South Gent

Long only, value, contrarian, bonds
South Gent
Long only, value, contrarian, bonds
Contributor since: 2014
SAN: I am not paying much attention to it. As I recall the dividend cut was necessary and was part of a plan to raise more capital by selling shares. SAN has been hit by a variety of problems including the required increases in capital from regulators, their exposure to Brazil which has become a basket case and was once viewed as a growth market for SAN, and other problems that seem to crop up whenever SAN releases earnings.
SAN's exposure to EMs is now a major minus when it was thought to be a major plus a few years ago.
The shares are also going to be hit whenever there are news stories about other European banks having troubles, caused by guilt by association, sell first and ask questions later, and the cockroach hotel theory.
Then you have these kind of events happening which regenerates fears that were prevailing back in 2011:
The monetary policies being pursued by the ECB and other central banks are harmful to banks.
Sweden's CB accelerated its Jihad against its own banks last week by increasing its negative interest rate for deposits.
So NIM is a big problem, as CBs undermine their own banks through the adoption of monetary policies that are contributing to rather than curing the problems.
And why make risky loans when the NIM is 1% which is happening in countries with negative rates. Just find a way to avoid leaving money with the CB for safekeeping rather than loaning it out. The European banks are finding more ways to pass on costs to customers even when the customers do not receive anything on their deposits which takes money out of their pockets which could be spent. It does not take much of a loss to wipe out that kind of NIM.
The SAN price is now back down to 1996 levels..;range=my
It is hard to see SAN going bankrupt based on what I know now. It would qualify as a Lottery Ticket purchase in my risk allocation.
It might be advisable for the bank to eliminate the common share dividend or at least reduce it again. A continuation long term of current CB policies could cause banking failures among banking institutions that are weakly capitalized particularly when the next recession rolls around and it will.
I will be skipping the CEF and Healthcare basket updates due to a lack of activity. I did come close on Friday to buying back 50 shares of SNY sold last year at close to $50.
I am considering selling some bond CEFs and using the proceeds to buy $1,000 par value bonds with intermediate maturities. Bond CEFs have been a tough place to find total return in excess of the dividend yields for over two years now. Exposures to junk or foreign bonds have contributed to poor performances along with the usual manager ineptitude. So I may be harvesting some losses soon to offset some short term trading gains already realized this year somehow.
My next update will be the bond and preferred stock basket and that may be ready by Monday. Most of my activity has been in that basket.
TR: I would disagree with your conclusion drawn from the prospectus quote about the market for preferred stocks. That is a common provision. The preferred stock universe is highly volatile and trading opportunities to buy low and sell high present themselves with regularity. Some investors do buy and hold. I am not one of those. If I bought that ENB preferred at $11, it would definitely be out of here at $25. Look at the wave chart for the Canadian preferred ETF and see what I mean here. The next move may be back down to $11 from $25.
You may have such an opportunity now with the Enbridge preferred stocks. A purchase at a greater than 50% discount can produce a 100% gain with a return to the par pricing prevailing before the energy price slump, plus you have a higher dividend yield than the common shares bought now. You also juice your current yield as the discount to par value expands.
4.8% on the Toronto listed ENB shares:
And, you have some protection built into the preferred reset preferred stock for an unanticipated rise in inflation and interest rates that does not exist in fixed coupon preferred stocks. To me, that is worth a price and a sacrifice in current yield compared to a fixed coupon preferred from the same issuer. It is conceivable that a significant rise in rates would restrain the price of the common shares while improving the price of the reset preferred stocks at a higher percentage rate.
If I was going to buy the ENB common or the ENB series B preferred at last Friday's closing prices, I would go with the preferred given the potentially fast recovery potential to par when and if conditions improve which would also cause the common to rise, the inflation protection component built into floaters, and the higher current yield and reasonably projected future yields over the intermediate term.
The preferred and common shares are competing for buyers among income oriented buyers. The preferred shares have benefits and disadvantages as do the common shares and it all has to be weighed in the context of an investor's objectives and situational risks.
I doubt that I would go with a Canadian bank reset preferred over the common stock, but I would have to consider that option if I was buying the bank common in Toronto.
While no one sees inflation becoming a problem, I lack their confidence and consequently will devote a portion of my bond portfolio, which includes preferred stocks, to securities whose coupons will rise as rates rise (pure floaters) or a spread to a rate exceeds a certain minimum "guaranteed" level (e.g. MSPra, GYB, etc)
LMH: The unsecured Linn bonds are trading at 1 to 3 cents per $1 in principal amounts.
That is a clear indication that the common units are worthless and would be canceled in a BK filing.
The unsecured senior debt owners may receive some common units in exchange for their bonds issued by the reorganized entity coming out of BK. The bond bookies are not even considering that as a viable option at the moment. If shares are distributed, the number as a percentage of the total would probably mean a potential recovery of something more than 2 cents on the dollar.
LINN has followed the traditional route to BK for poorly managed companies that took on too much debt. Dividends are eliminated and then unsecured debt is exchanged for second lien debt at steep discounts.
The company then draws down its first lien credit facility completely before filing a BK whereupon it starts to rely on an even superior priority DIP financing. All of that higher priority debt added to the capital structure causes a rapid decline in the junior unsecured debt.
Linn did a few weeks ago an exchange of unsecured debt into second line debt. That second lien debt may not recover much of anything either:
I noted in a September 2015 Post that the then current Linn bond prices were "consistent IMO with a near certain bankruptcy filing prior to May 2019 and a low recovery value for senior unsecured bond owners somewhere in the 15 to 30 cent range per dollar in par value. ...The bond pricing is not consistent with the pricing of the common units. The bond bookies are in effect saying that the common units are highly likely to become worthless." The common was then selling at $3.5.
That recovery value estimate has been coming down since I wrote that post and really started to accelerate to the downside this year.
I did a toe dip into Linn unsecured bonds one too many times and will end up losing close to my $2,500 outlay for 4 bonds, assuming the bond ghouls are pricing those bonds correctly now.
The descent was so fast that my efforts to sell two 2 bond lots, bought around 60 cents to the $1, ended up with nothing but air and some interest payments. It is conceivable that I may recover more in the event common units are distributed to me and there is a nice recovery in oil and gas prices thereafter. In that respect, the hope is that the senior unsecured debt holders will cause so many problems and delays that the senior secured debt owners throw them a bone just to shut them up.
ENB frequently "sells" assets to ENF which appear to be a way to overload non-core assets and/or to earn an income stream though increasing its ownership interest in ENF. Of the total consideration, 11.7B was in assumed debt which is another reason for transferring the assets. It frees up capital for ongoing ENB expansions.
The ENB preferred stocks are not bonds and are junior in priority to all debt. Those securities pay dividends that can be deferred indefinitely provided no cash dividend is paid to the common shareholder. Since the dividends are cumulative, they can not be eliminated short of bankruptcy.
The five year bonds of several developed nations are already below zero. If Canada goes to a negative rate for its 5 year, then a spread of 2.4% over a negative rate would produce an even lower floating rate coupon and yield at last Friday's closing price.
Preferred stocks would become worthless in a BK.
I have owned ENF shares in the past.
My last purchase was in November 2013:
1. Bought 100 ENF:CA at C$23
I sold those shares in August 2014 as part of an allocation reduction in the energy sector:
1. Sold 100 ENF:CA at C$27.65
In the U.S. we call reset preferred stocks fixed-to-floating rates.
When designing a portfolio to meet various potential future scenarios, I will include those securities and other types of floaters to address the unexpected rise in inflation scenario, currently viewed by the bond bookies as a no show until the end of days.
I recently discussed the purchase of a fixed to floating rate equity preferred stock which is going to make the transition next year:
2. Bought Back AHLPRA at $23.9 and Another 50 at $24.35 in the IB account
Since I have a certain vintage, I recall the bond ghouls pricing thirty year treasuries at a 14% yield in 1984 that ended up producing about an 11% real average annual return for those bonds. So it is hard to convince me that they have supernatural predictive powers. The current 30 year yield is 2.6%:
It will be difficult to squeeze an 11% real average annual return out of that 2.6% yield which is predicated in large part on the average annual inflation prediction for the next 30 years called the break-even spread which closed last Friday at 1.5%.
I am not in a market for a 30 year TIP which is going to be auctioned soon. If you put a gun to my head and told me that I had to buy either the 30 year TIP or the 30 Year non-inflation protected, I would buy the TIP based on an expectation (a bet!) that the current break-even spread will turn out to be too low so that an investor holding until maturity rather than trading these bonds would be better off now buying the TIP. I would have to buy the TIP in a Roth IRA due to taxation of accretion to the bond's principal amount due to the CPI adjustments.
TR: Enbridge has several cumulative preferred securities:
That link has the prospectuses and you need to review a prospectus before buying any preferred stock or bond. I spent a few minutes reviewed the prospectus for the ENB series B and this is what I found:
This is a link to the B series prospectus:
Parity: All preference shares have parity with respect to priority of dividend payment and to claims on assets (page 6)
Par Value=$25
Initial Fixed Coupon Rate= $1 or C$4192 per share to but excluding 6/1/17
Subsequent Rate: "Government of Canada Yield" plus 2.4%
So this preferred stock will become a floater on 6/1/17.
Then, you would need to find how the "Government of Canada Yield" is defined in the prospectus which can be found at page 5. It means the yield-to-maturity of a 5 year year Canadian government bond as quoted by Bloomberg.
Well, Bloomberg no longer quotes 5 year bond yields:
So then you go to the arithmetric yields quoted by two Canadian dealers.
I just went to the Bank of Canada's website and found that the average 5 year yield was .48% as of 2/11/16:
So that would mean a 2.88% coupon assuming that was the rate in June 2017. So your annual coupon would go down from C$1 per share at the fixed rate to $.72 assuming the .48% yield on the 5 year government bond held for an entire year.
Equity preferred stocks do not have maturity dates with a few exceptions. You will never see a maturity date for an equity preferred stock issued by a bank holding company since a maturity date would disqualify the capital raised as Tier 1 capital. So these securities are potentially perpetual.
If I have the right Toronto quote, the shares closed at C$11.33 which is a greater than 50% discount to the $25 par value:
Marketwatch calculates the current yield, which uses the fixed coupon rate, at 8.83%.
C$1 ÷ C$11.33 = 8.83% rounded
If I assumed a drop to a C$.72 annual rate when this security becomes a floater, the yield would drop to 6.35%. So that is probably an issue now for investors given the low rates.
The actual yield would be higher or lower depending on the Canadian 5 year government yield during each computation period. Will rates go negative, stay about the same or go up? The float provision provides some protection against a sustained and unanticipated inflation that causes a spike in interest rates.
I see that this security went ex dividend for its quarterly distribution on 2/11.
Prior to 2015, this security was trading near $25:
The decline since that time indicates that the herd's rationale involves primarily credit risk with interest rate risk taking the back seat.
The common share chart shows a similar waterfall decline starting at about the same time:
You can also buy in Toronto a Canadian preferred stock ETF (CBD:CA)
Closing Price 2/12/16: C$11.19
The chart at that website shows the risk. The fund currently owns 223 securities and has a .5% expense ratio. The 12 month yield is shown at 6.23% as of 2/11. That will go up if the price continues to go down.
Another risk is that 2/3rds of Canadian preferred stocks are reset preferred stocks like this ENB preferred:
BMO Laddered Preferred Share Index ETF (ZPR:CA):
So future yields could be trending down unless there is a spike in rates before too many reset at lower coupons.
J: The Near Depression has had profound negative impacts in several sectors including new business formations and new housing construction.
Your data set is out of date.
A new version is the Kauffman Index of Startup Activity 1997-2015 which is displayed in Figure 1 at page 9 found in a recent study which will not link here.
You can find it here for downloading (first pdf report):
There was a significant decline starting in 2009, as I would expect. The last economic downturn was not a garden variety of recession where the downturn would have a shorter time duration and would recover more quickly as shown in the recovery starting in 2003.
There has been a spike in new business formations starting in 2014 which many have overlooked.
As noted in that report, the startup increase from 2014 to 2015 was the largest Y-O-Y increase over the past two decades. The index showed that the rate of new entrepreneurs in 2015 rose at a rate of 530,000 per month.
TR: I view the fixed income side of my portfolio to include exchange traded bonds, equity preferred stocks and $1,000 par value bonds bought in the bond market.
I lump equity preferred stocks with bonds since their bond characteristics dominate over the equity features. You can pick up more yield with that class of securities given their lower priority in the capital structure and other undesirable characteristics. Their equity feature lacks a pro rata ownership share in a business, a primary benefit of common stock ownership.
When buying bonds now, there are sectors where the Bond Bookies disagree with the ratings and that disagreement is expressed in the yield.
There are several bonds that are currently rated investment grade which are viewed by the Bond Ghouls as junk.
This is particularly the case in the energy and commodity sectors, but I am seeing differentials in other areas as well.
An investor is free to disagree with the credit risk opinion expressed in the price and yield, but it is important to recognize when there is a consensus opinion disagreeing with the ratings and to understand its rationale. More likely than not, the investor would be assuming more credit risk than would normally be reflected in the rating.
I mentioned recently buying an Amerada Hess 2033 bond which was rated as investment grade but the yield was clearly in junk territory.
I looked today at several Anadarko Petroleum bonds rated at Baa2 grade where the yields were inconsistent with that rating.
e.g. 2033 8.473% YTM
That is the case also for several of your well known Canadian energy companies.
I am tracking several of them including three issued by CNQ.
That company has a Baa1 rating but its 2033 senior unsecured closed today at a 8.8% YTM:
That yield is no where near what a Baa1 rated bond should yield now.
If you went outside of the Canadian commodity businesses and wanted a higher bond rating, then you would have to come way down in yield.
For example, a Canadian National Railway 6.375% senior unsecured maturing in 2037 closed today at a 32% premium to par value and a 4.138% YTM. It has an A2 rating which is only two notches above CNQ's rating from Moody's:
My approach now is to spread my risk out far and wide by owning a lot of different securities, knowing that some of them will end up as less than optimal selections while others will generate capital gains.
I recognize that conditions are not ripe for capital gains offsetting losses by much, given the low yields and high prices, so I am investing now with the hope of generating any total return in excess of my interest dividend payments for bonds and dividend payments from equity preferred stocks.
The odds of realizing capital gains increase generally with the risk that an investor is willing to assume and their ability to withstand frequently wild swings in price.
And, when exchange traded bonds and preferred stock were in free fall earlier this week, you have to at least take a few nibbles when the discounts to par values expand that will have a better chance of being profitable down the road compared to prices prevailing just a few weeks ago when the same issues were selling at premiums to par.
E: Real GDP growth has slowed over the past ten years compared to the historical average annual rate. Real GDP increased by 2.4% in both 2014 and 2015; 2.2% in 2013; 2.3% in 2012; 1.6% in 2011 and 2.5% in 2010. During the last term of Clinton's presidency, the number were over 4% at 4.5%; 4.4%; and 4.8%. These numbers come and go and are frequently juiced by temporary and unsustainable events like the new home construction bubble during the Bush presidency.
Growth is harder to generate when the law of large numbers starts to work against you.
A thoughtful book on why U.S. growth may be in for a long period of slow growth is the recently published book with this title:
"The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War (The Princeton Economic History of the Western World)"
Reviewed here in the Washington Post;
He has a different take on why growth rates are slowing.
As to business loan growth, it is increasing at a nice pace as shown in the data:
Commercial And Industrial Loans, All Commercial Banks
Surveys of loan officers are starting to show slightly more banks tightening business credit than loosening it which needs to be monitored.
I am seeing good business loan growth numbers confirmed in virtually every regional bank earnings report that I have reviewed and I read maybe 200 a quarter.
Consumer debt is increasing at a relatively slow pace which is good long term IMO.
See NY FED Report released today:
Sure, there is a surplus of unproductive money gathering rays due to the FED's robust money creation starting in 2009. Excess bank reserves were minuscule prior to 2009 and hit a recent high at $2.7 trillion. Those reserves are being drained now by the way, around $400B or so since last August.
Sure, a number of corporations hoard cash and complain about this and that. I haven't notice a change in their griping over the past 50 years. There is a preference among large publicly traded corporations to use cash to increase their perks and to buy back stock which can increase the value of their free options, rather than investing in new plant and products that create jobs.
When Congress gave those corporations a holiday on the repatriation tax based on their promises to create jobs, they cut jobs while increasing top executive's pay and stock buy backs.
Ultimately, the health of the business sector will depend significantly on small businesses who are willing to take risks and to earn what they receive.
While optimism took a dip in January, the overall trends in small businesses have been positive since 2009:
Large businesses will outsource jobs to foreign countries irrespective of the considerations that you mention. If someone is willing to work for no pension or 401K contribution, little or no health benefits, at two bucks an hour, then that is hard to resist. And, it becomes much harder to resist when the foreign country allows the maximum amount of water and air pollution and has few "regulations" protecting worker safety, which is what many would like to see in the U.S.
The recent book titled Dark Money provides some details on what some industrialists want in the U.S. Why bother with meat inspections, for example, just to avoid rats in hamburger meat as Glen Beck once argued, railing against TR's 1906 Pure Food and Drug Act as representing a road to fascism and government dictatorship.
Glenn Beck's Common Sense, chapter "The Cancer of Progressivism"
John Steward's take:
C. Maybe so but I will plow ahead and predict anyway that there is a 74.86415673% chance that a 3.84% chance of a 2016 U.S. recession will be closer to the end result (as in no recession at all) than the pessimistic group think cited in my preceding comment.
It is all about probabilities assigned to the Big Picture scenarios and to each individual firm's prospects, which change based on new information that has to be acquired and evaluated without any pre-existing biases or opinions. If I thought there was a 65% likelihood of a recession this year, I would have a far lower allocation to stocks than I now do and might even buy TLT or I might need a window higher off the ground than the one alluded to previously.
Zerohedge is an example of an website that filters, distorts and blows out proportion information to conform to its glass is forever empty worldview. Positive information does not exist at all or is dismissed in unconvincing ways that are obvious to those familiar with original source information.
A recent example is this article:
For example, does it mention in that ZH article by the infamous Tyler Durden that the unadjusted retail and food service sales number for December 2015 was 514.928B while the adjusted number for last December was 449.109B. Why would the author focus on the January seasonally adjusted and unadjusted number? About the only accurate comment made in the article is that the seasonally adjusted and unadjusted numbers even out over time. The author counts on readers refusing to actually look at the source documents:
Table 1
I would also note that January 2015 had differences between adjusted (434.929B) and unadjusted ($396.495) numbers which plays into the author's January discussion how?
Consumer Spending: In the aggregate, U.S. consumers have been improving their balance sheets and have significantly more disposable income after debt service payments and energy costs to save, spend and/or pay down more expensive debt. I have mentioned in earlier comments here that the savings rate accelerated in the 2015 second half, possibly in response to the U.S. stock market's gyrations and unfavorable headlines from overseas.
The herd is processing today new information about consumer spending.
Previously, the consensus view was that consumers were going to hole up in their bunkers and delay spending until Wall Street quit bombarding them with negativity and a growing chorus of talking heads spewing seemingly rational predictions that 2008 was about to reappear like that character Jason Voorhees who wears the hockey mask in an apparently endless number of versions of Friday the 13th.
So that brings me to the today's news that the consumer is not dead yet.
The government reported today that retail sales in January, one horrible month for stocks, rose .2% over December. The December over November number was revised from a negative .1% to +.2%.
Y-0-Y, retail sales rose 3.4%.
Those numbers are NOT adjusted for price changes. Gasoline sales declined 8.1% Y-O-Y and -3.1% from December 2014 to January 2016. That is not a bad thing, since the decline was due to lower prices that leaves consumers with more money to spend elsewhere.
If you exclude gasoline from retail sales given the atypical price decline impacting the dollar value of sales, retail sales rose 4.5% Y-O-Y. I wonder whether the December revision will be mentioned by anyone citing the original negative number as a justification for a negative outlook.
In the same vein, I have noted here that initial claims for unemployment have been accelerating slightly in prior weeks but the 4 week moving average number was near historic lows during prior recoveries. Consequently, there was nothing that concerned me about the increases in initial unemployment claims, though some investors believed that the trend was ominous or actually meant something worth noting.
The DOL reported on 2/11 that initial unemployment claims fell by 16,000 for the week ending 2/6. The 4 week moving average decreased 3,500 to 281,250.
Chart: 4-Week Moving Average of Initial Claims
If I am going to intentionally try to spook myself into a negative outlook, I would not be using that chart or recent DOL reports about initial unemployment claims to scare myself. Others are welcomed to draw ominous conclusions.
When you look at this data objectively, it simply does not support a thesis, advanced by many pundits and investors, that a U.S. recession is occurring now or is likely to occur soon.
Brian Wesbury published today a blog titled "This is a Correction, Not a Recession":
If some of the fears about the future, confused by many as facts, actually happen, then recession odds increase. If they do not, then the odds decrease. Bank of America/Merrill Lynch recently put the odds of a U.S. recession occurring within twelve months at 25%.
I view that as high. I would say 5% to 20% and possibly 25% if you include 2017.
Fortune Magazine Article: Recession odds in 2016 may be less than 50% but not "by much":
A recently released survey of economists has the odds at 21%:
A Deutsche Bank economist places the odds at 40%:
He might want to pray that does not happen or DB may find that economists are worthy of cost cutting layoffs to preserve capital.
David Levy says 2 for 1:
" It’s at least 2 to 1 that we’ll be in a recession at the end of 2016."
"At least" may be another way for Levy to say 100% without looking foolish.
Citigroup has the odds at 65%:
Junk bond prices signal a 44% chance according to one pundit:
"Abandon Hope all ye who enter here" Inferno (Dante)
After reading the foregoing and a lot more over the past several weeks, I was thinking about jumping out of a window. I did not want to overdo it, so I was considering the front window on the first floor.
The St. Louis FED has a chart titled "Smoothed U.S. Recession Probabilities" that placed a 3.84% chance as of November 2015:
Recession Probability Models
Sam: I have frequently commented recently on the unreliability of future non-GAAP E.P.S. forecasts. The recent forward estimates have been so far off that they have contributed to investors paying too much for rationally predicted earnings growth.
Update For Portfolio Positioning And Management As Of 1/12/2016:
12/31/14 Estimate vs. 12/31/15 Operating Earnings for 2015:
Quarter / 2014 / 2015
1st / $30.58 / $25.91 actual
2nd/ $32.27 / $26.14 actual
3rd/ $33.36 / $25.44 Preliminary-Mostly Actual
4th/ $34.8 / $29 Estimated as of 12/31/15
So my first suggestion is not to drink Wall Street's kool aid.
"Drinking the Kool-Aid" defined:
I would also emphasize that the forward estimates are not GAAP projections but are based on "ex-items".
So I am not wondering about any of those numbers.
The ex-energy GAAP E.P.S. number for 2016 could be up in the low single digits IMO, based on what I know now, with commodity companies continuing to drag down the total. The main point is that overall earnings growth will likely be anemic and would not justify the high P/Es prevailing when the SPX was over 2100. That would hold true for reasonable forecasts of earnings growth over the next 3 to 5 years which I expect to be subdued.
As to the VIX Model, I always use valuations when making purchase and sell decisions. I started to shift out of cash and bonds into stock starting in early March 2009 and wrote several posts during that time period discussing the tension between the Vix Model and other timing rules including valuations. Once you have a Catastrophic Event, it will take at least a year for the VIX to return to any readings below 20 but conditions will often be most favorable for long term investments during those Catastrophic Events as well. The Model's primary use is to signal the need to reduce the stock allocation and to raise cash for later redeployment after the Trigger Event and during the First Recovery Period which is now kaput. We may now be starting a Second Confirmation Event for the same reasons that we had the Trigger Event and the First Confirmation Event.
Many of those posts asked a simple question. Was the market more or less safe for a new purchase with the SPX at 666 (March 2009 low) compared to 1500+(October 2007)
I was not finding much to buy when SPX was over 2100 but there are a growing number of reasonably priced stocks now; provided of course an investor has the mental and financial wherewithal to withstand further downside movements.
I would just assume that whatever is bought now could fall another 10% or 20% based on market events rather than fundamentals. The fears prevailing now may prove to be way overblown or may not even come to fruition. If they do become realities, then more losses will be on the horizon. So, like anything else in life, you place your bets, and take your chances.
TR: There is a strong tendency among investors to project current conditions into the indefinite future, even though their own experiences have proven to them repeatedly that conditions do in fact change.
The price of crude oil is now being projected as remaining in the $30 per barrel range until the end of days. Why? That is where the price is now. It is bad and is never going to change or improve is the mantra.
Looking at history, the conclusion that a rational person would draw from the foregoing is that humans do not learn much, if anything, from history that is experienced by them, let alone anything from the more distant past.
When I look at the statistics, I see the mother of all price spikes in the making. That does not matter when investors are having difficulty seeing the tips of their collective noses. Energy stocks and banks that lend to energy companies can remain under selling pressure until it becomes obvious and irrefutable that the pendulum has swung too far into irrational pessimism that has no factual foundation.
I am unsure when that will happen, but my best guess now is 2018-2020, possibly starting in the later half of 2017. You and I have discussed some of the reasons that will cause a recovery in crude prices, including the mothballing of major projects that take years to develop, the depletion rates of existing wells, and the worldwide increases in demand.
The EIA estimates that total worldwide demand will hit 95.02 million barrels per day this year, up from 93.78M last year or a 1.32% increase:
Total worldwide production is estimated at 96.07M barrels a day this year and 96.77M next year, or a .7% increase. So, production is estimated to grow at a slower rate than consumption. The EIA is forecasting a decline in non-Opec production between 2016 and 2017 which seems reasonable based on what we know now. The decline could easily be larger than currently predicted, which is a mere .17M barrels per day.
In any event, demand could easily outstrip production in 2018, causing the buyers at the margin to bid up prices which then flows to all buyers.
In every significant stock market decline occurring in the absence of a recession or depression, irrational pricing decisions based on emotion arise and accelerate as the decline continues.
The future forecasts being made in those pricing decisions would not withstand a competent cross examination and will frequently be based on inaccurate knowable information and unreasonable predictions about the future that are grounded primarily in fear.
So that just goes with the territory of being an investor. This will not change given human nature which includes an inherent inability to learn much, if anything, from the past or present or to make factually based decisions after performing diligent original source research.
HSEA and HSEB can be called by HSBC now so the price is going to hug par value plus accrued dividends unless there is a material change in the credit risk.
BCSPRA, BCSPRC and BCSPRD are subject to being called now by Barclays Bank.
I did pull up some of the European preferred stock quotes when I was in my IB account. Based on what I know now and what can rationally be feared, I would prefer buying HSBC preference shares over those issued by DB or SAN.
I elected to pass on a Barclays preferred stock which was trading below par value and instead put in several small lot limit orders for U.S. company issued preferred stocks below existing bids. If prices fall more then I may elect to average down with similar small lot orders. If I knew when this downdraft would stop, I could be more aggressive but alas I do not know.
I believe that I pulled up the quote for BCSPRD which fell $1.3 or -5.15% to close at $24.05.
I have not investigated why the two HSBC preference shares have not been called given their relatively high coupons: 8.125% coupon for HSEA and 8% for HSEA taken in light of HSBC's credit rating.
Does it mean, for example, that HSBC can not refinance now at lower levels based on how the markets view that bank's credit risk profile? The stock is in a waterfall decline:
Well, it could have been worse today. It still ended bad for Boeing shareholders:
With the market stabilizing rather than falling into a black hole, I can postpone buying books about turning my back yard into a vegetable garden and building a chicken coop, at least for the being. I did check out some coop designs online, and had no idea that there were several websites devoted to that enterprise. Possibly the best one was "my pet chicken".
Maybe I should go into that business which may be one of the booming businesses in short order.
Even if the market turns ugly, and it is only putting out some bad vibes now, I am more likely to exhaust my oversupply of Halloween candy before planting seed in the backyard.
I was impressed by the bulls goal line stand today. While there was some meandering below SPX 1820, that marginot line held at the close.
The U.S. stock market will be closed next Monday when the Shanghai exchange reopens after an extended holiday. Next Tuesday may prove to be a pivotal day.
Today, I sold a 100 shares lot of a stock yielding about 3%, whose purchase was not previously discussed in my blogs, harvesting about a $900 gain.
I am following my guidelines outlined in the first section of this post.
I will use the $3,100 in proceeds to buy higher yielding securities which increases my cash flow available for buying more of the same. So far, I have redeployed about $420 by buying a 50 share lot of SNR.
In my IB account, where I am charged a $1 commission, I am now slicing purchases of preferred stocks into 30 shares and bought two today using that scaredy cat method.
There are certainly a large number of exchange traded bonds and preferred stocks going down in price and up in yield, as are a number of equity REITs other than Realty Income which hit a new high after I sold my 100 shares.
C: I would not agree that the "long-term momentum on PGX is solidly down".
The momentum has been down starting on 1/5/2016 so I would classify that as barely short term:
2 Year PGX Chart: Price is not adjusted for dividends.{"showSma":true,"smaC...
The current short term decline coincides with the stock market decline and is to be expected when there is turmoil in the stock market.
The exchange traded bonds and preferred stocks owned by PGX start to trade more like stocks than fixed income investments during periods of heightened stock market volatility and accelerated common stock declines.
Fear then becomes the most dominant price driver.
The increasing yield differential over treasuries that are falling fast in yield becomes irrelevant. Credit risk concerns become irrational for most issues.
Today, the ten year treasury is currently trading at a 1.6% yield, which is below the lowest lows from early May 2013 (1.66%) and early February 2015 (1.68%).
I would not expect exchange traded bonds and preferred stocks to stop their price descent until stocks stabilize even though their yields are increasing as their prices continue to decline.
Back in the 2011 summer, when there was almost a 20% decline in the SPX and spike in the VIX, these securities declined significantly in price and were highly volatile with a downside bias. That would hold true for securities issued by European and U.S. companies. I documented in a 2011 blog several securities that had fluctuated close to 20% in price during just one trading day in August 2011:
Tuesday, August 9, 2011
1. Enhanced Price Volatility in CEFs, European Hybrids, and Equity Preferred Stocks During Periods of Fear:
So what you are seeing now in PGX and the other preferred stock ETFs that own exchange traded bonds and preferred stocks is normal when the stock market experiences stress and turmoil even when prices on similarly rated securities traded solely in the bond market are rising and yields are falling.
S&P 500 1,820.89 Down 30.97(1.67%) 11:20AM EST
28.64 Up 2.35(8.94%) 11:05AM EST
iShares 7-10 Year Treasury Bond (IEF)
$111.92 Up 1.00(0.90%)
iShares Investment Grade Corporate Bond (LQD)
$114.40 Up 0.65(0.57%) 11:21AM EST
PowerShares Preferred ETF (PGX)
$14.19 Down 0.24(1.66%) 11:22AM EST
SPDR Barclays High Yield Bond ETF (JNK)
$31.34 Down 0.37(1.15%) 11:22AM EST
PGX is down more again than JNK which owns junk bonds traded in the bond market:
BBB or Higher 0.18%
BB 43.11%
B 42.40%
CCC or Lower 14.30%
AA : 2%
A : 2%
BBB : 55%
BB : 35%
B : 5%
Not Rated : 2%
China's stock market remains closed for the lunar new year holiday period.
Honk Kong has opened for trading this evening.
18,577.50 Down 710.67(3.68%) 9:13PM EST
52wk Range: 18,450.61 - 28,588.50
"Hong Kong's Stocks Tumble to Three-Year Low After Trading Break"
Kyle Bass, one of the hedge fund managers that made a fortune on the subprime fiasco, is amping up his negativity on China or what some cynics would describe as "talking his book" to enhance his winnings.
"Bass Says China Bank Losses May Top 400% of Subprime Crisis"
T: The DB hybrid shares are off limits for me. I just published a comment mentioning that lack of enthusiasm to assume their downside risk.
Those securities could fall a lot more in price that could conceivably perk up my interest.
The problem is that no one really knows how bad the situation is at DB.
I would also add that DKT is a complex piece of work:
See e.g. Starting at last paragraph page S-7 and through S-10:
The DB hybrids are showing the most stress of USD priced European "preference" shares or hybrids, but the stress so far is subdued.
PGX: I read an article published today about PGX and PFF written by Eric Parnell.

Eric argues that it is important to look under the hood when buying these securities.
He claims that these ETFs were hit over the past few days due to their exposure to European bank issued "preferred" securities. This is what he said:
" And unfortunately for investors who hold the PFF, they are now starting to take a direct hit from the problems that have been plaguing these European banks since the start of the year. For example, a number of these preferreds declined by -5% to -9% on Tuesday alone, and are now trading at meaningful discounts to their par values."
I noted in my post that PGX owned European hybrids and gave a few examples.
Most exchange traded bonds and preferred stocks went down significantly in price, which usually happens whenever there is turmoil in the stock market. I have been pointing that out for about seven years. That fact applies to securities issued by U.S. and European companies. If you look under the hood, and had experience with the securities owned by these ETFs, that would be a given.
For PGX, I looked at all of the securities issued by European companies and will highlight their current prices below and monetary exposures as of 10/31/2015. All of the foregoing have $25 par values.
HSBC PLC and Barclays issued securities have the highest foreign weightings. The prices are influenced by the optional call dates. The HSBC securities have Baa2/BBB- ratings:
HSBC 8% Series 2 ($89+M)
HSBC Holdings plc (HSEB)
$25.47 Up 0.22(0.87%)
52wk Range: 25.16 - 26.89
HSBC 8.125% ($83+M)
HSBC Holdings plc (HSEA)
$26.02 Up 0.31(1.21%)
52wk Range: 25.27 - 27.15
Barclays 8.125% Series 5 ($122+M)
Barclays PLC American Depositar (BCS-PD)
$25.35 Up 0.33(1.32%)
52wk Range: 24.52 - 27.04
There are 4 Royal Bank of Scotland securities and they have been historically more volatile and are rated deep into junk at B1/B+:
5.75% Series L ($33+M) Royal Bank of Scotland Group Pl (RBS-PL)
22.63 Up 0.80 (3.66%)
52 week high/low $21.42-$25.28
6.6% Series S (30.+M)
Royal Bank of Scotland Group Pl (RBS-PS)
23.80 Up 1.12(4.94%)
52 week range $22.59 - $26
7.25% Series T ($29+M)
Royal Bank of Scotland Group Pl (RBS-PT)
$24.70 Up 0.95(4.00%)
52 week range 22.44 to 26.76
6.08% Series G ($15+M) Rated at Ba2 (bond)
RBS Capital Funding Trust VII (RBS-PG)
23.01 Up 0.62(2.77%)
52 week range $21.69-25.28
There are 3 ING hybrids with a total exposure of $10+M
6.125% ING Groep N.V. (ISG)
$24.16 Up 0.39 (1.64%)
52wk Range: 23.29 - 25.85
6.2% ING Groep N.V. (ISP)
24.19 Up 0.45(1.90%)
52wk Range: 22.27 - 25.95
6.375% ING Groep N.V. (ISF)
$24.36 Up 0.46(1.92%)
52wk Range: 23.00 - 25.99
There are two Aegon hybrids with a total exposure of $49+M
6.375% AEGON N.V. (AEH) $24.86 Up 0.27(1.10%)
$24.86 Up 0.27(1.10%)
52wk Range: 24.26 - 26.58
$26.49 Up 0.26(0.99%)
52 week range $25.6 to $28.71
There is one Prudential PLC security with a $12+M exposure.
6.5% Prudential Public Limited (PUK-PA)
25.76 Up 0.08(0.31%)
52wk Range: 25.00 - 27.1
There are two Deutshe Bank securities with $23+M exposure:
7.6% Deutsche Bk Contingent Cap Tr I (DTK)
22.55 Up 0.90(4.16%)
52wk Range: 20.70 - 28.53
8.05% Deutsch Bk Contingent Cap Tr V (DKT)
$23.05 Up 0.72(3.22%)
52wk Range: 21.01 - 29.47
There is one Santander security with a $2.7M exposure.
6.5% Banco Santander, S.A. 6.50% Non (SAN-PC)
24.75 Up 0.63(2.61%)
52 week range $23.6 to $26.88
The exposure numbers come from the last Annual Report.
Total PGX investments were then value at $3.114B. So you can do the math.
With the exception of the RBS and DB securities, these securities have shown narrow price ranges more influenced by the optional call dates, and are selling just under or over their $25 par values.
The RBS securities are showing their usual volatile trading patterns.
The only securities showing signs of unusual stress are the DB securities with a $23+M exposure or significantly less than 1% of total assets and their stress is far from extreme so far.
I have no interest in owning directly SAN, RBS or DB preferred stocks or hybrid securities. I last sold out of a SAN preferred stock, a floater SANPRB, last year:

1. Sold 80 SANPRB at $21.81 (snapshot of profit=$561.77/total return at $853.47)
PowerShares Preferred ETF (PGX) rose .77% today benefiting by a large number of securities, including the European hybrids, improving in price.
TR: I am never anywhere near 100% certain about any future outcome in the stock market.
While I have been saying for months that the risk is to the downside, that is merely an assessment of what is the most likely dominant future scenario.
I am not concerned about the market taking off now to SPX 2100 and beyond, but on falling quickly to 1700 or lower. A decline to 1100, which I view as highly unlikely based on what I can reasonably anticipate now, would only take us back to the closing SPX level from October 3, 2011.
That outcome sounds really far fetched given that it would represent about a 48+% decline from 2130. I have a healthy respect for the power of the bear which is the only normal and rational reaction given what has happened since I started to invest in the late 1960s. I would just note that there have been two similar percentage declines since 2000 in case anyone has forgotten. (-56.8% Near Depression; - 49.1% 2000-2002)
See Charts:
The risk of an accelerated downturn is growing IMO, which is about all that I can say. That is not the same as saying it is inevitable.
In short, I do not mean to give an impression that my opinions are dogmatic or based on certainty.
So, notwithstanding an opinion that the risk is to the downside, I will do some light buying, particularly on major down days and VIX spikes. Why? I recognize that my future predictions and opinions about the risk/reward balance may prove to be just plain wrong.
I will attempt to deal with uncertainty in a variety of ways, including chopping up orders into small pieces and to average into a position over several months, waiting for a stock to fall into my fair value range before buying, averaging down frequently in small lots at predetermined range price levels, etc.
There is a lot of hyperventilating now about European banks in general which may even be rational for banks like DB and SAN. It is always hard to say when dealing with big banks since everything is so obtuse and complicated and probably not even fully understand by risk managers and senior management. Many problems are swept under the rug in a variety of ways, including loan modifications and extensions to basically insolvent borrowers which is rampant in China, and the problems fester and grow underneath the surface until the big bang hits.
Cisco (own): CSCO reported its second fiscal quarter earnings after the close today:
"Cisco reported second quarter revenue of $11.9 billion, net income on a generally accepted accounting principles (GAAP) basis of $3.1 billion or $0.62 per share, and non-GAAP net income of $2.9 billion or $0.57 per share.
Cisco Systems, Inc. (CSCO)
After Hours : $24.17 Up $1.66 (7.37%) 6:03PM EST -
The estimate was for $.54 which is a non-GAAP number:
The company also hiked the dividend by 24%, increasing the quarterly penny rate to $.26 from $.21. The Board also approved a $15B addition to the stock buyback program.
I discussed re-initiating a CSCO position in the comment section to my last Portfolio positioning update:
at 21 Jan, 08:59 PM
That purchase was made almost entirely on statistics.
I later added shares on a dip below $23.
OHI: The 2015 4th quarter report looked good to me after a quick review.
"Adjusted FFO was $159.4 million, or $0.81 per common share, for the three months ended December 31, 2015, compared to $92.9 million, or $0.72 per common share, for the same period in 2014. . .
The Company currently expects its 2016 annual FAD available to common stockholders to be between $2.95 and $3.00 per diluted share and its 2016 annual Adjusted FFO available to common stockholders to be between $3.25 and $3.30 per diluted share."
FNB: I discuss this bank in Item # 5 above.
FNB is being promoted to the S & P MidCap Index effective after the close on 2/12/16:
USB was upgraded today by Wells Fargo to outperform, based apparently on valuation and USB's ability to weather economic storms better than most large banks. The price target is $44-46.
EXTREME: GOLDMAN upgraded Hess today to buy and placed the stock on its conviction buy list.
Hess did manage to sell a lot of stock a few days ago which is a positive for bond owners.
After writing my comment about Hess, and doing my usual due diligence, I was willing to buy 1 Hess bond. I was able to find 1 available for purchase in my Vanguard account, though none were available with that minimum in my Fidelity account.
I bought one of the 2033 senior unsecured at 86.75
I am not very brave at the moment particularly when it comes to energy bonds.
Senior unsecured bonds by several Canadian energy companies are selling with junk bond yields even though the rating agencies have them rated investment grade.
The market is anticipating downgrades.
For example, Canadian Natural Resources (CNQ) also has a 2033 bond, currently trading below 80 with a YTM of 8.8%:
Moody's has a Baa1 rating. For that maturity year, the Baa1 rated bonds would congregage mostly in the 4.% to 5 % YTM range.
E.G. FedEx 2034 4.47%; Eaton 2032 4.01%; Marsh 4.26%; Citigroup 2033 4.62%; Ohio Power 2033 4.77%; Keyspan 2033 4.88% All YTMs
Then you have the energy names with obvious junk bond yields:
Marathon Oil 2032 9.36% YTM
Devon Energy 2032 9.84 YTM
The 2032 Devon bond hit a high near 142 in September 2014 and is now at 85.
And one slightly stressed retailer which has an outlier yield based on its current Baa1 rating:
Kohl's 2033 6.2% YTM
Sam: I would call the recent action in the USD to be an adjustment rather than a trend that would support a sustained rise in the CAD's value against the USD.
I made this comment above on 2/4/16 at 7:29:
"A sustained up move in the CAD's value against the USD, and even a return to parity, will happen, but I have no confidence that it will happen this year due to my opinion about WTI remaining anchored near $30 with possible temporary spurts in the spring/summer period to $40 or $45 on a spike. Any burst will probably take the CAD higher but I just don't see it breaking above that ceiling hit in May 2015 this year."
I would add that the same would likely hold for 2017 based on my current opinion about crude oil and other commodity prices.
Yellen basically was talking mush in her prepared remarks reminding me once again what Harry Truman once said about economists: Give me a one-handed economist! All my economics say, ''On the one hand? on the other.''
"Financial conditions in the United States have recently become less supportive of growth, with declines in broad measures of equity prices, higher borrowing rates for riskier borrowers, and a further appreciation of the dollar. These developments, if they prove persistent, could weigh on the outlook for economic activity and the labor market, although declines in longer-term interest rates and oil prices provide some offset. . ..
As is always the case, the economic outlook is uncertain. Foreign economic developments, in particular, pose risks to U.S. economic growth. Most notably, although recent economic indicators do not suggest a sharp slowdown in Chinese growth, declines in the foreign exchange value of the renminbi have intensified uncertainty about China's exchange rate policy and the prospects for its economy"
Then, on the other hand,
"Still, ongoing employment gains and faster wage growth should support the growth of real incomes and therefore consumer spending, and global economic growth should pick up over time, supported by highly accommodative monetary policies abroad. Against this backdrop, the Committee expects that with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in coming years and that labor market indicators will continue to strengthen. . .
Of course, economic growth could also exceed our projections for a number of reasons, including the possibility that low oil prices will boost U.S. economic growth more than we expect."
TR: I am anticipating that the bulls will throw in the towel soon. The technical deterioration has spread and the bulls may be running out of ammunition that they are willing to use in the SPX 1820 to 1860 range.
Importantly IMO, the China and Hong Kong markets have been closed this week, so there could be a huge downdraft when they reopen next Monday. Japan is open and it has gone down substantially so far this week.
China and HK are celebrating their Lunar New Year holiday period:
I may wait until early next week to make any adds outside of the exchange traded bonds and preferred stock sectors.
There is a lot of deterioration in the share prices of European banks and investment banks as a perfect storm of problems have descended upon them.
Credit Suisse recently traded at a level below its lowest level during the Near Depression.
Santander's stock has been demolished. The USD priced shares are now trading at 1997 levels:{"customRangeStart":1...
There has been recent weakness in the USD as traders reassess the likelihood of any additional increases in the FF rate. The current prediction is that there is only a 21% chance that the FED will raise another .25% on or before 2/1/17:
A major impetus for the rise in the USD was a belief that the FED would actually be hiking the FF rate as other central banks maintain zero or negative interest rates. That thesis has now been tossed as a consensus so the USD has started to slide some.
Dollar Index:
Bloomberg Spot Dollar Index:
There is also an indeterminate amount of pressure on the USD resulting from widespread selling of USD priced assets. This extends beyond just sovereign wealth funds. China has been a major seller of treasuries and other USD denominated assets.
If currency problems accelerate, requiring more CB firepower, then a source of funds would be CB holdings of USTs and other USD priced securities.
Sam: The best source for loan information is the earnings reports and earnings call transcripts.
Wells claimed to have $17B in loans to energy companies but unfunded commitments would bring the total to $42B.
I generally avoid the big banks who have a tendency to blow themselves up and who frequently engage in what can be called criminal, fraudulent or clearly unethical activities. When they are caught, big fines and settlements are inevitable. The number of alleged criminal activities have been staggering over the years.
Wells recently settled a fraud suit for $1.2B:
C: The ETFs that own BABs have long durations and yields under 5% and would consequently be bad investments when interest rates rise. The leveraged CEFs that own BABs have higher yields, generally over 6%, but face the same duration risk plus the risks relating to their use of leverage.
I am personally not comfortable assuming the duration/interest rate risk for the yields prevailing in those securities at the current time.
I recently sold out of BBN which of course continued to rise after my disposition:
1. Sold 150 BBN:
BlackRock Taxable Municipal Bond Trust (BBN)
Closed Today at $23.39 Up 0.24 (1.04%)
That fund closed today at a .65% premium to its net asset value per share based on a net asset value per share of $23.24 and a closing market price of $23.39.
When I last bought shares on 10/9/15, BBN closed at a 8.97% discount to net asset value per share.
1. Bought 50 BBN at $20.26
The leveraged BAB CEFs are receiving buying interest due to the decline in longer term interest rates, the prospect that no further FF hikes will be made this year, and the overall high credit quality.
I still own NBB which I last discussed here:
1. Bought 50 NBB at $19.51 Roth IRA:
That one closed today at a 4.11% discount to net asset value per share. NBB and NBD will liquidate in 2020.
The CME's FED Watch Tool is currently predicting only a 21% chance that the FED will raise the FF by .25% on or prior to February 1, 2017. The chance for a .25% hike or or before September 21, 2016 has fallen to 11%. So traders have become far more pessimistic about any further hikes in the FF rate which is a positive for leveraged bond CEFs that borrow short term provided their consensus opinion proves prescient.
PFF and PGX went down more today than the junk bond ETF JNK.
SPDR Barclays High Yield Bond ETF (JNK)
31.76 Down 0.15(0.47%)
PowerShares Preferred ETF (PGX)
14.32 Down 0.15(1.04%)
PGX traded as low as $14.21.
PGX has a 55% weighting in BBB rated securities and another 4% in A/AA.
The divergence is due in my opinion to the fact that PGX owns exchange traded bonds and preferred stocks while JNK owns bonds traded in the bond market.
The prices of exchange traded bonds and preferred stocks can be whipped down on relatively light volume. An example, which I own and is owned as well by PGX, is the senior unsecured bond AGIIL:
$23.41 Down 1.37(5.53%)
Volume: 33,583
Avg Vol (3m): 8,876
Day's Range: 23.26 - 25.47
Looking at a one day chart, I see the price yanked down from $24.97 by the following trades near the close:
100 at $23.58
1,000 at $24
313 at $23.25
1,750 at $23.26
406 at $23.36
428 at $23.41
I am seeing widespread price declines in exchange traded bonds and preferred stocks.
More bank equity preferred stocks are now trading below their $25 par values. JPMPRG is one of the investment grade equity preferred stocks that have fallen below par value.
J P Morgan Chase & Co Depositar (JPM-PG)
$24.90 Down 0.43(1.70%) 1:51PM EST
I suspect the much better U.S. capitalized banks are being dragged down by a few European banks like Deutsche Bank AG (DB):
DB: $14.87 Down 0.67(4.31%) 1:56PM EST
DB has some exchange traded subordinated "contingent" payment "preference" securities, viewed here at HQ as a European hybrid:
Deutsche Bk Contingent Cap Tr III (DTK)
$20.86 Down 1.29(5.82%) 2:03PM EST
The recently issued BANCPRE is now available for trading on the NYSE.
Last Trade at $24.4 1:37PM EST
Day's Range: 24.25 - 24.70
The overall price declines are being reflected in "preferred" stock ETFs that own exchange traded bonds and preferred stocks, as both PFF and PGX extend their recent declines today.
14.21 Down 0.26(1.80%) 1:52PM EST
$36.54 Down 0.62(1.67%) 1:53PM EST
The worst performer of those "preferred" stock ETFs today by far is VRP:
PowerShares Variable Rate Preferred ETF (VRP)
$22.58 Down 0.81 (3.46%) 1:53PM EST
I can buy VRP and PGX commission free in my Schwab account and PFF commission free in my Fidelity account. I don't mind at all buying 5 or 10 shares to average down.
J: I will be eligible for Medicare in a few months so my healthcare insurance premiums will be going down. After being kicked off my $5K deductible plan, I opted for the cheapest Bronze plan available which cost me about 11% more while having a larger co-pay.
I am not sure how the BLS calculates inflation numbers for health insurance. How do they account for receiving less and paying more or the subsidies provided by the government which were received by about 80% of Obamacare customers last year?
The government's official inflation number for health insurance premiums is provided in the detailed listings contained in Table 2 to each CPI release:
Last Release
The Y-O-Y unadjusted health insurance premium increase was 3.8% between 12/14 and 12/15.
Both medical and college costs have historically increased at a faster rate than CPI. I discussed a few days ago that my tuition bill for the 1969-1970 year was $2,200, while the college charged $51,010 for the 2015-2016 period. If I adjusted the $2,200 number by CPI since 1969, my inflation adjusted tuition bill would have been $14,208.1.
The number would be less if I removed just the above average CPI increments for medical and college costs altogether.
User: When I started saving through an IRA in 1980, the only option was the traditional IRA.
I did not open a Roth IRA until October 2008 when I started the process of transferring positions from the regular IRA into the Roth. I did not do the conversion all at once. I attempted to time the conversions based on what was down the most and really bad days in the stock market which were not hard to find then. I no longer have any assets in a regular IRA. I view the Roth IRA to be the last source of funds to meet expenses.
I viewed it as important to pay the taxes associated with the conversion using non-IRA funds. So I did NOT elect to have taxes withheld when making the transfers.
I only have experience with transfers from a regular IRA to a Roth IRA. In that type of conversion, the value of the securities on the date of transfer was classified as taxable income-the lower the better.
Convert IRA to Roth calculator
BankRate has a number of calculators that may be of assistance in deciding between Roth and regular IRA contributions.
Entire List of Calculators:
Roth vs Traditional IRA Calculator:
A problem with the calculators is that the future tax rates at retirement are unknown. Most retirees without a pension other than social security would probably have lower income and be in a lower tax bracket than when they were working, but what will be the marginal tax rates for each income bracket when that happens? The tax rate now is more certain and a high, current marginal tax bracket factors into whether it is economical to do a conversion.
When I did the conversions, I was about 99.9% retired so I was already in a low tax bracket. And I was not that far away from the mandatory distributions applicable to regular IRAs. So with all of those factors, it made a lot of sense for me to use the September 2008 to March 2009 period to execute the conversions given the much lower prices prevailing then. And, all of the assets so transferred thereafter fully recovered and more while in the Roth IRA. And, I received the regular IRA contribution deduction when I was in a higher tax bracket. It could not have worked out better.
HCP: This large healthcare REIT hit a 52 week low this morning after releasing earnings this morning.
The origin of the problem is HCR MANORCARE and the negative outlook for nursing home operators in general.
The 2016 forecast for FFO was well below consensus estimates:
"Full year guidance, not including the impact from unannounced future transactions, for FFO per share of $2.74 – $2.80; FAD per share of $2.62 – $2.68; and EPS of $1.49 – $1.55"
Adjusted FFO was $3.16 for 2015.
The consensus estimate for 2016 was $3.17.
Brad Thomas remains positive about Omega Healthcare who has exposure Genesis Healthcare whose stock has been hammered over the past year:
"It's Time To Double Down On Omega Healthcare"
Genesis Healthcare, Inc. (GEN)
Historical Prices:
I have mentioned the exposure to Genesis as a negative when discussing OHI. I have also mentioned OHI's near death experience when there was a major change in government reimbursements for nursing homes that resulted in widespread bankruptcies.
E.G. 2. Added 50 OHI at $32.5 Roth IRA
Update For Equity REIT Basket Strategy As Of 11/16/15
The price today for OHI is below where I first bought shares in December 2013.
2. Bought 100 OHI at $29.85
Brad refers to Genesis as OHI's "largest tenant".
That would not be correct based on operator concentration numbers ranked by OHI's investment as of 9/30/15:
New Ark Investment, Inc. 7 %
Maplewood Real Estate Holdings, LLC 6%
Ciena Healthcare 5%
Genesis Healthcare 5%
CommuniCare Health Services, Inc. 5%
Genesis is ranked as 4th with $357+M in investments compared to New Ark with $592+M.