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."

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."

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

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."