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".
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