Risk/Reward Vol. 214
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"You gotta go/Go where you wanna go
And do/Do what you wanna do."---lyrics from "Go Where You Wanna Go" sung by The Mamas and The Papas
"Return to sender/Address unknown
No such number/No such zone."---lyrics from "Return to Sender" sung by Elvis Presley
"I will follow him/Follow him
Wherever he may go
For nothing can keep me away
He is my destiny."---lyrics from "I Will Follow Him" sung by Peggy March
If you subscribe to any financial publication (e.g. IBD, the Wall Street Journal, the Financial Times), you have been inundated this week by full page ads from BlackRock touting its "go anywhere" funds. With $4trillion (yes, that's TRILLION) under management, BlackRock is the largest asset manager in the world. Frustrated by the paltry returns afforded its clients by traditional fixed income instruments such as Treasury securities and investment grade corporate bonds, BlackRock is suggesting that retirement age income seekers (grand-Mamas and grand-Papas, if you will) look beyond traditional income vehicles and invest in funds that employ an active and dynamic approach to finding yield (e.g BCIIX). The guidelines for these funds permit fund managers to buy and sell preferred stock, real estate investment trusts, master limited partnerships, senior loans, business development companies, puts, calls, derivatives and a host of other non-traditional securities. Sound familiar? Like me, these managers "go where they wanna go/And do what they wanna do" in search of today's most elusive beast---a decent yield. I find comfort in knowing that I am not alone in this quest.
As mentioned in last week's edition (Vol. 213 www.riskrewardblog.blogspot.com ), biotech stocks have been pummeled ever since Congressman Henry Waxman wrote to high flyer Gilead Sciences two weeks ago asking it to justify the price of its Hep C drug. Unlike Elvis's girlfriend, Gilead could not simply mark the envelope "Return to sender/Address unknown/No such number/No such zone." Indeed, this letter has caused a stampede from these stocks because biotech like all pharmaceuticals is heavily reliant upon government reimbursement, a reliance that will only increase once Obamacare is fully implemented. IBB, the biotech exchange traded fund, is down 12% since March 18th. I am exposed to the sector through HQH, a closed end fund, which is down 10% for the same time period. However, but for the question raised by Waxman (which is a big issue), the future looks bright for these companies (Gilead, BiogenIdec, Celgene) each of whom has a robust pipeline of drugs awaiting final FDA approval. Is it time to trim or to add? Hmmm?
Conventional wisdom is that if and when the Federal Reserve raises the Fed Funds rate (the overnight interest rate charged by and between banks with funds on deposit with the Federal Reserve), the impact will ripple up the entire interest rate curve causing the yield on the 10 Year Treasury to rise (and its price to fall). Pundits opine that the 10Year "will follow the Fed Funds rate/Wherever it may go/Nothing can keep it away/It is its destiny." As loyal readers know, a rise in the yield on the 10 Year Treasury would not be good for those currently invested in securities priced in relation (or spread) thereto such as preferred stock, real estate investment trusts, etc.---in other words the types of investments I like. In anticipation of a rise in the Fed Funds rate, I have charted the relationship between Fed Funds and the 10 Year and frankly do not see an historic correlation. (I use the graphing function available on FRED, the Federal Reserve Bank of St. Louis' website.) This fact is borne out by how steady the rate on the 10Year has been since Janet Yellen's March 19th press conference where the possibility of raising the Fed Funds rate in 2015 first surfaced. My charting reveals that the 10Year is more correlated to the rate of inflation. If I am right, I will not need to exit these favorites until the rate of inflation increases (or some other event negatively impacts the 10 Year), irrespective of what the Fed does to the Fed Funds rate.
With the indices stuck in a trading range (DJIA down 1.5% and the S&P 500 up a mere 0.5% year to date) and returns from bonds "once abundant/now elusive" (a quote from the opening frame of BlackRocks's homepage), investors no longer enjoy "sweet dreams 'til the sunbeams find you/Sweet dreams that leave all the worries behind you." Instead they are forced to be nimble risk takers or to hire managers like BlackRock to be so on their behalf. But rest assured, through it all, I will be there, struggling beside you. In that regard, "in your dreams whatever they may be/Dream a little dream of me."
Saturday, March 29, 2014
Saturday, March 22, 2014
March 22, 2014 Limbo
Risk/Reward Vol. 213
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"I didn't mean to hurt you
I'm sorry that I made you cry"---lyrics from "Jealous Guy" by John Lennon
"It's hard to understand
But the touch of your hand
Can start me crying."---lyrics from "Crying" sung by Roy Orbison
"Jack be limbo/Jack be quick
Jack go under limbo stick
Limbo lower now
How low can you go?"---lyrics from "Limbo Rock" sung by Chubby Checker
On Wednesday, Federal Reserve Chair Janet Yellen held her first FOMC press conference. She told reporters that the current Fed funds short term interest rate of 0-0.25% (which the Fed controls) could be raised as early as mid 2015. She also discussed the interest rate projections of individual FOMC members, the majority of whom now see short term rates reaching 1% or higher by year end 2015 and as high as 2.25% come year end 2016. Just last December, the majority projected rates to be 0.75% or lower come year end 2015 and no greater than 1.75% at the end of 2016. This change in projections took the market by surprise. She "may not have meant to hurt me", but Ms. Yellen's comments "made me cry" as the rate on the 10Year Treasury Bond (which trades in relation to anticipated short term rates) spiked to 2.8% and appeared to be heading higher. This, in turn caused the price of my interest rate sensitive stocks to drop. (Again, a rise in interest rates means a drop in prices.) Fortunately for me, by week's end, the yield on the 10Year stopped rising and actually receded to 2.75%.
Although "it's hard to understand" how the market will react to any given stimulus (note the market move on Monday despite the annexation vote in Crimea), I am certain that a rise in interest rates "will start me crying." Such a rise can come from a mere "touch of Ms. Yellen's hand" To avoid a tantrum, I must remain disciplined and exit rate-sensitive stocks (preferred stocks, business development companies, mortgage real estate development companies, leveraged closed end funds, etc.) if and when yields start their move upward in earnest. Timing is everything when it comes to these. I recall clearly how rate sensitive securities plummeted last summer in response to Ben Bernanke's suggestion that QE3 tapering could begin as early as July, 2013. (It did not begin until January, 2014). ( See vols. 171 and 172 www.riskrewardblog.blogspot.com ) Had I not sold at that time, I would have lost all of my year to date gains and gone into the red in a matter of less than 10 days.
And speaking of crying, "how low can Kinder Morgan (KMP,KMR,KMI) go?" Kinder has been in "Limbo" since it was trashed in a Barron's article in February. Despite giving assurance early in the week that it will raise its already impressive dividend (7.5%), Kinder fell even further "under the limbo stick." On Thursday, however, the tide may have turned leaving this "Jack" to wonder whether it is time to "be quick" and to add more Kinder to his holdings despite having trimmed some just last week. Kinder is the largest oil, natural gas and gasoline pipeline company in the U.S. and owns a host of ancillary, profitable business. I do not see the demand for these products lessening any time soon. Once the taint of the Barron' article subsides (and I am confident that it will), Kinder should garner a price worthy of its large and sustainable cash flow.
With the rate on the 10Year stabilizing, I enjoyed a comeback on Friday; this despite a massive drop in biotech stocks (which I hold in the closed end fund, HQH). My comeback was not as robust, however, as the market's performance for the week with the Dow Jones Industrial Average gaining 237 points. In truth, the Fed's more hawkish approach to future interest rates was a twist that I did not anticipate. Had the 10Year rate continued to rise, I would have sold positions faster than Chubby Checker can pivot, leaving it to Ms. Yellen to croon:
"Come on let's twist again like we did last summer
Yea, let's twist again like we did last year
Do you remember when things were really hummin'
Yea, let's twist again, twistin' time is here"
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"I didn't mean to hurt you
I'm sorry that I made you cry"---lyrics from "Jealous Guy" by John Lennon
"It's hard to understand
But the touch of your hand
Can start me crying."---lyrics from "Crying" sung by Roy Orbison
"Jack be limbo/Jack be quick
Jack go under limbo stick
Limbo lower now
How low can you go?"---lyrics from "Limbo Rock" sung by Chubby Checker
On Wednesday, Federal Reserve Chair Janet Yellen held her first FOMC press conference. She told reporters that the current Fed funds short term interest rate of 0-0.25% (which the Fed controls) could be raised as early as mid 2015. She also discussed the interest rate projections of individual FOMC members, the majority of whom now see short term rates reaching 1% or higher by year end 2015 and as high as 2.25% come year end 2016. Just last December, the majority projected rates to be 0.75% or lower come year end 2015 and no greater than 1.75% at the end of 2016. This change in projections took the market by surprise. She "may not have meant to hurt me", but Ms. Yellen's comments "made me cry" as the rate on the 10Year Treasury Bond (which trades in relation to anticipated short term rates) spiked to 2.8% and appeared to be heading higher. This, in turn caused the price of my interest rate sensitive stocks to drop. (Again, a rise in interest rates means a drop in prices.) Fortunately for me, by week's end, the yield on the 10Year stopped rising and actually receded to 2.75%.
Although "it's hard to understand" how the market will react to any given stimulus (note the market move on Monday despite the annexation vote in Crimea), I am certain that a rise in interest rates "will start me crying." Such a rise can come from a mere "touch of Ms. Yellen's hand" To avoid a tantrum, I must remain disciplined and exit rate-sensitive stocks (preferred stocks, business development companies, mortgage real estate development companies, leveraged closed end funds, etc.) if and when yields start their move upward in earnest. Timing is everything when it comes to these. I recall clearly how rate sensitive securities plummeted last summer in response to Ben Bernanke's suggestion that QE3 tapering could begin as early as July, 2013. (It did not begin until January, 2014). ( See vols. 171 and 172 www.riskrewardblog.blogspot.com ) Had I not sold at that time, I would have lost all of my year to date gains and gone into the red in a matter of less than 10 days.
And speaking of crying, "how low can Kinder Morgan (KMP,KMR,KMI) go?" Kinder has been in "Limbo" since it was trashed in a Barron's article in February. Despite giving assurance early in the week that it will raise its already impressive dividend (7.5%), Kinder fell even further "under the limbo stick." On Thursday, however, the tide may have turned leaving this "Jack" to wonder whether it is time to "be quick" and to add more Kinder to his holdings despite having trimmed some just last week. Kinder is the largest oil, natural gas and gasoline pipeline company in the U.S. and owns a host of ancillary, profitable business. I do not see the demand for these products lessening any time soon. Once the taint of the Barron' article subsides (and I am confident that it will), Kinder should garner a price worthy of its large and sustainable cash flow.
With the rate on the 10Year stabilizing, I enjoyed a comeback on Friday; this despite a massive drop in biotech stocks (which I hold in the closed end fund, HQH). My comeback was not as robust, however, as the market's performance for the week with the Dow Jones Industrial Average gaining 237 points. In truth, the Fed's more hawkish approach to future interest rates was a twist that I did not anticipate. Had the 10Year rate continued to rise, I would have sold positions faster than Chubby Checker can pivot, leaving it to Ms. Yellen to croon:
"Come on let's twist again like we did last summer
Yea, let's twist again like we did last year
Do you remember when things were really hummin'
Yea, let's twist again, twistin' time is here"
Saturday, March 15, 2014
March 15, 2014 They'll Stone Ya
Risk/Reward Vol. 212
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"You'll always be my guardian angel
Always be my guiding light."---lyrics from "Guardian Angel/Guiding Light" sung by The Seekers
"How many times must the cannon ball fly/Before they are forever banned
How many times can a man turn his head/Pretending he just doesn't see
The answer my friend is blowin' in the wind/The answer is blowin' in the wind."---lyrics from "Blowin' In The Wind" sung by Bob Dylan
"Watch the smiths in the village of a thousand dreams told
Change the copper into gold."---lyrics from "Change Copper Into Gold" sung by Seals & Croft.
Unemployment has dropped to just above 6.5%. In previous communiques, the Federal Reserve has stated that 6.5% is the benchmark at which it would consider raising interest rates. The investing world is left to wonder if the Fed will re-affirm or alter this "forward guidance" at its meeting scheduled for March 18-19, 2014. Recent comments from individual Fed officials, including Vice Chair-nominee Stanley Fischer, have led many to speculate that the Fed will abandon the 6.5% target for some other, less quantitative benchmark. Forward guidance is a tool employed by central bankers. It consists of communiques intended to "guide" market expectations as to future actions particularly as they impact interest rates. Central bankers believe that providing a "guiding light" will reduce interest rate volatility. In a paper issued this week by the Bank for International Settlements (the central bank for central banks), two BIS economists postulate that forward guidance may not be a "guardian angel." They argue that investors have come to believe that they will be given ample warning of any significant change in policy, and as a consequence investors take on outsized risk. This in turn causes asset bubbles. ( Here is a link to their paper www.bis.org/publ/qtrpdf/r_qt1403f.htm) The economists cite the "taper tantrum" of 2013 discussed in last week's edition ( Vol. 211 www.riskrewardblog.blogspot.com ) as an example of how forward guidance can foment rather than suppress volatility. "Guiding light" or not, as an income investor laser focused on interest rates, I will be watching very closely the communique that the Fed issues next week.
Throughout the week, I corresponded with one subscriber about the fate of Linn Energy (LINE/LINCO) which dropped precipitously after a bashing by Jim Cramer and an attack by short sellers. As loyal readers know, I never have to ask "How many times must a cannon ball fly/Before they are banned?" or "How many times can a man turn his head/Pretending he just doesn't see?" Once a stock drops 8% below its purchase price (and often times a higher threshold), it is gone. Two of my LINE positions hit that mark on Thursday, and I decided to sell all four. The Linn story remains fundamentally sound, and I have no doubt that some day I will own it again. As to when, "the answer is blowin' in the wind." I do not hate any given stock, nor do I love any. I simply will not ride a stock below my rule-based sell point . A corollary to that rule, however, is that if I see an opportunity to profit from a stock, I will buy it--- whether or not owning that stock caused me a loss in the past.
A corporate bond default in China raised concerns as to the health of that economy; concerns that wreaked havoc on copper and iron ore prices. (China is the largest importer of both.) Understandably, the entire mineral and mining sector fell except for gold which hit a 24 week high as investors world wide sought the perceived safety of that precious metal. The "Smiths (and Fong's and Patel's) in a thousand villages" are "changing from owning copper to owning gold." I do not own physical gold or any shares in a physical gold exchange traded fund (e.g. GLD). That said, I do own shares in GGN, a closed end fund holding positions in gold miners and to a lesser extent other natural resource companies. I bought GGN on two occasions in January, 2014 when I perceived that it was woefully underpriced. That hunch has rewarded me handsomely, as both positions are up over 11%. Moreover, GGN pays a double digit annual dividend on a monthly basis. Parenthetically, the flight to safety occasioned by uncertainty in China and the Ukraine has attracted investors to U.S government securities, most notably the benchmark 10Year Treasury Bond, off which most of my income securities are priced or spread. (See Vol. 209 www.riskrewardblog.blogspot.com ). The yield on the 10 Year fell to 2.64% at week's end which buoyed the price of many of my holdings. (N.B. Lower yields means higher prices.)
Market participants were rocked this week as the Dow Jones Industrial Average sank 387 points and now is down 3% year to date. The S&P500 also dropped into negative territory for the year. My income stocks held their own, but I too was rocked by the energy sector. As noted by that well known investment guru, Bob Dylan, some weeks, stocks will
"... stone ya when you're trying to be good
They'll stone ya just like they said they would
They'll stone ya when you're tryin' to go home
They'll stone ya when you're there all alone
But, I would not feel so all alone
Everybody must get stoned."
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"You'll always be my guardian angel
Always be my guiding light."---lyrics from "Guardian Angel/Guiding Light" sung by The Seekers
"How many times must the cannon ball fly/Before they are forever banned
How many times can a man turn his head/Pretending he just doesn't see
The answer my friend is blowin' in the wind/The answer is blowin' in the wind."---lyrics from "Blowin' In The Wind" sung by Bob Dylan
"Watch the smiths in the village of a thousand dreams told
Change the copper into gold."---lyrics from "Change Copper Into Gold" sung by Seals & Croft.
Unemployment has dropped to just above 6.5%. In previous communiques, the Federal Reserve has stated that 6.5% is the benchmark at which it would consider raising interest rates. The investing world is left to wonder if the Fed will re-affirm or alter this "forward guidance" at its meeting scheduled for March 18-19, 2014. Recent comments from individual Fed officials, including Vice Chair-nominee Stanley Fischer, have led many to speculate that the Fed will abandon the 6.5% target for some other, less quantitative benchmark. Forward guidance is a tool employed by central bankers. It consists of communiques intended to "guide" market expectations as to future actions particularly as they impact interest rates. Central bankers believe that providing a "guiding light" will reduce interest rate volatility. In a paper issued this week by the Bank for International Settlements (the central bank for central banks), two BIS economists postulate that forward guidance may not be a "guardian angel." They argue that investors have come to believe that they will be given ample warning of any significant change in policy, and as a consequence investors take on outsized risk. This in turn causes asset bubbles. ( Here is a link to their paper www.bis.org/publ/qtrpdf/r_qt1403f.htm) The economists cite the "taper tantrum" of 2013 discussed in last week's edition ( Vol. 211 www.riskrewardblog.blogspot.com ) as an example of how forward guidance can foment rather than suppress volatility. "Guiding light" or not, as an income investor laser focused on interest rates, I will be watching very closely the communique that the Fed issues next week.
Throughout the week, I corresponded with one subscriber about the fate of Linn Energy (LINE/LINCO) which dropped precipitously after a bashing by Jim Cramer and an attack by short sellers. As loyal readers know, I never have to ask "How many times must a cannon ball fly/Before they are banned?" or "How many times can a man turn his head/Pretending he just doesn't see?" Once a stock drops 8% below its purchase price (and often times a higher threshold), it is gone. Two of my LINE positions hit that mark on Thursday, and I decided to sell all four. The Linn story remains fundamentally sound, and I have no doubt that some day I will own it again. As to when, "the answer is blowin' in the wind." I do not hate any given stock, nor do I love any. I simply will not ride a stock below my rule-based sell point . A corollary to that rule, however, is that if I see an opportunity to profit from a stock, I will buy it--- whether or not owning that stock caused me a loss in the past.
A corporate bond default in China raised concerns as to the health of that economy; concerns that wreaked havoc on copper and iron ore prices. (China is the largest importer of both.) Understandably, the entire mineral and mining sector fell except for gold which hit a 24 week high as investors world wide sought the perceived safety of that precious metal. The "Smiths (and Fong's and Patel's) in a thousand villages" are "changing from owning copper to owning gold." I do not own physical gold or any shares in a physical gold exchange traded fund (e.g. GLD). That said, I do own shares in GGN, a closed end fund holding positions in gold miners and to a lesser extent other natural resource companies. I bought GGN on two occasions in January, 2014 when I perceived that it was woefully underpriced. That hunch has rewarded me handsomely, as both positions are up over 11%. Moreover, GGN pays a double digit annual dividend on a monthly basis. Parenthetically, the flight to safety occasioned by uncertainty in China and the Ukraine has attracted investors to U.S government securities, most notably the benchmark 10Year Treasury Bond, off which most of my income securities are priced or spread. (See Vol. 209 www.riskrewardblog.blogspot.com ). The yield on the 10 Year fell to 2.64% at week's end which buoyed the price of many of my holdings. (N.B. Lower yields means higher prices.)
Market participants were rocked this week as the Dow Jones Industrial Average sank 387 points and now is down 3% year to date. The S&P500 also dropped into negative territory for the year. My income stocks held their own, but I too was rocked by the energy sector. As noted by that well known investment guru, Bob Dylan, some weeks, stocks will
"... stone ya when you're trying to be good
They'll stone ya just like they said they would
They'll stone ya when you're tryin' to go home
They'll stone ya when you're there all alone
But, I would not feel so all alone
Everybody must get stoned."
Saturday, March 8, 2014
March 8, 2014 When I'm 64
Risk/Reward Vol. 211
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Now give me money/That's what I want
That's what I want, yeah/That's what I want."---lyrics from "Money" sung by The Beatles
"When I think about the good love you gave me/I cry like a baby
Livin' without you is drivin' me crazy/I cry like a baby."---lyrics from "Cry Like a Baby" sung by The Boxtops
"I'm just wild about smorgasbord/I got a cravin' for smorgasbord
A little kiss here/A little kiss there
That's smorgasbord."---lyrics from "Smorgasbord" sung by Elvis Presley in the movie "Spinout"
http://www.youtube.com/watch?v=jGLjmHhUGzE (check it out)
As we do periodically, Barb and I sat with one of our investment professionals this week at which time we re-iterated our investment objective. Long ago we came to understand that "give me money/That's what I want/That's what I want,yeah/That's what I want" is not a meaningful goal. As we have for the past several years (See Vol. 1 www.riskrewardblog.blogspot.com ) we stated that, given our age, stage and circumstance, we seek a pre-tax annual return of 6-7% with minimal risk. No matter your age, stage or circumstance, it is important that you, too, formulate an objective in concrete terms. Otherwise, you run the risk of being whipsawed and hoodwinked by meaningless phrases such as "beating a benchmark." Who cares if your financial adviser beats a benchmark if the benchmark loses 37% as the S&P500 did in 2008. In this regard, note that although S&P500 returned over 32% in 2013, it has averaged barely 7% annually over the past 10 years with dividends comprising more than 2% of that performance.
The portfolio that I personally invest has enjoyed success since last fall when I perceived (and predicted, see Vol 186 www.riskrewardblog.blogspot.com ) that the yield on the benchmark 10 Year Treasury Bond would not exceed 3% any time soon. Indeed, in just the past two months, I have achieved well over half of our above-stated annual objective. That said, several recent developments lead me to believe that income securities (e.g. real estate investment trusts, preferred stock funds, senior loan funds, leveraged closed end funds, business development companies, etc) which comprise the majority of this portfolio may have peaked in price. First, the surprisingly good job numbers announced on Friday caused the yield on the ever important 10 Year Treasury Bond to jump to 2.8%. In turn, the price of most income securities dropped significantly. (Remember, the prices of bonds and income securites fall when interest rates increase.) Second, two Federal Reserve members commented this week that both the equity and debt markets appear "frothy" (given to bubbles). Indicative of this is 1) the price of the junk bond exchange traded fund, JNK, which is fast approaching its all time high reached last May, and 2) the spread (risk premium) between investment grade and Treasury debt which is at its lowest since 2007. Last year, similar circumstances prompted then Fed Chair Bernanke to question the continuation of the Fed's accommodative monetary policy and to raise the specter of tapering QE3. Bernanke's comments caused a massive exodus from bonds and other income securities--an event that the wags termed "the taper tantrum." The yield on the 10Year spiked from 1.64% on May 1st to 2.7% by July 4th---even though the taper was not implemented for six more months. (Again, remember a massive increase in yield means a massive decrease in price.) Last year's tantrum made me "cry like a baby" as the "good love that income securities gave me" quickly reversed and started "drivin' me crazy." By June 1, 2013 (see Vol. 172 www.riskrewardblog.blogspot.com ), I had sold most of our income stocks. Accordingly, I will be watching closely what the Fed communicates after its upcoming March 18-19 meeting and the impact any communication (especially forward guidance) has on interest rates. This year, in order to achieve our investment objective, I do not need this portfolio to further appreciate, but I do need a few more months of dividend income. That said, I will not tolerate the portfolio losing value.
My year to date success has come through "a little kiss here/A little kiss there." I hold several positions in a variety of stocks. One could say "I'm just wild about smorgasbord/I got a cravin' for smorgasbord." Here is a sample of some of my 2014 purchases:
1) TRN, the rail car manufacturer is up 27% since I bought it on January 22, 2014. Look for it to increase in value as more oil is transported by rail which has proven to be a better mode of transportation than pipelines out of North Dakota. TRN is one of the few stocks I own that does not pay a large dividend.
2) GGN, the closed end fund comprised of gold miners and other mineral interests, is up 11% (while paying an 11% dividend) since I bought it on January 3, 2014. Global uncertainty has caused the demand for physical gold to rise, particularly in China, the world's largest gold market.
3) HCLP, the fracking sand miner, is up 4% since my most recent purchase on February 10, 2014 and is up over 100% in the past year. I see no end in sight as demand for this proppant increases.
4) GM and F are up 7 and 8% respectively since I bought them in early February. I see new car sales increasing as the weather improves. Plus, each's 3+% dividend should serve as a healthy price support.
5) HQH. Despite a pullback, this closed end fund comprised of high growth biopharma stocks is up over 8% in the past month and pays nearly an 8% dividend.
6) ARCPP, the preferred stock issued by ARCP the large triple net lease real estate investment trust, is up 11% since I bought it on January 14, 2014. In addition it yields nearly 7.5% in dividends.
7) MHNC, the preferred stock of Bermudan insurer Maiden Holdings is up 9% since my purchase on January 9, 2014. It pays a 7.9% dividend at current prices.
8) ARRpB, the preferred stock of mortgage real estate investment trust, Armour Residential Realty, is up 12% since my purchase on January 10. 2014. It pays an 8+% dividend at current prices.
9) KMR/KMP and LINE. Both of these oil plays have disappointed recently, but once unfavorable reports prove wrong, I see them appreciating nicely. Their 7+ and 9+% dividends make the wait worthwhile.
10) EIM, MQT and VGM. These municipal bond closed end funds have held their price as the yield on the 10Year has remained below 3%. All the while they pay a tax free yield over 6%.
11) FFC, a closed end fund comprised of preferred stock, is up 5% since I bought on January 6, 2014. It pays an 8.6% dividend at its current price.
12) AAPL, GE and PSEC continue to disappoint, but are no where near a level justifying a sale. I continue to like all three, if not their stocks' performance.
13) UTG, a utility closed end fund, is up over 8% since I purchased it on Janury 23, 2014. It pays a 6+% dividend.
14) SFL, a ship financing company, is up 9% since my purchase on January 22, 2014. It pays an 8.33% dividend.
15) BTZ, a senior loan fund, is up 5.5% since my purchase on January 27, 2014. It pays a 7% dividend.
16) SDRL proved a dud, from which I exited early.
Remarkably (or maybe not), after Monday, the "Revolution" in Ukraine had little impact on the markets as Crimea's provincial parliament voted to re-unite "Helter Skelter" "Back in the USSR" (well, Russia). Obviously, US investors believe that in regard Russia's aggression, our government will "Let It Be", as said investors "Get Back" to focusing on domestic issues such as employment and Federal Reserve monetary policy. The Dow Jones Industrial Average was up again this week and is less than 1% to the negative year to date. The S&P500 set another record and is up 1.6% YTD. Personally, I will continue to monitor action on the 10Year Treasury. Having achieved much of my objective for the year, I am in "Hello/Goodbye" mode. At age 63 (this month), I will not allow a spike in interest rates to rob me of my gains. If necessary, I can capture profits from my income securities and wait until rates stabilize---even if that does not occur until next year "When I'm 64".
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Now give me money/That's what I want
That's what I want, yeah/That's what I want."---lyrics from "Money" sung by The Beatles
"When I think about the good love you gave me/I cry like a baby
Livin' without you is drivin' me crazy/I cry like a baby."---lyrics from "Cry Like a Baby" sung by The Boxtops
"I'm just wild about smorgasbord/I got a cravin' for smorgasbord
A little kiss here/A little kiss there
That's smorgasbord."---lyrics from "Smorgasbord" sung by Elvis Presley in the movie "Spinout"
http://www.youtube.com/watch?v=jGLjmHhUGzE (check it out)
As we do periodically, Barb and I sat with one of our investment professionals this week at which time we re-iterated our investment objective. Long ago we came to understand that "give me money/That's what I want/That's what I want,yeah/That's what I want" is not a meaningful goal. As we have for the past several years (See Vol. 1 www.riskrewardblog.blogspot.com ) we stated that, given our age, stage and circumstance, we seek a pre-tax annual return of 6-7% with minimal risk. No matter your age, stage or circumstance, it is important that you, too, formulate an objective in concrete terms. Otherwise, you run the risk of being whipsawed and hoodwinked by meaningless phrases such as "beating a benchmark." Who cares if your financial adviser beats a benchmark if the benchmark loses 37% as the S&P500 did in 2008. In this regard, note that although S&P500 returned over 32% in 2013, it has averaged barely 7% annually over the past 10 years with dividends comprising more than 2% of that performance.
The portfolio that I personally invest has enjoyed success since last fall when I perceived (and predicted, see Vol 186 www.riskrewardblog.blogspot.com ) that the yield on the benchmark 10 Year Treasury Bond would not exceed 3% any time soon. Indeed, in just the past two months, I have achieved well over half of our above-stated annual objective. That said, several recent developments lead me to believe that income securities (e.g. real estate investment trusts, preferred stock funds, senior loan funds, leveraged closed end funds, business development companies, etc) which comprise the majority of this portfolio may have peaked in price. First, the surprisingly good job numbers announced on Friday caused the yield on the ever important 10 Year Treasury Bond to jump to 2.8%. In turn, the price of most income securities dropped significantly. (Remember, the prices of bonds and income securites fall when interest rates increase.) Second, two Federal Reserve members commented this week that both the equity and debt markets appear "frothy" (given to bubbles). Indicative of this is 1) the price of the junk bond exchange traded fund, JNK, which is fast approaching its all time high reached last May, and 2) the spread (risk premium) between investment grade and Treasury debt which is at its lowest since 2007. Last year, similar circumstances prompted then Fed Chair Bernanke to question the continuation of the Fed's accommodative monetary policy and to raise the specter of tapering QE3. Bernanke's comments caused a massive exodus from bonds and other income securities--an event that the wags termed "the taper tantrum." The yield on the 10Year spiked from 1.64% on May 1st to 2.7% by July 4th---even though the taper was not implemented for six more months. (Again, remember a massive increase in yield means a massive decrease in price.) Last year's tantrum made me "cry like a baby" as the "good love that income securities gave me" quickly reversed and started "drivin' me crazy." By June 1, 2013 (see Vol. 172 www.riskrewardblog.blogspot.com ), I had sold most of our income stocks. Accordingly, I will be watching closely what the Fed communicates after its upcoming March 18-19 meeting and the impact any communication (especially forward guidance) has on interest rates. This year, in order to achieve our investment objective, I do not need this portfolio to further appreciate, but I do need a few more months of dividend income. That said, I will not tolerate the portfolio losing value.
My year to date success has come through "a little kiss here/A little kiss there." I hold several positions in a variety of stocks. One could say "I'm just wild about smorgasbord/I got a cravin' for smorgasbord." Here is a sample of some of my 2014 purchases:
1) TRN, the rail car manufacturer is up 27% since I bought it on January 22, 2014. Look for it to increase in value as more oil is transported by rail which has proven to be a better mode of transportation than pipelines out of North Dakota. TRN is one of the few stocks I own that does not pay a large dividend.
2) GGN, the closed end fund comprised of gold miners and other mineral interests, is up 11% (while paying an 11% dividend) since I bought it on January 3, 2014. Global uncertainty has caused the demand for physical gold to rise, particularly in China, the world's largest gold market.
3) HCLP, the fracking sand miner, is up 4% since my most recent purchase on February 10, 2014 and is up over 100% in the past year. I see no end in sight as demand for this proppant increases.
4) GM and F are up 7 and 8% respectively since I bought them in early February. I see new car sales increasing as the weather improves. Plus, each's 3+% dividend should serve as a healthy price support.
5) HQH. Despite a pullback, this closed end fund comprised of high growth biopharma stocks is up over 8% in the past month and pays nearly an 8% dividend.
6) ARCPP, the preferred stock issued by ARCP the large triple net lease real estate investment trust, is up 11% since I bought it on January 14, 2014. In addition it yields nearly 7.5% in dividends.
7) MHNC, the preferred stock of Bermudan insurer Maiden Holdings is up 9% since my purchase on January 9, 2014. It pays a 7.9% dividend at current prices.
8) ARRpB, the preferred stock of mortgage real estate investment trust, Armour Residential Realty, is up 12% since my purchase on January 10. 2014. It pays an 8+% dividend at current prices.
9) KMR/KMP and LINE. Both of these oil plays have disappointed recently, but once unfavorable reports prove wrong, I see them appreciating nicely. Their 7+ and 9+% dividends make the wait worthwhile.
10) EIM, MQT and VGM. These municipal bond closed end funds have held their price as the yield on the 10Year has remained below 3%. All the while they pay a tax free yield over 6%.
11) FFC, a closed end fund comprised of preferred stock, is up 5% since I bought on January 6, 2014. It pays an 8.6% dividend at its current price.
12) AAPL, GE and PSEC continue to disappoint, but are no where near a level justifying a sale. I continue to like all three, if not their stocks' performance.
13) UTG, a utility closed end fund, is up over 8% since I purchased it on Janury 23, 2014. It pays a 6+% dividend.
14) SFL, a ship financing company, is up 9% since my purchase on January 22, 2014. It pays an 8.33% dividend.
15) BTZ, a senior loan fund, is up 5.5% since my purchase on January 27, 2014. It pays a 7% dividend.
16) SDRL proved a dud, from which I exited early.
Remarkably (or maybe not), after Monday, the "Revolution" in Ukraine had little impact on the markets as Crimea's provincial parliament voted to re-unite "Helter Skelter" "Back in the USSR" (well, Russia). Obviously, US investors believe that in regard Russia's aggression, our government will "Let It Be", as said investors "Get Back" to focusing on domestic issues such as employment and Federal Reserve monetary policy. The Dow Jones Industrial Average was up again this week and is less than 1% to the negative year to date. The S&P500 set another record and is up 1.6% YTD. Personally, I will continue to monitor action on the 10Year Treasury. Having achieved much of my objective for the year, I am in "Hello/Goodbye" mode. At age 63 (this month), I will not allow a spike in interest rates to rob me of my gains. If necessary, I can capture profits from my income securities and wait until rates stabilize---even if that does not occur until next year "When I'm 64".
Sunday, March 2, 2014
March 1, 2014 Yelling Timber
Risk/Reward Vol. 210
THIS IS NOT INVESTMENT OR TAX ADVICE. THIS IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"So give me that high/Like you did last night, last night
'Cause I was high/When you made me fly."---lyrics from "That High" sung by Pitbull featuring Kelly Rowland
"Cause you make me feel like/I've been locked out of heaven
For too long/For too long."---lyrics from "Locked Out of Heaven" sung by Bruno Mars
"Respect yourself/Respect yourself
If you don't respect yourself
Ain't nobody gonna give cahoot, na na na na"---lyrics from "Respect Yourself" sung by The Staple Singers
Eschewing threats to world peace and lukewarm economic numbers, this week the S&P500 reached a new record, the NASDAQ hit a multiyear high and the Dow Jones Industrial Average gained 1.36%, closing down only 1.5% for the year. The question for next week is whether what happened (or did not happen) "last night, last night" in Crimea will impact "That High." If conventional wisdom prevails, until the Crimean crisis resolves look for a pull back in equities, a nosedive in emerging market stocks and a spike in the price of oil.
Speaking of conventional wisdom, its application caused the stock of all business development companies (BDC's) to drop early this week, as Standard and Poor's announced on Monday that henceforth BDC's would not be eligible for inclusion on any of its indices. The stocks included on these indices are those held by exchange traded index funds (ETF's) to which passive investors have flocked in recent years. Thus, the exclusion of BDC's caused the sponsors of these ETF's to sell their shares of BDC's in order to more accurately reflect the make up of each index. Talk about being "locked out of heaven." But the hit did not last "For too long/For too long", as the outstanding dividends paid by BDC's attracted a bevy of income investors in this yield starved environment.
BDC's were not the only stock to take a hit in what otherwise was an up week. Take a look at the action in Linn Energy (LINE, LNCO). Under attack by naysayers and short sellers for nearly a year, some of the gains recently enjoyed by LINE were erased as the company announced disappointing earnings at the close on Wednesday. A close reading of the transcript of the conference call held in conjunction with its earnings report revealed that LINE's earnings shortfall was a hangover from the now completed acquisition of Berry Petroleum. More important to me was the news that LINE has hedged its natural gas production through 2017 which should go a long way in protecting its remarkable 9+% annual dividend, paid on a monthly basis. Despite being overweight LINE, I bought more near Thursday's low.
As I write, the situation in Crimea becomes more uncertain. Although I find parallels drawn to 1914 unpersuasive, prudent investors should be at the ready. To quote that noted investor, Pitbull (and his most recent collaborator K$sha) be prepared if "It's going down/I'm yelling timber/You better move/You better dance.
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