Sunday, December 29, 2013
December 28, 2013 Alpha
Risk/Reward Vol. 201
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"What's it all about Alfie?/Is it just for the moment we live
What's it all about/When you sort it out Alfie?"---lyrics from "Alfie" by Burt Bacharach
"When this old world starts getting me down/And people are just too much for me to face
I climb way up to the top of the stairs/And all my cares just drift right into space
Up on the roof."---lyrics from "Up On The Roof" sung by The Drifters
"For we can fly up, up and away/In my beautiful, my beautiful balloon
The world's a nicer place in my beautiful balloon
It wears a nicer face in my beautiful balloon."---lyrics "Up, Up and Away" sung by The Fifth Dimension
In the financial world, "Alpha"measures the risk adjusted return on an investment. 2013 has been an incredible year for Alpha as the Dow Jones Industrial Average hit another weekly high on Friday. But, "when you sort it out/what's it all about, Alpha?" Is Alpha sustainable or "is it just for the moment?" Financial commentators certainly don't know "what it's all about", with some predicting a continued rosy picture for stocks and others forecasting a steep decline. Personally, I don't know if the stock market can continue to set records, but I do not see a precipitous fall. As I have written previously, with interest rates so low, There Is No Alternative to equities if one wants a decent return. (See a discussion of the "TINA"factor at Vol. 164 www.riskrewardblog.blogspot.com )
Speaking of interest rates, the yield on the 10 Year Treasury Bond broke through the 3% ceiling, an event that back in September I predicted would not happen even if QE3 tapering began. (See Vol.186 www.riskrewardblog.blogspot.com ) I may have been wrong, but the consequences of rates "Up on the Roof" "are not too much for me to face." Indeed, from what I can tell, with interest rates having "climbed way up to the top of the stairs" (the other side of 3%, that is) "this old world isn't getting me down" at all. I'm not saying "all my cares are going to just drift right into space." But, so long as the rise in interest rates is gradual, the impact on the stock market in general and my holdings in particular should be negligible.
Not that I would object to a general rise in interest rates (otherwise known as inflation). Indeed, this is what I wrote in Vol. 1 ( www.riskrewardblog.blogspot.com ):
"As I have explained to each of you, I am in search of a 6%, pre tax return. Throughout most of my life, this would have been a layup. From 1969 through 1997, the 10 Treasury rates rarely fell below 6%. From 1980 through 1985, they never fell below 10%. So, at this stage in my life all I need is a little inflation."
Unfortunately, I do not foresee inflation any time soon. Indeed, the recent minutes of the Federal Reserve bespeak a concern that we are headed into a period of sustained deflation despite the Fed's accommodative monetary policy. Deflation has plagued Japan for nearly 20 years and the conditions that have caused it ( e.g. an aging population, productivity gains and globalization of supply) plague us as well. For an interesting discussion on this topic, Google "Stephen Conwill Japan deflation." (Mr. Conwill is an actuary and President of Milliman of Japan.) The threat of deflation doesn't mean that we cannot earn a decent return (look at this year's Alpha!), but it does mean that we cannot do so simply by investing in low risk securities such as Treasury bonds.
I wish you all a very Happy New Year and may 2014 bring you continued prosperity. A special thanks to those who have responded to my posts. Investing is difficult in today's low interest rate environment. So take some advice from Burt Bacharach and "Make It Easy on Yourself." If you ever feel like "Raindrops Keep Fallin' On Your Head", drop me a line. I'm not "On My Own," and you shouldn't be either. After all, "That's What Friends Are For."
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Saturday, December 21, 2013
December 21, 2013 Top Of The World
Risk/Reward Vol. 200
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Hey life, look at me/I can see the reality
Cause when you shook me/Took me out of my world
I woke up/Suddenly I just woke up/To the happening."---lyrics from "The Happening" sung by The Supremes
"It's beginning to look a lot like Christmas/Everywhere you go
Take a look at the five and ten/Glimmering once again."---lyrics from "It's Beginning to Look a Lot Like Christmas" sung by everyone
"So they sprinkled gold dust in your hair of gold/And starlight in your eyes of blue
Just like me/They long to be/Close to you.---lyrics from "Close to You" by The Carpenters
Wow, on Wednesday Uncle Ben Bernanke and the Federal Reserve's Open Market Commitee (FOMC) "shook us/Took us out of our world." Early that afternoon, contrary to prevailing wisdom, the FOMC announced that starting in January it would reduce or "taper" by $10 billion/month its program (known as QE3) of purchasing $85 billion/month worth of Treasury securities and mortgages. The FOMC further stated that it would continue to keep short term interest rates low, but likely would reduce gradually its asset purchases down to zero by year end 2014. The "market woke up/Suddenly it just woke up to the happening." Within minutes of the announcement, the Dow Jones Industrial Average (DJIA) left negative territory and rose over 100 points. By day's end, the DJIA was up 293 points. Activity moderated on Thursday and at the close on Friday, but the DJIA was up 466 points for the week setting another record high.
With Wednesday's action, "it's beginning to look a lot like Christmas/Everywhere you go" in the stock market. Was Wednesday's meteoric rise simply an example of the oft cited but inexplicable Santa Claus effect? If you review the news stories that morning, you will see that no one predicted a huge rise in the stock indices should tapering begin. And after the fact, the rationale for the rise was poorly explained; if explained at all. I suggest the reason for the rise was the response in the underappreciated but extremely important bond market. Indeed, "take a look at the five and ten" year Treasury Bonds and in particular their yields in the wake of the announcement. Obviously, bond traders took heart in the fact that tapering, notwithstanding, the short term Treasury rates would remain at historic lows for the foreseeable future. Moreover, as discussed in last week's edition, it is my belief that tapering was already priced into bonds so I was not surprised by the traders' nonchalance. As a consequence, the yield on the 10 Year Treasury Bond (its importance to asset prices in general and income securities in particular is explained at Vol. 172 www.riskrewardblog.blogspot.com ) closed on Wednesday at 2.88; exactly where it was throughout most of the week. This stability signalled to stock buyers that the value of their assets would not be eroded by a spike in interest rates, and green lights in the stock market were "glimmering once again." The 10 Year yield closed the week at 2.89%.
For me, the bond market's muted response to QE3's tapering is tantamount to "sprinkling gold dust in my hair /And starlight in my eyes of blue." Why, you ask? I contend that the stock market has harbored a fear that tapering would result in the 10Year rate spiking well above 3% which in turn would cause the price of assets priced in relation to that rate to fall in value (remember the price of an interest rate sensitive securtiy falls when interest rates increase). It is for this reason that these assets have traded at depressed prices since the specter of tapering first arose back in May. And no asset class has suffered more than"Closed(to you") end funds, especially closed end funds comprised of preferred stocks (e.g. FFC, HPI, HPF, etc.), municipal bonds (EIM, MVF), REIT's (RQI), and utilities (UTF and BUI) many of which are trading at double digit discounts to net asset value and all of which pay handsome (often monthly) dividends. They will continue to be depressed through year end as many investors look to sell their losers in order to capture tax losses in what otherwise was a gang buster year. Thus in the short term, closed end funds may present excellent opportunities "to be long". BUT CAUTION, don't act "Just like me"---do your own homework and draw your own conclusions.
In the words of The Capenters, "We've Only Just Begun" QE3 tapering and "For All We Know" its longer term consequences could result in a series of "Rainy Days and Mondays."--- which "always get us down." But for now the markets are "On Top of The World." Moreover, no matter what, I intend to "Have Myself a Merry Little Christmas." I am wishing you the same.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Hey life, look at me/I can see the reality
Cause when you shook me/Took me out of my world
I woke up/Suddenly I just woke up/To the happening."---lyrics from "The Happening" sung by The Supremes
"It's beginning to look a lot like Christmas/Everywhere you go
Take a look at the five and ten/Glimmering once again."---lyrics from "It's Beginning to Look a Lot Like Christmas" sung by everyone
"So they sprinkled gold dust in your hair of gold/And starlight in your eyes of blue
Just like me/They long to be/Close to you.---lyrics from "Close to You" by The Carpenters
Wow, on Wednesday Uncle Ben Bernanke and the Federal Reserve's Open Market Commitee (FOMC) "shook us/Took us out of our world." Early that afternoon, contrary to prevailing wisdom, the FOMC announced that starting in January it would reduce or "taper" by $10 billion/month its program (known as QE3) of purchasing $85 billion/month worth of Treasury securities and mortgages. The FOMC further stated that it would continue to keep short term interest rates low, but likely would reduce gradually its asset purchases down to zero by year end 2014. The "market woke up/Suddenly it just woke up to the happening." Within minutes of the announcement, the Dow Jones Industrial Average (DJIA) left negative territory and rose over 100 points. By day's end, the DJIA was up 293 points. Activity moderated on Thursday and at the close on Friday, but the DJIA was up 466 points for the week setting another record high.
With Wednesday's action, "it's beginning to look a lot like Christmas/Everywhere you go" in the stock market. Was Wednesday's meteoric rise simply an example of the oft cited but inexplicable Santa Claus effect? If you review the news stories that morning, you will see that no one predicted a huge rise in the stock indices should tapering begin. And after the fact, the rationale for the rise was poorly explained; if explained at all. I suggest the reason for the rise was the response in the underappreciated but extremely important bond market. Indeed, "take a look at the five and ten" year Treasury Bonds and in particular their yields in the wake of the announcement. Obviously, bond traders took heart in the fact that tapering, notwithstanding, the short term Treasury rates would remain at historic lows for the foreseeable future. Moreover, as discussed in last week's edition, it is my belief that tapering was already priced into bonds so I was not surprised by the traders' nonchalance. As a consequence, the yield on the 10 Year Treasury Bond (its importance to asset prices in general and income securities in particular is explained at Vol. 172 www.riskrewardblog.blogspot.com ) closed on Wednesday at 2.88; exactly where it was throughout most of the week. This stability signalled to stock buyers that the value of their assets would not be eroded by a spike in interest rates, and green lights in the stock market were "glimmering once again." The 10 Year yield closed the week at 2.89%.
For me, the bond market's muted response to QE3's tapering is tantamount to "sprinkling gold dust in my hair /And starlight in my eyes of blue." Why, you ask? I contend that the stock market has harbored a fear that tapering would result in the 10Year rate spiking well above 3% which in turn would cause the price of assets priced in relation to that rate to fall in value (remember the price of an interest rate sensitive securtiy falls when interest rates increase). It is for this reason that these assets have traded at depressed prices since the specter of tapering first arose back in May. And no asset class has suffered more than"Closed(to you") end funds, especially closed end funds comprised of preferred stocks (e.g. FFC, HPI, HPF, etc.), municipal bonds (EIM, MVF), REIT's (RQI), and utilities (UTF and BUI) many of which are trading at double digit discounts to net asset value and all of which pay handsome (often monthly) dividends. They will continue to be depressed through year end as many investors look to sell their losers in order to capture tax losses in what otherwise was a gang buster year. Thus in the short term, closed end funds may present excellent opportunities "to be long". BUT CAUTION, don't act "Just like me"---do your own homework and draw your own conclusions.
In the words of The Capenters, "We've Only Just Begun" QE3 tapering and "For All We Know" its longer term consequences could result in a series of "Rainy Days and Mondays."--- which "always get us down." But for now the markets are "On Top of The World." Moreover, no matter what, I intend to "Have Myself a Merry Little Christmas." I am wishing you the same.
Saturday, December 14, 2013
December 14, 2014 Skyfall(Not)
Risk/Reward Vol. 199
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
"She, she ain't real/She is a stranger
Sure, she's got it all/But baby is that what you really want?
Rumor has it."---lyrics from "Rumor Has It" sung by Adele
"You wanted me so much/But I didn't get it
How could a fellow be so blind
And we began to rock steady
Steady rockin' all night long."---lyrics from "Rock Steady" sung by The Whispers
"Here I go again
I hear those trumpets blow again
All aglow again
Taking a chance on love "---lyrics from "Taking a Chance On Love" sung by Frank Sinatra
Although "She is a stranger", "She's got it all (the power that is), and "Rumor has it" that a favorite economic barometer for Federal Reserve Chair-nominee Janet Yellen (as well as outgoing Chair Bernanke) is the job opportunity number. That statistic was released on Tuesday and showed 3.93 million job opportunities, the most since May, 2008. At first blush this should be viewed as good news, but "Baby is that what you really want?" It's not what the stock market wanted as the Dow Jones Industrial Average (DJIA), after gaining steam on Monday, ended the week down 265 points. Many stock traders believe that this improved job opportunities number plus the real possibility of a budget deal by Congress (one passed the House late Thursday) heightens the likelihood of QE3 tapering and by extension means higher interest rates and lower asset prices.
I suggest that Mr. Market is overreacting. Indeed, "How could a fellow be so blind?" Doesn't "he get it?" When interest rates are the concern, look to the bond market. And the bond market is telling us that tapering sometime before March 2014 is already priced-in. Indeed, despite tapering's imminence (we should get a good read on its actual timing after next week's Federal Open Market Committee (FOMC) meeting), the yield on the bellwether 10 Year Treasury Bond held "rock steady/Steady rockin' all night (and all week) long" below 2.9% As I wrote last week (see Vol. 198 www.riskrewardblog.blogspot.com) this suggests to me that hemorrhaging by other interest rate sensitive securities is near the end.
So, does my above-stated conclusion mean that "I hear the trumpets blow again," that "I'm all aglow again", and that I'm "willing to take a chance" again on these rate sensitive securites such as preferred stocks, real estate investment trusts, levered closed end funds, business development companies, etc. exposure to which I have pared? (See Vol. 195 www.riskrewardblog.blogspot.com ) NO, NOT YET! Although many of these are at or near their 52 week lows (e.g. O, FFC, FLC), I must resist the temptation to go bottom hunting. If I am right, there should be ample opportunity to purchase them at bargain prices (if not at their absolute low points) once better visibilty on the actual tapering timeline appears.
Next week's market again will be dominated by what is done and said at the FOMC meeting. If QE3 tapering begins or its initiation in January is foretold, I am predicting that the bond market will not experience a"Skyfall". As stated above, I believe that the bond market has already priced tapering into interest rates and that its implementation will not "Set Fire to the Rain." That said, I will continue to sit on my large cash position until more certainty is had on this front. I will then buy into my favorite, interest rate sensitive, income producing sectors and hopefully, like Adele, be "Rolling In The Deep" soon thereafter.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
"She, she ain't real/She is a stranger
Sure, she's got it all/But baby is that what you really want?
Rumor has it."---lyrics from "Rumor Has It" sung by Adele
"You wanted me so much/But I didn't get it
How could a fellow be so blind
And we began to rock steady
Steady rockin' all night long."---lyrics from "Rock Steady" sung by The Whispers
"Here I go again
I hear those trumpets blow again
All aglow again
Taking a chance on love "---lyrics from "Taking a Chance On Love" sung by Frank Sinatra
Although "She is a stranger", "She's got it all (the power that is), and "Rumor has it" that a favorite economic barometer for Federal Reserve Chair-nominee Janet Yellen (as well as outgoing Chair Bernanke) is the job opportunity number. That statistic was released on Tuesday and showed 3.93 million job opportunities, the most since May, 2008. At first blush this should be viewed as good news, but "Baby is that what you really want?" It's not what the stock market wanted as the Dow Jones Industrial Average (DJIA), after gaining steam on Monday, ended the week down 265 points. Many stock traders believe that this improved job opportunities number plus the real possibility of a budget deal by Congress (one passed the House late Thursday) heightens the likelihood of QE3 tapering and by extension means higher interest rates and lower asset prices.
I suggest that Mr. Market is overreacting. Indeed, "How could a fellow be so blind?" Doesn't "he get it?" When interest rates are the concern, look to the bond market. And the bond market is telling us that tapering sometime before March 2014 is already priced-in. Indeed, despite tapering's imminence (we should get a good read on its actual timing after next week's Federal Open Market Committee (FOMC) meeting), the yield on the bellwether 10 Year Treasury Bond held "rock steady/Steady rockin' all night (and all week) long" below 2.9% As I wrote last week (see Vol. 198 www.riskrewardblog.blogspot.com) this suggests to me that hemorrhaging by other interest rate sensitive securities is near the end.
So, does my above-stated conclusion mean that "I hear the trumpets blow again," that "I'm all aglow again", and that I'm "willing to take a chance" again on these rate sensitive securites such as preferred stocks, real estate investment trusts, levered closed end funds, business development companies, etc. exposure to which I have pared? (See Vol. 195 www.riskrewardblog.blogspot.com ) NO, NOT YET! Although many of these are at or near their 52 week lows (e.g. O, FFC, FLC), I must resist the temptation to go bottom hunting. If I am right, there should be ample opportunity to purchase them at bargain prices (if not at their absolute low points) once better visibilty on the actual tapering timeline appears.
Next week's market again will be dominated by what is done and said at the FOMC meeting. If QE3 tapering begins or its initiation in January is foretold, I am predicting that the bond market will not experience a"Skyfall". As stated above, I believe that the bond market has already priced tapering into interest rates and that its implementation will not "Set Fire to the Rain." That said, I will continue to sit on my large cash position until more certainty is had on this front. I will then buy into my favorite, interest rate sensitive, income producing sectors and hopefully, like Adele, be "Rolling In The Deep" soon thereafter.
Saturday, December 7, 2013
December 7, 2013 Wearing Shades
Risk/Reward Vol. 198
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"So twiddly-dee, twiddly dum
Look out baby, cause here I come
So get ready, so get ready."---lyrics from "Get Ready" sung by The Temptations
"Apogee solar bright/Apogee through the night
Apogee over ground/Don't think I'll be coming down."---lyrics from "Apogee" by Jethro Tull
"Things are great/And they're only getting better
I'm doing all right/Getting good grades
The future's so bright/I gotta wear shades."---lyrics from "Future's So Bright I Gotta Wear Shades" by Timbuk 3
All week the market absorbed and processed news in anticipation of Friday's all important, "Look out baby, cause here I come," jobs report. As the week unfolded, good news on employment from ADP ("twiddly-dee") and on the GDP front ("twiddly dum") conditioned the market to "get ready, get ready" for a jobs report at or near a 200,000 increase. In the Bizarro World of investing that meant that the Dow Jones Industrial Average (DJIA) dropped 264 points through Thursday because good economic news heightens the likelihood that the Federal Reserve will taper its QE3 program which in turn could cause interest rates to spike and potentially could depress stock prices. When the jobs report came in as expected on Friday, the DJIA rose 198 points, closing the week only 66 points down. How come?
I believe the market rose on Friday because of happenings in the bond market. Anticipating a good jobs number and the real possibililty that QE3 tapering will begin in December or January, the yield on the 10 Year Treasury Bond rose precipitously from 2.74% last Friday to 2.88% on Thursday. However, when the good jobs report came on Friday, the rate on the 10 Year held below 2.9% To me, this means that if the Federal Reserve begins tapering within the next 60 days (and I think it will based upon several weeks of good economic news and the recent comments of some Fed members such as Charles Plosser), interest rates will not spike. Indeed, they may be at their "Apogee" whether "solar bright or through the night" I for one "don't think they'll be coming down", either. We are where we were back in mid September when the investing world believed that QE3 tapering was imminent only to be shocked when it was not implemented. I predicted then as I do again today that 3% is the ceiling on the 10Year yield for the foreseeable future---and that it will hold even if tapering begins soon--and let's all hope it does. (See Vol. 186 www.riskrewardblog.blogspot.com )
If I am right, then "Things are great/And they're only going to get better" for me. Don't get me wrong. "I'm doing all right this year/Getting good grades" if you will. But if tapering begins and the rate on the 10 Year stays below 3%, my "future's so bright/I gotta wear shades." I will deploy cash into my favorite income producing sectors (bdc's, preferred stock, REIT's),reap some capital appreciation (because these sectors are oversold) and collect outsized dividends. I just need to be patient for a few weeks. The next big event on the interest rate front is the FOMC meeting on December 15-16. We should get a good read on tapering then. And speaking of a "future so bright" did you catch the forward guidance given by two of my favorite oil plays (KMP and LINE)? Income investors should read what each said this week about next year's distributions.
Investing is not easy. I have spent a great deal of time studying the market. As The Temptations say, it's "Really Got a Hold On Me." That said, I "Ain't Too Proud to Beg" for input and advice. I am interested in learning "The Way You Do The Thing You Do." So unless you're "Too Busy Thinking About Your Baby", drop me a line with your thoughts and observations. Doing so would be like "Sunshine on a Cloudy Day." and will put me on "Cloud Nine."
Saturday, November 30, 2013
November 30, 2013 Thankful
Risk/Reward Vol. 197
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"I'm thankful/For the blessing
And the lessons that I've learned/With you by my side."---lyrics from "Thankful" sung by Kelly Clarkson
"Now the race is on/And here comes Pride up the back stretch
Heartache is goin' to the inside/My Tears are holding back"---lyrics from "Race Is On" by The Grateful Dead
"Bend me/Shape me/Anyway you want me
You got the power/To turn on the light."---lyrics from "Bend Me, Shape Me" sung by American Breed
This is my favorite holiday; one dedicated to family, food, football (as a Packer fan, not so much)---and reflection on the blessings bestowed upon Barb and me, most recently the birth on November 19th of our sixth grandchild, John Frederick Roberts. Believe me when I say that "I'm thankful/For these blessings." I am also thankful that I live in a time of such marvelous technology. Think about it for a moment. We have access to more information sitting on our duffs than any person could have dreamed imaginable a few short years ago---even if that person were sitting at the Library of Congress. Moreover, by virtue of the internet, we are able to blog, tweet, post and otherwise communicate with so many so quickly. In that regard, I am thankful "for the lessons that I've learned/With you by my side." May the future bring us all many more blessings, and the wisdom to appreciate them as they unfold.
On Wednesday, Howard Marks about whom I wrote last week, published another memo; this one entitled "The Race Is On". (To access it, click on this link and then go to Memos from our chairman http://www.oaktreecapital.com/ ) I recommend it to your attention. In it he compares his current sense-of-the-times to that expressed in a previous memo also entitled "The Race Is On" which he wrote in February, 2007, before the mortgage meltdown and the ensuing crash. He draws many parallels and sides with Mark Twain concluding that while history does not actually repeat itself-- "it does rhyme." According to Marks, when prudence is abandoned for enhanced returns, and "Pride is coming up the back stretch", surely "Heartache is goin' to the inside." In words that struck too close to home, Marks noted that "Investors that used to get 6% from Treasurys have turned to high yield bonds for such a return." Marks does not believe that now is time for "tears" or for selling for that matter, but in his opinion, most asset classes are now fully priced and that deploying any new money into the markets at this stage should be done with great caution.
I translate Mark's words to mean that now more than ever I need to be nimble. My early warning signal remains the yield on the 10Year Treasury Bond, which has been volatile of late, and which closed the week at 2.74%. If and when that yield rises, fixed income assets (which I have already pared) will fall in value, and it is likely that soon thereafter most other financial assets will stumble . Although I have not matched the returns experienced by those that have simply riden the stock indices upward this year, I am thankful that I have been able to surpass my annual goals with what I perceive to be considerably less risk. Perhaps my biggest challenge this year has been resisting the temptation to chase the market especially with the knowledge, in hindsight, that had I done so I would have achieved much, much better returns. However, I can not and will not allow market chatter to "bend me/shape me/anyway it wants me." I "got the power" to "turn on the light" or to turn it off. I must use that power if and when necessary to minimize the risk of loss, which is my paramount responsibility at this stage in my life.
Holy Kelly Clarkson! I just re-read what I wrote above, and it reads like "Mr. Know It All" is depressed, on the "Dark Side", if you will. Sure, I am disappointed that my returns are only half of what the indices have achieved, but anyone who has been in the market at all this year objectively should rejoice in "Moments Like This." My angst is not about past performance, but about the future and whether to preserve my gains, I should be "Already Gone."
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"I'm thankful/For the blessing
And the lessons that I've learned/With you by my side."---lyrics from "Thankful" sung by Kelly Clarkson
"Now the race is on/And here comes Pride up the back stretch
Heartache is goin' to the inside/My Tears are holding back"---lyrics from "Race Is On" by The Grateful Dead
"Bend me/Shape me/Anyway you want me
You got the power/To turn on the light."---lyrics from "Bend Me, Shape Me" sung by American Breed
This is my favorite holiday; one dedicated to family, food, football (as a Packer fan, not so much)---and reflection on the blessings bestowed upon Barb and me, most recently the birth on November 19th of our sixth grandchild, John Frederick Roberts. Believe me when I say that "I'm thankful/For these blessings." I am also thankful that I live in a time of such marvelous technology. Think about it for a moment. We have access to more information sitting on our duffs than any person could have dreamed imaginable a few short years ago---even if that person were sitting at the Library of Congress. Moreover, by virtue of the internet, we are able to blog, tweet, post and otherwise communicate with so many so quickly. In that regard, I am thankful "for the lessons that I've learned/With you by my side." May the future bring us all many more blessings, and the wisdom to appreciate them as they unfold.
On Wednesday, Howard Marks about whom I wrote last week, published another memo; this one entitled "The Race Is On". (To access it, click on this link and then go to Memos from our chairman http://www.oaktreecapital.com/ ) I recommend it to your attention. In it he compares his current sense-of-the-times to that expressed in a previous memo also entitled "The Race Is On" which he wrote in February, 2007, before the mortgage meltdown and the ensuing crash. He draws many parallels and sides with Mark Twain concluding that while history does not actually repeat itself-- "it does rhyme." According to Marks, when prudence is abandoned for enhanced returns, and "Pride is coming up the back stretch", surely "Heartache is goin' to the inside." In words that struck too close to home, Marks noted that "Investors that used to get 6% from Treasurys have turned to high yield bonds for such a return." Marks does not believe that now is time for "tears" or for selling for that matter, but in his opinion, most asset classes are now fully priced and that deploying any new money into the markets at this stage should be done with great caution.
I translate Mark's words to mean that now more than ever I need to be nimble. My early warning signal remains the yield on the 10Year Treasury Bond, which has been volatile of late, and which closed the week at 2.74%. If and when that yield rises, fixed income assets (which I have already pared) will fall in value, and it is likely that soon thereafter most other financial assets will stumble . Although I have not matched the returns experienced by those that have simply riden the stock indices upward this year, I am thankful that I have been able to surpass my annual goals with what I perceive to be considerably less risk. Perhaps my biggest challenge this year has been resisting the temptation to chase the market especially with the knowledge, in hindsight, that had I done so I would have achieved much, much better returns. However, I can not and will not allow market chatter to "bend me/shape me/anyway it wants me." I "got the power" to "turn on the light" or to turn it off. I must use that power if and when necessary to minimize the risk of loss, which is my paramount responsibility at this stage in my life.
Holy Kelly Clarkson! I just re-read what I wrote above, and it reads like "Mr. Know It All" is depressed, on the "Dark Side", if you will. Sure, I am disappointed that my returns are only half of what the indices have achieved, but anyone who has been in the market at all this year objectively should rejoice in "Moments Like This." My angst is not about past performance, but about the future and whether to preserve my gains, I should be "Already Gone."
Saturday, November 23, 2013
November 23, 2013 High Hopes
Risk/Reward Vol. 196
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Baby you're a firework/Come on let your colors burst
Make 'em go "Oh, oh oh."
You're gunna leave 'em fallin' down-own-own."---lyrics from "Fireworks" sung by Katy Perry
"Cause he had high hopes/He had high hopes
He had high apple pie in the sky hopes."---lyrics from "High Hope" sung by Frank Sinatra
"One minute you laugh
The next minute you're slowly sinking into something black"--lyrics from "One Minute" sung by Kelly Clarkson
With the Dow Jones Industrial Average now above 16,000, many commentators question whether stocks are overpriced. Are equities like a "firework" with their "colors about to burst" from green to red? Will some event such as a tapering of the Federal Reserve's QE3 program "Make investors go 'Oh, oh oh", and "leave 'em fallin' down-own- own"? Someday likely, but many advise that that time has not yet arrived. Analysts such as Change Wave Investing's Josh Levine cite the price/earnings metrics devised by recent Nobel laureate Robert Shiller and conclude that although Shiller's adjusted S&P 500 p/e for this week is on the high side historically speaking (24.5 times compared to a 130 year average of 16.5x), it is significantly lower than during the dot.com bubble (44x) or in 2007 (28x). Levine counsels caution, but warns against panic, a sentiment shared by such luminaries as Mohammed El Erien and Jeremy Grantham.
A similar conclusion has been reached by Oaktree Capital Managment Chairman Howard Marks (a personal favorite, see Vol. 173 http://www.riskrewardblog.blogspot.com/ ) who looks to investor confidence for signals. It is his belief that when stock buyers have "high hopes/high apple pie in the sky hopes", prudent investors should be terrified, citing the dot.com bubble and 2007 as well. That said, he does not see the current bull market as motivated by overconfidence, but rather by low interest rates created by the monetary policies of the world's central banks (e.g. QE3). In the short run, he is steady-as-she-goes, counselling that when there is nothing clever to do, the mistake lies in trying to be clever. He advises caution; do nothing too drastic or too bold. And then there is another favorite of mine, David Tepper (Vols. 59 and 170 www.riskrewardblog.blogspot.com ) whose only fear is that he is not long enough in equities.
So we watch for signals. A favorite place for signals is found in the minutes of the Federal Reserve's Open Market Commitee, the entity that will decide the future of QE3. Many in the market live or die on them. "One minute they laugh/The next minute they sink" Talk about "sinking", look what happened on Wednesday. By mid morning the DJIA had once again crested above 16,000 and the 10 Year Treasury Bond yield was bobbing at 2.7%. With the afternoon release of the FOMC minutes, which were interpreted to mean that QE3 tapering could begin before an improvement in the unemployment numbers, the DJIA plummeted more than 100 points and the 10Year yield spiked to 2.8%. Quite a reaction to a few carefully chosen words! Can you imagine the upheavel if and when real action on QE3 is taken? Over the next two days, the stock indices recovered nicely, but the yield on the 10Year remained stubbornly high closing the week at 2.75%. This fact reinforced the wisdom of my decision to pare my interest rate sensitive holdings (e.g. mREIT's, BCC's and preferred stock closed end funds). Remember: when analyzing bond sensitive assets, the higher the yield the lower the price.
What's not to love about this market? Seven weeks---seven record closes! Like Ol' Blue Eyes, should we just continue "Taking A Chance On This Love" or is this a case in which "Fools Have Rushed In Where Wise Men Never Go"? It sure looks like we are on "The Sunny Side of the Street", but, Frank-ly, attaining record highs on lackluster economic news and lukewarm corporate guidance leaves me mostly "Bewitched, Bothered and Bewildered."
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Baby you're a firework/Come on let your colors burst
Make 'em go "Oh, oh oh."
You're gunna leave 'em fallin' down-own-own."---lyrics from "Fireworks" sung by Katy Perry
"Cause he had high hopes/He had high hopes
He had high apple pie in the sky hopes."---lyrics from "High Hope" sung by Frank Sinatra
"One minute you laugh
The next minute you're slowly sinking into something black"--lyrics from "One Minute" sung by Kelly Clarkson
With the Dow Jones Industrial Average now above 16,000, many commentators question whether stocks are overpriced. Are equities like a "firework" with their "colors about to burst" from green to red? Will some event such as a tapering of the Federal Reserve's QE3 program "Make investors go 'Oh, oh oh", and "leave 'em fallin' down-own- own"? Someday likely, but many advise that that time has not yet arrived. Analysts such as Change Wave Investing's Josh Levine cite the price/earnings metrics devised by recent Nobel laureate Robert Shiller and conclude that although Shiller's adjusted S&P 500 p/e for this week is on the high side historically speaking (24.5 times compared to a 130 year average of 16.5x), it is significantly lower than during the dot.com bubble (44x) or in 2007 (28x). Levine counsels caution, but warns against panic, a sentiment shared by such luminaries as Mohammed El Erien and Jeremy Grantham.
A similar conclusion has been reached by Oaktree Capital Managment Chairman Howard Marks (a personal favorite, see Vol. 173 http://www.riskrewardblog.blogspot.com/ ) who looks to investor confidence for signals. It is his belief that when stock buyers have "high hopes/high apple pie in the sky hopes", prudent investors should be terrified, citing the dot.com bubble and 2007 as well. That said, he does not see the current bull market as motivated by overconfidence, but rather by low interest rates created by the monetary policies of the world's central banks (e.g. QE3). In the short run, he is steady-as-she-goes, counselling that when there is nothing clever to do, the mistake lies in trying to be clever. He advises caution; do nothing too drastic or too bold. And then there is another favorite of mine, David Tepper (Vols. 59 and 170 www.riskrewardblog.blogspot.com ) whose only fear is that he is not long enough in equities.
So we watch for signals. A favorite place for signals is found in the minutes of the Federal Reserve's Open Market Commitee, the entity that will decide the future of QE3. Many in the market live or die on them. "One minute they laugh/The next minute they sink" Talk about "sinking", look what happened on Wednesday. By mid morning the DJIA had once again crested above 16,000 and the 10 Year Treasury Bond yield was bobbing at 2.7%. With the afternoon release of the FOMC minutes, which were interpreted to mean that QE3 tapering could begin before an improvement in the unemployment numbers, the DJIA plummeted more than 100 points and the 10Year yield spiked to 2.8%. Quite a reaction to a few carefully chosen words! Can you imagine the upheavel if and when real action on QE3 is taken? Over the next two days, the stock indices recovered nicely, but the yield on the 10Year remained stubbornly high closing the week at 2.75%. This fact reinforced the wisdom of my decision to pare my interest rate sensitive holdings (e.g. mREIT's, BCC's and preferred stock closed end funds). Remember: when analyzing bond sensitive assets, the higher the yield the lower the price.
What's not to love about this market? Seven weeks---seven record closes! Like Ol' Blue Eyes, should we just continue "Taking A Chance On This Love" or is this a case in which "Fools Have Rushed In Where Wise Men Never Go"? It sure looks like we are on "The Sunny Side of the Street", but, Frank-ly, attaining record highs on lackluster economic news and lukewarm corporate guidance leaves me mostly "Bewitched, Bothered and Bewildered."
Saturday, November 16, 2013
November 16, 2013 On Top Of The World
Risk/Reward Vol. 195
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"I'm sitting on top of the world,
Just rolling along
Just rolling along"---lyrics from "I'm Sitting On Top of the World" sung by Al Jolson
"Trickle, trickle/Splash, splash
Tell me how long/Will this rain last?"---lyrics from "Trickle, Trickle" by Manhattan Transfer
"Lightening up/While you still can
Don't even try to understand
Just find a place to make your stand
And take it easy."---lyrics from "Take It Easy" by The Eagles
WOW! Another record breaking week! Anyone invested in a stock index fund is truly "sitting on top of the world." And it all happened in the absence of any significant news. Very little economic data issued and the much anticipated Congressional testimony of Janet Yellen, the Federal Reserve chair-nominee, went as expected. Each day seems to bring a new high---"Just rolling along/Just rolling along." How long will it last?
It is beyond dispute that one, perhaps THE, major driver of appreciating stock prices is QE3. In the Review and Outlook section of Friday's Wall Street Journal (WSJ), the editors predicted that the Federal Reserve under Janet Yellen's leadership would not end QE3 any time soon because Ms. Yellen believes that monetary policy can impact entire business cycles. In the words of PIMCO's Bill Gross, Ms. Yellen holds fast to the idea that supplying cheap money at the top of the financial food chain (QE3) will cause prosperity to trickle down to the middle class through full employment. Does it or does QE3's cheap debt merely finance huge stock repurchase programs which primarily serve to enrich those at the top, in a not-so virtuous circle? Don't get me wrong---we, as stockholders, have benefitted from this circle, at least so far. But as former Fed member Kevin Warsh noted in Wednesdays' WSJ, QE3 remains a giant experiment in "Trickle, trickle, splash splash." (I suggest you read this thought provoking piece which can be found here (http://online.wsj.com/news/articles/SB10001424052702304655104579165781051413674 ) According to Warsh, QE3's continued efficacy is questionable, and no one knows what will happen once the Fed stops raining easy money. Only one thing is for certain, QE3 will stop sometime---even Ms. Yellen stated so this week. I just want someone to "Tell me how long/Will this rain last."
I took advantage of the new highs and the moderation in interest rates this week to "Lighten up/While I still can" on many of my preferred stock closed end funds and my mortgage real estate investment trusts which will be adversely impacted should tapering of QE3 begin in mid December. If you have not followed my previous discourse on the relationship between QE3, interest rates on the 10 Year Treasury Bond and the performance of these sectors, then "Don't even try to understand" why I sold them. Let's just say that having collected several months of outsized dividends, I "found a place to take my stand" this week. In regard my other investments, I am holding tight and smiling like the rest of you. I have not redeployed the cash I raised, however. Instead, I'm "takin' it easy" for now.
These past few weeks have been like an Eagles concert. Every day, the stock markets "Take It To The Limit." Stock picking has become a "Life In the Fast Lane." Right or wrong, I have not chased those lofty stock index returns in recent days. I am happy with my year to date performance. After all, I am in for the "Long Run". The one thing I want to avoid at this stage is a "Heartache Tonight.".
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"I'm sitting on top of the world,
Just rolling along
Just rolling along"---lyrics from "I'm Sitting On Top of the World" sung by Al Jolson
"Trickle, trickle/Splash, splash
Tell me how long/Will this rain last?"---lyrics from "Trickle, Trickle" by Manhattan Transfer
"Lightening up/While you still can
Don't even try to understand
Just find a place to make your stand
And take it easy."---lyrics from "Take It Easy" by The Eagles
WOW! Another record breaking week! Anyone invested in a stock index fund is truly "sitting on top of the world." And it all happened in the absence of any significant news. Very little economic data issued and the much anticipated Congressional testimony of Janet Yellen, the Federal Reserve chair-nominee, went as expected. Each day seems to bring a new high---"Just rolling along/Just rolling along." How long will it last?
It is beyond dispute that one, perhaps THE, major driver of appreciating stock prices is QE3. In the Review and Outlook section of Friday's Wall Street Journal (WSJ), the editors predicted that the Federal Reserve under Janet Yellen's leadership would not end QE3 any time soon because Ms. Yellen believes that monetary policy can impact entire business cycles. In the words of PIMCO's Bill Gross, Ms. Yellen holds fast to the idea that supplying cheap money at the top of the financial food chain (QE3) will cause prosperity to trickle down to the middle class through full employment. Does it or does QE3's cheap debt merely finance huge stock repurchase programs which primarily serve to enrich those at the top, in a not-so virtuous circle? Don't get me wrong---we, as stockholders, have benefitted from this circle, at least so far. But as former Fed member Kevin Warsh noted in Wednesdays' WSJ, QE3 remains a giant experiment in "Trickle, trickle, splash splash." (I suggest you read this thought provoking piece which can be found here (http://online.wsj.com/news/articles/SB10001424052702304655104579165781051413674 ) According to Warsh, QE3's continued efficacy is questionable, and no one knows what will happen once the Fed stops raining easy money. Only one thing is for certain, QE3 will stop sometime---even Ms. Yellen stated so this week. I just want someone to "Tell me how long/Will this rain last."
I took advantage of the new highs and the moderation in interest rates this week to "Lighten up/While I still can" on many of my preferred stock closed end funds and my mortgage real estate investment trusts which will be adversely impacted should tapering of QE3 begin in mid December. If you have not followed my previous discourse on the relationship between QE3, interest rates on the 10 Year Treasury Bond and the performance of these sectors, then "Don't even try to understand" why I sold them. Let's just say that having collected several months of outsized dividends, I "found a place to take my stand" this week. In regard my other investments, I am holding tight and smiling like the rest of you. I have not redeployed the cash I raised, however. Instead, I'm "takin' it easy" for now.
These past few weeks have been like an Eagles concert. Every day, the stock markets "Take It To The Limit." Stock picking has become a "Life In the Fast Lane." Right or wrong, I have not chased those lofty stock index returns in recent days. I am happy with my year to date performance. After all, I am in for the "Long Run". The one thing I want to avoid at this stage is a "Heartache Tonight.".
Saturday, November 9, 2013
November 9, 2013 Hats Off
Risk/Reward Vol. 194
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
'Hats off to Larry/It may sound cruel
But you laughed at me when you
Said we were through."---lyrics from "Hats Off to Larry" sung by Del Shannon
"Is this a lasting treasure/Or just a moment's pleasure
Can I believe the magic of your sighs
Will you still love me tomorrow?"---lyrics from "Will You Still Love Me Tomorrow" sung by Ben E. King
"Why do we never get an answer
When we're knocking at the door
With a thousand million questions
About hate and death and war?"---lyrics from "Question" by the Moody Blues
"Hats off to Larry" and every other Tom, Dick and Harry who chose to invest in passive stock index funds this year. The Dow Jones Industrial Average (DJIA) is up 19% year to date and the S&P 500 (S&P) is up 22.5%. Deservedly, stock index investors can "laugh at me" because my active approach has reaped a much smaller return. And as for the really smart guys---those that run hedge funds---according to Hedgeweek, they have averaged a mere 5.7% return through the first three quarters of the year. "It may sound cruel", but those that predicted that the days of outsized stock index returns "were through" have been proven wrong.
But, is a strategy based upon stock index investing "a lasting treasure/Or just a moment's pleasure?" "Can you believe the magic ?" Lest we forget, despite both returning roughly 20% so far this year, the DJIA and S&P have averaged only a 7.5% return over the past 10 years---and with a great deal of volatitliy (remember Spring, 2009?) Moreover, in the past few weeks we have received mixed signals as to future returns---even from the same sources. Last week, Larry Fink, the CEO of BlackRock the largest asset manager in the world ($4Trillion!) warned that stock investors are exhibiting unwarranted exuberance and that the stock market in general is becoming an asset bubble (a sentiment shared by IBD in this Thursday's edition). At the same time, BlackRock published a report (www.blackrock.com/investor ) suggesting that the average investor may be overly cautious because 48% of his/her investable assets currently are in cash; inferring that considerable fuel for across the board stock price appreciation has yet to be deployed. Please, cut the double talk, just answer the question, "Will stocks still love me tomorrow?"
"Why do we never get an answer/When we're knocking at that door?" It's just one question on a single topic; not "a thousand million questions/About hate and death and war." Perhaps the best response is found in two axioms uttered by the Wizard of Omaha, Warren Buffett:
1)"Be fearful when others are greedy, and greedy when others are fearful."
2)"Interest rates are to asset prices like gravity is to the apple. When interest rates are low there is little gravitational pull on asset prices."
As shown by recent record highs in the stock indices, stockholders are greedy; so some level of fear is warranted. Thus, I keep my eye on interest rates. On Friday a better than expected jobs report resulted in the DJIA reaching another record high. But, that same report resulted in the rate on the 10 Year Treasury note jumping, to 2.75%. It is my belief that if interest rates continue to rise, their gravity will pull stock prices down. We shall see.
Index investing has been a runaway success so far this year. But, like Del Shannon, I question whether, longer term, index investing might be "A Little Town Flirt." If interest rates spike, "I wonder where she will stay/My little runaway--run, run, run, run, runaway."
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
'Hats off to Larry/It may sound cruel
But you laughed at me when you
Said we were through."---lyrics from "Hats Off to Larry" sung by Del Shannon
"Is this a lasting treasure/Or just a moment's pleasure
Can I believe the magic of your sighs
Will you still love me tomorrow?"---lyrics from "Will You Still Love Me Tomorrow" sung by Ben E. King
"Why do we never get an answer
When we're knocking at the door
With a thousand million questions
About hate and death and war?"---lyrics from "Question" by the Moody Blues
"Hats off to Larry" and every other Tom, Dick and Harry who chose to invest in passive stock index funds this year. The Dow Jones Industrial Average (DJIA) is up 19% year to date and the S&P 500 (S&P) is up 22.5%. Deservedly, stock index investors can "laugh at me" because my active approach has reaped a much smaller return. And as for the really smart guys---those that run hedge funds---according to Hedgeweek, they have averaged a mere 5.7% return through the first three quarters of the year. "It may sound cruel", but those that predicted that the days of outsized stock index returns "were through" have been proven wrong.
But, is a strategy based upon stock index investing "a lasting treasure/Or just a moment's pleasure?" "Can you believe the magic ?" Lest we forget, despite both returning roughly 20% so far this year, the DJIA and S&P have averaged only a 7.5% return over the past 10 years---and with a great deal of volatitliy (remember Spring, 2009?) Moreover, in the past few weeks we have received mixed signals as to future returns---even from the same sources. Last week, Larry Fink, the CEO of BlackRock the largest asset manager in the world ($4Trillion!) warned that stock investors are exhibiting unwarranted exuberance and that the stock market in general is becoming an asset bubble (a sentiment shared by IBD in this Thursday's edition). At the same time, BlackRock published a report (www.blackrock.com/investor ) suggesting that the average investor may be overly cautious because 48% of his/her investable assets currently are in cash; inferring that considerable fuel for across the board stock price appreciation has yet to be deployed. Please, cut the double talk, just answer the question, "Will stocks still love me tomorrow?"
"Why do we never get an answer/When we're knocking at that door?" It's just one question on a single topic; not "a thousand million questions/About hate and death and war." Perhaps the best response is found in two axioms uttered by the Wizard of Omaha, Warren Buffett:
1)"Be fearful when others are greedy, and greedy when others are fearful."
2)"Interest rates are to asset prices like gravity is to the apple. When interest rates are low there is little gravitational pull on asset prices."
As shown by recent record highs in the stock indices, stockholders are greedy; so some level of fear is warranted. Thus, I keep my eye on interest rates. On Friday a better than expected jobs report resulted in the DJIA reaching another record high. But, that same report resulted in the rate on the 10 Year Treasury note jumping, to 2.75%. It is my belief that if interest rates continue to rise, their gravity will pull stock prices down. We shall see.
Index investing has been a runaway success so far this year. But, like Del Shannon, I question whether, longer term, index investing might be "A Little Town Flirt." If interest rates spike, "I wonder where she will stay/My little runaway--run, run, run, run, runaway."
Saturday, November 2, 2013
November 2, 2013 Sounds of Silence
Risk/Reward Vol. 193
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"People hearing without listening
People writing songs that voices never share
And no one dared
Disturb the sound of silence."---lyrics from "Sounds of Silence" by Simon and Garfunkel
"Jam up and jelly tight
My, my, my baby
Now you're outta sight."---lyrics from "Jam Up and Jelly Tight" by Tommy Roe
"I am he/As you are he
And you are me
And we are all together
I am the Eggman/They are the Eggmen
I am the Walrus/Goo goo g-joob"---lyrics from "I Am the Walrus" by The Beatles
When the Federal Reserve Open Market Committee (FOMC) issued its press release on Wednesday, each phrase was parsed and each word analyzed in search of any clue as to when quantitative easing (QE3) would be tapered. Commentators noted that the FOMC omitted a reference to a concern over increased interest rates, a concern which had been discussed in previous releases. Immediately, the bond and stock markets were "disturbed by the sound of this silence." "Without listening", "people heard" from the silence the threat of QE3 tapering earlier than anticipated. And "no one dared" to challenge this interpretation. As a consequence, the price of bonds dropped (as indicated by the rise in the yield on the 10 Year Treasury Bond) and the stock market fell from its QE3 infused record high on Tuesday. The stock market recovered somewhat on Friday, but the 10 Year continued to sell off on the heels of an upbeat ISM number (which further fueled fears of a sooner-than-expected QE3 tapering) ending the week at a yield of 2.62%---not good news for income investors like me.
Have you noticed declines in both the price of domestic oil and the price of gasoline? These declines are a direct result of increased domestic oil production and world wide refining capacity. The U S is now producing 7.9 million barrels of crude oil per day which by law cannot be exported.. As a consequence stockpiles of crude at Cushing, OK (a pipeline hub at which domestic prices are determined) are increasing which in turn is causing the price of domestic crude (WTI) to fall in comparison to crude's international price (Brent). Brent oil is in short supply due to Libyan production declines and supply problems in Nigeria. In other words, domestically, crude is "Jammed up" while internationally it is "Jelly tight." . "My, my, my." The price of WTI for December delivery is $96-97 per barrel while the price of Brent is "outta sight" at $109-110 per barrel. Meanwhile, the price of gasoline (which U.S. producers CAN export) is falling because worldwide refining capacity is increasing at the same time world wide demand is waning. Someday the U.S. will have a comprehensive energy policy which will accommodate the sea change which has arisen from our new found domestic production; a policy which will allow the export of crude (and LNG and other products). But, don't look for such a policy not under this administration. Meanwhile, I still like oil stocks even if they are underperforming the market (except LINE which jumped 11% on Friday on news that its merger with BRY may actually occur).
Disappointing third quarter results from mortgage real estate investment trust ("mREIT"), AGNC, reverberated throughout the entire mREIT market early in the week. Despite the fact that AGNC faces unique issues, its performance tainted everyone. Truly ,in the mREIT world "I am he/As you are he/And you are me/And we are all together." I am still far ahead with my investment in MTGE, but it took a hit despite reporting a good quarter. It trades well below its book value which is a common metric for determining the price of an mREIT stock. Apparently, when it comes to mREITs, the market cannot tell the difference between the Eggman and the Walrus. Goo goo g'joob, indeed!
Although both the Dow Jones Industrial Average and the S&P 500 reached record highs this week, I am contemplating raising cash. I find very little in this market to "Please, Please Me." I study it "Eight Days A Week", and yet my studies do not "Help" me overcome a feeling that "It Won't Be Long, Yeah" before "I'm a Loser, " a "No Where Man" if you will. Financially I'm up, but confidence-wise "I'm Really Down" due largely to the prospect of rising interest rates. Then again, perhaps my funk is just the realization that investing is "A Long and Winding Road" , that none of us can afford to just "Let It Be," and that, in the end, most of our profits go to the "Taxman."
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"People hearing without listening
People writing songs that voices never share
And no one dared
Disturb the sound of silence."---lyrics from "Sounds of Silence" by Simon and Garfunkel
"Jam up and jelly tight
My, my, my baby
Now you're outta sight."---lyrics from "Jam Up and Jelly Tight" by Tommy Roe
"I am he/As you are he
And you are me
And we are all together
I am the Eggman/They are the Eggmen
I am the Walrus/Goo goo g-joob"---lyrics from "I Am the Walrus" by The Beatles
When the Federal Reserve Open Market Committee (FOMC) issued its press release on Wednesday, each phrase was parsed and each word analyzed in search of any clue as to when quantitative easing (QE3) would be tapered. Commentators noted that the FOMC omitted a reference to a concern over increased interest rates, a concern which had been discussed in previous releases. Immediately, the bond and stock markets were "disturbed by the sound of this silence." "Without listening", "people heard" from the silence the threat of QE3 tapering earlier than anticipated. And "no one dared" to challenge this interpretation. As a consequence, the price of bonds dropped (as indicated by the rise in the yield on the 10 Year Treasury Bond) and the stock market fell from its QE3 infused record high on Tuesday. The stock market recovered somewhat on Friday, but the 10 Year continued to sell off on the heels of an upbeat ISM number (which further fueled fears of a sooner-than-expected QE3 tapering) ending the week at a yield of 2.62%---not good news for income investors like me.
Have you noticed declines in both the price of domestic oil and the price of gasoline? These declines are a direct result of increased domestic oil production and world wide refining capacity. The U S is now producing 7.9 million barrels of crude oil per day which by law cannot be exported.. As a consequence stockpiles of crude at Cushing, OK (a pipeline hub at which domestic prices are determined) are increasing which in turn is causing the price of domestic crude (WTI) to fall in comparison to crude's international price (Brent). Brent oil is in short supply due to Libyan production declines and supply problems in Nigeria. In other words, domestically, crude is "Jammed up" while internationally it is "Jelly tight." . "My, my, my." The price of WTI for December delivery is $96-97 per barrel while the price of Brent is "outta sight" at $109-110 per barrel. Meanwhile, the price of gasoline (which U.S. producers CAN export) is falling because worldwide refining capacity is increasing at the same time world wide demand is waning. Someday the U.S. will have a comprehensive energy policy which will accommodate the sea change which has arisen from our new found domestic production; a policy which will allow the export of crude (and LNG and other products). But, don't look for such a policy not under this administration. Meanwhile, I still like oil stocks even if they are underperforming the market (except LINE which jumped 11% on Friday on news that its merger with BRY may actually occur).
Disappointing third quarter results from mortgage real estate investment trust ("mREIT"), AGNC, reverberated throughout the entire mREIT market early in the week. Despite the fact that AGNC faces unique issues, its performance tainted everyone. Truly ,in the mREIT world "I am he/As you are he/And you are me/And we are all together." I am still far ahead with my investment in MTGE, but it took a hit despite reporting a good quarter. It trades well below its book value which is a common metric for determining the price of an mREIT stock. Apparently, when it comes to mREITs, the market cannot tell the difference between the Eggman and the Walrus. Goo goo g'joob, indeed!
Although both the Dow Jones Industrial Average and the S&P 500 reached record highs this week, I am contemplating raising cash. I find very little in this market to "Please, Please Me." I study it "Eight Days A Week", and yet my studies do not "Help" me overcome a feeling that "It Won't Be Long, Yeah" before "I'm a Loser, " a "No Where Man" if you will. Financially I'm up, but confidence-wise "I'm Really Down" due largely to the prospect of rising interest rates. Then again, perhaps my funk is just the realization that investing is "A Long and Winding Road" , that none of us can afford to just "Let It Be," and that, in the end, most of our profits go to the "Taxman."
Saturday, October 26, 2013
October 26, 2013 You Got It
Risk/Reward Vol. 192
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"I'm falling/I'm falling
Falling in love with you."---lyrics from "Falling" by Roy Orbison
"Pump up the jam/Pump it up
I pump it up/You pump it up."---lyrics from "Pump Up the Jam" by Salt N Pepa
"Let's get together/Yeah, yeah, yeah
Think of all that we can share
Let's get together, everyday
Every way and everywhere."---lyrics from "Let's Get Together" sung by Hailey Mills
A less than encouraging jobs report on Tuesday and the overhang from the shutdown/debt crisis have led many market participants to conclude that the Federal Reserve will not taper quantitative easing until the first quarter of 2014. This conclusion has had a decided impact on the yield from the ever important 10 Year Treasury Bond ("10Year"). In fact, "It's falling/It's falling." And as an income investor, "I'm falling in love" with that fact. The yield on the 10Year fell to 2.50% by week's end which is its lowest close since July. Of course, this also means that the price of the 10Year increased, and since most of my holdings trade in relation to the price of the 10Year, I had a great week. The stock market in general rose as the Dow Jones Industrial Average ended the week up 170 points.
I remain astounded at how news from the oil/natural gas sector is under-reported. I recommend that you subscribe to several of the numerous free publications created and emailed by the U.S. Energy Information Agency (USEIA). Have you read about the Spraberry-Wolfcamp play in Texas, confirmed as the second largest oil field in the world? Are you aware that innovative technology is permitting fracking drillers to more efficiently "Pump up the jam." And believe me, they "pump it up/pump it up/pump it up." This new technology widens the shale fractures. This results in fewer wells, but requires significantly more frac sand in order to keep the wider fractures open. As a consequence, frac sand facilities in Wisconsin are working overtime. Wisconsin, with its abundance of quartz based sand, is the frac sand capital of the world. Indeed in the last three years, 115 frac sand mining operations (that's not a typo, fans) have become operational in our fair state with Eau Claire County serving as ground zero. Three of these operations have gone public. I prefer HiCrush (HCLP) which has risen 56% since I first discussed it back in September, 2012 (see. Vol. 136 www.riskrewardblog.blogspot.com ). The lawsuit that caused me to exit the position has been resolved, and I am back in it. Another new oil patch technology, which addresses the disposal of the watery by product of fracturing, has been developed by GreenHunter Resources. This is a speculative company which I am playing through its preferred stock GHRpC.
As interest rates have moderated over the past month, the values of real estate investment trusts (REIT's) have increased, and none more so than the value of ARCP about which I wrote in Vol. 187, www.riskrewardblog.blogspot.com . Up 12% since that time, ARCP has embarked upon an ambitious acquisition campaign, announcing this week that it's "getting together" via a merger with Cole Real Estate Investments (COLE) to form the nation's largest single tenant REIT. ARCP has "thought of all that it can share" with Cole. By cutting overhead "everyday, everyway and everywhere", the transaction will be accretive immediately. As a consequence, ARCP intends to raise its already impressive dividend to over 7.3% annually (at current prices) which it will continue to pay on a monthly basis. "Yeah, yeah, yeah."
I close by reminding you of the free and valuable information available on the internet. Publications like those from the USEIA discussed above, all public securities filings, various company presentations and the transcipts of earnings calls are just some of the free information available in cyberspace. These are publications for which investors have long been "Crying" and that just a few years ago were available to "Only the Lonely" few who frequented government depositories. If Roy Orbison were alive, he would know that now, instant and ready access is no longer available just "In Dreams". Indeed, "Anything you want/You got it/ Anything you need/You got it/Anything at all/You Got It."
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"I'm falling/I'm falling
Falling in love with you."---lyrics from "Falling" by Roy Orbison
"Pump up the jam/Pump it up
I pump it up/You pump it up."---lyrics from "Pump Up the Jam" by Salt N Pepa
"Let's get together/Yeah, yeah, yeah
Think of all that we can share
Let's get together, everyday
Every way and everywhere."---lyrics from "Let's Get Together" sung by Hailey Mills
A less than encouraging jobs report on Tuesday and the overhang from the shutdown/debt crisis have led many market participants to conclude that the Federal Reserve will not taper quantitative easing until the first quarter of 2014. This conclusion has had a decided impact on the yield from the ever important 10 Year Treasury Bond ("10Year"). In fact, "It's falling/It's falling." And as an income investor, "I'm falling in love" with that fact. The yield on the 10Year fell to 2.50% by week's end which is its lowest close since July. Of course, this also means that the price of the 10Year increased, and since most of my holdings trade in relation to the price of the 10Year, I had a great week. The stock market in general rose as the Dow Jones Industrial Average ended the week up 170 points.
I remain astounded at how news from the oil/natural gas sector is under-reported. I recommend that you subscribe to several of the numerous free publications created and emailed by the U.S. Energy Information Agency (USEIA). Have you read about the Spraberry-Wolfcamp play in Texas, confirmed as the second largest oil field in the world? Are you aware that innovative technology is permitting fracking drillers to more efficiently "Pump up the jam." And believe me, they "pump it up/pump it up/pump it up." This new technology widens the shale fractures. This results in fewer wells, but requires significantly more frac sand in order to keep the wider fractures open. As a consequence, frac sand facilities in Wisconsin are working overtime. Wisconsin, with its abundance of quartz based sand, is the frac sand capital of the world. Indeed in the last three years, 115 frac sand mining operations (that's not a typo, fans) have become operational in our fair state with Eau Claire County serving as ground zero. Three of these operations have gone public. I prefer HiCrush (HCLP) which has risen 56% since I first discussed it back in September, 2012 (see. Vol. 136 www.riskrewardblog.blogspot.com ). The lawsuit that caused me to exit the position has been resolved, and I am back in it. Another new oil patch technology, which addresses the disposal of the watery by product of fracturing, has been developed by GreenHunter Resources. This is a speculative company which I am playing through its preferred stock GHRpC.
As interest rates have moderated over the past month, the values of real estate investment trusts (REIT's) have increased, and none more so than the value of ARCP about which I wrote in Vol. 187, www.riskrewardblog.blogspot.com . Up 12% since that time, ARCP has embarked upon an ambitious acquisition campaign, announcing this week that it's "getting together" via a merger with Cole Real Estate Investments (COLE) to form the nation's largest single tenant REIT. ARCP has "thought of all that it can share" with Cole. By cutting overhead "everyday, everyway and everywhere", the transaction will be accretive immediately. As a consequence, ARCP intends to raise its already impressive dividend to over 7.3% annually (at current prices) which it will continue to pay on a monthly basis. "Yeah, yeah, yeah."
I close by reminding you of the free and valuable information available on the internet. Publications like those from the USEIA discussed above, all public securities filings, various company presentations and the transcipts of earnings calls are just some of the free information available in cyberspace. These are publications for which investors have long been "Crying" and that just a few years ago were available to "Only the Lonely" few who frequented government depositories. If Roy Orbison were alive, he would know that now, instant and ready access is no longer available just "In Dreams". Indeed, "Anything you want/You got it/ Anything you need/You got it/Anything at all/You Got It."
Saturday, October 19, 2013
October 19, 2013 Sunshine, Lollipops
Risk/Reward Vol. 191
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"You gotta be bold/You gotta be wiser
You gotta be hard/You gotta be tough
You gotta be stronger"---lyrics from "You Gotta Be" sung by Des'Ree
"My life is sunshine, lollipops and rainbows
That's how the refrain goes/So come on, join in everybody!
Sunshine, lollipops and rainbows
Everything that's wonderful is sure to come your way."---lyrics from "Sunshine, Lollipops and Rainbows" sung by Lesley Gore
"Regulators, we regulate any stealing off this property
And we damn good too
Gotta be handy with the steel if you know what I mean."---lyrics from "Regulators" by Warren G. featuring Nate Dogg
When it comes to investing in this insane political environment, "You gotta be bold/You gotta be wiser/You gotta be hard/You gotta be tough/You gotta be stronger." And the stock market was all of that throughout the debt ceiling crisis. The Dow Jones Industrial Average closed up 162 points for the week and the S&P 500 closed on Friday at a record high. But more importantly, both the stock and bond markets held remarkably steady even during the darkest hours of discord. Call it cryin'-wolf or once-burned-twice-shy, most market participants (including me) did not bail like I did back in 2011. Rhetoric be damned, default was not in the cards, and the markets sensed that fact.
By standing pat, I experienced a day on Thursday that was nothing short of "Sunshine, Lollipops and Rainbows." And why not? Think of how the table has been set for income investors like me. First, default is no longer a threat, so the credit markets will continue to function. Second, the events of the past several weeks have slowed mortgage originations thereby guaranteeing (IMHO) a continuation of the mortgage subsidy portion of quantitative easing (QE3). Third, the debt ceiling crisis will again arise in January militating against a tapering of the bond buying aspect of QE3 any time soon, a fact which should keep mid-to-long term interest rates in check. (Note that on Thursday, the yield on the 10Year Treasury Bond closed below 2.6% for the first time since early August.). Through year end, "everything that is wonderful is sure to come my way": low interest rates, a subsidized mortgage market and easy money---circumstances all favorable to yield hunters. Caution: I am not counseling you to "join in, everybody", but my list of mortgage real estate investment trusts, business development companies, leveraged closed end funds and preferred stocks SHOULD do well in the fourth quarter.
Speaking of income stocks, I have become enamored of another sector---mortgage servicing companies. As you may know, a portion of each mortgage payment defrays mortgage servicing costs which include tracking statements, fielding requests, backroom accounting and, unfortunately handling foreclosures. Under the Dodd-Frank Act, passed by Congress in response to the credit melt down of 2008, "Regulators" have made mortgage servicing unprofitable for mortgage originators. As a consequence, these institutions have sold "off this property" (mortgage servicing rights) to specialized entities such as Home Loan Servicing Solutions, Ltd. (HLSS). HLSS is "damn good" at what it does and has been "handy with the steel" in cutting expenses. That fact, in conjunction with improved underwriting standards and fewer refinancings, has resulted in HLSS being able to pay a 8% annualized dividend on a monthly basis.
What a way to finish the week! If I were a woman, I would be Lesley Gore. "It's My Party" now. Low interest rates are my boyfriend. And, if higher yields on the 10Year Treasury Bond were named Judy, it would be "Judy's Turn to Cry" because "My Boyfriend's Back." and "He's goin' to save my reputation."
Saturday, October 12, 2013
October 12, 2013 Sultans of Swing
Risk/Reward Vol. 190
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
"And then the man he steps right up to the microphone
And says at last/Just as the time bell rings
Thank you/Goodnight/ Now it's time to go home
And he makes it fast with one more thing
We are the Sultans of Swing."---lyrics from "Sultans of Swing" by The Dire Straits
"With a rebel yell/She cried "More, more, more"
Oh, yeah baby, she wants more, more, more"---lyrics from "Rebel Yell" sung by Billy Idol
"For the good times and the bad times
I'll be on your side for evermore
That's what friends are for."---lyrics from "That's What Friends Are For" sung by Dionne Warwick
With the Dow Jones Industrial Average vacillating from a 296 point decline on Monday and Tuesday to a 325 point rise on Thursday followed by an another triple digit move upward "as the time bell rang" on Friday, our elected representatives once again proved to be "The Sultans of Swing". As the world's economies continue to hang on every word from Washington, we need for someone to "step right up to the microphone" to announce a deal, and "make it fast." Then, as far as this writer is concerned, they can all say "goodnight and go home"---for good.
Almost forgotten in this week's noise was the announcement on Wednesday of the "Rebel Yell(in)" as the new Chair of the Federal Reserve. I say "rebel" because of her outspoken Keynsian views on monetary policy. When it comes to accommodation, Janet Yellin "cries more, more, more." Thus, I don't see the discount rate increasing until late 2015 or 2016, and tapering in 2013 likely is off table. Indeed, most commentators believe "She wants more, more, more" quantitative easing. If the debt ceiling issues are resolved, interest rate sensitive stocks (e.g. mortgage real estate investment trusts, preferred stocks, business development companies,etc.) should do well under Chairperson Yellin.
As the author of this publication, it is my desire to "be on your side (as investors) for evermore" That's true "for the good times and the bad times." In return, I would like you, my Readers, to share your investment observations and ideas. Some of you do and that is why I would like to extend a hearty thanks to a longtime friend and subscriber for alerting me to Main Street Capital Corporation (MAIN), an intriguing business development company ("BDC"). As a subscriber to BDCBuzz (www.bdcbuzz.blogspot.com ), I was aware generally of MAIN, but had not invested because it trades at a healthy premium to its book value, normally a BDC negative. My friend's heads-up, however, caused me to do further research which revealed that the premium was justified by MAIN's successful equity plays (in addition to a decent bread and butter loan portfolio) and its now regularly-scheduled supplemental distributions paid in addition to a monthly dividend calculated on a 6.4% annualized base yield. Thanks again for the tip. "That's what friends are for."
I stood pat all week with an eagle eye on the 10 Year Treasury Bond yield. It started to rise above 2.7% ,a disconcerting sign for income investors like me. Thankfully, it ended the week at 2.69%, a modest increase considering the continuing uncertainty. Clearly, there is room for the President and the House to compromise and in so doing each should remember the teachings of Dionne Warwick:
A room is still a room
Even though there's nothing there but gloom
But a room is not a house
And a house is not a home
When the two of us are far apart
And one of us has a broken heart
Saturday, October 5, 2013
October 5, 2013 Buddy, Gonna Shut You Down
Risk/Reward Vol. 189
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
"Declining numbers at an even rate/At the the count of one we both accelerate
Tach it up/Tach it up
Buddy gonna shut you down"---lyrics from "Shut Down" by The Beach Boys
"If you change your mind/I'm the first in line
Honey I'm still fine/Take a chance on me."---lyrics from "Take a Chance on Me" by Abba
"I'm back in the USSR
You don't know how lucky you are, boy
Back in the USSR"---lyrics from "Back in the USSR" by The Beatles.
After weeks of Republicans "taching up/taching up" the threat that "Buddy, gonna shut the government down," the government actually did shut down this week. That fact, plus the prospect of a default on government debt if the debt ceiling is not raised before October 17th (including a default on the ever important 10 Year Treasury Bond ("10Year")), caused the Dow Jones Industrial Average to drop 186 points this week. One would think that with a default looming, the price of the 10Year would "decline at an even rate" and that correspondingly its yield would "both accelerate." But, the 10Year held steady; its yield hovering between 2.62 and 2.65% throughout the week (note: a steady yield means a steady price). According to commentators, the following explains the relative calm dominating the bond market. First, it is highly unlikely that even the crazies in D.C. will allow a default to occur. Second, the economic data over the past few weeks shows a flat if not weakening economy which lessens the likelihood that quantitative easing (QE3) will be tapered any time soon. This bodes well for the 10Year, thus mitigating some of the negative bias associated with a possible default. And, third, even if a default occurs, it will impact the rest of the world worse than here.
The above logic caused me to stand pat in the face of a default; something that I did not do the last time one was threatened. (See Vol. 78 www.riskrewardblog.blogspot.com ) This time, "I'm still fine"; as none of my positions has triggered a sell signal. But frankly even if some do, I likely will not sell. Indeed, I've "changed my mind." I intend to be "first in line" to buy if and when the situation worsens. That stated, I do not recommend that you "Take a chance on me." I watch the market like a hawk and thus feel comfortable taking the risk. You do what your research indicates or what your professional recommends. Do not rely on me.
With all the brouhaha in D.C., a significant story in Thursday's Wall Street Journal (WSJ) was all but ignored. Therein, the WSJ reported that as a result of horizontal drilling and fracking (first discussed in this publication in June 2011, see Vol 70 www.riskrewardblog.blogspot.com), the United States has surpassed Russia as the world's largest producer of oil and natural gas. A personage no less than the head of the U.S. Energy Information Agency termed the development "a remarkable turn of events." It is the first time since 1982, when Russia was "back in the USSR" that the U. S. has produced more natural gas than Russia. And, the U.S.'s 10million barrels/day production of oil is only slightly less than that of Russia, a gap that will be bridged this year. Once again, "we don't know how lucky we are, boy" to live in such a bountiful country. I invest in this segment primarily through pipeline companies (KMP) and the preferred stock of small exploration companies: MHRpD, VNRAP and GSTpA, which when averaged pay monthly dividends at an annualized rate in excess of 8%. I also speculate with the common stock of LINE and VNR which likewise pay outsized monthly dividends.
So, "Do you want to know a secret/Do you promise not to tell? Closer/Let me whisper in your ear" If the news from Washington becomes progressively negative next week and if the market sells off, I will follow Warren Buffett's advice: "Be fearful when others are greedy and be greedy when others are fearful."
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
"Declining numbers at an even rate/At the the count of one we both accelerate
Tach it up/Tach it up
Buddy gonna shut you down"---lyrics from "Shut Down" by The Beach Boys
"If you change your mind/I'm the first in line
Honey I'm still fine/Take a chance on me."---lyrics from "Take a Chance on Me" by Abba
"I'm back in the USSR
You don't know how lucky you are, boy
Back in the USSR"---lyrics from "Back in the USSR" by The Beatles.
After weeks of Republicans "taching up/taching up" the threat that "Buddy, gonna shut the government down," the government actually did shut down this week. That fact, plus the prospect of a default on government debt if the debt ceiling is not raised before October 17th (including a default on the ever important 10 Year Treasury Bond ("10Year")), caused the Dow Jones Industrial Average to drop 186 points this week. One would think that with a default looming, the price of the 10Year would "decline at an even rate" and that correspondingly its yield would "both accelerate." But, the 10Year held steady; its yield hovering between 2.62 and 2.65% throughout the week (note: a steady yield means a steady price). According to commentators, the following explains the relative calm dominating the bond market. First, it is highly unlikely that even the crazies in D.C. will allow a default to occur. Second, the economic data over the past few weeks shows a flat if not weakening economy which lessens the likelihood that quantitative easing (QE3) will be tapered any time soon. This bodes well for the 10Year, thus mitigating some of the negative bias associated with a possible default. And, third, even if a default occurs, it will impact the rest of the world worse than here.
The above logic caused me to stand pat in the face of a default; something that I did not do the last time one was threatened. (See Vol. 78 www.riskrewardblog.blogspot.com ) This time, "I'm still fine"; as none of my positions has triggered a sell signal. But frankly even if some do, I likely will not sell. Indeed, I've "changed my mind." I intend to be "first in line" to buy if and when the situation worsens. That stated, I do not recommend that you "Take a chance on me." I watch the market like a hawk and thus feel comfortable taking the risk. You do what your research indicates or what your professional recommends. Do not rely on me.
With all the brouhaha in D.C., a significant story in Thursday's Wall Street Journal (WSJ) was all but ignored. Therein, the WSJ reported that as a result of horizontal drilling and fracking (first discussed in this publication in June 2011, see Vol 70 www.riskrewardblog.blogspot.com), the United States has surpassed Russia as the world's largest producer of oil and natural gas. A personage no less than the head of the U.S. Energy Information Agency termed the development "a remarkable turn of events." It is the first time since 1982, when Russia was "back in the USSR" that the U. S. has produced more natural gas than Russia. And, the U.S.'s 10million barrels/day production of oil is only slightly less than that of Russia, a gap that will be bridged this year. Once again, "we don't know how lucky we are, boy" to live in such a bountiful country. I invest in this segment primarily through pipeline companies (KMP) and the preferred stock of small exploration companies: MHRpD, VNRAP and GSTpA, which when averaged pay monthly dividends at an annualized rate in excess of 8%. I also speculate with the common stock of LINE and VNR which likewise pay outsized monthly dividends.
So, "Do you want to know a secret/Do you promise not to tell? Closer/Let me whisper in your ear" If the news from Washington becomes progressively negative next week and if the market sells off, I will follow Warren Buffett's advice: "Be fearful when others are greedy and be greedy when others are fearful."
Saturday, September 28, 2013
September 28, 2013 Not Doing Anything
Risk/Reward Vol. 188
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Some people think life is a dream/So they makin' matters worse
But no matter what the crisis is/Doin' it, doin' it, doin' your own thing."---lyrics from "Crisis" by Bob Marley
"Treasure, that is what you are/Honey, you are my golden star
You know you can make my dreams come true
If you let me treasure you."---lyrics from "Treasure" by Bruno Mars
"Just let go/And let it flow
Let it flow/Let it flow
Everything's gonna work out right, y'know."---lyrics from "Let It Flow" sung by Toni Braxton
With last week's taper tandrum behind us, Washington keeps "Doin' it, doin' it" to us---"making matters worse"; that is. Thanks to our friends, the politicians--be it the launch of Obamacare, the approach of the debt ceiling or a government shut down-- "no matter what the crisis is" just make sure there is a crisis. For investors, Washington makes "life a dream"---unfortunately that dream is a nightmare. That is why the Dow Jones Industrial Average fell six out of the past seven trading days.
Fortunately for income investors such as yours truly, that downward trend has been mitigated by a slow, but steady decline in the yield on the ever important 10 Year Treasury Bond ("10Year"). Although its drop from 2.89%, just prior to last week's decision not to taper, to 2.62% at the close this Friday is not so great as to deserve "a golden star", the yield decline has been enough to make my "dream" of interest rate stability "come true". How long the 10Year yield will remain in its current steady state is a matter of conjecture, but I "treasure" every day it does.
As explained previously (see Vol. 172 www.riskrewardblog.blogspot.com ), income producing securities such as preferred stock, master limited partnerships, real estate investment trusts, business development companies, utilities, etc. are interest rate sensitive. Generally, they decline in value if the yield on the benchmark 10Year increases. Conversely, as the 10Year yield declines, the value of income producing securites increases--as mine have done over the past several days--- despite a decline in the overall stock market. Of course, this recent activity pales in comparison to the spike in the 10Year yield this summer which at the time caused me to sell most of my positions (see. Vol. 173 www.riskrewardblog.blogspot.com ), but it is a welcome development nevertheless. The real benefit from the recent 10Year activity (or lack thereof), however, is that it has justified my continued ownership of income producing securties which in turn has resulted in dividend income "flowing". I recognize that "Everything does not always work out right" and that the yield on the 10Year will start rising again someday (likely when QE3tapering becomes more certain). I further recognize that I may have to "Just let go" of those positions again at that time. But in the interim I enjoy the cash generated by my list of monthly dividend paying stocks (see. Vol. 151 www.riskrewardblog.blogspot.com ), and I say "'Let it flow/Let it flow/Let it flow."
Perhaps I should be more concerned about the shut down and the debt ceiling and whatever other crisis Washington can create. But having overreacted to these threats in the past, I am holding pat. I may be foolish, but I am following the lead of my favorite investment advisor, Bruno Mars who counsels:
"Today I don't feel like doing anything
I just wanna lay in my bed
Don't feel like picking up my phone
So leave a message at the tone
'Cause today I swear I'm not doing anything"
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Some people think life is a dream/So they makin' matters worse
But no matter what the crisis is/Doin' it, doin' it, doin' your own thing."---lyrics from "Crisis" by Bob Marley
"Treasure, that is what you are/Honey, you are my golden star
You know you can make my dreams come true
If you let me treasure you."---lyrics from "Treasure" by Bruno Mars
"Just let go/And let it flow
Let it flow/Let it flow
Everything's gonna work out right, y'know."---lyrics from "Let It Flow" sung by Toni Braxton
With last week's taper tandrum behind us, Washington keeps "Doin' it, doin' it" to us---"making matters worse"; that is. Thanks to our friends, the politicians--be it the launch of Obamacare, the approach of the debt ceiling or a government shut down-- "no matter what the crisis is" just make sure there is a crisis. For investors, Washington makes "life a dream"---unfortunately that dream is a nightmare. That is why the Dow Jones Industrial Average fell six out of the past seven trading days.
Fortunately for income investors such as yours truly, that downward trend has been mitigated by a slow, but steady decline in the yield on the ever important 10 Year Treasury Bond ("10Year"). Although its drop from 2.89%, just prior to last week's decision not to taper, to 2.62% at the close this Friday is not so great as to deserve "a golden star", the yield decline has been enough to make my "dream" of interest rate stability "come true". How long the 10Year yield will remain in its current steady state is a matter of conjecture, but I "treasure" every day it does.
As explained previously (see Vol. 172 www.riskrewardblog.blogspot.com ), income producing securities such as preferred stock, master limited partnerships, real estate investment trusts, business development companies, utilities, etc. are interest rate sensitive. Generally, they decline in value if the yield on the benchmark 10Year increases. Conversely, as the 10Year yield declines, the value of income producing securites increases--as mine have done over the past several days--- despite a decline in the overall stock market. Of course, this recent activity pales in comparison to the spike in the 10Year yield this summer which at the time caused me to sell most of my positions (see. Vol. 173 www.riskrewardblog.blogspot.com ), but it is a welcome development nevertheless. The real benefit from the recent 10Year activity (or lack thereof), however, is that it has justified my continued ownership of income producing securties which in turn has resulted in dividend income "flowing". I recognize that "Everything does not always work out right" and that the yield on the 10Year will start rising again someday (likely when QE3tapering becomes more certain). I further recognize that I may have to "Just let go" of those positions again at that time. But in the interim I enjoy the cash generated by my list of monthly dividend paying stocks (see. Vol. 151 www.riskrewardblog.blogspot.com ), and I say "'Let it flow/Let it flow/Let it flow."
Perhaps I should be more concerned about the shut down and the debt ceiling and whatever other crisis Washington can create. But having overreacted to these threats in the past, I am holding pat. I may be foolish, but I am following the lead of my favorite investment advisor, Bruno Mars who counsels:
"Today I don't feel like doing anything
I just wanna lay in my bed
Don't feel like picking up my phone
So leave a message at the tone
'Cause today I swear I'm not doing anything"
Saturday, September 21, 2013
September 21, 2013 Sugar, Sugar
Risk/Reward Vol. 187
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Pour a little sugar on it, honey
Pour a little sugar on it, babe
I'm gonna make your life so sweet."---lyrics from "Sugar, Sugar" sung by The Archies
"Communication breakdown/It's always the same
I'm having a nervous breakdown/Drive me insane."---lyrics from "Communication Breakdown" by Led Zepplin
"How to avoid defeat/Where truth and fiction meet
Why nothing ever turns out as you planned
These are the things I don't understand."---lyrics from "Things I Don't Understand" by Coldplay
Two hours before the stock market closed on Wednesday, Federal Reserve Chairman Ben Bernanke emerged from the Federal Open Market Committee meeting and announced that contrary to the market's expectation, the Fed would not begin tapering its $85billion/month asset purchase program known as QE3. From then until the market's close, Uncle Ben "made life so sweet" for those holding long positions. Deciding not to taper in September was the equivalent of "pouring a little sugar on it , honey" for the equity markets and "pouring a little sugar on it, babe" for the bond market. On the equity side, the Dow Jones Industrial Average (DJIA) shot up 125 points in an instant, and closed at a record high, as did the S&P 500. On the bond side, the 10 Year Treasury Bond ("10Year") yield fell from 2.89% to 2.70% (remember: lower yields means higher price). For income investors like me (utilities, mlp's, bdc's, reits and preferreds each of which is interest rate sensitive), it was like eating cotton candy for two hours.
But, over the next two days as the announcement's significance was absorbed and evaluated, the stock market retrenched (look at the S&P 500 because a concatenation of non market factors contributed to the DJIA's drop on Friday), and the10Year yield rose. This retrenchment bespoke disappointment (which I share) in the Fed's decision. Since I profited from the announcement, why am I disappointed? Here is my logic. As an income investor, I crave stability (see Vols. 181 and 186 www.riskrewardblog.blogspot.com ). Stability is dependent in large measure on predictable monetary policy which ostensibly is the reason that the Federal Reserve, under the chairmanship of Ben Bernanke, has emphasized its desire to give "forward guidance"; that is to communicate its future intentions thereby reducing surprise and promoting stability. Based upon Bernanke's forward guidance in May as confirmed in June. (see Vol. 175 www.riskrewardblog.blogspot.com ), both the bond and the stock markets were positioned for QE3 tapering to begin this month . Not without pain to many (including yours truly), mortgage rates rose, income securities repriced and bond prices fell---all with the expectation of a modest taper. Despite numerous opportunities to inform investors that their supposition of a September taper may be in error (e.g. the August Fed meeting in Jackson Hole, WY discussed in Vol 183 www.riskrewardblog.blogspot.com), the Fed's guidance (mostly through silence) remained "always the same"; to wit, tapering would begin in September. That is why Wednesday's announcement was nothing short of a "communication breakdown"; one big enough to "drive me insane." And, by the way, what is one to make of Fed member James Bullard's statement on Friday that tapering could begin in October? Was that a rogue statement or was it authorized by the Fed? Will anyone take forward guidance seriously in the future? I think not. One should expect increased volatilty, with the market on the edge of a "nervous breakdown" with each Fed statement---the antithesis of the stability which I crave and which the Fed intended with forward guidance.
So "how is one to avoid defeat" when, at the Federal Reserve, "truth and fiction meet" and "nothing ever turns out as planned?" Do as I have been forced to do these past few years: continue to search for overlooked opportunities---stocks that seemingly others "don't understand." Here is a recent example. On Monday, one of my favorite triple net lease real estate investment trusts, ARCP (see Vol. 184 www.riskrewardblog.blogspot.com) announced that it was selling preferred and common stock to a sophisticated private investor at a discount to the then prevailing market price. Fearing dilution, the market overreacted, selling ARCP down to $12.19 even though a careful reading of the press release indicated that the sophisticated private investor was paying $12.29 and that it was entering into a lock up agreement on the preferred stock that demonstrated a belief that within a year, the common would be worth at least $13.59. I bought that day at $12.22. ARCP has since recovered closing Friday at $12.68 which I believe still represents a bargain.
My disappointment in the Fed Chair is like a string of Led Zepplin titles. "Heartbreaker" Bernanke's "Communication Breakdown" left me "Dazed and Confused." "You Shook Me", Ben. "How Many More Times" must we listen to you "Ramble On" so ineffectively? Thankfully, "Your Time Is Gonna Come"---really soon. And based upon the failure of QE3 ( mortgage rates and long term interest rates both have increased not decreased as a result of QE3) and the damage done by your forward guidance program, your departure will be a "Celebration Day."
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Pour a little sugar on it, honey
Pour a little sugar on it, babe
I'm gonna make your life so sweet."---lyrics from "Sugar, Sugar" sung by The Archies
"Communication breakdown/It's always the same
I'm having a nervous breakdown/Drive me insane."---lyrics from "Communication Breakdown" by Led Zepplin
"How to avoid defeat/Where truth and fiction meet
Why nothing ever turns out as you planned
These are the things I don't understand."---lyrics from "Things I Don't Understand" by Coldplay
Two hours before the stock market closed on Wednesday, Federal Reserve Chairman Ben Bernanke emerged from the Federal Open Market Committee meeting and announced that contrary to the market's expectation, the Fed would not begin tapering its $85billion/month asset purchase program known as QE3. From then until the market's close, Uncle Ben "made life so sweet" for those holding long positions. Deciding not to taper in September was the equivalent of "pouring a little sugar on it , honey" for the equity markets and "pouring a little sugar on it, babe" for the bond market. On the equity side, the Dow Jones Industrial Average (DJIA) shot up 125 points in an instant, and closed at a record high, as did the S&P 500. On the bond side, the 10 Year Treasury Bond ("10Year") yield fell from 2.89% to 2.70% (remember: lower yields means higher price). For income investors like me (utilities, mlp's, bdc's, reits and preferreds each of which is interest rate sensitive), it was like eating cotton candy for two hours.
But, over the next two days as the announcement's significance was absorbed and evaluated, the stock market retrenched (look at the S&P 500 because a concatenation of non market factors contributed to the DJIA's drop on Friday), and the10Year yield rose. This retrenchment bespoke disappointment (which I share) in the Fed's decision. Since I profited from the announcement, why am I disappointed? Here is my logic. As an income investor, I crave stability (see Vols. 181 and 186 www.riskrewardblog.blogspot.com ). Stability is dependent in large measure on predictable monetary policy which ostensibly is the reason that the Federal Reserve, under the chairmanship of Ben Bernanke, has emphasized its desire to give "forward guidance"; that is to communicate its future intentions thereby reducing surprise and promoting stability. Based upon Bernanke's forward guidance in May as confirmed in June. (see Vol. 175 www.riskrewardblog.blogspot.com ), both the bond and the stock markets were positioned for QE3 tapering to begin this month . Not without pain to many (including yours truly), mortgage rates rose, income securities repriced and bond prices fell---all with the expectation of a modest taper. Despite numerous opportunities to inform investors that their supposition of a September taper may be in error (e.g. the August Fed meeting in Jackson Hole, WY discussed in Vol 183 www.riskrewardblog.blogspot.com), the Fed's guidance (mostly through silence) remained "always the same"; to wit, tapering would begin in September. That is why Wednesday's announcement was nothing short of a "communication breakdown"; one big enough to "drive me insane." And, by the way, what is one to make of Fed member James Bullard's statement on Friday that tapering could begin in October? Was that a rogue statement or was it authorized by the Fed? Will anyone take forward guidance seriously in the future? I think not. One should expect increased volatilty, with the market on the edge of a "nervous breakdown" with each Fed statement---the antithesis of the stability which I crave and which the Fed intended with forward guidance.
So "how is one to avoid defeat" when, at the Federal Reserve, "truth and fiction meet" and "nothing ever turns out as planned?" Do as I have been forced to do these past few years: continue to search for overlooked opportunities---stocks that seemingly others "don't understand." Here is a recent example. On Monday, one of my favorite triple net lease real estate investment trusts, ARCP (see Vol. 184 www.riskrewardblog.blogspot.com) announced that it was selling preferred and common stock to a sophisticated private investor at a discount to the then prevailing market price. Fearing dilution, the market overreacted, selling ARCP down to $12.19 even though a careful reading of the press release indicated that the sophisticated private investor was paying $12.29 and that it was entering into a lock up agreement on the preferred stock that demonstrated a belief that within a year, the common would be worth at least $13.59. I bought that day at $12.22. ARCP has since recovered closing Friday at $12.68 which I believe still represents a bargain.
My disappointment in the Fed Chair is like a string of Led Zepplin titles. "Heartbreaker" Bernanke's "Communication Breakdown" left me "Dazed and Confused." "You Shook Me", Ben. "How Many More Times" must we listen to you "Ramble On" so ineffectively? Thankfully, "Your Time Is Gonna Come"---really soon. And based upon the failure of QE3 ( mortgage rates and long term interest rates both have increased not decreased as a result of QE3) and the damage done by your forward guidance program, your departure will be a "Celebration Day."
Saturday, September 14, 2013
September 14, 2013 A Ceiling Call
Risk/Reward Vol. 186
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Can we go back/This is the moment
Tonight is the night/We'll fight 'til it's over
So we put our hands up/Like the ceiling can't hold us
Like the ceiling can't hold us."---lyrics from "Can't Hold Us" by Macklemore and Ryan Lewis
"Out in the club
And I'm sippin' that bubb
And you're not gonna reach my telephone"---lyrics from "Telephone" by Lady Gaga
"You're knocking me off my feet again
Got me feeling like I'm nothing
Why you got to be so mean?"---lyrics from "Mean" by Taylor Swift
All quiet on the Syria and QE3 tapering fronts allowed the stock market to soar this week with the Dow Jones Industrial Average registering three consecutive days of triple digit gains, finishing with its second best weekly performance of the year.. But the folks who should really "put their hands up" based on this week's action are fixed income investors such as yours truly. Although barely noticed, two important events occurred this week that lead me to believe that the interest rate "fight is over"; that "tonight is the night"; that "this is the moment" that the 10Year Treasury Bond ("10Year Treasury") interest rate has stabilized at or below 3%; and that the 3% "ceiling can hold us/the ceiling can hold us" during the first phase of QE3 tapering..
The most significant event this week for fixed income investors, the one that should cause us to "sip the bubb/Out in the club", was the pricing of $49billion of Verizon (VZ) corporate bonds, the proceeds of which VZ will use to buy back Vodafone's VZ shares. To put this event into perspective, heretofore the largest corporate bond issuance of all time was the $17billion floatation of Apple bonds last April. This week VZ was hoping to float $20billion in bonds, but the demand was so strong, it was able to sell more than twice that amount---and more importantly in so doing VZ only had to pay 5.2% in interest on the 10 year tranche. This is a slim 2.3% (230 basis point) premium (or spread) over the all important prevailing 10Year Treasury rate of 2.9% (see e.g Vol. 172 www.riskrewardblog.blogspot.com ). This is one of the smallest corporate/10Year Treasury rate spreads since 2007---since which spreads have fluctuated between 250 and 350 basis points. Indeed, the VZ deal could be a harbinger of the 10Year Treasury rate receding. What gives even more hope that the 3% "ceiling can hold" is this week's second event. On the same day the VZ bond was priced, the Treasury sold $21billion of new 10Year Treasuries at 2.946% at an auction in which there were almost 3 times more bidders than buyers. Of course, all of this encouraging interest rate news is premised on a belief that next week the Federal Reserve will announce the first phase of its tapering program and that it will taper no more than a modest amount from its monthly $85 billion QE3 purchases (say a taper of $8-15billion). But, if that expectation is met, I'll be "reaching for my telephone" to enter more fixed income buy orders. (N.B. Some wags believe the VZ sale will have the opposite effect. They argue that it will encourage others to float bonds thereby flooding the market with debt and causing prices to drop and rates to go up. Hey, if market prognostication were easy, we'd all be rich---at no risk.)
What will I be buying? As I have detailed in previous editions, over the past few months, the rising 10Year Treasury interest rate has been "knocking me off my feet"; making me "feel like I'm nothing" for having bought into sectors like preferred stock, real estate investment trusts, business development companies and master limited partnerships--all of which decline in value during times of increasing interest rates. But if I am correct and the 10Year Treasury stabilizes at or below 3%, then these oversold sectors should revert to the "mean" and once again trade at normal spreads. For example, over the past 10 years, on average, credit worthy preferred shares have traded at rates 350 basis points above the 10Year Treasury rate (only 227 basis points on average before the 2008 financial crisis). This "means" that a credit worthy preferred should be yielding 6.5% if the 10Year Treasury rate is at 3%. If you peruse the Wall Street Journal preferred closing table ( http://online.wsj.com/mdc/public/page/2_3024-Preferreds.html?mod=mdc_h_usshl#C) you will see many credit worthy preferreds trading at substantially higher yields making them very attractive indeed. After all, if there is an insatiable appetite for VZ bonds at 5.25%, that hunger should benefit other fixed income sectors paying even higher rates. REIT and BDC prices should also stabilize if not appreciate (frankly, at their current yields, stability is all that I need) because they too are trading as if the 10Year Treasury rate will continue to escalate.
Yes, I am making an interest rate prediction---something only a fool should or would do. And, whatever YOU do, DON'T ACT ON WHAT I SAY! Indeed, if I were smart, I would maintain a "Poker Face." But I am constantly in search of "Applause", so here I go, subjecting myself, once again, to the risk of public humiliation. I can't help it, Gaga--- "I Was Born This Way."
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Can we go back/This is the moment
Tonight is the night/We'll fight 'til it's over
So we put our hands up/Like the ceiling can't hold us
Like the ceiling can't hold us."---lyrics from "Can't Hold Us" by Macklemore and Ryan Lewis
"Out in the club
And I'm sippin' that bubb
And you're not gonna reach my telephone"---lyrics from "Telephone" by Lady Gaga
"You're knocking me off my feet again
Got me feeling like I'm nothing
Why you got to be so mean?"---lyrics from "Mean" by Taylor Swift
All quiet on the Syria and QE3 tapering fronts allowed the stock market to soar this week with the Dow Jones Industrial Average registering three consecutive days of triple digit gains, finishing with its second best weekly performance of the year.. But the folks who should really "put their hands up" based on this week's action are fixed income investors such as yours truly. Although barely noticed, two important events occurred this week that lead me to believe that the interest rate "fight is over"; that "tonight is the night"; that "this is the moment" that the 10Year Treasury Bond ("10Year Treasury") interest rate has stabilized at or below 3%; and that the 3% "ceiling can hold us/the ceiling can hold us" during the first phase of QE3 tapering..
The most significant event this week for fixed income investors, the one that should cause us to "sip the bubb/Out in the club", was the pricing of $49billion of Verizon (VZ) corporate bonds, the proceeds of which VZ will use to buy back Vodafone's VZ shares. To put this event into perspective, heretofore the largest corporate bond issuance of all time was the $17billion floatation of Apple bonds last April. This week VZ was hoping to float $20billion in bonds, but the demand was so strong, it was able to sell more than twice that amount---and more importantly in so doing VZ only had to pay 5.2% in interest on the 10 year tranche. This is a slim 2.3% (230 basis point) premium (or spread) over the all important prevailing 10Year Treasury rate of 2.9% (see e.g Vol. 172 www.riskrewardblog.blogspot.com ). This is one of the smallest corporate/10Year Treasury rate spreads since 2007---since which spreads have fluctuated between 250 and 350 basis points. Indeed, the VZ deal could be a harbinger of the 10Year Treasury rate receding. What gives even more hope that the 3% "ceiling can hold" is this week's second event. On the same day the VZ bond was priced, the Treasury sold $21billion of new 10Year Treasuries at 2.946% at an auction in which there were almost 3 times more bidders than buyers. Of course, all of this encouraging interest rate news is premised on a belief that next week the Federal Reserve will announce the first phase of its tapering program and that it will taper no more than a modest amount from its monthly $85 billion QE3 purchases (say a taper of $8-15billion). But, if that expectation is met, I'll be "reaching for my telephone" to enter more fixed income buy orders. (N.B. Some wags believe the VZ sale will have the opposite effect. They argue that it will encourage others to float bonds thereby flooding the market with debt and causing prices to drop and rates to go up. Hey, if market prognostication were easy, we'd all be rich---at no risk.)
What will I be buying? As I have detailed in previous editions, over the past few months, the rising 10Year Treasury interest rate has been "knocking me off my feet"; making me "feel like I'm nothing" for having bought into sectors like preferred stock, real estate investment trusts, business development companies and master limited partnerships--all of which decline in value during times of increasing interest rates. But if I am correct and the 10Year Treasury stabilizes at or below 3%, then these oversold sectors should revert to the "mean" and once again trade at normal spreads. For example, over the past 10 years, on average, credit worthy preferred shares have traded at rates 350 basis points above the 10Year Treasury rate (only 227 basis points on average before the 2008 financial crisis). This "means" that a credit worthy preferred should be yielding 6.5% if the 10Year Treasury rate is at 3%. If you peruse the Wall Street Journal preferred closing table ( http://online.wsj.com/mdc/public/page/2_3024-Preferreds.html?mod=mdc_h_usshl#C) you will see many credit worthy preferreds trading at substantially higher yields making them very attractive indeed. After all, if there is an insatiable appetite for VZ bonds at 5.25%, that hunger should benefit other fixed income sectors paying even higher rates. REIT and BDC prices should also stabilize if not appreciate (frankly, at their current yields, stability is all that I need) because they too are trading as if the 10Year Treasury rate will continue to escalate.
Yes, I am making an interest rate prediction---something only a fool should or would do. And, whatever YOU do, DON'T ACT ON WHAT I SAY! Indeed, if I were smart, I would maintain a "Poker Face." But I am constantly in search of "Applause", so here I go, subjecting myself, once again, to the risk of public humiliation. I can't help it, Gaga--- "I Was Born This Way."
Saturday, September 7, 2013
September 7, 2013 Higher
Risk/Reward Vol. 185
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Feeling's gettin' stronger
Music's gettin' longer, too
I want to take you higher."---lyrics from "I Want To Take You Higher" by Sly and The Family Stone
"Couldn't see tomorrow today/Then you came
Say what you say/We're floating away
Now I see the sun on the horizon
Now I think that I'll be OK."---lyrics from "Floating Away" sung by Ne-Yo
"He was just tryin' to make things go his way
And honey, you were the believer
He wasn't the deceiver
He was just talkin' trash."---lyrics from "Talkin' Trash" sung by Sam Cooke
With a Syrian air strike on the back burner, the income/dividend focused portion of the stock market once again became fixated on the Federal Reserve; specifically on whether the spate of economic news this week ( purchasing manager numbers, unemployment claims, and the jobs report) would cause the Fed to begin tapering asset purchases (QE3) come its mid September meeting. As the week progressed, the "music was gettin' longer and the feelin' was gettin' stronger, too" that tapering would begin. In turn this news was "takin' higher" the yield on the all important 10 Year Treasury Bond (the significance of which for yield hunters like me was explained in Vol. 172 www.riskrewardblog.blogspot.com ). Indeed, on Thursday, the 10 Year yield rose above 3% for the first time in 25 months only to drop to 2.94% at the close on Friday after a truly mediocre jobs report---a report so disappointing that it shed doubt on the magnitude if not the likelihood of tapering. (N.B. After that report was issued even the Fed's most hawkish member, Esther George, said she supported a cut of no more than $15billion per month which portends that the actual first cut likely will be less---say 10% or $8.5billon)
So what does an income/dividend investor do in times of increasing interest rates (and concomitantly falling asset prices)? "Say what you say", but one can't "see tomorrow's rates today"or anything else "on the horizon." That said, "I think that one will be OK" if as part of diversification, one invests a portion of one's portfolio in "floating" rate senior loan funds. These funds lend money to below-investment grade companies and charge an interest rate that "floats"; that is, an interest rate that is reset from time to time in relation to some agreed barometer (e.g the London InterBank Offered Rate or LIBOR). This "float" provides some hedge against escalating rates. Several large fund managers (e.g. BlackRock, Eaton Vance and Nuveen) specialize in these types of investments. I recommend that you review a list of such funds which can be found at www.cefconnect.com. Go to the Fund Sorter/Screener function, select "Taxable Income", check "Senior Loans", hit "Enter" and then start your review and analysis. You may also wish to look at business development companies that specialize in floating rate financing of all types (senior loans, mezzanine loans, hybrids, etc.) such as my favorites, PSEC and FSC.
One sideshow in the market this week was how a single stock analyst crashed the stock price of oil and gas pipeline stalwart Kinder Morgan (KMP, KMI and KMR) by "Talkin' Trash" about its balance sheet. Whether the analyst (from Hedgeye) was "a deceiver" or "just tryin' to make things go his way", the market "was a believer" as Kinder Morgan's stock plummeted 6% at one point on Wednesday. I have been a KMP investor for years and took advantage of the swoon to buy at $79.45, a bargain basement price in my humble opinion (IMHO for you texters--LMAO).
This week, the "Sly" money was "Dancin' to the Music" of rising interest rates which in turn caused my high yielding portfolio to drop slightly in value through Thursday. (Remember: with income producing assets, prices fall as rates increase.) But, I decided to "Stand" pat, and the portfolio recovered nicely on Friday as the 10Year moderated a bit. I continue to believe that the market has unduly punished income/dividend stocks in anticipation of tapering (See Vol. 182 www.riskrewardblog.blogspot.com) , a situation that should be rectified once tapering begins. So, enough with this vacilation! Let's just start the taper, adjust to it and move on. With interest rates (and asset values) rising and falling daily based upon the odds that tapering will or will not begin and/or the magnitude of the taper should it begin, it has not been "Hot Fun In The Summertime" for yield hunters like me.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Feeling's gettin' stronger
Music's gettin' longer, too
I want to take you higher."---lyrics from "I Want To Take You Higher" by Sly and The Family Stone
"Couldn't see tomorrow today/Then you came
Say what you say/We're floating away
Now I see the sun on the horizon
Now I think that I'll be OK."---lyrics from "Floating Away" sung by Ne-Yo
"He was just tryin' to make things go his way
And honey, you were the believer
He wasn't the deceiver
He was just talkin' trash."---lyrics from "Talkin' Trash" sung by Sam Cooke
With a Syrian air strike on the back burner, the income/dividend focused portion of the stock market once again became fixated on the Federal Reserve; specifically on whether the spate of economic news this week ( purchasing manager numbers, unemployment claims, and the jobs report) would cause the Fed to begin tapering asset purchases (QE3) come its mid September meeting. As the week progressed, the "music was gettin' longer and the feelin' was gettin' stronger, too" that tapering would begin. In turn this news was "takin' higher" the yield on the all important 10 Year Treasury Bond (the significance of which for yield hunters like me was explained in Vol. 172 www.riskrewardblog.blogspot.com ). Indeed, on Thursday, the 10 Year yield rose above 3% for the first time in 25 months only to drop to 2.94% at the close on Friday after a truly mediocre jobs report---a report so disappointing that it shed doubt on the magnitude if not the likelihood of tapering. (N.B. After that report was issued even the Fed's most hawkish member, Esther George, said she supported a cut of no more than $15billion per month which portends that the actual first cut likely will be less---say 10% or $8.5billon)
So what does an income/dividend investor do in times of increasing interest rates (and concomitantly falling asset prices)? "Say what you say", but one can't "see tomorrow's rates today"or anything else "on the horizon." That said, "I think that one will be OK" if as part of diversification, one invests a portion of one's portfolio in "floating" rate senior loan funds. These funds lend money to below-investment grade companies and charge an interest rate that "floats"; that is, an interest rate that is reset from time to time in relation to some agreed barometer (e.g the London InterBank Offered Rate or LIBOR). This "float" provides some hedge against escalating rates. Several large fund managers (e.g. BlackRock, Eaton Vance and Nuveen) specialize in these types of investments. I recommend that you review a list of such funds which can be found at www.cefconnect.com. Go to the Fund Sorter/Screener function, select "Taxable Income", check "Senior Loans", hit "Enter" and then start your review and analysis. You may also wish to look at business development companies that specialize in floating rate financing of all types (senior loans, mezzanine loans, hybrids, etc.) such as my favorites, PSEC and FSC.
One sideshow in the market this week was how a single stock analyst crashed the stock price of oil and gas pipeline stalwart Kinder Morgan (KMP, KMI and KMR) by "Talkin' Trash" about its balance sheet. Whether the analyst (from Hedgeye) was "a deceiver" or "just tryin' to make things go his way", the market "was a believer" as Kinder Morgan's stock plummeted 6% at one point on Wednesday. I have been a KMP investor for years and took advantage of the swoon to buy at $79.45, a bargain basement price in my humble opinion (IMHO for you texters--LMAO).
This week, the "Sly" money was "Dancin' to the Music" of rising interest rates which in turn caused my high yielding portfolio to drop slightly in value through Thursday. (Remember: with income producing assets, prices fall as rates increase.) But, I decided to "Stand" pat, and the portfolio recovered nicely on Friday as the 10Year moderated a bit. I continue to believe that the market has unduly punished income/dividend stocks in anticipation of tapering (See Vol. 182 www.riskrewardblog.blogspot.com) , a situation that should be rectified once tapering begins. So, enough with this vacilation! Let's just start the taper, adjust to it and move on. With interest rates (and asset values) rising and falling daily based upon the odds that tapering will or will not begin and/or the magnitude of the taper should it begin, it has not been "Hot Fun In The Summertime" for yield hunters like me.
Saturday, August 31, 2013
August 31, 2013 Cruisin'
Risk/Reward Vol. 184
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Baby, let's cruise away from here
Don't be confused/The way is clear
This is not a one night stand."---lyrics from "Cruisin'" sung by Smokey Robinson and the Miracles
"If you wanna know/The real deal about the three
Let me tell ya we're a triple threat."---lyrics from "Triple Threat" by The Beastie Boys
"You tried to lease my love
Lease my love, lease my love."---lyrics from "Lease My Love" sung by Rihanna
For the first time in weeks, the possible tapering of QE3 by the Federal Reserve has not dominated the stock market. Instead, the market is concerned with "cruisin'" (as in cruise missiles) far "away from here" and for reasons that are "confused" and not exactly "clear." For whatever reason, our President feels the need to take a "stand" in Syria of all places, even if it is only bombing for "one night." None of our allies supports such a move, and the prospect of unilateral action sent the Dow Jones Industrial Average down 200 points for the week.
In times like these, indeed at any and all times, one protection against market turbulence is diversification. And, any diversified portfolio should have exposure to income producing "real" estate. But how does one achieve such exposure if one does not want to bother with the "triple threat" of taxes, maintenance and insurance (TMI)? "If you wanna know", the answer is simple: invest in properties that hold triple net leases; that is, properties where the tenant has to "deal with all three", T,M and I. Better yet, invest in publicly traded real estate investment trusts (REIT's) that own triple net leased properties and get the added benefit of broad exposure and liquidity.
When it comes to triple net "leases my love, leases my love", I love Realty Income Corporation (O) and American Realty Capital Partners (ARCP), two of the largest triple net lease REIT's in the country. Between them, they own over 5000 single tenant buildings throughout the United States. Chances are that when you walk into a Walgreen's, a CVS, a Home Depot, a Firestone facility, an LA Fitness salon or any Dollar store, the building is owned by one of these REIT's (or NNN or WPC). Learn more about this sector by visiting Realty Income's website ( www.realtyincome.com ) which is full of easily understood information. I like Realty's preferred stock, OpF, and ARCP's common, both of which yield over 6.5% annually, paid on a monthly basis.
As we enter the Labor Day weekend, our Rihanna-influenced President remains bound and determined to "Take A Bow" on the international stage. As investors, we can only hope that a Syrian air strike does not cause too much stock market "Disturbia."
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Baby, let's cruise away from here
Don't be confused/The way is clear
This is not a one night stand."---lyrics from "Cruisin'" sung by Smokey Robinson and the Miracles
"If you wanna know/The real deal about the three
Let me tell ya we're a triple threat."---lyrics from "Triple Threat" by The Beastie Boys
"You tried to lease my love
Lease my love, lease my love."---lyrics from "Lease My Love" sung by Rihanna
For the first time in weeks, the possible tapering of QE3 by the Federal Reserve has not dominated the stock market. Instead, the market is concerned with "cruisin'" (as in cruise missiles) far "away from here" and for reasons that are "confused" and not exactly "clear." For whatever reason, our President feels the need to take a "stand" in Syria of all places, even if it is only bombing for "one night." None of our allies supports such a move, and the prospect of unilateral action sent the Dow Jones Industrial Average down 200 points for the week.
In times like these, indeed at any and all times, one protection against market turbulence is diversification. And, any diversified portfolio should have exposure to income producing "real" estate. But how does one achieve such exposure if one does not want to bother with the "triple threat" of taxes, maintenance and insurance (TMI)? "If you wanna know", the answer is simple: invest in properties that hold triple net leases; that is, properties where the tenant has to "deal with all three", T,M and I. Better yet, invest in publicly traded real estate investment trusts (REIT's) that own triple net leased properties and get the added benefit of broad exposure and liquidity.
When it comes to triple net "leases my love, leases my love", I love Realty Income Corporation (O) and American Realty Capital Partners (ARCP), two of the largest triple net lease REIT's in the country. Between them, they own over 5000 single tenant buildings throughout the United States. Chances are that when you walk into a Walgreen's, a CVS, a Home Depot, a Firestone facility, an LA Fitness salon or any Dollar store, the building is owned by one of these REIT's (or NNN or WPC). Learn more about this sector by visiting Realty Income's website ( www.realtyincome.com ) which is full of easily understood information. I like Realty's preferred stock, OpF, and ARCP's common, both of which yield over 6.5% annually, paid on a monthly basis.
As we enter the Labor Day weekend, our Rihanna-influenced President remains bound and determined to "Take A Bow" on the international stage. As investors, we can only hope that a Syrian air strike does not cause too much stock market "Disturbia."
Sunday, August 25, 2013
August 24, 2013 Roller Coaster
Risk/Reward Vol. 183
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"How can I be sure/In a world that's constantly changing?
How can I be sure/Where I stand with you?"---lyrics from "How Can I Be Sure" sung by The Young Rascals
"I recall when I was young/My papa said don't cry
Life is full of ups and downs/Like a roller coaster ride."---lyrics from "Roller Coaster" by the Partridge Family
"I'm pickin' up good vibrations
Good, good, good, good vibrations."---lyrics from "Good Vibrations" by the Beach Boys
"How can I be sure/In a world that's constantly changing? How can I be sure/Where I stand with QE3 tapering?" The fact is I/we can't be sure. Indeed, if we take the Federal Reserve at its word: to wit, that its decision making is transparent, then one must conclude that the Fed itself, does not know what it will do at its much anticipated September meeting. Nevertheless, many hours were spent by countless analysts parsing each sentence of the Fed's July meeting minutes (which were released last Wednesday) in an effort to divine the Fed's one true intention. And seemingly every participant at the Jackson Hole conference had an opinion on when the Fed would start tapering; every participant, that is, except the Fed members themselves.
Not surprisingly, both the bond and the stock markets "were full of ups and downs/Like a roller coaster ride" as the uncertain future of QE3 dominated the financial news. The yield on the 10Year Treasury Bond ("10Year") went from 2.83 last Friday to over 2.9 mid week to close at 2.82 on Friday. Similarly the Dow Jones Industrial Average plunged 200 points by mid week from last Friday's close only to recover almost all that it had lost at week's end, in spite of Thursday's unnerving NASDAQ snafu. No sector made me "cry" more than the uber rate-sensitive, mortgage real estate investment trusts (mREIT's). My favorite in that area, MTGE (which I bought on July 18th at 18.23) went from 19.31 last Friday to 17.96 on Monday only to rebound to 19.93 at the close this past Friday. Why did it recover so well, even as QE3 uncertainty persists?
Could it be that the stock markets (even the fixed income sectors like mREIT's) have become comfortable with the inevitability of tapering and finally have factored in a rise in the 10Year rate to 3+%? ( a possibility about which I wrote in Vol. 181 www.riskrewardblog.blogspot.com ) Call me a pollyanna, but I am "pickin' up good vibrations" to that effect---"good, good, good vibrations." Indeed, in discussions with a few subscribers this week, I lamented my hesitation to buy what I perceive to be great bargains in the form of OpF, AEV, MHRpD, CTY, GOODpN, EEP, KMP, SHNH, ARCC, FSC, PSEC---just to name a few. If I am correct, prices on these worthy, 7+% dividend payers could stabilize, if not appreciate. I was not a buyer this past week, but I may be one next week.
As I have written previously, this Beach Boy doesn't need the stock market to "Catch A Wave." All "Barbara Ann" and "The Stupe (Sloop) John B." desire is some market stability so that we can collect our dividends over the next few months. And, I sense that the market may be stabilizing ----whether tapering begins in September or not. I may be right, or we may be headed toward a "Wipeout." Stay tuned, fellow surfers, and we shall see.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"How can I be sure/In a world that's constantly changing?
How can I be sure/Where I stand with you?"---lyrics from "How Can I Be Sure" sung by The Young Rascals
"I recall when I was young/My papa said don't cry
Life is full of ups and downs/Like a roller coaster ride."---lyrics from "Roller Coaster" by the Partridge Family
"I'm pickin' up good vibrations
Good, good, good, good vibrations."---lyrics from "Good Vibrations" by the Beach Boys
"How can I be sure/In a world that's constantly changing? How can I be sure/Where I stand with QE3 tapering?" The fact is I/we can't be sure. Indeed, if we take the Federal Reserve at its word: to wit, that its decision making is transparent, then one must conclude that the Fed itself, does not know what it will do at its much anticipated September meeting. Nevertheless, many hours were spent by countless analysts parsing each sentence of the Fed's July meeting minutes (which were released last Wednesday) in an effort to divine the Fed's one true intention. And seemingly every participant at the Jackson Hole conference had an opinion on when the Fed would start tapering; every participant, that is, except the Fed members themselves.
Not surprisingly, both the bond and the stock markets "were full of ups and downs/Like a roller coaster ride" as the uncertain future of QE3 dominated the financial news. The yield on the 10Year Treasury Bond ("10Year") went from 2.83 last Friday to over 2.9 mid week to close at 2.82 on Friday. Similarly the Dow Jones Industrial Average plunged 200 points by mid week from last Friday's close only to recover almost all that it had lost at week's end, in spite of Thursday's unnerving NASDAQ snafu. No sector made me "cry" more than the uber rate-sensitive, mortgage real estate investment trusts (mREIT's). My favorite in that area, MTGE (which I bought on July 18th at 18.23) went from 19.31 last Friday to 17.96 on Monday only to rebound to 19.93 at the close this past Friday. Why did it recover so well, even as QE3 uncertainty persists?
Could it be that the stock markets (even the fixed income sectors like mREIT's) have become comfortable with the inevitability of tapering and finally have factored in a rise in the 10Year rate to 3+%? ( a possibility about which I wrote in Vol. 181 www.riskrewardblog.blogspot.com ) Call me a pollyanna, but I am "pickin' up good vibrations" to that effect---"good, good, good vibrations." Indeed, in discussions with a few subscribers this week, I lamented my hesitation to buy what I perceive to be great bargains in the form of OpF, AEV, MHRpD, CTY, GOODpN, EEP, KMP, SHNH, ARCC, FSC, PSEC---just to name a few. If I am correct, prices on these worthy, 7+% dividend payers could stabilize, if not appreciate. I was not a buyer this past week, but I may be one next week.
As I have written previously, this Beach Boy doesn't need the stock market to "Catch A Wave." All "Barbara Ann" and "The Stupe (Sloop) John B." desire is some market stability so that we can collect our dividends over the next few months. And, I sense that the market may be stabilizing ----whether tapering begins in September or not. I may be right, or we may be headed toward a "Wipeout." Stay tuned, fellow surfers, and we shall see.
Sunday, August 18, 2013
August 17, 2013 Paint It Black
Risk/Reward Vol. 182
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"I see a red door/And I wanted painted black
No colors any more/I want it painted black."---lyrics from "Paint It Black" by The Rolling Stones
"Opportunity, opportunity/This is your opportunity
To shop around/Follow without a sound."---lyrics from "Opportunity" by Elvis Costello
"Everybody here/Get outta control
Get yo' backs off tha' wall/Cause Misdemeanor said so."---lyrics from "Lose Control" by Missy (Misdemeanor) Elliott
As the stock market suffered its worst week of the year, "I see red charts/And I want them painted black." And no chart is redder than the preferred stock closing table http://online.wsj.com/mdc/public/page/2_3024-Preferreds.html . That snapshot is either a signal to sell, or it represents a significant buying opportunity. I am not selling, and my research is telling me to buy. The research of which I speak is a comparative study of the yields on the 10 Year Treasury Bond ("10Year") and of various preferred stocks today, in 2003, 2006 and 2007 (before and after the 2008-2010 financial crisis, an event which skews all comparative studies involving preferred stocks). That comparison indicates to me that preferreds are oversold, trading at prices indicating that the yield on the 10Year (currently at 2.8%) will soon be at 4 to 4.5%. (Contact me if you want more information on this.) I see the yield on the 10Year rising to 3-3.5% as QE3 tapers, but I do not see 4% or higher for quite some time. If I am right, in short order the preferred stock closing table should have "no colors any more (other than green)". And my monthly statements should be "painted black."
In addition to preferred stock, "Opportunities, opportunites/Big opportunities" may be brewing in other fixed income sectors. I am "shopping around", and I would not blame you if you "Followed without a sound.". Pipeline master limited partnerships ("mlp's") are on sale, and none more than Kinder Morgan (KMP), the nation's largest and most secure mlp. Seeing KMP trading so far below its 50 and 200 day moving averages and yielding nearly 6.5% makes it nearly irresistible. Also, having Realty Income Corp. (O), a leading triple net lease commercial real estate investment trust, trading so low is equally appealing. I am partial to its investment grade preferred stock, OpF, which is now trading below its call price (below $25) and yielding 6.7% which it pays on a monthly basis. Wow, talk about hitting my sweet spot!
With all of the turmoil in the bond and stock markets, one thing is clear to "Everybody here." The bond market (the 10 and 30Year in particular) is "outta control." If the Federal Reserve wants to rein it in, it better "Get its back off tha' wall." Recall that QE3 was instituted to suppress long term (10 to 30 year) rates. At the time QE3 was instituted in 2012, the 30Year rate was 2.9% and the 10Year rate was 1.8%. A 30 year mortgage was at 3.6 %. These rates stabilized and even fell over the next several months. But with tapering on the horizon, they now stand at 3.86 and 2.84 on the bonds respectively, and 30 year mortgages are at 4.5%. QE3 is proving itself to have been a sugar high for the stock market, a quickly bursting bubble machine for fixed income assets, particularly risky debt (check the charts for JNK and HYG), and a mortgage rate teaser; but little else. Ironic for sure; a mistake perhaps; a Misdemeanor maybe.
These past several days in the stock market have been difficult to watch, "As Tears (and profits) Go By." Yet, I believe that I will receive "Satisfaction" once the rate on the 10Year stabilizes enough to "Gimme Shelter." If that does not happen soon however, my loss limits will be reached, and my profits for the year will shrink in a "Jumpin' Jack Flash."
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"I see a red door/And I wanted painted black
No colors any more/I want it painted black."---lyrics from "Paint It Black" by The Rolling Stones
"Opportunity, opportunity/This is your opportunity
To shop around/Follow without a sound."---lyrics from "Opportunity" by Elvis Costello
"Everybody here/Get outta control
Get yo' backs off tha' wall/Cause Misdemeanor said so."---lyrics from "Lose Control" by Missy (Misdemeanor) Elliott
As the stock market suffered its worst week of the year, "I see red charts/And I want them painted black." And no chart is redder than the preferred stock closing table http://online.wsj.com/mdc/public/page/2_3024-Preferreds.html . That snapshot is either a signal to sell, or it represents a significant buying opportunity. I am not selling, and my research is telling me to buy. The research of which I speak is a comparative study of the yields on the 10 Year Treasury Bond ("10Year") and of various preferred stocks today, in 2003, 2006 and 2007 (before and after the 2008-2010 financial crisis, an event which skews all comparative studies involving preferred stocks). That comparison indicates to me that preferreds are oversold, trading at prices indicating that the yield on the 10Year (currently at 2.8%) will soon be at 4 to 4.5%. (Contact me if you want more information on this.) I see the yield on the 10Year rising to 3-3.5% as QE3 tapers, but I do not see 4% or higher for quite some time. If I am right, in short order the preferred stock closing table should have "no colors any more (other than green)". And my monthly statements should be "painted black."
In addition to preferred stock, "Opportunities, opportunites/Big opportunities" may be brewing in other fixed income sectors. I am "shopping around", and I would not blame you if you "Followed without a sound.". Pipeline master limited partnerships ("mlp's") are on sale, and none more than Kinder Morgan (KMP), the nation's largest and most secure mlp. Seeing KMP trading so far below its 50 and 200 day moving averages and yielding nearly 6.5% makes it nearly irresistible. Also, having Realty Income Corp. (O), a leading triple net lease commercial real estate investment trust, trading so low is equally appealing. I am partial to its investment grade preferred stock, OpF, which is now trading below its call price (below $25) and yielding 6.7% which it pays on a monthly basis. Wow, talk about hitting my sweet spot!
With all of the turmoil in the bond and stock markets, one thing is clear to "Everybody here." The bond market (the 10 and 30Year in particular) is "outta control." If the Federal Reserve wants to rein it in, it better "Get its back off tha' wall." Recall that QE3 was instituted to suppress long term (10 to 30 year) rates. At the time QE3 was instituted in 2012, the 30Year rate was 2.9% and the 10Year rate was 1.8%. A 30 year mortgage was at 3.6 %. These rates stabilized and even fell over the next several months. But with tapering on the horizon, they now stand at 3.86 and 2.84 on the bonds respectively, and 30 year mortgages are at 4.5%. QE3 is proving itself to have been a sugar high for the stock market, a quickly bursting bubble machine for fixed income assets, particularly risky debt (check the charts for JNK and HYG), and a mortgage rate teaser; but little else. Ironic for sure; a mistake perhaps; a Misdemeanor maybe.
These past several days in the stock market have been difficult to watch, "As Tears (and profits) Go By." Yet, I believe that I will receive "Satisfaction" once the rate on the 10Year stabilizes enough to "Gimme Shelter." If that does not happen soon however, my loss limits will be reached, and my profits for the year will shrink in a "Jumpin' Jack Flash."
Saturday, August 10, 2013
August 10, 2013 Promises, Promises
Risk/Reward Vol. 181
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"How can you leave me standing/Alone in a world so cold?
This is what is sounds like/When doves cry."---lyrics from "When Doves Cry" by Prince
"Just wishin' and hopin'and thinkin' and prayin'
Plannin' and dreamin'/His kiss is the start."---lyrics from "Wishing and Hoping" sung by Dusty Springfield
What do you get when you fall in love?
You only get lies and pain and sorrow
So for at least until tomorrow
I'll never fall in love again."---lyrics from "I'll Never Fall In Love Again" by Burt Bacharach
As reported here and elsewhere (See, e.g. Vol.175 www.riskrewardblog.blogspot.com ), the Federal Reserve has sent mixed signals on the timing of any QE3 tapering: hawks advocating that it begin in September; doves not wanting it to begin for several months. As of late, the hawks have held sway. On Wednesday, no longer wishing to be "left standing/Alone in a world so cold", two dovish Fed officials, Sandra Pianalto and Charles Evans, independently acknowledged that the recent improvement in employment numbers may justify tapering sooner rather than later. So "what does it sound like/When doves cry" uncle? It's deafeningly quiet. The 10Year Treasury Bond didn't move at all on the news. Its yield has held steady at 2.6% or so for several days, possibly signalling that the market already has priced-in tapering commencing this fall. If tapering were already priced-in, it would be very good news for fixed income investors such as yours truly. It would mean a period of price/yield stability not only for the 10Year but for other income producers such as real estate investment trusts, preferred stocks and business development companies, all of which lose value as the 10Year yield increases. Stability is all I need.
And speaking of good news, as part of its second quarter reporting, ETP, the large oil and natural gas storage/pipeline company, announced the completion of the much anticipated corporate restructuring occasioned by its acquistion of Sunoco Logisitics. This restructuring will result in increased dividends in the next two quarters. Unitholders won't "Just be wishin' and hopin' and thinkin' and prayin'/Plannin' and dreamin'" about unlocking the promised synergies from the Sunoco deal. Moreover, it is anticipated that this "kiss is just the start" of several additional quarterly dividend increases as more good news was reported this week. ETP announced that it received a license (only the third one issued by the U.S. government) to export liquid natural gas, an enterprise which should prove to be a highly profitable.
The quarterly report from another of my oil/gas investments was not so encouraging. As loyal readers know, I have had a love affair with Linn Energy (LINE and LNCO) for several years. On Thursday, Linn reported that it missed its numbers for the quarter, will miss them for the remainder of the year and still has not completed its acquisition of Berry Petroleum, a purchase that is supposed to be significantly accretive. The market punished Linn such that my loss limits were triggered. "What do you get when you fall in love with a stock?/You only get lies and pain and sorrow/So for at least until tomorrow/I'll never fall in love with an investment idea again." But wait, have you heard about....
The Linn saga is a lesson re-learned. Linn may recover and may even prosper (especially if the oil rich Berry deal happens), but without me as a shareholder. As Burt Bacharach knows only too well, even rigorous due diligence cannot overcome the combination of an attack by short sellers and empty "Promises, Promises" made by a less than candid management team.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"How can you leave me standing/Alone in a world so cold?
This is what is sounds like/When doves cry."---lyrics from "When Doves Cry" by Prince
"Just wishin' and hopin'and thinkin' and prayin'
Plannin' and dreamin'/His kiss is the start."---lyrics from "Wishing and Hoping" sung by Dusty Springfield
What do you get when you fall in love?
You only get lies and pain and sorrow
So for at least until tomorrow
I'll never fall in love again."---lyrics from "I'll Never Fall In Love Again" by Burt Bacharach
As reported here and elsewhere (See, e.g. Vol.175 www.riskrewardblog.blogspot.com ), the Federal Reserve has sent mixed signals on the timing of any QE3 tapering: hawks advocating that it begin in September; doves not wanting it to begin for several months. As of late, the hawks have held sway. On Wednesday, no longer wishing to be "left standing/Alone in a world so cold", two dovish Fed officials, Sandra Pianalto and Charles Evans, independently acknowledged that the recent improvement in employment numbers may justify tapering sooner rather than later. So "what does it sound like/When doves cry" uncle? It's deafeningly quiet. The 10Year Treasury Bond didn't move at all on the news. Its yield has held steady at 2.6% or so for several days, possibly signalling that the market already has priced-in tapering commencing this fall. If tapering were already priced-in, it would be very good news for fixed income investors such as yours truly. It would mean a period of price/yield stability not only for the 10Year but for other income producers such as real estate investment trusts, preferred stocks and business development companies, all of which lose value as the 10Year yield increases. Stability is all I need.
And speaking of good news, as part of its second quarter reporting, ETP, the large oil and natural gas storage/pipeline company, announced the completion of the much anticipated corporate restructuring occasioned by its acquistion of Sunoco Logisitics. This restructuring will result in increased dividends in the next two quarters. Unitholders won't "Just be wishin' and hopin' and thinkin' and prayin'/Plannin' and dreamin'" about unlocking the promised synergies from the Sunoco deal. Moreover, it is anticipated that this "kiss is just the start" of several additional quarterly dividend increases as more good news was reported this week. ETP announced that it received a license (only the third one issued by the U.S. government) to export liquid natural gas, an enterprise which should prove to be a highly profitable.
The quarterly report from another of my oil/gas investments was not so encouraging. As loyal readers know, I have had a love affair with Linn Energy (LINE and LNCO) for several years. On Thursday, Linn reported that it missed its numbers for the quarter, will miss them for the remainder of the year and still has not completed its acquisition of Berry Petroleum, a purchase that is supposed to be significantly accretive. The market punished Linn such that my loss limits were triggered. "What do you get when you fall in love with a stock?/You only get lies and pain and sorrow/So for at least until tomorrow/I'll never fall in love with an investment idea again." But wait, have you heard about....
The Linn saga is a lesson re-learned. Linn may recover and may even prosper (especially if the oil rich Berry deal happens), but without me as a shareholder. As Burt Bacharach knows only too well, even rigorous due diligence cannot overcome the combination of an attack by short sellers and empty "Promises, Promises" made by a less than candid management team.
Saturday, August 3, 2013
August 3, 2013 Different Drum
Risk/Reward Vol. 180
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"You and I travel to the beat of a different drum
Oh, can't you tell by the way I run
Every time you make eyes at me."---lyrics from "Different Drum" sung by the Stone Ponies
"I'll be there to comfort you
Build my world of dreams around you
I'm so glad that I found you."---lyrics from "I'll Be There" sung by the Jackson Five
"Sunshine came softly through my window today
Could have tripped out easy/But I've a-changed my way."---lyrics from "Sunshine Superman" by Donovan
As discussed in Volume 177 (www.riskrewardblog.blogspot.com), the correlation between the bond and stock markets began to break apart in early July. As demonstrated this week, the two clearly now are "traveling to the beat of a different drum." "You can tell by the way each runs" in response to economic data. No longer is good news bad for both. (See. Vol. 167). A string of good reports this week (excellent ADP numbers, a spike in the purchasing manager index, good news from China) caused the risk-on stock market to reach new highs and caused the risk-off bond market to plummet. Fundamentals have returned. The stock market has ceased rising or falling "every time Ben Bernanke makes eyes at it."
Indeed, in an obvious attempt to "be there to comfort" a badly bruised bond market, the Federal Reserve's press release following its meeting on Wednesday, purposefully omitted any reference to tapering and left open the possibility that it could continue QE3 (its monthly purchase of $85billion of Treasury securities and mortgages) indefinitely. Nevertheless, signaling that it, too, no longer "builds its world of dreams around" the Fed's every word, the bond market continued to sell off the flagship 10Year Treasury Bond ("10Year") which closed Thursday at a yield of 2.72%, its highest in over two years. (Remember, higher bond yields mean lower bond prices.)
The above notwithstanding, the investment community apparently has "a-changed its way" and is no longer "trippin out easy" by indiscriminately selling all fixed income assets in lock step with the 10Year. Discernment, like fundamental analysis, has returned. Indeed, "Sunshine came softly through the window" of mortgage real estate investment trusts this week, as better than expected results were reported by several mREIT's. MTGE, to which I alluded in Vol.178, has gained 8.8% since I purchased it on July 18th while still paying a 16% dividend. Preferred stock has also held its own during this week's bond sell-off. Here is my take on why. PGX, an exchange traded fund comprised of preferred stock, pays a 6.5% dividend which is about average for the sector and which represents a 390 basis point spread from the current (as of Friday's close) 2.6% yield on the 10Year Treasury bond. From 1997 to 2007 (before the 2008 financial crisis, which ever since has skewed all fundamentals) the yield spread between the average preferred stock and the 10Year remained at an almost constant 227 basis points. This leads me to believe that with the return of fundamental analysis, even if the 10Year yield continues to rise, I should not experience much, if any, loss of principle on PGX while continuing to enjoy its excellent yield.
My municipal bond portfolio has not fared as well. None has approached my sell limit, but they remain in the loss column. I would have done better to wait until more stability returns to that world. Patience is a virtue I need to acquire. Like the Jackson 5, once I lock on an idea, I "Gotta Be There."
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"You and I travel to the beat of a different drum
Oh, can't you tell by the way I run
Every time you make eyes at me."---lyrics from "Different Drum" sung by the Stone Ponies
"I'll be there to comfort you
Build my world of dreams around you
I'm so glad that I found you."---lyrics from "I'll Be There" sung by the Jackson Five
"Sunshine came softly through my window today
Could have tripped out easy/But I've a-changed my way."---lyrics from "Sunshine Superman" by Donovan
As discussed in Volume 177 (www.riskrewardblog.blogspot.com), the correlation between the bond and stock markets began to break apart in early July. As demonstrated this week, the two clearly now are "traveling to the beat of a different drum." "You can tell by the way each runs" in response to economic data. No longer is good news bad for both. (See. Vol. 167). A string of good reports this week (excellent ADP numbers, a spike in the purchasing manager index, good news from China) caused the risk-on stock market to reach new highs and caused the risk-off bond market to plummet. Fundamentals have returned. The stock market has ceased rising or falling "every time Ben Bernanke makes eyes at it."
Indeed, in an obvious attempt to "be there to comfort" a badly bruised bond market, the Federal Reserve's press release following its meeting on Wednesday, purposefully omitted any reference to tapering and left open the possibility that it could continue QE3 (its monthly purchase of $85billion of Treasury securities and mortgages) indefinitely. Nevertheless, signaling that it, too, no longer "builds its world of dreams around" the Fed's every word, the bond market continued to sell off the flagship 10Year Treasury Bond ("10Year") which closed Thursday at a yield of 2.72%, its highest in over two years. (Remember, higher bond yields mean lower bond prices.)
The above notwithstanding, the investment community apparently has "a-changed its way" and is no longer "trippin out easy" by indiscriminately selling all fixed income assets in lock step with the 10Year. Discernment, like fundamental analysis, has returned. Indeed, "Sunshine came softly through the window" of mortgage real estate investment trusts this week, as better than expected results were reported by several mREIT's. MTGE, to which I alluded in Vol.178, has gained 8.8% since I purchased it on July 18th while still paying a 16% dividend. Preferred stock has also held its own during this week's bond sell-off. Here is my take on why. PGX, an exchange traded fund comprised of preferred stock, pays a 6.5% dividend which is about average for the sector and which represents a 390 basis point spread from the current (as of Friday's close) 2.6% yield on the 10Year Treasury bond. From 1997 to 2007 (before the 2008 financial crisis, which ever since has skewed all fundamentals) the yield spread between the average preferred stock and the 10Year remained at an almost constant 227 basis points. This leads me to believe that with the return of fundamental analysis, even if the 10Year yield continues to rise, I should not experience much, if any, loss of principle on PGX while continuing to enjoy its excellent yield.
My municipal bond portfolio has not fared as well. None has approached my sell limit, but they remain in the loss column. I would have done better to wait until more stability returns to that world. Patience is a virtue I need to acquire. Like the Jackson 5, once I lock on an idea, I "Gotta Be There."
Saturday, July 27, 2013
July 27, 2013 Summer(s)time
Risk/Reward Vol. 179
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"The Big 3 baby and the finest cars
We spend our days on the line
And our nights in the bar."---lyrics from "Detroit, Michigan" by Kid Rock
"So you gotta have a swan/Or you're out of luck
And besides you couldn't say/I saw a chicken leg ballet."---lyrics from "The Swan" by Fanny Brice (from "Funny Girl")
"Sometimes I wonder/What I'm gonna do
Cause there ain't no cure/For the summertime blues."---"Summertime Blues" sung by The Who
As the Dow Jones Industrial Average continued to reach record heights this week, my portfolio fell 0.5%. One reason was expected; the other was a "black swan."
As loyal readers know, a few weeks ago I started buying municipal bond funds despite (actually because of) the precipitous drop in prices (and concomitant increase in yields) in the sector due in part to Detroit's recent bankruptcy filing. Some may say that I am way out "on the line" and would have done better to spend our money on the stock of the "Big 3" or one of their "finest cars" or even in "a bar." I disagree. Municipal bond funds are trading at historic lows despite the uptick in the fiscal health of most state and local governments. But, so long as Detroit is prominently discussed in the news, the downward trend will continue. Thankfully, the fall did slow considerably this week. Risky as it may seem, a taxable equivalent yield of 10+% on closed end funds that hold mostly AAA or AA bonds is just too tantalizing for me to resist.
But what sent me for a loop this week was not Detroit: it was a "Black Swan". A "black swan" is a random, surprise event that has a major impact. It was first applied to market behavior by statistician/author/trader Nassim Nicholas Taleb in his book "Fooled by Randomness" which I recently completed. I have found this read extremely valuable in giving context to my own anxiety and in coming to grips with my risk tolerance: especially my feeling "chicken" when I am "out of luck."
This week's Black Swan was the unexpected emergence of Larry Summers as the leading candidate to replace Ben Bernanke as Federal Reserve chair come year end. My "Summer(s)time Blues" manifested in an unanticipated drop in the 10Year Treasury Bond (and the concomitant spike in its yield from 2.49% last Friday to 2.61% Thursday). In turn, this caused the value of my recently reacquired portfolio of preferred stock, mortgage REIT's and business development companies to fall. "What am I gonna do?" All of this was because Summers, unlike Janet Yellen, the other leading candidate, is on record as disliking QE3 and would undoubtedly end it sooner rather than later. There was a "cure" however. An open letter from leading Democrats in support of Yellen was sent to the White House on Friday, an act which bolstered bond prices and caused my portfolio to recapture much of what it had lost. "Sometimes I wonder" if the White House is completely clueless. There is no more critical appointment than Bernanke's replacement, and that choice should not be driven by rumor or open-letter lobbying.
As proven once again this week, my approach to the market is too much like "Tommy" playing pinball: "Plays by intuition/Plays by sense of smell." Until Friday, randomness rendered my intuition faulty, and my sense of smell stunk.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"The Big 3 baby and the finest cars
We spend our days on the line
And our nights in the bar."---lyrics from "Detroit, Michigan" by Kid Rock
"So you gotta have a swan/Or you're out of luck
And besides you couldn't say/I saw a chicken leg ballet."---lyrics from "The Swan" by Fanny Brice (from "Funny Girl")
"Sometimes I wonder/What I'm gonna do
Cause there ain't no cure/For the summertime blues."---"Summertime Blues" sung by The Who
As the Dow Jones Industrial Average continued to reach record heights this week, my portfolio fell 0.5%. One reason was expected; the other was a "black swan."
As loyal readers know, a few weeks ago I started buying municipal bond funds despite (actually because of) the precipitous drop in prices (and concomitant increase in yields) in the sector due in part to Detroit's recent bankruptcy filing. Some may say that I am way out "on the line" and would have done better to spend our money on the stock of the "Big 3" or one of their "finest cars" or even in "a bar." I disagree. Municipal bond funds are trading at historic lows despite the uptick in the fiscal health of most state and local governments. But, so long as Detroit is prominently discussed in the news, the downward trend will continue. Thankfully, the fall did slow considerably this week. Risky as it may seem, a taxable equivalent yield of 10+% on closed end funds that hold mostly AAA or AA bonds is just too tantalizing for me to resist.
But what sent me for a loop this week was not Detroit: it was a "Black Swan". A "black swan" is a random, surprise event that has a major impact. It was first applied to market behavior by statistician/author/trader Nassim Nicholas Taleb in his book "Fooled by Randomness" which I recently completed. I have found this read extremely valuable in giving context to my own anxiety and in coming to grips with my risk tolerance: especially my feeling "chicken" when I am "out of luck."
This week's Black Swan was the unexpected emergence of Larry Summers as the leading candidate to replace Ben Bernanke as Federal Reserve chair come year end. My "Summer(s)time Blues" manifested in an unanticipated drop in the 10Year Treasury Bond (and the concomitant spike in its yield from 2.49% last Friday to 2.61% Thursday). In turn, this caused the value of my recently reacquired portfolio of preferred stock, mortgage REIT's and business development companies to fall. "What am I gonna do?" All of this was because Summers, unlike Janet Yellen, the other leading candidate, is on record as disliking QE3 and would undoubtedly end it sooner rather than later. There was a "cure" however. An open letter from leading Democrats in support of Yellen was sent to the White House on Friday, an act which bolstered bond prices and caused my portfolio to recapture much of what it had lost. "Sometimes I wonder" if the White House is completely clueless. There is no more critical appointment than Bernanke's replacement, and that choice should not be driven by rumor or open-letter lobbying.
As proven once again this week, my approach to the market is too much like "Tommy" playing pinball: "Plays by intuition/Plays by sense of smell." Until Friday, randomness rendered my intuition faulty, and my sense of smell stunk.
Saturday, July 20, 2013
July 20, 2013 Sign On The Wall
Risk/Reward Vol. 178
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"I loved ya' baby/From the start
Loved ya' baby/With all of my heart
Lord, you put a spell on me/I just want to testify."---lyrics from "Testify" by Grand Funk Railroad
"What's it all about, Alfie?/Is it just for the moment we live?
What's it all about/When you sort it out, Alfie?
Are we meant to take more than we give?"---lyrics from "Alfie" by Burt Bacharach
"There's a sign on the wall/But she wants to be sure
Cause you know/Sometimes words have two meanings
In a tree by a brook/There's a songbird who sings
Sometimes all of our thoughts are misgiven."---lyrics from "Stairway to Heavan" by Led Zepplin
The stock indices reached new highs on Thursday, but Wednesday was the big day for yield hungry investors like me. As reported last week (Vol. 177 www.riskrewardblog.blogspot.com ), Federal Reserve Chair Benjamin Bernanke was scheduled to "Testify" before Congress on Wednesday. At 8:30 Eastern, an hour before the markets opened, he released his prepared remarks. And "from the start", the bond market "Loved it, baby/With all of its heart." In the remarks and the subsequent testimony, Bernanke confirmed what other Fed members have been saying recently: that any tapering of quantitative easing (QE3) would be tied to how well the economy is doing, and that the economy is not doing well enough now or in the foreseeable future to warrant it. In so stating, Bernanke seemingly abandoned his comments of June 19th which the bond market had interpreted as putting QE3 tapering on a set timetable beginning no later than September, 2013 with a complete cessation by the summer of 2014; comments which, at the time, sent bonds and bond related securities into a nose dive. His remarks "put a spell" on the all important 10 Year Treasury Bond. Its yield quickly fell below 2.5% with a correspondent spike in the bond's price. (Remember, a drop in bond yields means a rise in bond prices.)
Also on Wednesday, CNBC televised its annual "Delivering Alpha" conference. (In the financial world, "alpha" means performance above a benchmark. It is short hand for profitable, risk adjusted investing, and "when you sort it out/ Alpha is what it's all about" ; it means you "take more than you give.") Tips from such luminaries as Leon Cooperman and Steve Kuhn who were featured at the conference are "moments for which I live." Hailed as clairvoyant for picking ten out of ten double digit winners at last year's conference, Cooperman again listed 10 stocks that he believes will out perform over the next twelve months. And five of them fit within my yield-hungry wheelhouse: two real estate investment trusts (REIT's), two business development companies and a master limited partnership. Universally recognized as a leading bond/fixed income fund manager, Kuhn recommended a re-look at mortgage REIT's which he said had been oversold. When asked to pick the one sector of fixed income which he believed would deliver the greatest alpha over the coming months, he stated unequivocally municipal bonds---about which I wrote last week.
Although I started my re-entry last week, I tiptoed "Cause you know/Sometimes words have two meanings." And the words from the Fed over the past few weeks about the future of QE3 were ambiguous if not contradictory. But Wednesday's pronouncement by Uncle Ben was "a sign on the wall": "a song bird singing" if you will, about which I have "no misgivings." As a consequence, this week I bought with conviction and am now 60% invested. Hopefully, I am again on a "Stairway to Heaven." I repurchased much of what I had sold in late May plus some municipal bond funds, the downdraft from Detroit's bankruptcy having provided an excellent buying opportunity. I am on track for annualized, taxable equivalent dividends of 8+%. All I want is stability but will gladly accept some capital appreciation.
It is my considered opinion that Bernanke's statements will impact the bond/fixed income world in which I dwell like a Led Zepplin concert: taking us from a market that has been "Dazed and Confused" to one that promises a "Whole Lotta Love."
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"I loved ya' baby/From the start
Loved ya' baby/With all of my heart
Lord, you put a spell on me/I just want to testify."---lyrics from "Testify" by Grand Funk Railroad
"What's it all about, Alfie?/Is it just for the moment we live?
What's it all about/When you sort it out, Alfie?
Are we meant to take more than we give?"---lyrics from "Alfie" by Burt Bacharach
"There's a sign on the wall/But she wants to be sure
Cause you know/Sometimes words have two meanings
In a tree by a brook/There's a songbird who sings
Sometimes all of our thoughts are misgiven."---lyrics from "Stairway to Heavan" by Led Zepplin
The stock indices reached new highs on Thursday, but Wednesday was the big day for yield hungry investors like me. As reported last week (Vol. 177 www.riskrewardblog.blogspot.com ), Federal Reserve Chair Benjamin Bernanke was scheduled to "Testify" before Congress on Wednesday. At 8:30 Eastern, an hour before the markets opened, he released his prepared remarks. And "from the start", the bond market "Loved it, baby/With all of its heart." In the remarks and the subsequent testimony, Bernanke confirmed what other Fed members have been saying recently: that any tapering of quantitative easing (QE3) would be tied to how well the economy is doing, and that the economy is not doing well enough now or in the foreseeable future to warrant it. In so stating, Bernanke seemingly abandoned his comments of June 19th which the bond market had interpreted as putting QE3 tapering on a set timetable beginning no later than September, 2013 with a complete cessation by the summer of 2014; comments which, at the time, sent bonds and bond related securities into a nose dive. His remarks "put a spell" on the all important 10 Year Treasury Bond. Its yield quickly fell below 2.5% with a correspondent spike in the bond's price. (Remember, a drop in bond yields means a rise in bond prices.)
Also on Wednesday, CNBC televised its annual "Delivering Alpha" conference. (In the financial world, "alpha" means performance above a benchmark. It is short hand for profitable, risk adjusted investing, and "when you sort it out/ Alpha is what it's all about" ; it means you "take more than you give.") Tips from such luminaries as Leon Cooperman and Steve Kuhn who were featured at the conference are "moments for which I live." Hailed as clairvoyant for picking ten out of ten double digit winners at last year's conference, Cooperman again listed 10 stocks that he believes will out perform over the next twelve months. And five of them fit within my yield-hungry wheelhouse: two real estate investment trusts (REIT's), two business development companies and a master limited partnership. Universally recognized as a leading bond/fixed income fund manager, Kuhn recommended a re-look at mortgage REIT's which he said had been oversold. When asked to pick the one sector of fixed income which he believed would deliver the greatest alpha over the coming months, he stated unequivocally municipal bonds---about which I wrote last week.
Although I started my re-entry last week, I tiptoed "Cause you know/Sometimes words have two meanings." And the words from the Fed over the past few weeks about the future of QE3 were ambiguous if not contradictory. But Wednesday's pronouncement by Uncle Ben was "a sign on the wall": "a song bird singing" if you will, about which I have "no misgivings." As a consequence, this week I bought with conviction and am now 60% invested. Hopefully, I am again on a "Stairway to Heaven." I repurchased much of what I had sold in late May plus some municipal bond funds, the downdraft from Detroit's bankruptcy having provided an excellent buying opportunity. I am on track for annualized, taxable equivalent dividends of 8+%. All I want is stability but will gladly accept some capital appreciation.
It is my considered opinion that Bernanke's statements will impact the bond/fixed income world in which I dwell like a Led Zepplin concert: taking us from a market that has been "Dazed and Confused" to one that promises a "Whole Lotta Love."
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