Risk/Reward Vol. 157
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"War, it ain't nothing but a heart breaker
War, it's got one friend/That's the undertaker."---lyrics from "War" sung by Edwin Starr
"Say what you say/We're floating away
Now I see the solemn horizons/Now I think I'll be OK"---lyrics from "Floating Away" by John Legend
"Oh, if I'd only known/What your heart cost
Oh, can we call it a loan/And a debt that I owe on a bet I lost"---lyrics from "Call It A Loan" by Jackson Browne
Finance ministers from the twenty largest economies ( the "G20") met this week in Moscow. In the corridors, a topic of great interest was the prospect of a global currency war. As discussed last week, this topic was brought to the fore by Japan's overt pledge to devalue the yen in order to address the "heartbreak" of fifteen years of deflation and to promote sagging exports. Publicly, Japan's position has not found "one friend" as virtually all of the finance ministers repeated the orthodoxy that governments should not use their currencies as economic weapons, but instead should let market forces determine exchange rates. As demonstrated by the Federal Reserve's massive increase in the supply of dollars via quantitative easing, this orthodoxy is honored in the breach. And speaking of currency wars, the diplomatic niceties in Moscow had no impact on Venezuela. That currency "undertaker" announced early in the week that it was devaluing the bolivar by 30%! In other word, a bolivar worth $0.23 in exchange last week is now worth $0.16. Companies such as P&G, Colgate Palmolive, Halliburton and Merck which have a big presence in Venezuela (and thus large sums of bolivars) anticipate huge losses as a result. Venezuela's conduct even hurt me. As I reported in Vol 152 ( www.riskrewardblog.blogspot.com ) I own ESD, a closed end fund comprised of emerging market sovereign debt including that of Venezuela. Even though ESD is hedged against just such a currency devaluation (it buys bonds that pay interest in dollars not bolivars), the move caused a sell off, thus reducing the premium that I was enjoying. Even the best hedge cannot trump market sentiment.
Those that can "see the solemn horizon" predict that interest rates will rise this year, a prediction that appears valid in light of the excellent performance of TBT, a double short on Treasuries that I own. Consequently, as reported in both the Wall Street Journal and The Financial Times this week, money is flowing out of fixed interest securities such as high yield bonds and into "floating" rate senior loans. ($1.3bn last week alone) "Say what you say", but I have said for some time (See e.g. Vol 154) that everyone should have some senior loan exposure in his/her portfolio. As the name suggests, the interest rate on these securities "float" in relation to some benchmark such as the London Interbank Offered Rate or LIBOR. (e.g. interest is reset each month at 3% above LIBOR). If LIBOR rises, so does the rate on the loan.
The vehicles that I use for floating rate senior loan exposure include two closed end funds managed by Nuveen: JFR and JQC. "If only I had known" that JFR in particular would perform so well year to date, I would have purchased a larger position. As stated previously, I like closed end funds because they use leverage. Many investors however prefer exchange traded funds (ETF's) which generally avoid the risk of leverage and the high management fees associated with closed end funds. BKLN and SNLN are ETF's in the floating rate loan space. For those that have the "heart" and are not afraid of a "bet lost", exposure to a riskier and higher yielding mix of floating rate senior loans and more junior forms of debt (such as mezzanine loans) can be accomplished via business development companies (BDC's) that specialize in this space such as Solar Senior Capital (SUNS) or Pennant Park Floating Rate Capital (PFLT).
Having constructed a portfolio that is primarily dependent on dividends for a return on investment, I do not mind the respite that the stock market is currently experiencing. The Dow Jones Industrial Average fell only 9 points for the week. We are in this game for the long haul so remember the words of Jackson Browne
"Take it easy/Take it easy
Don't let the sound of your own wheels
Drive you crazy."
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