treasury Yield Curve Rates I will look for an opportunity to buy this bond back at less than 96 which is not going to happen anytime soon.
FINRA Page: Bond Detail
Issuer: Voya Financial Inc. (VOYA)
Sold at 100
YTM at 100 = 3.125%
3. Short Term Bond/CD Ladder Basket Strategy:
$10K in an add
A. Bought 10 Citizens Bank 2.45% CDs Maturing on 12/12/19 (6 month CD)-A Roth IRA Account:
Issuer: Operating bank for Citizens Financial Group (CFG)
CFG | Citizens Financial Group Inc. Analyst Estimates
Citizens Financial Group, Inc. Reports First Quarter Net Income of $439 million and EPS of $0.92
$10K in an add
A. Bought 10 Citizens Bank 2.45% CDs Maturing on 12/12/19 (6 month CD)-A Roth IRA Account:
Issuer: Operating bank for Citizens Financial Group (CFG)
CFG | Citizens Financial Group Inc. Analyst Estimates
Citizens Financial Group, Inc. Reports First Quarter Net Income of $439 million and EPS of $0.92
4. Eliminated DXPRB-Sold 50 at $24.67 (used commission free trade):
Profit Snapshot: +$44.98
Item # 4 Bought 50 DXPRB at $23.77-Used Commission Free Trade (2/2/19 Post)
Quote: Dynex Capital Inc. 7.625% Cumulative Preferred Series B Stock
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: 3/29/19
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 generally discuss the risks of MREIT preferred stocks in Item # 2 (4/11/17 Post).
I view MREIT preferred stocks with disfavor.
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.
I would expect the recovery to be zero in a bankruptcy which would be the same result for bank holding company preferred stocks when their operating bank is seized by the FDIC.
I will consequently flip MREIT preferred stocks for total returns in excess of the dividend yields.
I have already substituted two equity REIT preferred stocks for the MREIT preferred stocks that I have sold recently. I will be discussing those purchases in the next two posts.
5. Small Ball ETF "Buying Program" Strategy-Bought 10 REET at $27.16 (commission free for Fidelity brokerage customers):
Quote: REET | iShares Global REIT ETF Overview
Sponsor's Website: iShares Global REIT ETF | REET
Expense Ratio: .14%
This is my first purchase.
Last Ex Dividend Date: 6/17/19 (after purchase)
Recent REET Dividend History: Quarterly at a variable rate
Current Position: 10 Shares
Purchase Restriction: Small Ball Rule
Maximum Position: 100 shares.
Top 10 Holdings as of 6/13/19:
Number of Holdings: 301 as of 6/13/19
Profit Snapshot: +$44.98
Item # 4 Bought 50 DXPRB at $23.77-Used Commission Free Trade (2/2/19 Post)
Quote: Dynex Capital Inc. 7.625% Cumulative Preferred Series B Stock
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: 3/29/19
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 generally discuss the risks of MREIT preferred stocks in Item # 2 (4/11/17 Post).
I view MREIT preferred stocks with disfavor.
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.
I would expect the recovery to be zero in a bankruptcy which would be the same result for bank holding company preferred stocks when their operating bank is seized by the FDIC.
I will consequently flip MREIT preferred stocks for total returns in excess of the dividend yields.
I have already substituted two equity REIT preferred stocks for the MREIT preferred stocks that I have sold recently. I will be discussing those purchases in the next two posts.
5. Small Ball ETF "Buying Program" Strategy-Bought 10 REET at $27.16 (commission free for Fidelity brokerage customers):
Quote: REET | iShares Global REIT ETF Overview
Sponsor's Website: iShares Global REIT ETF | REET
Expense Ratio: .14%
This is my first purchase.
Last Ex Dividend Date: 6/17/19 (after purchase)
Recent REET Dividend History: Quarterly at a variable rate
Purchase Restriction: Small Ball Rule
Maximum Position: 100 shares.
Top 10 Holdings as of 6/13/19:
Number of Holdings: 301 as of 6/13/19
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.
While the Fed left the FF unchanged, the signal read by the Bond Ghouls is that a .25% cut will happen next month. The probability is now at 100%.
ReplyDeletehttps://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html
The probability that the FF range will be .5% lower than now on or before the December meeting stands at 95.2%.
The Fed's dot plot released today is less confident.
9 members project no decrease this year with 8 projecting a FF cut, with 7 of those 8 at a .5% cut by year end.
Figure 2:
https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20190619.htm
The 1 month treasury bill yield, which will be auctioned tomorrow, is more consistent at a 2.14% yield with a .25% cut today than no cut IMO. That bill had a 2.36% yield on 6/3/19:
https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield
U.S. 10 Year Treasury Note 2.027% -0.03%
Last Updated: Jun 19, 2019 4:31 p.m. EDT
https://www.marketwatch.com/investing/bond/tmubmusd10y?countrycode=bx
IEF outperformed TLT but the longest duration treasury ETF, ZROZ, outperformed both of those treasury ETFs.
iShares 7-10 Year Treasury Bond ETF (IEF)
$109.81+$0.30 (+0.27%)
iShares 20+ Year Treasury Bond ETF (TLT)
$132.54 +$0.19 (+0.14%)
PIMCO 25+ Year Zero Coupon U.S. Treasury Index Exchange-Traded Fund (ZROZ)
$128.28 +$0.40 (+0.32%)
The more credit sensitive investment grade bond sector outperformed those credit risk free treasuries:
iShares Investment Grade Corporate Bond ETF (LQD)
$123.42 +$0.78 (+0.64%)
The duration of LQD is similar to IEF.
Possibly the credit sensitive bond sectors were expecting less positive comments from the FED and Powell during his press conference.
As expected, the MREIT Two Harbors (TWO) cut its quarterly dividend. The new penny rate will be $.40 per share, down from the prior $.47:
ReplyDeletehttps://www.businesswire.com/news/home/20190619005782/en/
I doubt that this cut will have much, if any, impact on the share price tomorrow. The shares are down 2 cents in after hours trading as of 6:10 E.D.T.:
https://www.marketwatch.com/investing/stock/two
Several MREITs have recently cut their dividend rates.
The 1 year TWO total return (dividends reinvested) is currently at -11.69%.
The inverted yield curve is unfavorable to MREITs who borrow short term to buy longer term securities. The recent decline in mortgage rates may also accelerate prepayments of higher yielding mortgages as households refinance at lower rates.
The ten year treasury yield has now broke below 2%.
ReplyDeleteU.S. 10 Year Treasury Note 1.984%
Last Updated: Jun 19, 2019 10:24 p.m. EDT
Gold is trading up:
https://www.kitco.com/charts/livegold.html
SPX hit an intra-day high of 2,956.2 near the open today, which is a new 52 week and all time high, but has been moving down since achieving those milestones.
ReplyDeleteI would note that the previous intra-day high was on 5/1/19 at 2954.13. Prior to that one, the highest intra-day number was 2940.91 on 9/21/18. Those numbers from today, 5/1/19 and 9/21/18 are close enough to call a triple top unless the SPX can achieve a meaningful move above 2955.
I am not surprised that sellers emerged when SPX hit those two prior high points.
S&P 500
2,934.58+8.12 (+0.28%)
As of 12:22PM EDT
With about 2 minutes left in the trading day (2:58 C.S.T.), SPX had worked its way back to a new 52 week and all time high at 2,958.06 but closed at 2,954.18 or almost precisely at the intra-day high of 2,954.13 on 5/1/19.
DeleteThis may end up being a triple top or the beginning of a new sprint to higher levels.
Bonds are smoking hot but the yields have fallen too far for me to make new investments.
CD coupons have plummeted this month.
1 year CD rates were around 2.4% in early June and are now at 2%.
To pick up a 2.4% yield at Fidelity's current CD offerings, you would have to go out to 2023, a CD offered by a bank that I never heard of.
For a bank that I have heard of, there is a 2.5% Goldman Sachs Bank CD offer which matures in June 2024. There is only one CD offering more than 3% and that one matures in July 2039.
So it is understandable why there is a herd movement back into stocks. The issue now is whether the herd is just being fattened up for the slaughter.
More will be known about whether a trade deal with China is possible early next week. That may decide whether the herd is being fatten up to be slaughtered or will make a run to Stock Jock paradise.
The ten year treasury fell to a 1.98% intra-day yield but the yield started to go back up around 11:30 A.M. and ended up at 2.01%. The ten year treasury was at a 3.24% yield on 11/9/18.
https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield
China does not sound like it will give into Donald's trade demands:
https://www.reuters.com/article/us-usa-trade-china/china-u-s-to-resume-trade-talks-but-china-says-demands-must-be-met-idUSKCN1TL00T
South Gent,
ReplyDeletePNNT dropped to $6.21 in December 2018 to climb back to $7.34 in February 2019. It dropped again to $6.26 in June 2019.
When you sold your 50 shares at $7.35 in May 2018 you indicated that “… will consider buying back this 50 share lot at less than my last purchase price adjusted down for any subsequent dividend payment. …”
Does PNNT stock price movement resemble a dividend harvesting pattern?
Y: For BDCs in general, the most relevant factor at the moment is the actual and anticipated decline of the Libor rates which will lead to less net investment income and possibly some dividend cuts if that trend persists long enough.
DeleteFDUS, which I own, is different from most in that the most of its loans are at fixed coupon rates.
I have looked at PNNT recently. Currently, I own only 57+ shares with an average cost per share of $6.79. The last quarterly dividend was $.18 per share which went ex dividend on 6/14 and will be paid on 7/1. I am reinvesting the dividend.
There is a possibility of a dividend cut for PNNT with NII likely to fall with the Libor rate decline and it was barely covering that $.18 before that started to happen looking at just core operating net income per share.
Q/E 3/31/19
https://www.sec.gov/Archives/edgar/data/1383414/000117184319003209/exh_991.htm
Note the variable rate loan percentage to total loans is at 89%. Those loans are priced at spreads to Libor. As the Libor rate declines as it has recently, and is currently anticipated to fall further, the loan coupon will decline and keep declining until Libor falls to the Libor floor which is generally 1%.
See pages 8-10 and note 4 at page 10:
https://www.sec.gov/Archives/edgar/data/1383414/000156459019017975/pnnt-10q_20190331.htm
If there is a number "6" by a loan, it is non-performing. Both PFLT and PNNT have exposure to Hollander Sleep Products, but the PNNT loan is about 2x larger. Hollander filed for a BK.
I will be discussing PFLT in my next post. I just bought 20 shares using a Fidelity commission free trade, rounding the lot in that account up to 50 shares. Hardly betting the farm. I decided to add to that one given the lower exposure to Hollander and the monthly dividend payments compared to PNNT's quarterly payments.
There will be some dividend harvesting in BDCs but that strategy is probably not going to work out for a BDC in a bear market mode like PNNT. Possibly, if the stock declined by more than the dividend shortly before the ex dividend date, and the investor held for more than 30 days until the price recovered to profit territory, it might work out.
Hello South Gent,
ReplyDeleteI tried to look through your blog for some discussion of leverage in closed-end funds. I really can't seem to find much and was hoping you can enlighten having an impact both bond funds and stock funds in terms of duration and, rates and stock prices.
I just wanted to get your thinking on closed-end funds for when the market becomes more rational
Thanks
G: Borrowing costs are coming down for most CEFs and that is a plus for those who borrow at a short term rate.
DeleteAnd, when the securities bought with borrowed money go up in price, that is what I call a twofer.
I have discussed the impacts of CEF leverage throughout this blog and the one at SA.
One post that goes into more details is the following:
Scroll to General Risk Discussion for Leveraged Bond CEFs
https://seekingalpha.com/instablog/434935-south-gent/4261546-update-for-closed-end-fund-basket-strategy-as-of-8-14-15
Generally speaking, most of the leveraged taxable bond CEFs own a meaningful amount of junk and lower tier investment grade bonds (Baa3/BBB-).
The bond fund that owns high quality bonds will fare the best during a recession.
Recession risk is front and center now even though the Stock Jocks dismiss that risk.
Owning a leveraged bond CEF with meaningful junk bond exposure is not a good idea during a recession.
As to duration, the general rule on all how interest rate changes impact net asset value per share is to multiply the percentage change by the duration number provided by the sponsor but that rough approximation deals only with interest rate risk
https://investor.vanguard.com/insights/bond-fund-basics-duration
You can find information on duration at the sponsor's website.
Just as an example, the Western Asset Global Corporate Defined Opportunity Fund (GDO) provides that information under the "characteristics" tab. The weighted average effective duration was at 5.86 years as of 3/31/19.
You can find leverage information at the sponsor's websites and at CEFConnect.
I would also recommend reviewing information about the cost of leverage which will be provided in shareholder reports. That information will be in a footnote.
As to credit quality, sometimes CEFConnect provides that information, but the best source would be the fund sponsor. For example, I did not see any information on credit quality for GDO at CEFConnect.
https://www.cefconnect.com/fund/GDO
The GDO credit quality breakdown can be found at the sponsor's website under the "characteristics" tab.
The problem with the information provided by the sponsor is that the information lacks the + and - ratings.
GDO shows a 48.11% exposure to "BBB" without breaking down the BBB+, BBB, and BBB- ratings. During a recession, there will be a lot of "fallen angels", defined as being investment grade bonds downgraded to junk. They will generally be concentrated at the BBB- notch with some BBB or higher depending on the variables which include the severity and duration of the recession and how it impacts different industry sectors.
For GDO, there was as of 3/31/18 a 21.61% weighting in BB and 11.08% in B. How much of that is in BB+, BB-, B+ and B-. That information may not be provided anywhere which is usually the case.
You will not find that breakdown in GDO's shareholder reports:
https://www.sec.gov/Archives/edgar/data/1472341/000119312518361071/d622783dncsr.htm
I have been nibbling on some leveraged stock CEFs.
For bonds, I am basically running my own unleveraged multi-sector bond fund that has no junk bonds and an average weighted credit rating at around A or A+.
I have been selling some of my BBB and BBB+ rated intermediate term corporate bonds into the latest rally which raises the weighted average rating number.
The top credit end would be concentrated in my holdings of U.S. treasuries and Tennessee Munis. The treasury weighting will likely come down as securities mature and reinvestment rates are too pitiful.
I noticed it was quiet... then realized why. I'd stopped receiving notices. This posting should reactivate them again.
ReplyDeleteTriple tops - are they uncommon? I'd think if the market reaches a high a few times, it then just breaks through, limiting the number of triple tops.
Rates are still inverted for 3m/10y? Max to date is -.28. Current is .14. But meanwhile, 2m/10y hasn't inverted yet? It is 2MONTH/10y that everyone uses, or is it 2YEAR/10y?
Land: You have to click the "notify me" box for each post.
DeleteAs to which inversion means the most or is the most widely used, there is probably no consensus opinion.
Given the historical data, I believe that most investors are using the 3 month and 10 year. One of the original proponents of this recession indicator has a model that uses the 3 month/5 year and the 3 month/10 year. I previously linked an article discussing his model:
https://www.marketwatch.com/story/this-yield-curve-expert-with-a-perfect-track-record-sees-recession-risk-growing-2019-06-05
We discussed that article recently.
Ultimately it is a judgment call that is influenced by the duration of the inversion and the length along the maturity spectrum. At a minimum, this indicator is flashing a warning signal.
The 2 year/10 year has not inverted. No one to my knowledge uses the 2 month T Bill and the 10 year in a model.
I personally view the inversion along the maturity spectrum to be important and that would include the short term bill yields compared to the 10 year.
Based on yesterday's closing numbers, the highest yield from the 1 month treasury bill through the 10 year note is the 2.17% provided by the 1 month. The yields are in a declining mode from the 1 month through the 3 year. The 3 month T Bill had a 13 basis point higher yield than the 10 year.
https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2019
Based on that article and something else I'd seen, when I did my back-looking, I'd used 3mo/10year.
DeleteI couldn't remember if the usual talked about by media and pundits, has been 2mo or 2year view 10 years. It must be 2 year. The use of 3mo is usually not talked about, even though it's found to be more of an indicator. So that answers what I couldn't remember.
Until 2year/10month inverts, the pundits won't sound the alarms all that loudly.
The pattern I'd seen is there's a small inversion, -.1 to -.05. That followed by a deeper one, that was -.4 ish in the past. When those happened in 3mo/10year, they were followed by a crash. The timing wasn't all that useful because the last one, in 2007-8 had a sizable rally before the crash.
It's feels surreal to see the inversion, but there's the "this time it's different" and lack of much fussing over it. The stock market certainly isn't very worried as long as the FED will "correct" it. So I'll probably keep bringing it up, to make sure I'm not imaging that warning...
I do click the notify box. Every once in a while, the notices stop coming. Then I come and see it's unchecked the box for me.
Land: The 2year/10 year may have been the one most talked about in the press, but the models use the 3 month or the 1 year year bills as the short term rate.
DeleteThe New York Fed's model, for example, uses the 3 month bill and the 10 year note:
https://www.newyorkfed.org/research/capital_markets/ycfaq.html
That model is updated monthly and the last update was for May. The recession probability within 12 months was then at 29.62%.
https://www.newyorkfed.org/medialibrary/media/research/capital_markets/Prob_Rec.pdf
Since 1980 recessions have followed readings in the 30% to 40% range using that model which is similar to one that I previously referenced by the professor who came up with yield inversions being a future recession indicator.
The Cleveland Fed has one that uses the 3 month and 10 year. That model has a 34.8% chance of a recession within 12 months as of the May data:
https://www.clevelandfed.org/en/our-research/indicators-and-data/yield-curve-and-gdp-growth.aspx
See also:
The professor who is referenced above and in the previously linked Marketwatch article is Campbell Harvey, Professor of Finance at Duke University and a former president of the American Finance Association.
The Fourth Horseman of the Next Recession Approaches
https://www.fuqua.duke.edu/duke-fuqua-insights/harvey-yield-curve-2019
The Stock Jocks are ignoring this indicator. Their herd opinion is that negative real interest rates are a magic potion for virtuous GDP and earnings growth, better for the real economy than Love Potion Number 9 is for love:
https://www.youtube.com/watch?v=7rXhXLsNJL8
""better for the real economy than Love Potion Number 9 is for love:""
DeleteWell whatever floats their boat...
I suppose an Iranian conflict could be a factor too. Though I expect whatever this dance is... it's pre-arranged, and a lot less of a surprise to Trump, than to the rest of us.
ReplyDeleteLand: The NYT reported this morning that Trump called off an air strike against Iranian targets at the last moment.
Deletehttps://www.cnbc.com/2019/06/21/trump-approves-military-strikes-on-iran-then-pulls-back-report.html
He has been mostly downplaying the attacks on freighters and the missile attacks on U.S. drones, both operating in international waters.
https://www.cnn.com/2019/06/20/politics/trump-iran-drone-downing/index.html
https://time.com/5608787/iran-oil-tanker-attack-very-minor/
The successful missile attack on a drone was preceded by one that missed. Iran is crowing about the successful strike which does not sound like underling went rogue.
Iran denies complicity in the freighter attacks which lack credibility IMO.
I seriously doubt that those attacks are rogue operations. If Trump labeled them approved attacks by the Iranian government, he would have to do something besides talk about it.
There still may be a U.S. military response but it may take another attack before that happens. The most likely targets would be the missile batteries, radar stations, and/or Iranian guard small boats in dock that may have been used in the freighter attacks.
If Obama was President, and the same attacks occurred, Trump and the republicans would be attacking Obama constantly for weakness. The shrillness of their attacks would have already busted my eardrums. But what can you say about those whose hypocrisy is so embedded in their DNA that it becomes a dominant personality characteristic.
Iran recently said that it would exceed the limits on uranium imposed on it through the nuclear deal that Trump has abandoned.
https://www.npr.org/2019/06/17/733327050/iran-says-it-will-exceed-nuclear-deals-limit-on-uranium-in-10-days
The Trump administration had some gall when expressing outrage that Iran would violate a term of an agreement that the U.S. has renounced as no longer binding on it.
The U.S. followed that withdrawal by reimposing serious economic sanction on Iran, including on foreign purchases of Iranian oil.
If the U.S. was still a party to that nuclear deal, and Iran was about to violate it, all of the signatories could pressure Iran to adhere to the terms or face group sanctions. That is not an option available to the U.S. now due to Donald's actions.
Tensions in the gulf area and the shipping lanes will likely continue IMO, which may evolve into a war as the U.S. actions and sanctions against Iran provoke that already hostile nation to respond.
I didn't mean rogue behaviors. I mean that Trump has buddies he's already done deals with... like extorting Qatar to bankroll his son-in-law to side step bankrupcy. They may have deals happening now that are not at all known to media, in how this is playing out.
DeleteStill, the forward with missile, then backing down, sounds similar to the other times he had no sound judgement then got talked out of disaster type behavior.
Unfortunately he's single handedly damaged much of the US ally relationships around the world, as you describe.
He can't manage a war as commander in chief and knows it. That's part of his calculus. He knows he's mess up, so he wants to make war noises, but not really have to lead a war and prove what we already know about his incompetencies. That's an impression I've gotten, which I hope is accurate.
Land: Donald announced through a tweet his plans for a response. He called off an attack when a general told him that 150 people would die which he believed to be disproportionate to what Iran had done which has not yet resulted in loss of life.
DeleteWhile that point is debatable and becomes more so when and if Iran continues to launch attacks against U.S. drones or shipping, my main quarrel with his approach now is discussing his thoughts about a response in tweets.
The rogue behavior reference in my previous comment was in reference to Trump downplaying the Iranian attacks so far, refusing to attribute them to Iranian government policy but to rogue Iranian local commanders.
Sure, Donald is the King of Swamp Creatures in D.C. He went after Qatar even though that nation allows the U.S. to operate the largest military base in the Middle East. He is nice to them now after Qatar bailed out Kushner.
https://www.vanityfair.com/news/2019/02/qatar-666-5th-ave-jared-kushner
Oh, I missed that rogue being Trump's attrition. via of course, tweet.
DeleteI have published a new post:
ReplyDeletehttps://tennesseeindependent.blogspot.com/2019/06/observations-and-sample-of-recent_23.html