Wednesday, May 29, 2013

Down days like this, it's probably only worth contemplating any purchases one might make rather than selling.

That said, my research comparing earnings yield with next year's returns suggests that we are looking at modest equity returns in the next 12 months.  Right now, earnings yield is about 7% while 10year bond yields are close to 1.9% so the premium is around 5%.  We were last at these levels around 2009.  Stock returns were strong so I am still bullish, but it is a big change from 2012 when this measure was up at 8%!

Miserable performance for me this month as I missed the rally and didn't stay hedged enough all the way down.  In addition, I missed implementing the Aussie dollar trade.  Yuck.



Australian Dollar:
Down about 6-8% since I recommended selling it.  I think it is worth holding the short position, maybe cut it if we climb back into the 98 range.  I could see this extending down in to the low 90's.

Bonds:
TLT now approaching the lows of the last couple of years of around 110.  I still believe we have not seen enough evidence of a pickup in demand to warrant a backing off of the accelerator pedal by the Fed.  If I am wrong, equities will see some more rallies this year, hence my recommendation to be at on'e benchmark equity allocation.  Bonds can diversify and add value to a portfolio.  Notice I did not use the word hedge because they are not a true hedge.  A TRUE hedge moves in lock-step opposite direction to a given asset - for example, a short position in SPY will be a hedge to a diversified large cap equity portfolio.  Over recent memory, long bonds (TLT have had a correlation of about -.7 which is very negative, but it's not -1.  So, it will have a mind of it's own, if you will.  In this case, I think TLT will hedge stocks if we have a bad event, but will also have a positive return regardless (even if stocks go up).

High yield:
I have gotten out of 3/4 of my high yield bonds and have reduced my exposure to credit in general as I believe spreads are not high enough and one is better off in stocks.  Loans are ok, but VTA is better than VVR (which I have been selling) as there is a premium to NAV of over 7% in VVR.  BKLN is a good portfolio with no leverage.  If one is concerned with the possibility of short term rates spiking up, then that is a better play.  The reason is that VVR and VTA borrow very short term and lend out over longer term in order to earn a spread and juice up their returns.  The risk is that their borrowing costs go up and that will cut into their returns.

Muni:
MHN and all muni funds have suffered with renewed concern over public finances.  I share the concern, but if we are truly getting a bounce back, then tax receipts will go up, right?  So I think the market is missing the linkage a bit.  Perhaps, people are selling muni to buy stocks, but that would be strange to me as the after tax returns are so high!

There is no doubt though, that the muni funds have been moving down dramatically so that has been a hit.  I will hold here and if you have any dry powder, it is worth looking at buying some.

Stocks:
Overall exposure for me is around 23%

MRK was a good buy on the dip and I see that continuing.  It is a solid company that should be bought when it is offered at a discount.

VZ has dropped about 6.5% vs T dropping 3.5% since mentioned swapping VZ for T.  Nice on a relative basis, but still T has lost.  I'm still a believer in the sector, though.

The Miners have been a loser as well with VALE acting like an anchor in my portfolio.  FCX has been good, but CLF has been volatile and a loser.  I will sell my VALE and buy more FCX 






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