Risk/Reward Vol. 226
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“You don’t pull on Superman’s cape
You don’t spit in the wind”---lyrics from “You Don’t Mess With Jim” sung by Jim Croce
“Feel like jumpin’ baby/Won’t ya join me please
I don’t feel like beggin’/But I’m on my knees
So be my guest/You got nothin’ to lose
Won’t ya let me take you on a sea cruise.”---lyrics “Sea Cruise” sung by Frankie Ford
“This old man/He played nine
He played knick-knack on my spine
With a knick-knack paddy whack
Give a dog a bone
This old man came rolling home.”---lyrics from “This Old Man” sung by Everyone
Although the major stock indices continue to flirt with record highs, financial commentators characterize investor sentiment as jittery. One factor contributing to this sentiment is the following: much of the gain in stock prices over the past year has resulted from an increase in stock multiples as opposed to an increase in corporate earnings. Recall that a primary determiner of a stock’s value is its price to earnings or p/e ratio which is otherwise termed its multiple. For example, Google, which trades at $575 per share, had earnings over the past twelve months of 19.09 per share, and thus has a p/e ratio or multiple of 30.12 ($575/$19.09= 30.12). Nobel prize winner, Robert Shiller, who is viewed as a “Superman” when it comes to economic trends (e.g. the Case-Shiller Home Price Index) measures the health of stock markets by calculating an average “Cyclically Adjusted Price to Earnings Ratio” or CAPE for all of the stocks comprising the S&P 500 Index (S&P) or predecessor indices. Since 1881, Superman's CAPE has averaged a multiple of 17. Today, the CAPE multiple of the S&P is 26, a number that has been exceeded only three times: in 1929, 2000 and 2007, just before significant market downturns. CAPE has been criticized because it does not take into consideration interest rates which are currently at historic lows. Nevertheless, his observations are more than just “spittin’ in the wind.”
Domestic oil producers and oil services companies “felt like jumpin’” this week. After years of “beggin’” from “on their knees”, the Commerce Department approved the applications of Pioneer Natural Resources (PXD) and Enterprise Products (EPD) to export condensate. Condensate is a petroleum product that is lighter than crude oil, but is capable of being refined into diesel and jet fuel. Condensate is found in large quantities in the oil fields of West Texas and North Dakota. It is better suited to foreign refineries than to US refineries which are engineered to crack heavier oil imported from the mid-East, Nigeria and Venezuela. This fact supported sending condensate “on a sea cruise” since many of our domestic refiners can not refine condensate and thus “got nothin’ to lose”. As noted previously (see Vol.193 www.riskrewardblog.blogspot.com ), US producers have been precluded from exporting unrefined petroleum products since 1973 so the potential associated with exporting condensate is significant. On news of the approval, stocks in the oil patch rose generally, and the stock of oil services companies such as HCLP and TRN skyrocketed.
As loyal readers know, I have had a love/hate relationship with ARCP, the triple-net-lease real estate investment trust (REIT) founded by the not so “Old Man”, Nick Schorsch. “(K)Nick” has a “knack”of upsetting stockholders by overpaying himself and by making massive acquisitions funded by disruptive secondary stock offerings . The former problem was eliminated Friday last when Nick took a “paddy whack”, stepped down as CEO and went “rolling home”. The latter problem likely has been resolved by an announcement accompanying the resignation that ARCP will eschew acquisitions for the remainder of the year and instead will rely upon organic growth to improve its already handsome monthly dividend. Due in part to “Nick’s knack”, ARCP has lagged the REIT sector this year, but I believe these recent developments and its 8+% dividend will give this “dog a bone” and will propel ARCP’s stock higher. I added to my position.
If you read financial news reports, you know that the markets have shown little, if any volatility. Indeed, the market indices have closed above their 200 day moving averages for more than 400 consecutive days. That said, investors are nervous because they know (like Jim Croce) that one cannot “Put Time in a Bottle”. Someday a bear market will come roaring back, “badder than old King Kong/Meaner than a junk yard dog.” Thus, I, for one, remain vigilant; ever ready to exit should I see a clear bearish signal. For my income weighted portfolio, that signal will be in the form of a spike in the interest rate on the 10Year Treasury Bond. Currently, that rate remains in a range between 2.5 and 2.65%. Should it suddenly spike and head toward 3%, I will sell. I may be a market timer, but I am not a gambler (although like Bad, Bad Leroy Brown “I like my fancy clothes!”).
Saturday, June 28, 2014
Saturday, June 21, 2014
June 21, 2014 Wings of a Dove
Risk/Reward Vol. 225
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“On the wings of a pure, white dove
He sends His pure sweet love
A sign from above
On the wings of a dove”---lyrics from “Wings of a Dove” sung by Ferlin Husky
"Take me in tender woman
Take me in, for heaven's sake
Take me in, tender woman"/ Sighed the snake”---lyrics from “The Snake” sung by Johnny Rivers
“Don’t have the inclination to look back on any mistake
In the fury of the moment/I can see the master’s plan
In every leaf that trembles/In every grain of sand.”---lyrics from “Every Grain of Sand” sung by Bob Dylan
Two weeks ago, I reported that I had sold most of my interest rate-sensitive securities and stated:
“Likely, I will stay that way (1/3rd in cash) until after the Federal Reserve meets later this month. Signals from that meeting could have a big impact on interest rates and by extension the value of interest rate sensitive securities.” (Vol. 224 www.riskrewardblog.blogspot.com )
The Federal Reserve met on Tuesday and Wednesday, and I can report that currently I am re-purchasing many of the securities that I had sold. I re-enter “On the wings of a pure, white (haired) monetary dove” named Janet Yellen. Characterizing the fear of inflation expressed by others as nothing more than "noise", Fed Chair Yellen confirmed at her Wednesday news conference that the Federal Reserve intends to keep interest rates low for the foreseeable future. That was the “sign from above” that I needed. And I was not the only one to take notice of “Her pure sweet love” as the Dow Jones Industrial Average rose more than 100 points during her press conference. Also that day, the rate on the benchmark 10 Year Treasury Bond (10Year) fell from 2.65% to 2.61% (which of course meant that its price rose). In addition, Yellen's words propelled the S&P 500 to another record high which it sustained through Friday's close.
Although I forewent some capital appreciation and some dividend payments during my two week hiatus, I derived great comfort from having the interest rate-sensitive portion of my portfolio on the sidelines as the yield on the 10Year moved up (and its price correspondingly moved down) in anticipation of a more hawkish Federal Reserve meeting (which did not materialize). The makeup of my portfolio and more particularly its sensitivity to interest rate fluctuations prompted some at last weekend’s Subscriber Roundtable to liken my investment strategy to snake handling. Am I not like the “tender woman” who is “taken in by the interest rate snake” only to be bitten and left for dead? I think not. Rather, I liken myself to a herpetologist. As loyal readers know, I not only watch interest rates, I study them everyday "for heaven's sake". Admittedly, in today’s world, interest rate-sensitive securities are not for the casual investor or for the part time student. That said, I believe that, fully understood and closely monitored, these securities (e.g. preferred stocks, leveraged closed end bond funds, etc.) can be a source of steady and secure income, and that is what I seek as I approach retirement. Speaking of studying, thanks to the subscriber who sent me a link to a short, but informative discussion on why Northern Trust believes that the interest rate on the all important 10Year Treasury Bond will remain low well into the future. View it here: https://www.northerntrust.com/insights-research/market-economic-commentary/marketscape .
Much uncertainty surrounds the situation in Iraq which currently produces 3.4 million barrels of oil per day (4-5% of world's daily consumption). “The fury of the moment”, however, has redounded to the benefit of those invested in domestic oil and gas. The meteoric rise in domestic production is directly tied to fracking, and fracking is wholly dependent on a steady supply of high grade frack sand, the type mined by HiCrush LP (HCLP). HCLP operates two large frack sand mines in Wisconsin. HCLP's stock is up 70% since my October, 2013 purchase and up 48% since my follow-on purchase in early January, 2014. All the while it has paid a handsome dividend. “I don’t have the inclination to look back on any mistake”, but if I did I would regret not buying more. I see profits "In every grain of sand" that HCLP mines.
Assurance this week from the Federal Reserve that it intends to keep interest rates low was a “Taste of Honey” for me. It means that we likely will avoid the precipitous drop in interest rate sensitive securities that we experienced last summer. Avoiding such a drop is "Goode (for) Johnny B." (sorry Mr. Rivers!) and keeps me from “The Poor Side of Town.”
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“On the wings of a pure, white dove
He sends His pure sweet love
A sign from above
On the wings of a dove”---lyrics from “Wings of a Dove” sung by Ferlin Husky
"Take me in tender woman
Take me in, for heaven's sake
Take me in, tender woman"/ Sighed the snake”---lyrics from “The Snake” sung by Johnny Rivers
“Don’t have the inclination to look back on any mistake
In the fury of the moment/I can see the master’s plan
In every leaf that trembles/In every grain of sand.”---lyrics from “Every Grain of Sand” sung by Bob Dylan
Two weeks ago, I reported that I had sold most of my interest rate-sensitive securities and stated:
“Likely, I will stay that way (1/3rd in cash) until after the Federal Reserve meets later this month. Signals from that meeting could have a big impact on interest rates and by extension the value of interest rate sensitive securities.” (Vol. 224 www.riskrewardblog.blogspot.com )
The Federal Reserve met on Tuesday and Wednesday, and I can report that currently I am re-purchasing many of the securities that I had sold. I re-enter “On the wings of a pure, white (haired) monetary dove” named Janet Yellen. Characterizing the fear of inflation expressed by others as nothing more than "noise", Fed Chair Yellen confirmed at her Wednesday news conference that the Federal Reserve intends to keep interest rates low for the foreseeable future. That was the “sign from above” that I needed. And I was not the only one to take notice of “Her pure sweet love” as the Dow Jones Industrial Average rose more than 100 points during her press conference. Also that day, the rate on the benchmark 10 Year Treasury Bond (10Year) fell from 2.65% to 2.61% (which of course meant that its price rose). In addition, Yellen's words propelled the S&P 500 to another record high which it sustained through Friday's close.
Although I forewent some capital appreciation and some dividend payments during my two week hiatus, I derived great comfort from having the interest rate-sensitive portion of my portfolio on the sidelines as the yield on the 10Year moved up (and its price correspondingly moved down) in anticipation of a more hawkish Federal Reserve meeting (which did not materialize). The makeup of my portfolio and more particularly its sensitivity to interest rate fluctuations prompted some at last weekend’s Subscriber Roundtable to liken my investment strategy to snake handling. Am I not like the “tender woman” who is “taken in by the interest rate snake” only to be bitten and left for dead? I think not. Rather, I liken myself to a herpetologist. As loyal readers know, I not only watch interest rates, I study them everyday "for heaven's sake". Admittedly, in today’s world, interest rate-sensitive securities are not for the casual investor or for the part time student. That said, I believe that, fully understood and closely monitored, these securities (e.g. preferred stocks, leveraged closed end bond funds, etc.) can be a source of steady and secure income, and that is what I seek as I approach retirement. Speaking of studying, thanks to the subscriber who sent me a link to a short, but informative discussion on why Northern Trust believes that the interest rate on the all important 10Year Treasury Bond will remain low well into the future. View it here: https://www.northerntrust.com/insights-research/market-economic-commentary/marketscape .
Much uncertainty surrounds the situation in Iraq which currently produces 3.4 million barrels of oil per day (4-5% of world's daily consumption). “The fury of the moment”, however, has redounded to the benefit of those invested in domestic oil and gas. The meteoric rise in domestic production is directly tied to fracking, and fracking is wholly dependent on a steady supply of high grade frack sand, the type mined by HiCrush LP (HCLP). HCLP operates two large frack sand mines in Wisconsin. HCLP's stock is up 70% since my October, 2013 purchase and up 48% since my follow-on purchase in early January, 2014. All the while it has paid a handsome dividend. “I don’t have the inclination to look back on any mistake”, but if I did I would regret not buying more. I see profits "In every grain of sand" that HCLP mines.
Assurance this week from the Federal Reserve that it intends to keep interest rates low was a “Taste of Honey” for me. It means that we likely will avoid the precipitous drop in interest rate sensitive securities that we experienced last summer. Avoiding such a drop is "Goode (for) Johnny B." (sorry Mr. Rivers!) and keeps me from “The Poor Side of Town.”
Saturday, June 7, 2014
June 7, 2014 The Happening
Risk/Reward Vol. 224
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“Hey, life look at me/I can see reality
Cause when you shook me/Took me out of my world
I woke up/Suddenly I just woke up
To the happening.”---lyrics from “The Happening” sung by The Supremes
“Why can’t you tell this boat is sinking?
Tell me…Why
Tell me…Why”---lyrics from “Why” sung by Annie Lennox
“I’m out on a limb
I’m giving in
I’m selling out.”---lyrics from “The Sellout” sung by Macy Gray
Two weeks ago, I wrote (Vol. 222 www.riskrewardblog.blogspot.com):
“It was a good week for growth and income investors alike. I see a day soon, however, when the interests of these two investment approaches diverge. I am betting that growth stalls, interest rates stay low and income securities benefit. If I am wrong, I will exit before my holdings (in the words of that marvelous lyricist, Lil Jon) “Skeet, skeet/Get low/Get low.”
I cannot speak to future growth, but “Hey, life look at me/I can see reality”—at least when it comes to interest rates. And the movement in the yield on the all-important US 10 Year Treasury Bond during the first three days of this week “shook me/Took me out of my world.” On Wednesday, “I woke up/Suddenly I just woke up/To the happening.”
What happened? The interest rate on the 10Year rose from 2.46% last Friday to 2.53% on Monday to 2.59% on Tuesday. On Wednesday morning, disappointing trade deficit numbers were reported which commentators thought would send the 10Year rate down. Instead the 10Year rate jumped to 2.61% which of course sent the price down . “Tell me…Why/Tell me…Why/this boat is sinking?” Perhaps rates below 2.5% simply are not sustainable. Perhaps the market fears a mid-summer rate tantrum like last year. Perhaps the bond market has become a bubble as suggested by Federal Reserve officials quoted in Jon Hilsenrath's Wall Street Journal article Wednesday morning. To me, the “Why” is less important than the fact that rates appear to be rising. And that fact was confirmed on Thursday when the unprecedented, rate-suppressing action by the European Central Bank in 1) lowering interbank borrowing rates to 0.15% and 2) charging a negative deposit rate had little impact on the US10Year rate which ended the day at 2.58%. Friday's jobs report was better than expected and not surprisingly the 10Year rate rose to 2.60%.
Having achieved my goal for the year (over 6%), there is no reason for me to be “out on a limb” while the now volatile 10Year settles into a new, normal interest rate. So, with respect to those securities that are most directly correlated to the interest rate on the 10Year (e.g. preferred stocks, preferred stock closed end funds and mortgage real estate investment trusts or mREIT’s), “I gave in” and “sold out”--- taking a handsome profit in the process. I held those in 401(k) and IRA accounts so there were no tax consequences associated with the sales, and the transaction costs in total were less than $200 ($9 per trade). After my “sell out”, I am 1/3rd in cash. Likely, I will stay that way until after the Federal Reserve meets later this month. Signals from that meeting could have a big impact on interest rates and by extension the value of interest rate sensitive securities. They did last year. If and when I perceive that the interest rate on the 10Year has stabilized, I will repurchase the securities that I sold--- thus preserving my profits while foregoing, at most, only a handful of monthly dividend checks. I view this time-out as cheap insurance against volatility. As for my other holdings (e.g. triple net lease REIT’s, oil and natural gas, pipeline master limited partnerships and leveraged closed end index funds), I remain invested. The stock market in general continues to move upward, and I want to participate.
As another record week for the S&P 500 and the Dow Jones Industrial Average comes to a close, I take comfort in where I sit. I have captured a “Supreme” return on my interest rate sensitive securities and still have exposure to growth stocks. Selling all or part of one's portfolio may be “Nothing But Heartache” for some, but I would rather take a profit than “Keep Me Hangin’ On” during a volatile period, especially one with a downward bias. “My World Is (Not) Empty Without Them” in part because I know that in time, these interest-rate sensitive securities will be “Back in My Arms Again.”
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