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.”
Saturday, May 31, 2014
May 31, 2014 Treasure
Risk/Reward Vol. 223
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“Honey, you’re my golden star
You know you can make my wish come true
If you let me treasure you.”---lyrics from “Treasure” sung by Bruno Mars
“If you believe in magic/Come along with me
We’ll dance until the morning/Just you and me.”---lyrics from “Do You Believe in Magic” sung by The Lovin’ Spoonful
“Category 6 as I storm in
Take this as a, take this as a warning
Welcome to, welcome to global warming.”---lyrics from “Global Warming” sung by Pitbull
If, at the start of the year, you gambled that the bond market would rally, your “golden star wish has come true.” And how! Combine the following: 1) a sluggish domestic economy (revised numbers this week indicate that the US economy actually shrank in the first quarter of 2014); 2) a rise in unemployment in Europe’s crown jewel, Germany; 3) a regulatory environment that has banks clamoring for Treasury securities and eschewing loans ; 4) the recent parliamentary gains made by anti-EU parties throughout Europe; and 5) the likelihood that next week the European Central Bank will lower interest rates--- and you have the recipe for a robust bond market. In fact, according to Friday's Wall Street Journal, high grade US corporate bonds have returned 5.8% year to date compared to a 4.7% return from the S&P500 and a 1.5% return from the Dow Jones Industrial Average (DJIA) (each number inclusive of principle appreciation plus interest/dividend payments). And as for the bellwether US 10 Year “Treasury” Bond (10Year), it hit an eleven month high on Wednesday as its yield fell to 2.44% (remember the lower the yield the higher the price.)
If you “believe the magic” of low interest rates will continue, then you should consider “coming along with me” and increasing your bond sensitive investments. As noted two weeks ago (Vol. 221 www.riskrewardblog.blogspot.com ), one investment closely correlated to the yield on the 10Year Bond is preferred stock which I like to own through leveraged, closed end funds (CEF’s). Interestingly, although directionally aligned, the angle of decline in the 10Year yield has yet to be mirrored in the yields paid by preferred CEF’s, a situation which I believe presents an excellent buying opportunity. If and when these angles align (and they typically do), a significant price increase will result. I like preferred stock CEF’s that trade below net asset value, pay dividends on a monthly basis and carry at least a Bronze rating by Morningstar. HPS fits this bill, and I bought some this week. If the 10Year stays at or below 2.5% over the next several days, I see HPS rising in value even as it continues to pay me a 8+% dividend. If so, “We’ll dance until the morning/Just you and me (and anyone else who owns HPS).”
Next week, the EPA will release draft “global warming” carbon dioxide emission standards specifically aimed at coal fired electric power plants. It is anticipated that these regulations will cause a “Category 6 storm” in the coal and utility world. Don’t forget, in the US, coal still generates 40% of all electricity. “Take this as a, take this as a warning" if you own coal stocks and keep a watchful eye on electric utilities. That said, one energy source’s hurdle is another’s slide. Effectively, the only alternative to coal is natural gas. As a consequence, I bought more Kinder Morgan (KMR, KMP or KMI) which owns the largest natural gas pipeline system in the US and thus stands to gain as more natural gas is produced and consumed. I like Kinder Morgan because it pays a healthy dividend and because its stock remains depressed after a Barron’s article published in February which questioned some of Kinder’s accounting practices. On any pullback, I intend to add to my holdings in HCLP which mines franking sand used in natural gas and oil drilling. HCLP is up 54% since I repurchased it in October, 2013 and 34% since I added shares in February, 2014.
Another week, another record close for the S&P 500 and the DJIA---and another stellar performance by the bond market. The yield on the bellwether 10Year continues to fall; now hovering below 2.5% (which of course means the price of the bond continues upward). As I wrote last week, some day soon this movement in tandem by the stock and bond markets likely will end. But with the German 10Year at 1.35%, that of Spain at 2.86%, that of France at 1.74%, that of Italy at 2.95% and that of Japan at 0.57%, the US 10Year still looks like a bargain. No one---I mean no one--- predicted this. Indeed, most market savants opined that the 10Year yield would be above 3.25% by now. I took the counter bet, but not even I saw 2.44% coming. Events next week (e.g. the jobs report) may cause a reversal of fortune for me, but I really like my interest rate sensitive portfolio at this juncture. Absent some massive market upheaval I intend to stay pat. Like the great Bruno Mars
“Today I don’t feel like doing anything
I’m going to kick up my feet and stare at the fan
Cause today I swear I’m not doing anything
Nothing at all.”
Monday, May 26, 2014
May 24, 2014 Turn Down For What
Risk/Reward Vol. 222
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“Turn down for what?/Turn down for what?”---lyrics from “Turn Down For What” by DJ Snake
featuring Lil Jon
“Don’t go chasing waterfalls
Please stick to the rivers and the lakes
That you’re used to”---lyrics from “Waterfalls” sung by TLC
“Don’t look back/But if you don’t look back
We’re only learning then
How to make the same mistakes.”---lyrics from “Same Mistakes” sung by One Direction
News on Friday that the housing market improved in April sent the S&P 500 over the 1900 mark for the first time and propelled the Dow Jones Industrial Average over 16,600. Typically, such a growth-oriented stock stimulus would cause bond prices to fall. But on Friday, the price of the bellwether US Treasury 10Year Bond rose and its yield “Turn(ed) Down”. (Remember when bond prices rise, bond yields fall.) This led many to wonder “Turn(ed) down for what/Turn(ed) down for what?” Perhaps the answer lies in a closer examination of the housing numbers. True, existing house sales did improve over March, but they remain 7% lower than in April, 2013. Equally discouraging was a report earlier in the week that despite low mortgage rates, 40% of all homes are either 1) worth less than their outstanding mortgage or 2) have insufficient equity to cover the cost of the mortgage plus a broker’s commission should the owner desire to sell. Obviously, the bond market read the data to suggest that the Federal Reserve will continue its efforts to keep interest rates (which directly impact mortgage rates) low for the foreseeable future.
With interest rates so low, income investors continue to search for yield in progressively risky pools, in other words, in “rivers and lakes/That they’re (not) used to.” Indeed the spread between the 10Year Treasury and the lowest rated junk bond (CCC) is at an all time low. One alternative to junk bonds are collateralized loan obligations (CLO’s). CLO’s are a subset of collateralized debt obligations (CDO’s). You may recall that all CDO’s were tarnished by the collapse of the subprime mortgage market which dominated CDO’s prior to 2008. In contrast, CLO’s (comprised of senior loans to reputable mid-sized companies whose balance sheets are too small to warrant investment grade status), for the most part, remained solvent throughout the debt crisis. Moreover, CLO's underwritten after 2009 have performed as advertised. In a nutshell, CLO sponsors acquire senior loans from banks, and re-bundle the obligations into tranches. Tranche A is the most secure because current obligations are paid in full before any obligations to succeeding tranches are addressed. As more payments are received from the underlying senior loans, they are used to defray the obligations to Tranches B in total, then to C, then to D, etc. in what is called a payment “waterfall.” The lower the tranche, the riskier the investment is deemed, even though recently any default "chasing waterfalls" has been rare. Oxford Lane Capital is a closed end fund that invests in Tranches F and lower. I own the preferred shares of it (OXLCO) which currently pay a 7.8% annual dividend on a monthly basis.
For years now (see Vol. 102 www.riskrewardblog.blogspot.com ), I have advised you, Dear Readers, that the optimum time to purchase shares in pass through entities such as business development companies, master limited partnerships and especially real estate investment trusts is at the time any secondary stock offering is priced. The larger the secondary offering, the more dilutive its immediate effect, the greater the stock discount. This axiom is part of my DNA. I “don’t (have to ) look back.” Or do I? With the announcement by ARCP that it was doing a very large secondary offering, I “didn’t look back.” I bought before the pricing. Why you ask? Because the stock’s decline in anticipation of the pricing was precipitous, and I thought that the market had overshot the dilutive impact. WRONG! So I overpaid. The lessons that I have learned these past four years must be observed! “If we don’t look back/We’re only learning/How to make the same mistakes.”
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.”
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“Turn down for what?/Turn down for what?”---lyrics from “Turn Down For What” by DJ Snake
featuring Lil Jon
“Don’t go chasing waterfalls
Please stick to the rivers and the lakes
That you’re used to”---lyrics from “Waterfalls” sung by TLC
“Don’t look back/But if you don’t look back
We’re only learning then
How to make the same mistakes.”---lyrics from “Same Mistakes” sung by One Direction
News on Friday that the housing market improved in April sent the S&P 500 over the 1900 mark for the first time and propelled the Dow Jones Industrial Average over 16,600. Typically, such a growth-oriented stock stimulus would cause bond prices to fall. But on Friday, the price of the bellwether US Treasury 10Year Bond rose and its yield “Turn(ed) Down”. (Remember when bond prices rise, bond yields fall.) This led many to wonder “Turn(ed) down for what/Turn(ed) down for what?” Perhaps the answer lies in a closer examination of the housing numbers. True, existing house sales did improve over March, but they remain 7% lower than in April, 2013. Equally discouraging was a report earlier in the week that despite low mortgage rates, 40% of all homes are either 1) worth less than their outstanding mortgage or 2) have insufficient equity to cover the cost of the mortgage plus a broker’s commission should the owner desire to sell. Obviously, the bond market read the data to suggest that the Federal Reserve will continue its efforts to keep interest rates (which directly impact mortgage rates) low for the foreseeable future.
With interest rates so low, income investors continue to search for yield in progressively risky pools, in other words, in “rivers and lakes/That they’re (not) used to.” Indeed the spread between the 10Year Treasury and the lowest rated junk bond (CCC) is at an all time low. One alternative to junk bonds are collateralized loan obligations (CLO’s). CLO’s are a subset of collateralized debt obligations (CDO’s). You may recall that all CDO’s were tarnished by the collapse of the subprime mortgage market which dominated CDO’s prior to 2008. In contrast, CLO’s (comprised of senior loans to reputable mid-sized companies whose balance sheets are too small to warrant investment grade status), for the most part, remained solvent throughout the debt crisis. Moreover, CLO's underwritten after 2009 have performed as advertised. In a nutshell, CLO sponsors acquire senior loans from banks, and re-bundle the obligations into tranches. Tranche A is the most secure because current obligations are paid in full before any obligations to succeeding tranches are addressed. As more payments are received from the underlying senior loans, they are used to defray the obligations to Tranches B in total, then to C, then to D, etc. in what is called a payment “waterfall.” The lower the tranche, the riskier the investment is deemed, even though recently any default "chasing waterfalls" has been rare. Oxford Lane Capital is a closed end fund that invests in Tranches F and lower. I own the preferred shares of it (OXLCO) which currently pay a 7.8% annual dividend on a monthly basis.
For years now (see Vol. 102 www.riskrewardblog.blogspot.com ), I have advised you, Dear Readers, that the optimum time to purchase shares in pass through entities such as business development companies, master limited partnerships and especially real estate investment trusts is at the time any secondary stock offering is priced. The larger the secondary offering, the more dilutive its immediate effect, the greater the stock discount. This axiom is part of my DNA. I “don’t (have to ) look back.” Or do I? With the announcement by ARCP that it was doing a very large secondary offering, I “didn’t look back.” I bought before the pricing. Why you ask? Because the stock’s decline in anticipation of the pricing was precipitous, and I thought that the market had overshot the dilutive impact. WRONG! So I overpaid. The lessons that I have learned these past four years must be observed! “If we don’t look back/We’re only learning/How to make the same mistakes.”
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.”
Saturday, May 17, 2014
May 17, 2014 Rainbow Connection
Risk/Reward Vol. 221
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“Some day we'll find it
The rainbow connection
The lovers, the dreamers, and me”---lyrics from “Rainbow Connection” sung by The Muppets
“Hands on your knees/Hands on your hips
Hands on your shoulders/Hands on your head
Up, down, turn around.”---lyrics from “Up, Down, Turn Around” sung by The Wiggles
“And don’t speak too soon for the wheel’s still spinnin’
And there’s no tellin’who that it’s namin’
For the loser now will be later to win
For the times they are a changin’”---lyrics from “Times They Are A Changin’” sung by Bob Dylan
Modern portfolio theory posits that an investor can maximize his/her return and minimize risk through asset diversification. In other words, by creating a portfolio of assets that move in different (even opposite) directions in response to any given market stimulus one can lower one’s risk and still profit. I get the theory. But, it just isn’t right for “ lovers, dreamers or me.” I have come to believe that one can construct a non-diverse portfolio correlated to a market singularity; with movement by that singularity providing clarity on when to buy, hold or sell. I believe that my “some day to find” that singularity, the “rainbow connection” if you will, has arrived. No surprise to my readers, the singularity of which I write is the yield on the 10Year US Treasury Bond (10Year). I further believe that by maintaining daily vigilance, adhering to strict principles and fearing not, the buying and/or selling, in short order, of some or all of one’s portfolio, one can prosper. In sum, predictability is more important to me than diversification.
Allow me to elaborate As loyal readers now know,” hands on your knees/hands on your hips/hands down” the benchmark interest rate against which all income securities are priced or spread is the yield on the 10Year. Based upon observation and study over the past three years, “hands on your shoulders/hands on your head/ hands down” the asset class most correlated to movement in the 10Year yield or rate is preferred stock. This is understandable since preferred stocks are a pure interest rate play and absent credit risk are unaffected by the performance of the underlying issuer. Stated alternatively, any change in the price of a credit worthy preferred stock is driven almost exclusively by the interest rate on the 10Year. Indeed, on most days I can tell whether my preferred stocks are “up or down” by simply looking at what happened to the yield on the 10Year. or vice versa Moreover, having studied and confirmed this correlation, I have increased my preferred stock income by buying preferred stock closed end funds (e.g. FFC, HPF, JPC) which enhance returns through leverage. To me, the risk associated with these leveraged funds is no greater since the correlation to the 10Year remains the same. Similar correlations to the yield on the 10Year obtain for mortgage real estate investment trusts, triple net lease investment trusts, leveraged bond funds, leveraged senior loan funds, leveraged municipal bond funds, leveraged utility funds and a host of other income securities. On average this portfolio pays an 8% annual dividend. In addition, I look for stocks or funds that distribute dividends monthly because a corollary to owning a portfolio singularly correlated to the yield on the 10Year is that one must be prepared to sell everything once the prevailing winds shift, and the yield on the 10Year starts to rise. This is what happened during the “taper tantrum” last summer when the yield on the 10Year went from 1.63% on May 2 to 2.16% on May 31 to 2.6% on July 5. Once the upward direction of that movement was confirmed (remember: upward yield means downward price), liquidation of the portfolio was in order (See Vol. 172 www.riskrewardblog.blogspot.com ). That wholesale departure was made more palatable by the receipt of monthly dividends which meant that I was not leaving a juicy quarterly dividend behind. In time, the yield on the 10Year stabilized, the typical spreads returned and I re-entered en masse. (See Vol. 200 www.riskrewardblog.blogspot.com ) If and when the 10Year yield begins to inflate in the future, I will sell and await stability again. It's a win/win because all that I have wanted from the beginning of this journey is a decent rate of return on government bonds (see Vol. 1 www.riskrewardblog.blogspot.com )
Some observations on the week:
1)Speaking of winds shifting (and metaphor mixing), the “times they are a changin’” in the oil patch. This week Energy Secretary Ernest Moniz and White House Senior Counselor John Podesta each confirmed that the President is considering lifting the 40 year ban on exporting crude oil. I’m not “speakin’ too soon for the wheel’s still spinnin’/And there’s no tellin’ who that it’s namin’.” But, it appears that “losers now” (namely the producers of light sweet crude not universally suited for refining in the US) “will be later to win” if they are allowed to export. Indeed, the news caused oil and oil related shares (e.g. pipelines, oil services and especially frac sand miner, HCLP) to soar on Wednesday even as most of the market fell.
2)Thursday's Wall Street Journal reported that "central bankers and investors" are "confounded by the persistently sluggish economy" and the drop in yield on the US 10Year. Really? An economy needs demand before it can grow, and consumers drive demand. Where are the consumers? This week, respected bond fund manager Jeff Grundlach and last week, Bond King Bill Gross each restated the obvious. Consumer demand declines as populations age and shrink. Look at Japan and Europe. We are not far behind. As for the yield on the US 10Year, please understand the following: 1)the bond market is global and 2)demand for bonds drives prices up and yields down. One third of all bonds issued by the United States are owned by US agencies which are required by law to keep their reserves in Treasury securities (e.g. Social Security, Federal Reserve, Military Pension Fund, etc.), 1/3rd are owned by US citizens and institutions (the guidelines of which also require a large percentage of assets be held in bonds) and 1/3rd are owned by foreign nationals and governments. If you are required (or of a mind) to own bonds, would you rather own the US 10Year paying 2.5% or Italy's 10Year paying 3.06% or Spain's paying 2.95% or France's paying 1.78% or Germany's paying 1.33% or Japan's paying 0.57%?
3)I was in the car most of Thursday listening to CNBC and Bloomberg Radio. One would have thought the financial world was collapsing---two days after record highs on both the Dow Jones Industrial Average and the S&P 500. Financial news stations are convenient, but like all 24 hour news outlets, they are given to hyperbole.
4)Although the headline news on Friday was that new housing permits jumped in April, the gain came exclusively in multifamily construction. Single family home construction remains in the dumps. Long term, this does not bode well for the economy.
Year to date, including dividends, the Dow Jones Industrial Average is even and the S&P 500 is up only 2%. The stock market is range bound. In contrast, my non diverse portfolio of income securities correlated to the 10Year (plus some oil/gas stocks) has exceeded my annual goal of 6%. That said, like Dylan,
“I ain't lookin' to compete with you
Beat or cheat or mistreat you
Simplify you, classify you
Deny, defy or crucify you
All I really want to do
Is, baby, be friends with you.”
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“Some day we'll find it
The rainbow connection
The lovers, the dreamers, and me”---lyrics from “Rainbow Connection” sung by The Muppets
“Hands on your knees/Hands on your hips
Hands on your shoulders/Hands on your head
Up, down, turn around.”---lyrics from “Up, Down, Turn Around” sung by The Wiggles
“And don’t speak too soon for the wheel’s still spinnin’
And there’s no tellin’who that it’s namin’
For the loser now will be later to win
For the times they are a changin’”---lyrics from “Times They Are A Changin’” sung by Bob Dylan
Modern portfolio theory posits that an investor can maximize his/her return and minimize risk through asset diversification. In other words, by creating a portfolio of assets that move in different (even opposite) directions in response to any given market stimulus one can lower one’s risk and still profit. I get the theory. But, it just isn’t right for “ lovers, dreamers or me.” I have come to believe that one can construct a non-diverse portfolio correlated to a market singularity; with movement by that singularity providing clarity on when to buy, hold or sell. I believe that my “some day to find” that singularity, the “rainbow connection” if you will, has arrived. No surprise to my readers, the singularity of which I write is the yield on the 10Year US Treasury Bond (10Year). I further believe that by maintaining daily vigilance, adhering to strict principles and fearing not, the buying and/or selling, in short order, of some or all of one’s portfolio, one can prosper. In sum, predictability is more important to me than diversification.
Allow me to elaborate As loyal readers now know,” hands on your knees/hands on your hips/hands down” the benchmark interest rate against which all income securities are priced or spread is the yield on the 10Year. Based upon observation and study over the past three years, “hands on your shoulders/hands on your head/ hands down” the asset class most correlated to movement in the 10Year yield or rate is preferred stock. This is understandable since preferred stocks are a pure interest rate play and absent credit risk are unaffected by the performance of the underlying issuer. Stated alternatively, any change in the price of a credit worthy preferred stock is driven almost exclusively by the interest rate on the 10Year. Indeed, on most days I can tell whether my preferred stocks are “up or down” by simply looking at what happened to the yield on the 10Year. or vice versa Moreover, having studied and confirmed this correlation, I have increased my preferred stock income by buying preferred stock closed end funds (e.g. FFC, HPF, JPC) which enhance returns through leverage. To me, the risk associated with these leveraged funds is no greater since the correlation to the 10Year remains the same. Similar correlations to the yield on the 10Year obtain for mortgage real estate investment trusts, triple net lease investment trusts, leveraged bond funds, leveraged senior loan funds, leveraged municipal bond funds, leveraged utility funds and a host of other income securities. On average this portfolio pays an 8% annual dividend. In addition, I look for stocks or funds that distribute dividends monthly because a corollary to owning a portfolio singularly correlated to the yield on the 10Year is that one must be prepared to sell everything once the prevailing winds shift, and the yield on the 10Year starts to rise. This is what happened during the “taper tantrum” last summer when the yield on the 10Year went from 1.63% on May 2 to 2.16% on May 31 to 2.6% on July 5. Once the upward direction of that movement was confirmed (remember: upward yield means downward price), liquidation of the portfolio was in order (See Vol. 172 www.riskrewardblog.blogspot.com ). That wholesale departure was made more palatable by the receipt of monthly dividends which meant that I was not leaving a juicy quarterly dividend behind. In time, the yield on the 10Year stabilized, the typical spreads returned and I re-entered en masse. (See Vol. 200 www.riskrewardblog.blogspot.com ) If and when the 10Year yield begins to inflate in the future, I will sell and await stability again. It's a win/win because all that I have wanted from the beginning of this journey is a decent rate of return on government bonds (see Vol. 1 www.riskrewardblog.blogspot.com )
Some observations on the week:
1)Speaking of winds shifting (and metaphor mixing), the “times they are a changin’” in the oil patch. This week Energy Secretary Ernest Moniz and White House Senior Counselor John Podesta each confirmed that the President is considering lifting the 40 year ban on exporting crude oil. I’m not “speakin’ too soon for the wheel’s still spinnin’/And there’s no tellin’ who that it’s namin’.” But, it appears that “losers now” (namely the producers of light sweet crude not universally suited for refining in the US) “will be later to win” if they are allowed to export. Indeed, the news caused oil and oil related shares (e.g. pipelines, oil services and especially frac sand miner, HCLP) to soar on Wednesday even as most of the market fell.
2)Thursday's Wall Street Journal reported that "central bankers and investors" are "confounded by the persistently sluggish economy" and the drop in yield on the US 10Year. Really? An economy needs demand before it can grow, and consumers drive demand. Where are the consumers? This week, respected bond fund manager Jeff Grundlach and last week, Bond King Bill Gross each restated the obvious. Consumer demand declines as populations age and shrink. Look at Japan and Europe. We are not far behind. As for the yield on the US 10Year, please understand the following: 1)the bond market is global and 2)demand for bonds drives prices up and yields down. One third of all bonds issued by the United States are owned by US agencies which are required by law to keep their reserves in Treasury securities (e.g. Social Security, Federal Reserve, Military Pension Fund, etc.), 1/3rd are owned by US citizens and institutions (the guidelines of which also require a large percentage of assets be held in bonds) and 1/3rd are owned by foreign nationals and governments. If you are required (or of a mind) to own bonds, would you rather own the US 10Year paying 2.5% or Italy's 10Year paying 3.06% or Spain's paying 2.95% or France's paying 1.78% or Germany's paying 1.33% or Japan's paying 0.57%?
3)I was in the car most of Thursday listening to CNBC and Bloomberg Radio. One would have thought the financial world was collapsing---two days after record highs on both the Dow Jones Industrial Average and the S&P 500. Financial news stations are convenient, but like all 24 hour news outlets, they are given to hyperbole.
4)Although the headline news on Friday was that new housing permits jumped in April, the gain came exclusively in multifamily construction. Single family home construction remains in the dumps. Long term, this does not bode well for the economy.
Year to date, including dividends, the Dow Jones Industrial Average is even and the S&P 500 is up only 2%. The stock market is range bound. In contrast, my non diverse portfolio of income securities correlated to the 10Year (plus some oil/gas stocks) has exceeded my annual goal of 6%. That said, like Dylan,
“I ain't lookin' to compete with you
Beat or cheat or mistreat you
Simplify you, classify you
Deny, defy or crucify you
All I really want to do
Is, baby, be friends with you.”
Saturday, May 10, 2014
May 10, 2014 Never Can Tell
Risk/Reward Vol. 220
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"If I listened long enough to you
I'd find a way/To believe that it's all true."---lyrics from "Reason to Believe" sung by Rod Stewart
"It was a teenage wedding/ And the old folks wished them well
You could see that Pierre/Did truly love the mademoiselle
C'est la vie say the old folks
It goes to show you never can tell"---lyrics from "Never Can Tell" sung by Chuck Berry
"Pardon the way that I stare
There's nothing else to compare."---lyrics from "Can't Take My Eyes Off of You"---sung by The Four Seasons
According to Federal Reserve economists, after previous recessions, pent up demand for residential housing has led economic recovery. Not so this time. That is why housing and, in particular new home construction, dominated the news this week. It started on Monday with Warren Buffett's expression of surprise at how sluggish that sector has been. That comment was followed by an article in the New York Times reporting that housing has been a net drag on the economy. Later, noted investor Jeff Gundlach stated in his speech at the Sohn Conference that any hope that housing would lead the recovery this time around was "overbelieved." But what really focused concern was Janet Yellen's testimony to Congress on Wednesday and Thursday that the "flattening in housing activity could be protracted." This is troubling considering that the Federal Reserve has bid upon and purchased over $1.6TRILLION in conventional home mortgages since January, 2009. Indeed, it now owns 17% of ALL currently outstanding home mortgages. Like bonds, the interest rates on mortgages fall if the prices paid therefor increase. Thus, the Fed's upbidding has kept mortgage rates artificially low in an attempt to jump start this traditional recovery bellwether. It hasn't worked. We’ve been “listening long enough” for a "Reason To Believe" that it will rebound. The fact remains that housing is in the dumps---even if Warren finds it hard to “believe that it’s all true.”
I predict that housing will not only fail to lead the recovery, it will not recover at all. The reason has nothing to do with the economy, and everything to do with demographics. According to the US Census Bureau, between 1997 and 2006, on average 1,350,000 net new households (independent living units with one or more persons) were formed each year. Since 2007, annual net household formation has averaged 550,000 and is declining. Meanwhile, the total number of family households (e.g. husband+wife with or without children) has fallen. In other words, today when "Pierre truly loves the mademoiselle" there is no wedding even if the "old folks wish them well." With home ownership proving to be a poor investment, why would any single person or any couple, for that matter, buy a house unless they have children? Note the following two points. First, as reported on Thursday, 43% of all existing home sales in Q1 2014 were cash sales. Believe me these are not first time buyers which is the group the Fed wants to attract with low interest rates. Second, as noted in Vol. 218 (www.riskrewardblog.blogspot.com ), as a nation we are reproducing at less than a population replacement rate. Do you think I'm off target regarding the impact of demographics? Take a look around. When Barb and I were 33 we had four children, had bought and sold one house and had purchased, remodeled and furnished a second one. We lived in a neighborhood of similarly situated couples. How many 33 year olds do you know with four children, how about three, how about two, how about one? How many are even married? I make no societal judgments here, but you have to be blind (or the Federal Reserve Chair) not to see that housing, particularly single family home construction, is not going to rebound. “C’est la vie says this old folk/It goes to show you never can tell.”
So what does this mean for investors? The answer was supplied by Fed insider Jon Hilsenrath in an article published in Thursday’s Wall Street Journal headlined “Housing Doldrums Worry Fed Officials.” Therein, Hilsenrath wrote: “If housing fails to revive as expected and holds back the broader recovery, Fed officials could decide to take even more time on an already slow path to eventual interest rate increases.” Believe me that is not speculation on Hilsenrath’s part. That tidbit came straight from Yellen’s lips to Hilsenrath’s ear to WSJ’s front page. As a consequence my overweight position in income securities priced in relation (or spread) to the interest rate on the all important 10 Year Treasury Bond continues to look good (remember lower interest rates mean higher prices). So, “Pardon the way that I stare” at the interest rate on that all important security as it continues to trend downward. It now hovers around 2.6% ; this despite the consensus prediction last fall, last winter and this spring (except by yours truly—see Vol. 186 www.riskrewardblog.blogspot.com ) that at this juncture, it would be well over 3%. And continue to stare at the yield on the 10 Year I will, because there is “nothing else to compare” when it comes to predicting how income stocks will fare. I "Can't Take My Eyes Off Of It."
Even if historically it has led the way out of recessions, the sale of new and existing houses only represents 4-5% of annual GDP. So why is the Fed so obsessed with it? I suspect there is another reason why Ms. Yellen has “Got It Under Her Skin”, one about which she has spoken in the past. (Google: "Yellen speech Feb.11, 2013). A house has been the average American’s largest investment for generations, and no generation sunk more of their net worth into housing than the Baby Boomers. We were weaned on the belief that houses never depreciate. Mortgage interest was our only tax break, and we used home equity as our piggy bank. So, if housing prices fall (which is more likely if mortgage interest rates go up), a huge percentage of Baby Boomer wealth will evaporate just as they enter retirement. This prospect carries significant deflationary implications. I suggest this is her greater concern and one more reason why she will keep interest rates low indefinitely
“In spite of a warning voice that comes in the night
And repeats, repeats in her ear
Don’t you know you fool/You never can win
Use your mentality/Wake up to reality.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"If I listened long enough to you
I'd find a way/To believe that it's all true."---lyrics from "Reason to Believe" sung by Rod Stewart
"It was a teenage wedding/ And the old folks wished them well
You could see that Pierre/Did truly love the mademoiselle
C'est la vie say the old folks
It goes to show you never can tell"---lyrics from "Never Can Tell" sung by Chuck Berry
"Pardon the way that I stare
There's nothing else to compare."---lyrics from "Can't Take My Eyes Off of You"---sung by The Four Seasons
According to Federal Reserve economists, after previous recessions, pent up demand for residential housing has led economic recovery. Not so this time. That is why housing and, in particular new home construction, dominated the news this week. It started on Monday with Warren Buffett's expression of surprise at how sluggish that sector has been. That comment was followed by an article in the New York Times reporting that housing has been a net drag on the economy. Later, noted investor Jeff Gundlach stated in his speech at the Sohn Conference that any hope that housing would lead the recovery this time around was "overbelieved." But what really focused concern was Janet Yellen's testimony to Congress on Wednesday and Thursday that the "flattening in housing activity could be protracted." This is troubling considering that the Federal Reserve has bid upon and purchased over $1.6TRILLION in conventional home mortgages since January, 2009. Indeed, it now owns 17% of ALL currently outstanding home mortgages. Like bonds, the interest rates on mortgages fall if the prices paid therefor increase. Thus, the Fed's upbidding has kept mortgage rates artificially low in an attempt to jump start this traditional recovery bellwether. It hasn't worked. We’ve been “listening long enough” for a "Reason To Believe" that it will rebound. The fact remains that housing is in the dumps---even if Warren finds it hard to “believe that it’s all true.”
I predict that housing will not only fail to lead the recovery, it will not recover at all. The reason has nothing to do with the economy, and everything to do with demographics. According to the US Census Bureau, between 1997 and 2006, on average 1,350,000 net new households (independent living units with one or more persons) were formed each year. Since 2007, annual net household formation has averaged 550,000 and is declining. Meanwhile, the total number of family households (e.g. husband+wife with or without children) has fallen. In other words, today when "Pierre truly loves the mademoiselle" there is no wedding even if the "old folks wish them well." With home ownership proving to be a poor investment, why would any single person or any couple, for that matter, buy a house unless they have children? Note the following two points. First, as reported on Thursday, 43% of all existing home sales in Q1 2014 were cash sales. Believe me these are not first time buyers which is the group the Fed wants to attract with low interest rates. Second, as noted in Vol. 218 (www.riskrewardblog.blogspot.com ), as a nation we are reproducing at less than a population replacement rate. Do you think I'm off target regarding the impact of demographics? Take a look around. When Barb and I were 33 we had four children, had bought and sold one house and had purchased, remodeled and furnished a second one. We lived in a neighborhood of similarly situated couples. How many 33 year olds do you know with four children, how about three, how about two, how about one? How many are even married? I make no societal judgments here, but you have to be blind (or the Federal Reserve Chair) not to see that housing, particularly single family home construction, is not going to rebound. “C’est la vie says this old folk/It goes to show you never can tell.”
So what does this mean for investors? The answer was supplied by Fed insider Jon Hilsenrath in an article published in Thursday’s Wall Street Journal headlined “Housing Doldrums Worry Fed Officials.” Therein, Hilsenrath wrote: “If housing fails to revive as expected and holds back the broader recovery, Fed officials could decide to take even more time on an already slow path to eventual interest rate increases.” Believe me that is not speculation on Hilsenrath’s part. That tidbit came straight from Yellen’s lips to Hilsenrath’s ear to WSJ’s front page. As a consequence my overweight position in income securities priced in relation (or spread) to the interest rate on the all important 10 Year Treasury Bond continues to look good (remember lower interest rates mean higher prices). So, “Pardon the way that I stare” at the interest rate on that all important security as it continues to trend downward. It now hovers around 2.6% ; this despite the consensus prediction last fall, last winter and this spring (except by yours truly—see Vol. 186 www.riskrewardblog.blogspot.com ) that at this juncture, it would be well over 3%. And continue to stare at the yield on the 10 Year I will, because there is “nothing else to compare” when it comes to predicting how income stocks will fare. I "Can't Take My Eyes Off Of It."
Even if historically it has led the way out of recessions, the sale of new and existing houses only represents 4-5% of annual GDP. So why is the Fed so obsessed with it? I suspect there is another reason why Ms. Yellen has “Got It Under Her Skin”, one about which she has spoken in the past. (Google: "Yellen speech Feb.11, 2013). A house has been the average American’s largest investment for generations, and no generation sunk more of their net worth into housing than the Baby Boomers. We were weaned on the belief that houses never depreciate. Mortgage interest was our only tax break, and we used home equity as our piggy bank. So, if housing prices fall (which is more likely if mortgage interest rates go up), a huge percentage of Baby Boomer wealth will evaporate just as they enter retirement. This prospect carries significant deflationary implications. I suggest this is her greater concern and one more reason why she will keep interest rates low indefinitely
“In spite of a warning voice that comes in the night
And repeats, repeats in her ear
Don’t you know you fool/You never can win
Use your mentality/Wake up to reality.
Saturday, May 3, 2014
May 3, 2014 Blame It On The Rain
Risk/Reward Vol. 219
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"And you feel like such a fool
Gotta blame it on something
Blame it on the rain."---lyrics from "Blame It On the Rain" lip-sync'd by Milli Vanilli
"So look at me now/I'm just makin' my play
Cause I'm back/Yes I'm back
Well, I'm back in black."---lyrics from "Back in Black" sung by AC/DC
"We just want to dance here/Someone stole the stage
They call us irresponsible/Write us off the page
We built this city/We built this city on rock and roll."---lyrics from "Built This City" sung by Starship
On Wednesday, the Commerce Department released a report on first quarter (Q1) 2014 gross domestic product (GDP), the broadest measure of how the US economy has performed. For the first three months of 2014, GDP grew at a woeful 0.1% annualized rate, far short of the 2.6% annualized rate reported for Q4 2013 and well below 1.1%, the consensus estimate from economists before the report's issuance. The GDP report preceded a press release of the Federal Reserve which also was issued on Wednesday. In that press release, the Fed referenced the sharply lower Q1GDP number but attributed it to weather and cited its expectation of much better numbers in Q2 as a justification for further tapering its asset purchase program (QE3). Really? Really? Instead of owning up to the fact that its accommodative monetary policies have failed to jump start the Main Street economy (see last week's edition Riskrewardblog
So if the GDP report was a disappointment, why did the Dow Jones Industrial Average (DJIA) record a new high on Wednesday--- and drop after Fridays' seemingly positive jobs report? (Note: the DJIA dropped before any details came from Ukraine, news which admittedly contributed to Friday's negative close.) Here is my take. The employment report is a mixed bag. The headline gain in jobs (288,000) and drop in the unemployment rate (6.3%) is encouraging, but a deeper dive into the report reveals that the labor force (job participation rate) is shrinking. Only 62.8% of working age persons are employed or unemployed and looking for a job. This is the lowest labor participation rate in 35 years---a time when women did not participate in the work force in the numbers that they do now. As discussed last week, an aging and shrinking labor force (800,000 people dropped out of the pool in April alone!) carries long term and lasting negative implications for economic growth. Fewer workers means less demand, and less demand means less growth. Moreover, minimal wage gains were reported which signals that the new jobs that were added are lower paying ones. I submit that any positive movement in the market this week had less to do with lower unemployment OR the expectation of future growth and more to do with another statement in the Fed's press release; to wit, that the Fed will keep the Fed Funds rate low as long as inflation remains below its 2% target. This could be a very long time since 1) inflation is currently below 1%, and 2) the greatest driver of inflation, wages, remains stagnant. The bond market obviously agreed as the yield on the 10Year US Treasury Bond did not rise above 2.68% during the entire week and fell to 2.59%% at Friday's close. So what does this have to do with stock prices? Low interest rates make borrowing inexpensive for credit worthy companies such as those comprising the DJIA. This cheap and plentiful credit promotes mergers, acquisitons and stock buy backs. Thus, it is not surprising that currently Pfizer is in the hunt for AstraZeneca , AT&T is pursuing DirecTV and Exelon is buying Pepco, all at huge premiums to their market price. In addition, Apple sold $12billion in bonds this week and intends to use the proceeds to fund in part its announced $90billion share buy back program. The entire purpose of buybacks is to keep stock prices elevated. Like AC/DC, "look at Apple now/Just makin' its play" It's "buyin' stock back/ Yes, it's buyin' stock back/Well it's buyin' stock back/Puttin' its shareholders more into the black." Accordingly, in my humble opinion, it was the prospect of more mergers, acquisitions and buybacks fueled by continued cheap credit that drove the stock market higher for the week.
Last summer's spike in the 10Year Treasury rate, a concomitant drop in the price of all securities that trade in relation thereto and the ripple effect of Detroit's bankruptcy made 2013 a terrible year for municipal bonds. Many investors wrote this sector completely "off the page." But the prospect that Detroit, the "irresponsible" "city built on rock and roll (and automobiles)" may actually forge a workable solution to its problems, combined with improved tax receipts in cities nationwide, investor desire for tax advantaged investments and most importantly low and stable interest rates has made muni's a big winner so far this year. Having "stolen the stage", they are beginning to be spotlighted. I own some muni bonds outright but prefer the returns available through leveraged closed end muni bond funds. I own EIM, MNP, MQT, MUS, MVF, MYD, OIA, PMO and VGM.
I know that I sound like a broken AC/DC record, but "Hells Bell" if you remember nothing else from these epistles, remember that the most accurate stock market barometer is the interest rate on the10Year Treasury Bond. The 10Year drives the credit markets, reflects market sentiment and is the closest instrument we have to the hypothetical risk free security against which all risk adjusted returns are measured. Those that thought that the stock market would explode like "TNT' in the wake of Friday's jobs headlines simply failed to appreciate this fact. Those that watched what happened to the 10Year were not fooled. Markets can move on the "Flick of a Switch", but miscalculating which signals to follow is the surest path to the "Highway to Hell." Contrary to what Michael Lewis asserts, I believe we CAN make money in the stock market without resorting to "Dirty Deeds Done Dirt Cheap" But we must keep studying, observing, recording and learning. "It's A Long Way to the Top (If You Wanna Rock and Roll).
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"And you feel like such a fool
Gotta blame it on something
Blame it on the rain."---lyrics from "Blame It On the Rain" lip-sync'd by Milli Vanilli
"So look at me now/I'm just makin' my play
Cause I'm back/Yes I'm back
Well, I'm back in black."---lyrics from "Back in Black" sung by AC/DC
"We just want to dance here/Someone stole the stage
They call us irresponsible/Write us off the page
We built this city/We built this city on rock and roll."---lyrics from "Built This City" sung by Starship
On Wednesday, the Commerce Department released a report on first quarter (Q1) 2014 gross domestic product (GDP), the broadest measure of how the US economy has performed. For the first three months of 2014, GDP grew at a woeful 0.1% annualized rate, far short of the 2.6% annualized rate reported for Q4 2013 and well below 1.1%, the consensus estimate from economists before the report's issuance. The GDP report preceded a press release of the Federal Reserve which also was issued on Wednesday. In that press release, the Fed referenced the sharply lower Q1GDP number but attributed it to weather and cited its expectation of much better numbers in Q2 as a justification for further tapering its asset purchase program (QE3). Really? Really? Instead of owning up to the fact that its accommodative monetary policies have failed to jump start the Main Street economy (see last week's edition Riskrewardblog
So if the GDP report was a disappointment, why did the Dow Jones Industrial Average (DJIA) record a new high on Wednesday--- and drop after Fridays' seemingly positive jobs report? (Note: the DJIA dropped before any details came from Ukraine, news which admittedly contributed to Friday's negative close.) Here is my take. The employment report is a mixed bag. The headline gain in jobs (288,000) and drop in the unemployment rate (6.3%) is encouraging, but a deeper dive into the report reveals that the labor force (job participation rate) is shrinking. Only 62.8% of working age persons are employed or unemployed and looking for a job. This is the lowest labor participation rate in 35 years---a time when women did not participate in the work force in the numbers that they do now. As discussed last week, an aging and shrinking labor force (800,000 people dropped out of the pool in April alone!) carries long term and lasting negative implications for economic growth. Fewer workers means less demand, and less demand means less growth. Moreover, minimal wage gains were reported which signals that the new jobs that were added are lower paying ones. I submit that any positive movement in the market this week had less to do with lower unemployment OR the expectation of future growth and more to do with another statement in the Fed's press release; to wit, that the Fed will keep the Fed Funds rate low as long as inflation remains below its 2% target. This could be a very long time since 1) inflation is currently below 1%, and 2) the greatest driver of inflation, wages, remains stagnant. The bond market obviously agreed as the yield on the 10Year US Treasury Bond did not rise above 2.68% during the entire week and fell to 2.59%% at Friday's close. So what does this have to do with stock prices? Low interest rates make borrowing inexpensive for credit worthy companies such as those comprising the DJIA. This cheap and plentiful credit promotes mergers, acquisitons and stock buy backs. Thus, it is not surprising that currently Pfizer is in the hunt for AstraZeneca , AT&T is pursuing DirecTV and Exelon is buying Pepco, all at huge premiums to their market price. In addition, Apple sold $12billion in bonds this week and intends to use the proceeds to fund in part its announced $90billion share buy back program. The entire purpose of buybacks is to keep stock prices elevated. Like AC/DC, "look at Apple now/Just makin' its play" It's "buyin' stock back/ Yes, it's buyin' stock back/Well it's buyin' stock back/Puttin' its shareholders more into the black." Accordingly, in my humble opinion, it was the prospect of more mergers, acquisitions and buybacks fueled by continued cheap credit that drove the stock market higher for the week.
Last summer's spike in the 10Year Treasury rate, a concomitant drop in the price of all securities that trade in relation thereto and the ripple effect of Detroit's bankruptcy made 2013 a terrible year for municipal bonds. Many investors wrote this sector completely "off the page." But the prospect that Detroit, the "irresponsible" "city built on rock and roll (and automobiles)" may actually forge a workable solution to its problems, combined with improved tax receipts in cities nationwide, investor desire for tax advantaged investments and most importantly low and stable interest rates has made muni's a big winner so far this year. Having "stolen the stage", they are beginning to be spotlighted. I own some muni bonds outright but prefer the returns available through leveraged closed end muni bond funds. I own EIM, MNP, MQT, MUS, MVF, MYD, OIA, PMO and VGM.
I know that I sound like a broken AC/DC record, but "Hells Bell" if you remember nothing else from these epistles, remember that the most accurate stock market barometer is the interest rate on the10Year Treasury Bond. The 10Year drives the credit markets, reflects market sentiment and is the closest instrument we have to the hypothetical risk free security against which all risk adjusted returns are measured. Those that thought that the stock market would explode like "TNT' in the wake of Friday's jobs headlines simply failed to appreciate this fact. Those that watched what happened to the 10Year were not fooled. Markets can move on the "Flick of a Switch", but miscalculating which signals to follow is the surest path to the "Highway to Hell." Contrary to what Michael Lewis asserts, I believe we CAN make money in the stock market without resorting to "Dirty Deeds Done Dirt Cheap" But we must keep studying, observing, recording and learning. "It's A Long Way to the Top (If You Wanna Rock and Roll).
Saturday, April 26, 2014
April 26, 2014 Wild About Harry (Dent)
Risk/Reward Vol. 218
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"You may be right/I may be crazy
But it just may be a lunatic/You're looking for."---lyrics from "You May Be Right" sung by Billy Joel
"People who need people
Are the luckiest people in the world
Children needing other children"---lyrics from "People" sung by Barbra Streisand
"A room is still a room
Even when there's nothing there but gloom
But a room is not a house
And a house is not a home."---lyrics from "A House Is Not a Home" sung by Dionne Warwick
Busch's Postulate: Interest rates will not increase in the foreseeable future.
In so postulating, I posit two premises: 1) economies in countries with aging and shrinking populations do not grow; and 2) the above notwithstanding, central bankers and the economists that they employ believe they can spur economic growth by maintaining low interest rates. I lit on these two premises while reading Harry Dent Jr.'s new book "The Demographic Cliff". If you google Mr. Dent, you may conclude that he is a crackpot. "You may be right/He may be crazy/But it just may be a lunatic (as opposed to an economist) that we are looking for." And before dismissing premise number one, take a gander at Japan's experience over the past 15 years and keep an eye on present day Europe. One has long suffered from economic stagnation, even deflation and the other is on the verge. (Indeed , my concern is such that I am currently spending several days on the French Riviera helping its economy.) The US is not far behind. All three have aging/shrinking populations. Dent is not alone in his thinking. Read the musings of Stephen Conwill who as president of Milliman of Japan has witnessed deflation first hand and who has issued the following challenge: "Find in history an example of an economy that has combined solid growth with a declining population."
It is Mr. Dent's further contention that a person's peak age of consumption is 46--- a larger abode, college tuition, a second home, a nicer car, etc. With the post World War II Baby Boom ending in 1961, simple math led Dent to conclude that Baby Boomer consumption crested in 2007. The offspring of the Boomers have heretofore reproduced at less than the population replacement rate (1.84 births per woman vs. 2.1 needed to simply replace a population) and even that rate is trending down. Apparently, they do not believe that "People who need people/Are the luckiest people in the world." Or that "children need other children." As Harry puts it, in the US the dyers are outnumbering the buyers. (N.B. In 2012 deaths outnumbered births in the US non-Hispanic white population for the first time in history.) The birth rate in Europe and Japan is even lower, and if you think that China will help spur demand, think of the impact of the "one child rule". Hence, Dent sees years of lessening demand world wide and slow to no growth.
So how does this impact my investing? As noted in premise two above, central bankers have unlimited hubris, but limited tools to combat slow growth. They can keep short term interest rates low by fiat (e.g. via the Fed fund rate) and longer term ones low by quantitative easing (e.g. buying bonds and mortgages). Both may have a short term positive impact on the stock market but neither has proven to spur economic growth. As reported this week, despite spending hundreds of billions of dollars to suppress mortgage rates (QE3), new home sales for March were at an annualized rate of 384,000 down from February and downright puny when compared to the 1,400,000 new homes sold in 2005. Last week, the number of existing home sales was reported at an annualized rate of 4.6million compared to 7.25million in 2005. Talk about "nothing there but gloom." I guess Dionne is right, "a room is not a house/And a house is not a home"--- if no one buys it, that is. Yet, despite demonstrated ineffectiveness, we can expect the Fed to keep interest rates low. And as long as interest rates stay low (especially on the 10Year US Treasury Bond) my high yielding, income securities remain a good investment. Holding pat with preferred stocks, utilities, real estate investment trusts and leveraged close end funds seems the right thing to do.
The mediocre performance of the stock market year to date (as of Friday the Dow Jones Industrial Average is down 1% and the S&P is up less than 1%) reflects mounting concern over the prospects for solid economic growth despite low interest rates. Some, like Dent, believe that slow growth could become no growth or even deflation. I'm not saying that any day soon you, like Ms. Warwick, will be able to "put $100 down and buy a car", but the deflationary impact of an aging/shrinking population is disconcerting. And as for Janet Yellen, like all central bankers,
"The moment she wakes up
Before she puts on her make up
She says a little prayer"
that low interest rates will spur growth. Bonne chance, Janet!
Au revoir from Nice.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"You may be right/I may be crazy
But it just may be a lunatic/You're looking for."---lyrics from "You May Be Right" sung by Billy Joel
"People who need people
Are the luckiest people in the world
Children needing other children"---lyrics from "People" sung by Barbra Streisand
"A room is still a room
Even when there's nothing there but gloom
But a room is not a house
And a house is not a home."---lyrics from "A House Is Not a Home" sung by Dionne Warwick
Busch's Postulate: Interest rates will not increase in the foreseeable future.
In so postulating, I posit two premises: 1) economies in countries with aging and shrinking populations do not grow; and 2) the above notwithstanding, central bankers and the economists that they employ believe they can spur economic growth by maintaining low interest rates. I lit on these two premises while reading Harry Dent Jr.'s new book "The Demographic Cliff". If you google Mr. Dent, you may conclude that he is a crackpot. "You may be right/He may be crazy/But it just may be a lunatic (as opposed to an economist) that we are looking for." And before dismissing premise number one, take a gander at Japan's experience over the past 15 years and keep an eye on present day Europe. One has long suffered from economic stagnation, even deflation and the other is on the verge. (Indeed , my concern is such that I am currently spending several days on the French Riviera helping its economy.) The US is not far behind. All three have aging/shrinking populations. Dent is not alone in his thinking. Read the musings of Stephen Conwill who as president of Milliman of Japan has witnessed deflation first hand and who has issued the following challenge: "Find in history an example of an economy that has combined solid growth with a declining population."
It is Mr. Dent's further contention that a person's peak age of consumption is 46--- a larger abode, college tuition, a second home, a nicer car, etc. With the post World War II Baby Boom ending in 1961, simple math led Dent to conclude that Baby Boomer consumption crested in 2007. The offspring of the Boomers have heretofore reproduced at less than the population replacement rate (1.84 births per woman vs. 2.1 needed to simply replace a population) and even that rate is trending down. Apparently, they do not believe that "People who need people/Are the luckiest people in the world." Or that "children need other children." As Harry puts it, in the US the dyers are outnumbering the buyers. (N.B. In 2012 deaths outnumbered births in the US non-Hispanic white population for the first time in history.) The birth rate in Europe and Japan is even lower, and if you think that China will help spur demand, think of the impact of the "one child rule". Hence, Dent sees years of lessening demand world wide and slow to no growth.
So how does this impact my investing? As noted in premise two above, central bankers have unlimited hubris, but limited tools to combat slow growth. They can keep short term interest rates low by fiat (e.g. via the Fed fund rate) and longer term ones low by quantitative easing (e.g. buying bonds and mortgages). Both may have a short term positive impact on the stock market but neither has proven to spur economic growth. As reported this week, despite spending hundreds of billions of dollars to suppress mortgage rates (QE3), new home sales for March were at an annualized rate of 384,000 down from February and downright puny when compared to the 1,400,000 new homes sold in 2005. Last week, the number of existing home sales was reported at an annualized rate of 4.6million compared to 7.25million in 2005. Talk about "nothing there but gloom." I guess Dionne is right, "a room is not a house/And a house is not a home"--- if no one buys it, that is. Yet, despite demonstrated ineffectiveness, we can expect the Fed to keep interest rates low. And as long as interest rates stay low (especially on the 10Year US Treasury Bond) my high yielding, income securities remain a good investment. Holding pat with preferred stocks, utilities, real estate investment trusts and leveraged close end funds seems the right thing to do.
The mediocre performance of the stock market year to date (as of Friday the Dow Jones Industrial Average is down 1% and the S&P is up less than 1%) reflects mounting concern over the prospects for solid economic growth despite low interest rates. Some, like Dent, believe that slow growth could become no growth or even deflation. I'm not saying that any day soon you, like Ms. Warwick, will be able to "put $100 down and buy a car", but the deflationary impact of an aging/shrinking population is disconcerting. And as for Janet Yellen, like all central bankers,
"The moment she wakes up
Before she puts on her make up
She says a little prayer"
that low interest rates will spur growth. Bonne chance, Janet!
Au revoir from Nice.
Saturday, April 19, 2014
April 19, 2014 Bond Lorde
Risk/Reward Vol. 217
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"I know y'all think I'm lyin'
But listen you're wrong
Like I told you before
My word is bond."---lyrics "Word is Bond" sung by Ice T
"Then I began to fall so low
Lost all my friends/Had no where to go
Because nobody knows you
When you're down and out."---lyrics from "Nobody Knows You When You're Down and Out" sung by Eric Clapton
"We were in the hospital
Waiting for you to get well
In the ambulance you were laughing
The real fun was when we were young."---lyrics from "Hospital" sung by Lorde
As loyal readers know, I am an income investor. Because interest rates have been at historic lows since the financial crisis of 2008, my search for yield has forced me out of investment grade bonds and into riskier income securities such as master limited partnerships, real estate investment trusts, utlilites, preferred stocks, etc. But, "like I told you before", "my world is (still dictated by) bonds." With as many equity positions as I have, "I know y'all think I'm lying'"; "but listen you're wrong." Bonds, particularly the 10 Year U.S. Treasury Bond ("10Year"), influence, nay dominate, my every move. My thesis is this: understanding income producing stocks requires understanding bonds. Here is why. Backed by the full faith, credit and property of the United States, the 10Year is the security most analogous to the hypothetical risk-free asset upon which modern portfolio theory is based. All income securities are priced in relation (or "spread") to the return available on risk free assets; the greater the risk, the greater the spread that Mr. Market demands. Thus any movement in price/yield on the 10Year necessarily impacts all income securities. That's why I follow the bond market so assiduously. I even tolerate Rick Santelli's speaking voice (or rather his yelling). His insights on the bond market heard daily on CNBC are worth the screech and signal more about what to expect than any other commentary on that station. Also, it's why I read any and all columns written by Jon Hilsenrath of the Wall Street Journal ( free for non subscribers via Google one or two days after publication). His columns on bonds and interest rates are so influential, he refuses to Tweet, fearing the possible impact of an off-handed, unedited comment.
As loyal readers also know, central banks greatly influence bond prices (and thus their yields) by controlling short term interest rates, issuing forward guidance and purchasing bonds outright in programs such as the Federal Reserves's QE3. Less well known is the influence of two large bond fund sponsors, PIMCO and BlackRock, and the men who run them, Bill Gross and Larry Fink. If you look at the bond funds offered by your 401(k), chances are one or more are sponsored by PIMCO or BlackRock. Between them, these two sponsors control over $3Trillion worth of bonds, or over 3%% of the world's supply ($90TR). By comparison, despite having purchased $85billion of bonds per month for more than a year (QE3), the Federal Reserve today holds a total of $4Trillion in bonds, only 25% more than PIMCO and BlackRock. As you know, the spike in interest rates last year (after almost 30 years of falling rates) caused the price of bonds to plummet. (Remember, rising rates means falling prices.) Not surprisingly, "nobody fell so low" as Bill Gross who for the past decade has been known as the Bond King. Gross' reputation also suffered from orchestrating the departure of PIMCO's popular CEO, Mohamed El Erian. Indeed, recently it has been as if "Gross lost all his friends/and Had no where to go" But in my opinion, Gross' current diminished circumstance presents an excellent opportunity for income investors. It was precisely "Because nobody wanted to know Gross/When he was down and out" that I was able to purchase, at a discount to net asset value, shares of PFN, a closed end bond fund personally managed by Gross. PFN pays a 9+% annual dividend on a monthly basis and heretofore rarely if ever traded at a discount. In my opinion, buying PFN (and Gross' expertise) at a discount (still available, by the way) is like getting front row seats below face value to an Eric Clapton concert.
On the equity side, few sectors have outperformed real estate investment trusts (REIT's) this year. REIT's suffered from the spike in interest rates in 2013 because, as discussed above, they trade in relation to the 10Year. If interest rates increase as they did sharply last summer, prices fall. But REIT's have flourished in this year's surprisingly (to person's other than me, that is--see Vol. 186 http://www.riskrewardblog.blogspot.com ) stable rate environment . And in the REIT sector, health care REIT's have done particularly well. These entities own health care facilities which they rent via long term, triple net leases to hospitals, nursing home operators and physician groups. You may be of the opinion that "the real fun was when we were young", but the future for aging America is "in the ambulance" and/or "in the hospital waiting to get well". Consequently, I own HCN and HCP, both of which are up over 10% year to date. Since both now pay only a mid 5% dividend due to their run up in price, I do not see them appreciating in the next several months. For that reason, I recently purchased shares in HCT, a smaller health care REIT run by Nicholas Schorsch and William Kahane. They built ARCP into the largest commercial, triple net REIT in the country. I look for them to repeat that success in the health care arena, all the while maintaining a 7% dividend.
Thankfully, the markets rallied this holiday-shortened week. The Dow Jones Industrial Average closed up 382 points. And speaking of thanks, thank you all for your patience as I struggle to make sense of investing. Recording my thoughts and observations is helping me to formulate an investment philosophy. Moreover, I find your feedback to be invaluable. Clearly, I remain a novice, and under no circumstance would I, like Lorde, request that you "let me be your ruler, ruler." I do not wish to "live that fantasy." But I am convinced that the better we understand concepts such as relational asset pricing, the better investors we will be. We will no longer be merely "driving Cadillacs in our dreams." Instead, we will be enjoying:
"...Cristal, Maybach, diamonds on our timepiece
Jet planes, islands, and tigers on a gold leash."
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"I know y'all think I'm lyin'
But listen you're wrong
Like I told you before
My word is bond."---lyrics "Word is Bond" sung by Ice T
"Then I began to fall so low
Lost all my friends/Had no where to go
Because nobody knows you
When you're down and out."---lyrics from "Nobody Knows You When You're Down and Out" sung by Eric Clapton
"We were in the hospital
Waiting for you to get well
In the ambulance you were laughing
The real fun was when we were young."---lyrics from "Hospital" sung by Lorde
As loyal readers know, I am an income investor. Because interest rates have been at historic lows since the financial crisis of 2008, my search for yield has forced me out of investment grade bonds and into riskier income securities such as master limited partnerships, real estate investment trusts, utlilites, preferred stocks, etc. But, "like I told you before", "my world is (still dictated by) bonds." With as many equity positions as I have, "I know y'all think I'm lying'"; "but listen you're wrong." Bonds, particularly the 10 Year U.S. Treasury Bond ("10Year"), influence, nay dominate, my every move. My thesis is this: understanding income producing stocks requires understanding bonds. Here is why. Backed by the full faith, credit and property of the United States, the 10Year is the security most analogous to the hypothetical risk-free asset upon which modern portfolio theory is based. All income securities are priced in relation (or "spread") to the return available on risk free assets; the greater the risk, the greater the spread that Mr. Market demands. Thus any movement in price/yield on the 10Year necessarily impacts all income securities. That's why I follow the bond market so assiduously. I even tolerate Rick Santelli's speaking voice (or rather his yelling). His insights on the bond market heard daily on CNBC are worth the screech and signal more about what to expect than any other commentary on that station. Also, it's why I read any and all columns written by Jon Hilsenrath of the Wall Street Journal ( free for non subscribers via Google one or two days after publication). His columns on bonds and interest rates are so influential, he refuses to Tweet, fearing the possible impact of an off-handed, unedited comment.
As loyal readers also know, central banks greatly influence bond prices (and thus their yields) by controlling short term interest rates, issuing forward guidance and purchasing bonds outright in programs such as the Federal Reserves's QE3. Less well known is the influence of two large bond fund sponsors, PIMCO and BlackRock, and the men who run them, Bill Gross and Larry Fink. If you look at the bond funds offered by your 401(k), chances are one or more are sponsored by PIMCO or BlackRock. Between them, these two sponsors control over $3Trillion worth of bonds, or over 3%% of the world's supply ($90TR). By comparison, despite having purchased $85billion of bonds per month for more than a year (QE3), the Federal Reserve today holds a total of $4Trillion in bonds, only 25% more than PIMCO and BlackRock. As you know, the spike in interest rates last year (after almost 30 years of falling rates) caused the price of bonds to plummet. (Remember, rising rates means falling prices.) Not surprisingly, "nobody fell so low" as Bill Gross who for the past decade has been known as the Bond King. Gross' reputation also suffered from orchestrating the departure of PIMCO's popular CEO, Mohamed El Erian. Indeed, recently it has been as if "Gross lost all his friends/and Had no where to go" But in my opinion, Gross' current diminished circumstance presents an excellent opportunity for income investors. It was precisely "Because nobody wanted to know Gross/When he was down and out" that I was able to purchase, at a discount to net asset value, shares of PFN, a closed end bond fund personally managed by Gross. PFN pays a 9+% annual dividend on a monthly basis and heretofore rarely if ever traded at a discount. In my opinion, buying PFN (and Gross' expertise) at a discount (still available, by the way) is like getting front row seats below face value to an Eric Clapton concert.
On the equity side, few sectors have outperformed real estate investment trusts (REIT's) this year. REIT's suffered from the spike in interest rates in 2013 because, as discussed above, they trade in relation to the 10Year. If interest rates increase as they did sharply last summer, prices fall. But REIT's have flourished in this year's surprisingly (to person's other than me, that is--see Vol. 186 http://www.riskrewardblog.blogspot.com ) stable rate environment . And in the REIT sector, health care REIT's have done particularly well. These entities own health care facilities which they rent via long term, triple net leases to hospitals, nursing home operators and physician groups. You may be of the opinion that "the real fun was when we were young", but the future for aging America is "in the ambulance" and/or "in the hospital waiting to get well". Consequently, I own HCN and HCP, both of which are up over 10% year to date. Since both now pay only a mid 5% dividend due to their run up in price, I do not see them appreciating in the next several months. For that reason, I recently purchased shares in HCT, a smaller health care REIT run by Nicholas Schorsch and William Kahane. They built ARCP into the largest commercial, triple net REIT in the country. I look for them to repeat that success in the health care arena, all the while maintaining a 7% dividend.
Thankfully, the markets rallied this holiday-shortened week. The Dow Jones Industrial Average closed up 382 points. And speaking of thanks, thank you all for your patience as I struggle to make sense of investing. Recording my thoughts and observations is helping me to formulate an investment philosophy. Moreover, I find your feedback to be invaluable. Clearly, I remain a novice, and under no circumstance would I, like Lorde, request that you "let me be your ruler, ruler." I do not wish to "live that fantasy." But I am convinced that the better we understand concepts such as relational asset pricing, the better investors we will be. We will no longer be merely "driving Cadillacs in our dreams." Instead, we will be enjoying:
"...Cristal, Maybach, diamonds on our timepiece
Jet planes, islands, and tigers on a gold leash."
Saturday, April 12, 2014
April 12 , 2014 Ronnie
Risk/Reward Vol. 216
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"You're just too good to be true/Can't take my eyes off of you
You'd be like heaven to touch/I wanna hold you so much."---lyrics from "Too Good To Be True" sung by The Four Seasons
"You keep lifting me higher/Than I've ever been lifted before
So keep it up/Quench my desire
And I'll be at your side for evermore."---lyrics from "Higher and Higher" sung by Jackie Wilson
"Wherever it is/I'll fly
Whatever it takes/I'll try."---lyrics from "Whatever It Takes" sung by Leona Lewis
The Dow Jones Industrial Average, the NASDAQ Composite and the S&P 500 are all in tailspins. But, this week was "just too good to be true" for those who own income securities. Preferred stock, mortgage real estate investment trusts and leveraged closed end funds "were like heaven to touch/I loved holding them so much." Why you ask? As I have written in the past (Vols. 172 and 207 www.riskrewardblog.blogspot.com ), income securities are priced in relation to (or "spread" from) the 10 Year U.S. Treasury Bond. As the interest rate on the 10Year decreases (and concomitantly its price increases), the yields from other income securities become more attractive to investors, and the prices thereof increase. With the release on Wednesday of the minutes from the March Federal Reserve meeting, concerns about the Fed raising interest rates any time soon abated. In response, the yield on the 10 Year sank into low 2.6% territory. In turn, the prices of income securities held firm or increased on Thursday and Friday even as the broader markets sputtered and crashed.
For example, despite double digit gains year to date, several preferred stock closed end funds attracted higher bids all week. The reason is clear: they are paying an 8+% dividend. That is remarkable in this yield starved world. Indeed, the ones I own "keep lifting me higher/Than I've ever been lifted before." Moreover, so long as the 10Year interest rate stays at or below 2.8%, I believe these funds will "keep it up/ and Quench my desire." If they do, "I'll be at their side for evermore." A good place to research them is www.cefconnect.com . Access the Fund Screener, and screen for Taxable Income-Preferreds. You will see 17 funds displayed. They are all very similar. I like to buy ones that trade at a discount to net asset value. If you do buy, however, remember noted investor Frankie Valli's warning: "Can't take my eyes off of you". Because, if the 10Year rate increases, preferred funds will drop like rocks. These are not for the faint of heart.
Central banks keep interest rates low to discourage saving, to encourage investment and to spur economic growth. In the wake of the Great Recession, central bankers have adopted other "Wherever it is/I'll fly/Whatever it is/I'll try" policies to further encourage growth including forward guidance and outright asset purchases ( e.g. quantitative easing). Unfortunately, these initiatives have not been as successful as hoped, and central bankers are running out of ammunition. Interest rates can not go much lower without adverse consequences, many of which are beginning to surface For example, junk bonds now average a meager 5.2% return; subprime collateralized loan obligations (CLO'S) are selling as they did in 2007; and Greece successfully issued 5 year bonds just this week at 4.95%. These rates do not adequately compensate investors for the risks they are undertaking. To make matters worse, many fear that demographics (read, 40 years of low birth rates in developed nations) have reduced demand so much that world wide deflation may be near. The Japanese economy (the world's third largest) has been deflationary for the past several years; little wonder considering more adult than baby diapers are sold there. No kidding! (pun intended.) As I have written previously (Vol. 204 www.riskrewardblog.blogspot.com ), deflation is a greater threat today than inflation.
In sum, current central bank monetary policies have run out of steam as engines of economic growth. And, with interest rates as low as they are, central bankers have little if anything left to offer. One can debate the form, but a change in fiscal policy is sorely needed. I prefer Reaganomics (tax reform) over Keynes (government spending). Unfortunately, there is little prospect for either during an election year. Not surprisingly, these days I find myself singing:
"Ronnie, Ronnie, Ronnie why did you go?
Ronnie, oh Ronnie, Ronnie I am regretting
But can't stop forgetting
Because you/ You were my first love."
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"You're just too good to be true/Can't take my eyes off of you
You'd be like heaven to touch/I wanna hold you so much."---lyrics from "Too Good To Be True" sung by The Four Seasons
"You keep lifting me higher/Than I've ever been lifted before
So keep it up/Quench my desire
And I'll be at your side for evermore."---lyrics from "Higher and Higher" sung by Jackie Wilson
"Wherever it is/I'll fly
Whatever it takes/I'll try."---lyrics from "Whatever It Takes" sung by Leona Lewis
The Dow Jones Industrial Average, the NASDAQ Composite and the S&P 500 are all in tailspins. But, this week was "just too good to be true" for those who own income securities. Preferred stock, mortgage real estate investment trusts and leveraged closed end funds "were like heaven to touch/I loved holding them so much." Why you ask? As I have written in the past (Vols. 172 and 207 www.riskrewardblog.blogspot.com ), income securities are priced in relation to (or "spread" from) the 10 Year U.S. Treasury Bond. As the interest rate on the 10Year decreases (and concomitantly its price increases), the yields from other income securities become more attractive to investors, and the prices thereof increase. With the release on Wednesday of the minutes from the March Federal Reserve meeting, concerns about the Fed raising interest rates any time soon abated. In response, the yield on the 10 Year sank into low 2.6% territory. In turn, the prices of income securities held firm or increased on Thursday and Friday even as the broader markets sputtered and crashed.
For example, despite double digit gains year to date, several preferred stock closed end funds attracted higher bids all week. The reason is clear: they are paying an 8+% dividend. That is remarkable in this yield starved world. Indeed, the ones I own "keep lifting me higher/Than I've ever been lifted before." Moreover, so long as the 10Year interest rate stays at or below 2.8%, I believe these funds will "keep it up/ and Quench my desire." If they do, "I'll be at their side for evermore." A good place to research them is www.cefconnect.com . Access the Fund Screener, and screen for Taxable Income-Preferreds. You will see 17 funds displayed. They are all very similar. I like to buy ones that trade at a discount to net asset value. If you do buy, however, remember noted investor Frankie Valli's warning: "Can't take my eyes off of you". Because, if the 10Year rate increases, preferred funds will drop like rocks. These are not for the faint of heart.
Central banks keep interest rates low to discourage saving, to encourage investment and to spur economic growth. In the wake of the Great Recession, central bankers have adopted other "Wherever it is/I'll fly/Whatever it is/I'll try" policies to further encourage growth including forward guidance and outright asset purchases ( e.g. quantitative easing). Unfortunately, these initiatives have not been as successful as hoped, and central bankers are running out of ammunition. Interest rates can not go much lower without adverse consequences, many of which are beginning to surface For example, junk bonds now average a meager 5.2% return; subprime collateralized loan obligations (CLO'S) are selling as they did in 2007; and Greece successfully issued 5 year bonds just this week at 4.95%. These rates do not adequately compensate investors for the risks they are undertaking. To make matters worse, many fear that demographics (read, 40 years of low birth rates in developed nations) have reduced demand so much that world wide deflation may be near. The Japanese economy (the world's third largest) has been deflationary for the past several years; little wonder considering more adult than baby diapers are sold there. No kidding! (pun intended.) As I have written previously (Vol. 204 www.riskrewardblog.blogspot.com ), deflation is a greater threat today than inflation.
In sum, current central bank monetary policies have run out of steam as engines of economic growth. And, with interest rates as low as they are, central bankers have little if anything left to offer. One can debate the form, but a change in fiscal policy is sorely needed. I prefer Reaganomics (tax reform) over Keynes (government spending). Unfortunately, there is little prospect for either during an election year. Not surprisingly, these days I find myself singing:
"Ronnie, Ronnie, Ronnie why did you go?
Ronnie, oh Ronnie, Ronnie I am regretting
But can't stop forgetting
Because you/ You were my first love."
Saturday, April 5, 2014
April 5, 2014 Deja Vu
Risk/Reward Vol. 215
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Work it/Make it/Do it
Makes us
Harder/Better/Faster/Stronger."---lyrics from "Stronger" sung by Kanye West
"That I'm strong enough to live without you
Strong enough and I quit crying
Long enough, now I'm stong enough
To know you gotta go."---lyrics from "Strong Enough" sung by Cher
"And I can feel this for sure, ooh
I've been here before/I can feel this for sure
For sure/For sure."---lyrics from "Deja Vu" sung by Teena Marie
What amazed me about the high frequency trading revelation made on "60 Minutes" last Sunday by author Michael Lewis was how little it impacted the stock market. Whether high frequency traders (HFT's) extract a penny here or a nickel there as part of order execution or otherwise "rig" the stock market apparently is of no moment to the investing public as another record high was reached by the S&P 500 this week. If not the HFT's, then the market makers of old would be extracting some toll. As someone who has traded stocks for years, I know that order execution is "Easier/Better/Faster/Stronger----and CHEAPER" now than at any time in the past. Whether HFT's "Made it/Did it" or some other actor is responsible, I say good riddance to the days of old.
Friday's selloff was led by NASDAQ's momentum stocks, and I predict will not continue in the broader market next week. Indeed with encouraging data from purchasing agents and good news on the jobs front, some are wondering whether the economy is "Strong Enough" to withstand a quicker pace of pullbacks by the Federal Reserve. In other words, is the economy "stong enough to live without" any quantitative easing and is it time to signal that the 0% Fed Funds rate has "gotta go"? Many suspect not, given counter indications from Federal Reserve Chair Janet Yellen delivered in a speech last Monday in Chicago wherein she discussed at length her view that the labor market still suffers from too much slack (more people willing and capable of filling jobs than there are jobs for them to fill). So long as that slack persists, she is of the mind that accommodative monetary policies will be needed.
But "can I feel this for sure"? Several articles this week pointed to these very same accommodative policies as the cause of many asset classes attaining bubble status, driven there by yield hungry investors like me. Here are some examples. 1) European sovereign debt is in great demand. It is trading at pre-Eurozone crisis levels. Spanish and Italian 10Year rates are as low as they have been since 2005. 2) Corporate bond issuance in general is at near record levels, and the rate spread between the 10Year Treasury and junk bonds is only 355 basis points (3.55%) which is at its lowest point since 2007. 3) Citigroup is launching a new suite of subprime debt instruments--the same poisonous fruit that precipitated the 2008 banking crisis. Add to this the resurfacing of a debate among central bankers as to whether monetary policy should take into account asset bubbles (see comments this week from Fed Gov. Jeremy Stein), and I sense "Deja Vu." It's as if "I've been here before/I can feel this for sure." Indeed, it was exactly one year ago (Vol. 165 www.riskrewardblog.blogspot.com ) that I warned that the Federal Reserve could do something to burst the then growing asset bubbles----exactly the ones inflating today. And it did so a few weeks later when Chair Bernanke hinted that QE3 could end within weeks (it didn't), a hint that caused the bond market and the stocks that trade in relation thereto (e.g. real estate investment trusts, preferred stocks, business development companies, utilities, master limited partnerships, etc.) to plummet. That event is now known as the "Taper Tantrum."
Despite Friday's negative action, both the Dow Jones Industrial Average and the S&P 500 finished up for the week. I sense that Ms. Yellen is at a cross roads. Will she do as she said this week and let the accommodative "Beat Go On" even if it results in asset bubbles continuing to inflate? Or, like Chairperson Bernanke last year, will she hint that accommodative policies will end sooner than expected and cause another interest rate/bond market tantrum? Positioned as I am, if she takes the latter course, I will be Cher-in' the following theme song:
"Bang, bang, she shot me down
Bang, bang I hit the ground
Bang, bang that awful sound
Bang, bang Ms. Yellen shot me down."
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Work it/Make it/Do it
Makes us
Harder/Better/Faster/Stronger."---lyrics from "Stronger" sung by Kanye West
"That I'm strong enough to live without you
Strong enough and I quit crying
Long enough, now I'm stong enough
To know you gotta go."---lyrics from "Strong Enough" sung by Cher
"And I can feel this for sure, ooh
I've been here before/I can feel this for sure
For sure/For sure."---lyrics from "Deja Vu" sung by Teena Marie
What amazed me about the high frequency trading revelation made on "60 Minutes" last Sunday by author Michael Lewis was how little it impacted the stock market. Whether high frequency traders (HFT's) extract a penny here or a nickel there as part of order execution or otherwise "rig" the stock market apparently is of no moment to the investing public as another record high was reached by the S&P 500 this week. If not the HFT's, then the market makers of old would be extracting some toll. As someone who has traded stocks for years, I know that order execution is "Easier/Better/Faster/Stronger----and CHEAPER" now than at any time in the past. Whether HFT's "Made it/Did it" or some other actor is responsible, I say good riddance to the days of old.
Friday's selloff was led by NASDAQ's momentum stocks, and I predict will not continue in the broader market next week. Indeed with encouraging data from purchasing agents and good news on the jobs front, some are wondering whether the economy is "Strong Enough" to withstand a quicker pace of pullbacks by the Federal Reserve. In other words, is the economy "stong enough to live without" any quantitative easing and is it time to signal that the 0% Fed Funds rate has "gotta go"? Many suspect not, given counter indications from Federal Reserve Chair Janet Yellen delivered in a speech last Monday in Chicago wherein she discussed at length her view that the labor market still suffers from too much slack (more people willing and capable of filling jobs than there are jobs for them to fill). So long as that slack persists, she is of the mind that accommodative monetary policies will be needed.
But "can I feel this for sure"? Several articles this week pointed to these very same accommodative policies as the cause of many asset classes attaining bubble status, driven there by yield hungry investors like me. Here are some examples. 1) European sovereign debt is in great demand. It is trading at pre-Eurozone crisis levels. Spanish and Italian 10Year rates are as low as they have been since 2005. 2) Corporate bond issuance in general is at near record levels, and the rate spread between the 10Year Treasury and junk bonds is only 355 basis points (3.55%) which is at its lowest point since 2007. 3) Citigroup is launching a new suite of subprime debt instruments--the same poisonous fruit that precipitated the 2008 banking crisis. Add to this the resurfacing of a debate among central bankers as to whether monetary policy should take into account asset bubbles (see comments this week from Fed Gov. Jeremy Stein), and I sense "Deja Vu." It's as if "I've been here before/I can feel this for sure." Indeed, it was exactly one year ago (Vol. 165 www.riskrewardblog.blogspot.com ) that I warned that the Federal Reserve could do something to burst the then growing asset bubbles----exactly the ones inflating today. And it did so a few weeks later when Chair Bernanke hinted that QE3 could end within weeks (it didn't), a hint that caused the bond market and the stocks that trade in relation thereto (e.g. real estate investment trusts, preferred stocks, business development companies, utilities, master limited partnerships, etc.) to plummet. That event is now known as the "Taper Tantrum."
Despite Friday's negative action, both the Dow Jones Industrial Average and the S&P 500 finished up for the week. I sense that Ms. Yellen is at a cross roads. Will she do as she said this week and let the accommodative "Beat Go On" even if it results in asset bubbles continuing to inflate? Or, like Chairperson Bernanke last year, will she hint that accommodative policies will end sooner than expected and cause another interest rate/bond market tantrum? Positioned as I am, if she takes the latter course, I will be Cher-in' the following theme song:
"Bang, bang, she shot me down
Bang, bang I hit the ground
Bang, bang that awful sound
Bang, bang Ms. Yellen shot me down."
Saturday, March 29, 2014
March 29, 2014 Go Where You Wanna Go
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."
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 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.
Sunday, February 23, 2014
February 22, 2014 The Difference
Risk/Reward Vol. 209
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"It ain't that I'm too big to listen to the rumors
It's just that I'm too big to pay attention to 'em
That's the difference."---lyrics from "What's The Difference" sung by Dr. Dre
"I'll make a wish/Take a chance
Make a change/And breakaway."---lyrics from "Breakaway" sung by Kelly Clarkson
"I've been working on the railroad/All the live long day
I've been working on the railroad/Just to pass the time away."---lyrics from "I've Been Working On The Railroad" sung by Everybody
Comprehending yield spreads (discussed at Vol. 207 www.riskrewardblog.blogspot.com ) necessitates learning "the difference" between interest rate risk, which is a relative number, and credit risk which is an absolute (although not a constant) one. Last year when the the interest rate on the benchmark 10 Year Treasury Bond spiked from 1.6% to nearly 3%, the interest rates on securities priced or "spread" in relation thereto (such as preferred stock and real estate investment trusts) spiked similarly causing their prices to fall accordingly. (Remember, when interest rates increase, prices of the underlying securities decrease.) The risk of this occurring is called interest rate risk, and one must always "pay attention to it". On the other hand, credit risk is the risk that an obligor will default on an obligation---like back in 2009 when, if one had "listened to rumors," one reasonably could have concluded that the major banks would suspend dividend payments on their preferred stock. (Sixty percent of preferred stock is issued by banks.) After all, most major banks had suspended payment of common stock dividends. Fear of this occurring (and it did not occur) caused the price of preferred stocks to plummet, and their yields to spike. Those who bought preferreds in this trough have reaped bountiful rewards as major banks have rebounded (e.g. 400% price appreciation plus 25% annual dividends).
I believe preferred stocks are again ready for a "breakaway" to the upside. This belief is not "a wish." It is based upon my study of credit risk and is something upon which I have "taken a substantial chance." Allow me to explain. Prior to the 2008-2009 banking crisis, the difference between the yield on the benchmark 10 Year Treasury Bond and the yield on investment grade preferred stock hovered around 2.4%. This difference reflected the premium one received for shouldering what the market perceived as the risk of default on these preferreds. Thus, if the prevailing 10Year rate had been 2.7% back in 2007 (as it is today), the prevailing yield on an investment grade preferred stock would have been 5.1% (2.7% + 2.4%=5.1%). At the height of the banking crisis, the spread between the yield on the 10Year and the yield on an investment grade preferred stock spiked as high as 13% reflecting the above described fear that payment of dividends would be suspended. Since 2010 this spread has come to rest at around 4%. The recent issuance of JPMorgan's Series T preferred shares which pay a 6.7% dividend based an issue price of $25 exemplifies this spread (2.7% 10YearTreasury yield + 4% spread=6.7%). To me, continuing a 4% credit risk spread given the financial strength of investment grade banks is no longer warranted. In other words, the credit risk premium is overblown, and the market may be ready to "make a change" by migrating back toward the historic spread of 2.4%. This, of course, would mean a commensurate rise in prices. A quick glance at all of the green on the far right hand column of the preferred stock closing table indicates that my belief may be correct (http://online.wsj.com/mdc/public/page/2_3024-Preferreds.html ). I am using several preferred stock closed end funds (e.g. FFC, HPF and PDT) and some individual issues as vehicles for this play.
The resurgence of domestic oil production impacts our economy in a positive way "all the live long day". Look at what it has done for those who "have been working on the railroad." In 2008, only 9500 carloads of oil were transported by rail: last year over 400,000 carloads were transported. This equates to over 800,000 barrels of oil per day. Railroads and those that supply them no longer need to merely "pass the time away." Take Trinity Industries (TRN), a multi line manufacturer. One of its business units is the largest supplier of oil tank rail cars in the U.S. On Thursday TRN reported record sales of over $4billion dollars. More importantly, it reported a $5billion order back log in its rail car division alone. The stock spiked that day and is up 16.6% since I bought it on January 22, 2014.
In a four day week, the Dow Jones Industrial Average traded in a narrow range, ended down 51 points and remains 2.68% to the negative for the year. The yield on the 10Year likewise moved only slightly ending the week at 2.73%. This rate stability played into my fixed income strategy. Preferred stock, business development companies and real estate investment trusts all gained ground as investors are becoming progressively more comfortable with the prospect that the 10Year rate will stay below 3% (interest rate risk) and with the financial strength of the underlying institutions (credit risk). Like Kelly Clarkson, I've been waiting "For A Moment Like This." May it continue for a long time.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"It ain't that I'm too big to listen to the rumors
It's just that I'm too big to pay attention to 'em
That's the difference."---lyrics from "What's The Difference" sung by Dr. Dre
"I'll make a wish/Take a chance
Make a change/And breakaway."---lyrics from "Breakaway" sung by Kelly Clarkson
"I've been working on the railroad/All the live long day
I've been working on the railroad/Just to pass the time away."---lyrics from "I've Been Working On The Railroad" sung by Everybody
Comprehending yield spreads (discussed at Vol. 207 www.riskrewardblog.blogspot.com ) necessitates learning "the difference" between interest rate risk, which is a relative number, and credit risk which is an absolute (although not a constant) one. Last year when the the interest rate on the benchmark 10 Year Treasury Bond spiked from 1.6% to nearly 3%, the interest rates on securities priced or "spread" in relation thereto (such as preferred stock and real estate investment trusts) spiked similarly causing their prices to fall accordingly. (Remember, when interest rates increase, prices of the underlying securities decrease.) The risk of this occurring is called interest rate risk, and one must always "pay attention to it". On the other hand, credit risk is the risk that an obligor will default on an obligation---like back in 2009 when, if one had "listened to rumors," one reasonably could have concluded that the major banks would suspend dividend payments on their preferred stock. (Sixty percent of preferred stock is issued by banks.) After all, most major banks had suspended payment of common stock dividends. Fear of this occurring (and it did not occur) caused the price of preferred stocks to plummet, and their yields to spike. Those who bought preferreds in this trough have reaped bountiful rewards as major banks have rebounded (e.g. 400% price appreciation plus 25% annual dividends).
I believe preferred stocks are again ready for a "breakaway" to the upside. This belief is not "a wish." It is based upon my study of credit risk and is something upon which I have "taken a substantial chance." Allow me to explain. Prior to the 2008-2009 banking crisis, the difference between the yield on the benchmark 10 Year Treasury Bond and the yield on investment grade preferred stock hovered around 2.4%. This difference reflected the premium one received for shouldering what the market perceived as the risk of default on these preferreds. Thus, if the prevailing 10Year rate had been 2.7% back in 2007 (as it is today), the prevailing yield on an investment grade preferred stock would have been 5.1% (2.7% + 2.4%=5.1%). At the height of the banking crisis, the spread between the yield on the 10Year and the yield on an investment grade preferred stock spiked as high as 13% reflecting the above described fear that payment of dividends would be suspended. Since 2010 this spread has come to rest at around 4%. The recent issuance of JPMorgan's Series T preferred shares which pay a 6.7% dividend based an issue price of $25 exemplifies this spread (2.7% 10YearTreasury yield + 4% spread=6.7%). To me, continuing a 4% credit risk spread given the financial strength of investment grade banks is no longer warranted. In other words, the credit risk premium is overblown, and the market may be ready to "make a change" by migrating back toward the historic spread of 2.4%. This, of course, would mean a commensurate rise in prices. A quick glance at all of the green on the far right hand column of the preferred stock closing table indicates that my belief may be correct (http://online.wsj.com/mdc/public/page/2_3024-Preferreds.html ). I am using several preferred stock closed end funds (e.g. FFC, HPF and PDT) and some individual issues as vehicles for this play.
The resurgence of domestic oil production impacts our economy in a positive way "all the live long day". Look at what it has done for those who "have been working on the railroad." In 2008, only 9500 carloads of oil were transported by rail: last year over 400,000 carloads were transported. This equates to over 800,000 barrels of oil per day. Railroads and those that supply them no longer need to merely "pass the time away." Take Trinity Industries (TRN), a multi line manufacturer. One of its business units is the largest supplier of oil tank rail cars in the U.S. On Thursday TRN reported record sales of over $4billion dollars. More importantly, it reported a $5billion order back log in its rail car division alone. The stock spiked that day and is up 16.6% since I bought it on January 22, 2014.
In a four day week, the Dow Jones Industrial Average traded in a narrow range, ended down 51 points and remains 2.68% to the negative for the year. The yield on the 10Year likewise moved only slightly ending the week at 2.73%. This rate stability played into my fixed income strategy. Preferred stock, business development companies and real estate investment trusts all gained ground as investors are becoming progressively more comfortable with the prospect that the 10Year rate will stay below 3% (interest rate risk) and with the financial strength of the underlying institutions (credit risk). Like Kelly Clarkson, I've been waiting "For A Moment Like This." May it continue for a long time.
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