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."
Saturday, August 31, 2013
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."
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