Fw: Risk/Reward Vol. 98
THIS IS NOT INVESTMENT OR TAX ADVICE. THIS IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Hey all you people that are tryin' to sleep
I'm out to make it with my midnight dreams, yeah
'Cause I'm a backdoor man"---lyrics "Back Door Man" by The Doors
"The road is long/With many a winding turn
That lead us to who knows where/Who knows where
But I'm strong/Strong enough to carry him
He ain't heavy/He's my brother"---lyrics "He Ain't Heavy" by the Hollies
"This little piggy went to market
This little piggy stayed home..."---Nursery Rhyme
"Give me golf clubs, fresh air and a beautiful partner, and you can keep the clubs and the fresh air."---Jack Benny
Merry Christmas and Happy Hanukkah---and with France and the UK "airing grievances" and Germany demonstrating "feats of strength", Happy Festivus (the holiday for the rest of us), as well.
As reported in Volume 96 ( www.riskrewardblog.blogspot.com ), on Wednesday, the European Central Bank (ECB) launched its Longer Term Refinancing Operation (LTRO) (a/k/a the "Backdoor Bazooka", name explained below) making available 3year loans in unlimited amounts at 1% interest to all Eurozone banks. In anticipation of this event, the markets skyrocketed on Tuesday. It was and remains the hope of ECB President, and noted Backdoor Man, Mario Draghi, that Eurozone banks would draw heavily on the LTRO in order 1) to quench their thirst for liquidity and thus thaw the recent European credit freeze and 2) to, perhaps, induce the banks to purchase more of the sovereign debt of their heavily indebted brothers, Portugal, Italy, Ireland, Greece or Spain (PIIGS) and to "carry" it on their books for a few years, reaping profits from the spread between the inexpensive cost of the loans (1%) and the yield on the heavily depressed PIIG bonds (6+%). It is Mr. Draghi's dream that by flooding banks with a 'bazooka" blast of Euros, he will stabilize the PIIGS sovereign debt crisis through the backdoor ( to wit; lending money to banks to allow THEM to carry the debt); something he refuses to allow the ECB to do through the front door (to wit; purchasing and carrying PIIGS sovereign debt directly). With more than 490billion Euros lent on the first day of the LTRO, it appears that liquidity has been restored, but with 10 year Italian bonds trading at a yield of nearly 7%, it remains to be seen whether the Backdoor Man's "midnight dream" of Eurozone banks carrying the debt of their "heavy" PIIG "brothers" comes to pass. Much will be learned come mid-January when Italy, the first little PIIG-y, goes to market with a new issuance of debt. If it cannot refinance 10 year notes at yields near 5% ( as noted, they are currently trading at 7% on the secondary market), most of my cash is going to "stay home".
While the longer term impact of the LTRO is still unknown, the immediate impact has given lift and stability to the stock markets, with the Dow sitting comfortably for the past few days above 12,000, almost to the penny where I exited in late July. This provided impetus for me to pick up a few bargains---and there are plenty to be had. I bought some Ford debt paying 7.7% (XKN) when it fell below its "call" price of $25 (Remember, when purchasing exchange traded debt or preferred stock that is subject to redemption or "call" at any time, always do so below the call price--typically $25).
I also bought shares in JMF, a closed end fund (CEF), comprised of "beautiful" oil and gas pipeline master limited "partner"ships. JMF pays a 7.8% dividend ( a return even the parsimonious Jack Benny could appreciate) and is priced below its net asset value (NAV). As you may recall from earlier posts, I like CEF's which have some of the same characteristics of mutual funds and ETF's (e.g. comprised of the shares of a basket of companies thereby giving diverse exposure to a given sector or industry). In times of low interest rates, I prefer CEF's to the others because CEF's can use borrowed funds to leverage returns (e.g. borrow money at 3%, invest in MLP's paying 7% and distribute the difference to shareholders). They are also attractive because they do not distribute unrelated business taxable income (UBTI) to shareholders thus allowing retirement accounts (which have severe limits on the amount of UBTI they can receive) to invest indirectly in master limited partnerships. (THIS IS MY PERSONAL VIEW ON THE ISSUE AND NOT TAX ADVICE---CONSULT YOUR OWN TAX ADVISOR ON THE SUBJECT.)
With the announcement this week that AT&T (T) is abandoning its bid for T-Mobile, the prospect improved that Sprint (S) could survive as a distant, third alternative to T and Verizon in the US wireless arena. So far this year, every investment associated with Sprint has tanked, including its exchange traded debt (JZK, PYG, GJD). Although this debt is not investment grade, it trades at a significant discount to similarly rated paper (B1) and is currently yielding over 10%. I bought some JZK.
I remain impressed by the US economy which will likely surpass all estimates in Q4 and the US stock market. Unfortunately, news from Europe bespeaks recession, and news from China stinks. This latter fact has resulted in a severe drop off in commodity prices with platinum, tin, copper,etc. down 20% or more from the year's high. One commodity bright spot is oil--particularly US domestic oil production and delivery. World wide demand for oil is still high and the uncertainty associated with Iran has caused a supply shortage and price resiliency. US crude oil inventories are at record lows, a fact that should spur domestic production. Billions of dollars of investment are afoot in exploration, pipeline and storage construction. My trigger finger is itching, and I likely will re-einter the oil patch soon with the lion's share of my holdings still in cash.
I am not expecting much news next week, but early January promises more fireworks--and hopefully more liftoff.
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