Wednesday, June 26, 2013

Investors are a fickle bunch.  Many were decrying the lack of a buying opportunity as the market took off on a one way steep ramp up.  Well, we have gotten a bit of a pullback and then it's panic time (when every asset class goes down, I define that as a panic).

It is important to pay attention to the numbers.  The economy grew at 1.8% in the first quarter versus an expected 2.4%.  Some are dismissing it, but why?  I believe this is more evidence that we are not growing anywhere near a level where the Fed will stop QE in any shape or form.  Asset purchases will continue and rates will stay low for a long time.  The curve steepening (long rates rising more than short term rates) will bring out buyers of long term securities soon enough.

That said, it will be a bumpy ride and if the drawdown caused too much volatility in your portfolio, look to sell portions/all of any positions that you don't love when we get a rally.  I can understand why investors feel the market is rigged against them.  It can certainly feel that way.  Look at the movement in LO yesterday where it had an almost $3 range with no real news.  Very difficult sledding for sure.

I am focusing on value and right now the most obvious are the closed end funds trading at significant discounts.  This is true almost across the board, so pick an asset class, comb through the CEF connect website and find a nugget!

Monday, June 24, 2013

Not much to add here.  Market is speaking with a wholesale repricing of financial assets.  Stocks, bonds, there is nowhere to hide.

Muni's getting absolutely pulverized.

I am not selling anything here and just looking to buy opportunistically.
S&P about 6.4% off of it's highs.  I think it is overdone, but it is difficult to stand in front of this train heading downhill.  That said, there are deals if you are willing to provide liquidity.  I bought a little JPS which is now at about a 12% discount.

The yield curve is steepening with the long-term TIPS trading now at 1.4%+ real yield.  I would not be surprised to see this go even higher as I believe the negative real yields are an anomaly.  At 2% I believe these to be screaming buys, so even at this level I like them.

10 year TIPS are at about 0.5% real yield which is still very low.

All that said, I think bonds are good value here as growth will be hard to come by.  China is not giving us any warm fuzzy feelings.  In a low growth world, bonds will do well.

Finally, if anyone is keeping score with the AUD (australian dollar) there has been a huge move our way down to 92 area and I would not be a pig about it and cover the short around here.  Some believe this can keep going below 80 and maybe it would be a good hedge against a world value destruction scenario as AUD is heavily dependent on China.

Thursday, June 20, 2013

Updating a favorite graph of mine and adding some data:

The first shows the spread between Earnings yield and 10 year Treasury notes.  The second is the absolute levels of each (Blue is the prospective earnings yield and yellow is the 10 year treasury rate)

Both are since 1961 (of no particular relevance).

If you graph the spread versus future S&P 500 returns you get a statistically significant positive relationship - higher spread, higher S&P return.  

Given that we have been high for the last few years, it should be no surprise that the S&P returns have been good.  Looking forward from now, we have a spread higher than 5% so stocks still look good.  Perhaps not so good are the bonds.  I think the average spread over time is around 2+%.  Since we are over 5%, then it stands to reason this will come down some day.  The second graph shows that probably the more likely way the spread will "normalize" is by treasury yields going up.

I think that is what we are seeing in the market right now.  The proper trade would be buy stocks/short bonds but that is a very "hedge fund/absolute return/somewhat risky" strategy.  For long term investors, the proper course is to overweight stocks and keep bonds on the lower end of their weight ranges.  

My caveat would be that while rates are low and probably should go up at some point, it would be more economically rational for rates to go up because the economy is picking up.  We have not really seen that.  So, I'll stay with my bond exposure (MHN, TLT, PFF and others) for now and wait to see some actual growth surface before I quit it.

Tuesday, June 18, 2013

I sold 1/3 of my RAX position in keeping with my strategy of using the up moves to sell things that are not your favorites.  Better to have a few great positions than many that are unloved (and thus not analyzed properly).

I also continue to buy JPS and JTP.  In absolute terms, the yield is excellent and risks are low.  I am certain that in this type of economy, the coupon/dividend will be good.  The risk is a quick up move in short term rates.  Here is a quick "back of the envelope" analysis of the situation.

Leverage amount(%) 28%
Borrowing rate 1.2%
distribution rate = 6.9%

portfolio yield= (dist+borr * levg)/(1+levg)
                      approx  5.65%

A 1% point rise in borrowing rates will mean that distribution yield will go down by about 0.3% to 6.6%

In all, I think you are compensated for taking the risk of rates backing up, so I am adding here.  The kicker is that one is buying the assets at a 8+% discount.

Another downside would be liquidity as it is difficult to put on or sell a big position without moving the market against you.  So some of the premium in yield is compensating for that aspect.

Monday, June 17, 2013

I like this post.  It is well reasoned and urges calmness in the face of volatility.  All good traits.

I agree with the conclusions as well.  There has been no evidence that the sell off in bonds is due to stronger economic growth prospects or inflation expectations.  I remain with the view that there are lots of good buying opportunities right now - loans (VTA or VVR), preferred stock funds (JPS, JTP) munis (MHN) as well as any favorite dividend stocks that might have been sold off prematurely.  Utilities may be in this group as well XLU, but I do not have any at this point.

Up days like today are good for trimming any unloved positions and then waiting to buy into your favorites.  It is probably best to "leg" this spread - sell, then wait until a better price and buy.  There is risk in this approach, but we have been seeing enough volatility to warrant it.

Thursday, June 13, 2013

One other thing to note.  TIPS (the actual bonds not the ETF) are looking interesting again.  The longest one (2043) is trading at around 1.2% real yield.  If it gets anywhere near 2%, that is my magic number to add this to my portfolio as that is my target return.

Above is a link to a good site for exploring closed end funds.  Closed end funds fluctuate and trade around their NAV (net asset value).  There is not real mechanism to make a fund trade at it's underlying value save breaking it up legally.  The fees involved with this process are high and this makes the process not really efficient.  In any case, when a closed end fund (CEF) trades at a significant discount (or premium for that matter), then there is a trading/investing opportunity.  Yesterday I brought up JTP, but a simple screen with the tool above will show at least 15 other possibilities.

One can investigate other sectors as well.  In a market like we have had the last week or so, investors are bailing out of everything (stocks and bonds down) so funds like these that aren't particularly liquid will trade at discounts.

I think this is an opportunity for long term investors.  It would not be good to focus on one particular fund, but I think it is a good strategy to find a few and buy some at discounts.  Recognize that discounts may get worse AND may persist for some time.  For example the 5 year average for some of these CEF could be -5% or more.  So buying at a -7% is not a huge edge.  The plus side is that you can earn some income and have a little bit of asset protection.

Take a look.  I will report any findings I have.

As for the markets, the Nikkei getting pummeled is not that surprising given that it was manipulated up by a rather bold and rapid monetary policy move.  Ours was bold, not so rapid and so injects a bit less risk to our equity markets.

That said, it should come as no surprise to readers here that I think growth is going to be low and bonds are still good.  Maybe not a slam dunk, but ok.  Good equities are ok as well.  Don't expect get rich type moves here. Think solid, long term, grow over time.

Wednesday, June 12, 2013

Good article about another core holding of mine, PFF.

JTP looks pretty attractive.  PFF has the advantage of lower fees, no leverage (see my note about MHN) and higher liquidity.

JTP is trading at a nice discount and has a higher yield (though most of that is the leverage talking).  So depending on your feelings about leverage, it looks interesting as a swap for PFF based on the discount.  Please note though, that discounts can persist for long periods of time.

PIMCO and Bill Gross are sticking with their bond view:

I am in the same camp.  While, there is room for some optimism, there will be a protracted process of replacement.  What I mean is that the private sector will have to fill in for all the "grease" that the fed has provided over time.  Our fiscal picture, although improving, will involve reducing government spending and that will be a drag on the economy.

Bottom line is that I don't see global growth accelerating and so bonds will be ok.  Stocks will also be good and a balanced approach will be rewarded.  One could go all equity and probably earn a higher return over the next five years, but that will entail a fair amount of risk.

MHN remains under pressure.  Here are a few of the reasons:

-Rotation away from bonds
-Muni interest tax free status under the knife in the budget talks
-Leverage is such that the fund NAV would be hurt if short term interest rates rise

The last one is perhaps the most subtle, but can have an effect here.  It is my firm belief that short term rates are not going anywhere anytime soon, but if there is a surprise there, then the fund will underperform.

It already forms about 15% of my portfolio so I am done adding for now.  If we get a move back to parity in NAV, then I would probably trim some.

S  I think the game is just about over.  There is a chance DISH will come up with an even higher bid, forcing Softbank to raise even further, but I am not sanguine.  Also, from a post deal value perspective, Softbank is just taking cash it was going to provide S for growth and giving it to shareholders.  This is not good for the future prospects.  S could still be a good hold if you think they can gain a bigger foothold from the big two.  I don't think there is a ton of downside risk either, just not exciting either way.

Monday, June 3, 2013

If we are truly on an upswing in the economy, I would look to swap some big cap exposure for small cap.  IWM is much more volatile and has more upside potential than SPY.  That said, it also has more downside as well.  For myself, if I sell a doggy stock that I don't like anymore, I would look to replace it with IWM in order to maintain equity exposure.
MHN is now at a -6% discount to NAV (Net asset value).  I already have a large position (about 13%) but I will be looking to add to it.  I will probably sell some of my lower yielding or dog equity stocks like ORCL (low yield), RAX (dog but I'll wait for an up move to sell), QCOM (good stock but I'm in a bad mood and it hasn't done anything for me), maybe MCD (same as QCOM) and perhaps the remainder of my S (there may be more upside left here, but the Softbank deal looks more likely to pass through which reduces upside potential).

Of course there is interest rate risk, but I believe one is protected by the high yields of this fund, plus the discount to NAV.  If NY were in trouble, this could also lead to a further sell off, but I do not believe that to be the case.

I am not sure why the loan ETF's have dropped off.  I think they are good value here after considering the NAV premiums.  So BKLN is good and VTA is now at a discount.  If one believes the economy is OK then they should not drop.  These portfolios are protected against interest rate rises, so they should not be dropping unless credit quality is impinged (which I don't think there has been any change here).
I will look to add some VTA.

Don't be afraid of the sell off in the dividend stocks.  They will participate in economic growth if it appears.  Their pricing power will only increase.  If you have a favorite and have some powder, they are still a good buy.  It is worthwhile, though to go through and chop off the "dead wood" so to speak and reduce any positions you don't love and buy more of things that you do.