Adam Scott

Long/short equity, contrarian, special situations, registered investment advisor
Adam Scott
Long/short equity, contrarian, special situations, registered investment advisor
Contributor since: 2013
Company: Argyle Capital Partners, LLC
Personally, I think the best opportunity to profit by shorting high yield has already passed. But if you still want to, I'm sure you can short those two funds you referenced in a margin account. You might also find a fund that shorts for you (which you could buy).
Theoretically yes, though I spent the entirety of my article arguing the opposite.
I agree, I think, with your first point - low yield (or at least low duration) may actually fare worse during the Fed's first rate hike than many think.
You've left out a few relevant economies/currencies in Asia - like India and Russia, for instance...and all of those in Latin America - like Brazil, Mexico, Argentina, Chile... You did, however, point to one country whose currency has been relatively stable over the past few years. Another is Saudi Arabia. Key similarity? Enormous USD reserves.
Thanks for the comment, huey35.... I don't know exactly which strategies the pension funds and insurance companies use, and I also don't know what will happen with rates -- but I do like to look for possibilities that aren't being discussed much. There may not be a precise way to measure the appetite for Treasuries (sans Fed) at various interest rates, but I can only imagine it would be parabolic. Meaning, there is most likely a limit as to how high, and how quickly, rates can really go here...
This is an interesting comment. One thing CAT has going for itself at the moment, though, is a relatively large short interest -- technically the stock looks poised to move a little higher, which could easily trigger some of those shorts to cover.
The CEO of CAT has been wrong more often than not the past few years, and as a result is under increased pressure to issue more conservative estimates/guidance. 2014 may not be great, still, but when things are great the price won't be nearly as good.
Had CAT not over invested at the worst time its stock wouldn't be priced so favorably.
It's possible you'll never see CAT at $80 again. Right now it looks like BAC did at $5 -- current price discounts the absolute worst.
Not only is this is already being priced into the market, its negative impact is being overestimated.
Digging deep is great, provided you aren't only looking for data to back up your own predetermined conclusion. Keubiko called FGP overvalued six months, and 25% ago -- since then their distributable cash flow has crept closer to 1x as they make immediately accretive acquisitions and refinance long-term debt. And as pass-through entities, MLPs almost all issue additional equity to fund initiatives, so the fact that more shares exist today than 18 years ago is nothing of note.
My point is not that Keubiko isn't EVER helpful or insightful; but in this case, he isn't. His conclusions have cost, or lost, you money if you followed them.
Heather--don't be dissuaded by the negative comments above, with Keubiko's being the least insightful and helpful of all. While it's true that FGP's is not a particularly exciting story, sometimes those make the best stocks to own. A seasoned MLP investor understands the inherent tax benefits to the structure of their distributions. With the overwhelming majority of FGP's distributions coded as 'return of capital' and therefore tax-deferred, the taxable equivalent yield (TEY) is well into double digits for the highest marginal tax rate, and has been since inception. Not interested in income? Reinvest the dividends--your effective cost basis for shares bought in 1994 would be $3 today. Doesn't sound much like a bond to me....
You are very insightful and interesting writer. I look forward to your future articles. Keep up the good work!!
As RE prices have increased, so too has the number/size of outstanding loans eligible for refinance. REITs look good from a technical standpoint, too....
The only thing I've heard about that is "mid-November at the earliest" -- should be interesting! Thanks for the comment, 'hagan'.... ;-)
That seems like a very reasonable, and easily replicated, strategy for just about anyone. Great comment.
Do you have any data to back that up? While I agree with your assertion that the "consumer is still flat broke" I am interested in what you are basing the rest of your commentary on....
Thanks for the comment, Bill. Are you sure they didn't have adequate cash on hand to make that investment without the bond offering?
Yes, I suppose we do. With the exception of this week, REITs have been on a steady tear for years. As their yield as dropped they have become less attractive to us, in relative terms. And they don't have the same ability to increase rates (and therefore distributions) as the MLPs do. But there are also different factors driving their appreciation. We own both asset classes -- in slightly different allocations than in years past.... Keep the good stuff coming, Phil!
Hi Philip,
Great article and I'm happy to be following you! The short answer to your question is 'yes,' but it's a little more complicated these days. In our view, US Treasuries hold just about zero relative value to cash, so in "relative terms" you aren't really gaining much advantage by making that comparison today. When it comes to cost of capital for assets that are highly leveraged, Treasury rates are obviously important. Not sure if that answers your question?
Thanks again!
Adam
Hi Matt,
Neither your #1 nor #2 most important points are, in fact, the most important point. The single most important point with regard to how attractive an MLP is, or MLPs are, is their after-tax yield.
A great deal (60-100%) of an MLP's distributions are recorded as 'return of capital' and, as such, are tax-exempt. The remainder are taxed as ordinary income. If I'm a long-time municipal bond investor who has watched my risk- and tax-free interest income dwindle from 10+% all the way down to 2-3%, I'm suddenly very interested in the beneficial tax treatment the MLPs' distributions offer.
Historically, yes, the comparison of MLP yields vs. 10-yr Treasuries has been a relevant factor in determining MLP valuations. I think it's more interesting to consider what could happen if just 5-10% of the trillion dollar municipal bond market shifted towards the space....
Adam
It is extreme. I can't imagine there were too many people in 1983 who had $50k to put into a single stock that would be the slightest bit concerned about paying capital gains taxes along that ride in order to mitigate risk and diversify. There are also the considerations of tax deferred accounts (in which this entire discussion is moot) as well as tax loss harvesting and carry-forwards....
That's a fairly extreme example, though it does prove your point. If I had to go back 30 years and put cash to work in a single stock -- yes, KO would have been a good choice.
I don't see how that could possibly be true.
Thanks, TF. I suppose you're right, to some extent, that I'm promoting a bit of timing here -- what's the difference between timing and tactically allocating?
My guess is that there is a direct correlation between how high the market runs and how many people are swimming naked.....
Ok.
;-)
Thanks, Phil, I appreciate the feedback. And in particular the Super Grandmaster vs. Grandmaster comparison..... ;-)
Why is it unsustainable? Because you say it is? Was it unsustainable when your father taught you to ride a bike using training wheels?
Thank you for the great feedback.