OJO Zafado

Upstream MLPs and Canadian Royalty Trusts: High Return, High Risk?

As I posted above I like the short treasury position. I have used DXKSX to hedge my non-Adj preferred shares. While owning this 2&1/2 times short mutual fund involves one in trading restrictions, no short term trading allowed and positions purchased must be held for 6 months under the rules of my brokerage company. The 2 etf's are of course as good as they are of the same investment strategy. As I own RCS and the 2 foreign bond funds MERKX and PFBDX, I find the mutual fund a better vehicle for my averaging my DXKSX position. You would be right to be cautious of RCS. It's yield & quality are good but the premium to NAV is in the teens! With these mutual funds I am able to sell partial positions in the foreign bond funds where I have gottted +30% combined div and cap gain returns over the last 2 years & then put that into the inverse strategy DXKSX, with out paying commissions. Shorting the 10 year Treasury is going to be a long term trend/play. The current rate situation is just not sustainable given the Fed continuing to flood the WORLD with liquidity. Yes I think the PJL is very good. I own several Verizon conventional bonds in my bond ladder. I just added another position in MSJ for about the same yield. But you are going to be paying a premium for PJL as it sells above par. This issue is past it's call date. That supports the price if you are an owner of the shares but means that if it is called which is quite likely you will not recover your full cost basis. Your YTM will be less than the coupon. The MSJ is even a higher quality, has an early 2011 call date, yields 7.4% against it's price well below par of about $22.20. If called in 2/11 you will get a very large gain on your cost basis while enjoying the 7.4% HJJ ditto. FBF-PrN as well. While I am now gun shy of PYI you can see by the chart why it was a bargain down around $20. As I generally make my purchases in partial positions I missed out on getting more shares of PYI on board. This is why you are better getting these "third party trust certificates" below par. I have the EFL watch listed but own the GLQ. If I were to add to this emerging market thing I would prefer to own KMM for income and the EEB for appreciation. The Central banks of emerging market debt markets seem very willing to keep their interest rates higher and may just rise in lock step with US rates. This is a riskier investment as we must recall the huge default of Russia on it's massive debt some ten years ago. The GLQ holds larger positions in global O&G exploration and production as well as a big positionin Global Financials. I also own the DGT as a trade. I do not knoe OTT. I have seen the BNA and the AWF but do not recall what they are about. The INB intrigues me. Global real estate I believe. It has really come up off the mat and has a great yield.

Upstream MLPs and Canadian Royalty Trusts: High Return, High Risk?

M mar k's It depends on your outlook on interest rates. I would continue to own the inflation protected such as FINPX and WIA. I would continue to own INCMX despite a pretty high expense ratio. While a fund of Short term bond funds it seems to have more safety than some of the floating rate bond funds and provides a superior yield. It also has some tax advantages. The PFIDIX and FFRHX may be OK but the quality of the debt is not that great. This may pose a danger in a recessionary environment. IMSIX is another of these. The convertible bond funds are probably the best bet in this kind of envirionment and economy. In addition to the FCVSX as in my previous post the NOIEX is also a very well run fund. Convertibles give you more protection in an envirionment of rising rates. If we assume the market forces are at work pushing cash over to equities from fixed income to take advantage of the stock markets' reviving, then interest rates would rise further. In this case the value of your bonds is curbed. With convertibles you are participating in the stock market appreciation while receiving a marginally higher coupon . Perhaps tax exempt munis might still be a value. I have owned PMX in the past. It is very good especially when it can be gotten at a discount to NAV. I have a position in FLTMX intermediate term. Generally sticking with the bigger outfits like Pimco will get you better management. I currently own no straight forward "Bond Funds". In an environment of rising interest rates if you own a bond mutual fund you are not going to neccessarily prosper. These are open end funds. As rates rise your initial principle investment erodes. This can be partially offset by reinvesting your interest. As rates continue to rise more money pours in from other and new investors to take advantage of the higher yield. This is particularly damaging to the existing share holders as the portfolios always have bonds acquired during your owner ship period below par. As these mature or worse are sold by the bond fund near maturity to buy higher yield new paper at or near par the new investors then participate in that portion of the "effective" yield that would have been yours. Conversely the bonds held with higher yields that were above par when you take your position lose value. Your portion of the effective yield to maturity is effected by the new investors now participating in that yield at the higher rate at a lower price. Bonds and bond funds also have the added disadvantage of not getting any favorable tax treatment in non-sheltered accounts. You are much better off just building your own bond ladder with individual issues. When there appears to be a period of unsustainable low interest rates as we currently seem to be in you would buy short term notes of less than 3 year maturity. As they mature you will participate in the whole portion of a 5% coupon on a bond you buy over par to maturity or call. You may only get 2.75% on bonds you buy below par but the effective yield to maturity again will be all yours. There is no dilution. As rates rise you can continue to go out further to 4-6 years to get better coupons. Generally at some point you take a long "barbell " of 12-15 year bonds of very high quality paper with rates that have a strong premium over the average rate of your ladder. For this envirionment there seems no compelling value in buying anything long. ST and ultrashort term funds are about as safe as you can get . I have recently taken a position in DXKSX and I have added to it every time there is a small rally in the Ten year note. !!!At this time standard bond funds especially with any kind of what may appear to be a "good" yield (longer average maturities)are very dangerous investments in my humble opinion, given the box the Fed has worked itself into!!!! What is wrong with the floating rate high quality preferred issues I have previously posted? Adjustable means that as rates rise the coupon rises as well. Aside from that the reason these are selling so very far below par means that the effective rate for a new purchaser is fabulous. Once the rates rise the price of these issuances will rise as well with their coupons towards par. There is a dearth of value in the bond market right now. I have had nearly 1/2 of my bond ladder positions for this calendar year mature. I have reinvested the entire proceeds in the investments as posted before. The average yield is well over 7% and while a majority of this paper may never be called, most all third party trust securities are called near their Call dates. The yield premium and QUALITY are just way too compelling, compared to bonds of the same ratings to not take advantage of this current market disruption. Of course I have a fully structured bond ladder with rungs full thru '11 to start with. Once rates rise to reflect inflation and true risk premiums I will go back to investing current maturities in the '12 -'15 bond issuances. I owned some RBS preferred that went 5 years past the call date before being called. The yield was just over 8% 15% tax qualified against my below par cost basis. I had a nice tidy tax advantaged LT capital gain as well.

Upstream MLPs and Canadian Royalty Trusts: High Return, High Risk?

SLTD>JM Keynes once remarked, "When the situation changes, I change my mind. What do you do?" This is something to keep in mind when constructing a retirement portfolio. While a medium term bond ladder with some small 8-15 year barbelling is the most effective way to preserve your assets and protect against inflation, current medium term high investment grade bonds do not offer very atttractive yields for the amount of inflation risk that currently exists. Best not to go out more than 3 years and avoid the long barbell issues as well until rates rise to reflect the true inflation risk.. It may be helpful to supplement such an investment with some high grade subordinated debt. There are many fixed rate preferreds offerred by the nation's 4 largest banks and even some large foreign banks that look attractive. These investments are not all 15% tax qualified so that is a big consideration if holding them outside a tax sheltered account. I have supplemented these with Adjustable Rate preferreds like FNM-P,BAC-E and UBS-D. Some of the "better" grade fixed issues I have used are FBF-N(BAC),USB-E,C-F,H... Sachs),MSJ,to name a few. You can get an improvement in overall yield at valuations in most cases well below par. Looking for fixed rate preferreds with near term call dates has some advantage in that if called you will enjoy a nice capital gain. I have backed this with some leveraging in DXKSX. This is a 2 1/2 times ten year note SHORTING vehicle. The adjustables still kick out some amazing yields and are "effectively " inflation protected. The UBS-D is a monthly payer. The WIA is a very good closed end fund that sells at a decent discount as well with lots of very good quality inflation protected debt also with monthly distributions. I have done very well in some foreign bond mutual funds. The +30% ride in MERKX, PFBDX, and LSGLX may be over in the short term... Also for exposure to precious metals without being too leveraged is the very excellent PRPFX. Best to limit distributions to less than 4.5% and use excess income to invest in equities so as to have all nine morningstar boxes as well as some good foreign mutual funds. The one stop for BRIC is the very volatile EEB. A leveraged long term fund like RYTNX is a great LT way to play the S&P 500 but is of course very volatile as well. I use the FCVSX to hedge RYTNX. Selling converts on S&P weakness to invest in RYTNX and then conversely taking something off the Rytnx and putting it back into FCVSX in up markets. The ADVDX is another very good income producer with broad market participation. While having a high expense ratio the INCMX fund of income funds has also done pretty well in this credit issuance crushing market. In the current period it is indeed hard to find good safe income at a decent return. While most of the economic scenarios continue to look bleak globalizatrion has left the FED impotent to control real interest rates. $4 gasoline, road fuel and home heating oil are going to show up and very soon in the inflation risk premium for investors. Most people who never bought a house with an 11.25% mortgage can not believe how high rates can ultimately go. Some RJI,MOO and DBA may also be good ways to hunker down. The mutuals like UMESX,FLATX,FICDX,PSPF... and ICBMX are great ways to missle proof a portfolio!

Upstream MLPs and Canadian Royalty Trusts: High Return, High Risk?

Sorry for the typo, GACHF is the correct symbol for Grand Cache Coal.

Upstream MLPs and Canadian Royalty Trusts: High Return, High Risk?

To SLTD : Your situation is as you post. The tax credit is only good on taxes you had access to. There are some schemes that claim you can get the tax credit in tax sheltered accounts. In many years of trading Canroys I have not seen one that holds up. This tax is then lost. However for tax sheltered accounts and for income from them these Canroys still make sense. You can recoup your tax "losses" by trading partial positions of the units against the swings. A look at the 5 year charts shows the drop offs as being even steeper than the runups of this volatile asset class. In tax sheltered accounts there are no ST vs LT trading issues or capital gains taxes. If you are over 59 1/2 in most cases you can with draw the units from tax sheltered status and pay the income tax. If held in a ROTH you may be able to avoid that situation. This could be an efffective tax strategy if you have losses in the market in unsheltered holdings you can "effectively" write off against. The same as for margin account interest. If you can get some good capital gains generated in the early (or any)part of the calendar year you can write off your margin interest against the ST portion of those gains. As long as your margin interest is nominally the same or less than your ST capital gains then it even makes sense to buy these trusts on Margin. You effectively then convert ST Capital gains to a 15% tax qualified dividend. You also then get the foreign tax credit as well. There are some other Canroy and Canroy morphs that have tax advantages. This is due to the tax treaty with the US and how the distributions are classified or packaged. There are some "stapled UNit" trusts like Atlantic Power ATPWF, and Timber West TWTUF that payout a portion or all of their distributions in the form of bond interest. Bond interest is not subject then to the 15% with holding. This dramatically increases your effective yield. In the case of Canfor timber income trust CFPUF there has been no 15% withholding on my units held in tax sheltered accounts. The ATBUF which is 40% owned by BAM Brookfield Asset management is converting from a trust to a Reit. I am expecting it to return to the $14 level when that occurs. While the loss of compensation or credit for the foreign tax is regretable it does not materially affect the buy for yield and appreciation in share value that most tax sheltered investors find most effective to provide income while growing NAV once your account is under distributions. I have recently sold out my positions in FDG but may re-enter if it gets below $47. This seems dubious but I was buying it at +/- $20 not that long ago. I own AAV, BTE, PGH,PWE,PVX, HTE as well as the others previously mentioned. I recently took off half the position in BTE as the valuation seems to be getting in the nose bleed section. I expect to do some additional "Sell in May and go away", selling of partial positions in the next several weeks. There is a time to sow and a time to reap. The time to buy these (energy related trusts) in partial positions is from Thanksgiving to just prior the MLK W/E. A big hurricane season can leave you out of the money but does not happen that often. I rarely sell more than half an accumulatied position. After bottoming near $8.50 CFPUF has shown good strength since TIN was put on some recommended list. Since then many Wall Street analysts have been pumping the forestry stocks as one of the commodities sectors to have not yet participated. Lumber futures have made a Quad bottom in the last year. I believe this is a trust with one of the greatest valuations. Checking the charts of FDG and GACCF (CFX~on TSX)we see that Met coal was at one time and even recently a grossly undervalued asset. The TWTUF has also been making a decent move higher recently as well despite being put on the sell rating by a Neil George news letter. In the same vein, not a trust but a Canadian company in another commodity severely beaten down is Uranium One. SXRZF -or UUU ~tsx. It rebounded last month off the less than $4 valuation to a near term high of $5. it has now started to settle back a little as the whole commodities thing may have been a little over done in this leg. It is interesting perhaps to note that it does alot of volume for a small cap stock.