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"
Saturday, September 28, 2013
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.
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