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  • Options Income Strategies May Be Dangerous To Your Health  [View instapost]
    Thanks for the nice article on options. It is food for thought.

    Interest rates are definitely a topic I've been analyzing for 5 years. Conventional wisdom is that rates have nowhere to go but up. But... I caution everyone that asks. I joke that if you ask 2 PhD economists whether rates are going up or down, you will get three different answers, and all of them will include the words "it depends". :-)

    We could be in a liquidity trap situation that will tend toward deflation and low rates. 30 year bond at 2.00% is not impossible. You have to think through the outcome of many scenarios. For instance, let's say after 5 years of Q-infinitiy the Fed finally gets its way and levitates the housing market another 10%. Allegedly there are 27 milion houses underwater, let's say 10M finally get above water. You would think this is all positive for rising rates. Not so fast. Most people in that situation would just pay the minimum and try to save in cash if they could as long as they are underwater. The moment they have some equity, they might put as much in as much cash as they can to improve their LTV and try to refi. Banking 101 says any payment directly to a bank (assuming the mortgage is held by a bank) is a reduction in the money supply. So suddenly you have a spike in equity pay-downs coupled with reduction in bank earnings from the lower rates after the refis. All of these forces push inflation and rates down.

    I'm not saying I can prove that will happen, but it is one of many paradoxes you can think of that asset inflation might cause. The road back to the old normal has many twists and turns. I think that is why they call it the new normal.
    Apr 18 12:52 AM | Likes Like |Link to Comment
  • Dividend Stocks Can't Take The Place Of Bonds [View article]
    Sigh yet again, the equation I see on many Seeking Alpha articles: Fanciful conclusions x erroneous data = you may as well use a dart board to pick stocks or bonds.

    Add to Yahoo and Google, Morningstar has MCD -4.45% decline YTD, not +34%. Some of the other data also looks wrong to me, but I am not going to spend more time correcting it all. This article needs to be deleted and reposted with accurate data then we can talk.

    The only thing that seems in the right ballpark to me from your charts is that High YIeld bonds have generally outperformed everything since late 2008. That is due in significant part to a massive liquidity premium and risk aversion after Lehman. When liquidity returned and defaults declined, HY came roaring back. I am not sure how this informs long term strategy on bonds vs dividend growth stocks.
    May 6 04:03 PM | Likes Like |Link to Comment
  • First Trust Strategic High Income II: Ample Time To Sit And Wait [View article]
    I would not buy in at a premium. If you have uninvested cash there are better choices at the moment, I agree with Bob on that point. If you are fully invested I don't know that I would sell at 2.58% premium as of this weekend. I would look for something closer to 5-8% but it's a judgment call. Part of the equation is whether you need to rebalance, or you may need to hold to avoid becoming over-concentrated in one name or one sector. The other part of the equation is taxes. Unless you're holding in a tax free account, if you are close to the 1 yr mark it makes sense to hold a little and pay long term vs short term Cap Gains, a 20-25% savings depending on your state and brackets.

    I don't know that I would wait till it got to 15%, I would consider buying in at 5-10% discount, but that all depends on the pricing of all the alternatives on that day and all the above considerations. I don't think most people can be so rigid as if it's not a buy it's a sell. Most have a buy point, a hold range, and a sell point. It's just not that practical to churn so much. But if you wish to do that there is a certain logic just don't become over-concentrated you will regret it one day imho.
    May 6 03:19 PM | Likes Like |Link to Comment
  • First Trust Strategic High Income II: Ample Time To Sit And Wait [View article]

    Not sure what the point of your post is. Bob said it's a hold until the discount improves. You said "As such, it is a hold currently ". Sounds like you're in violent agreement. And that makes 3 of us.
    May 5 04:48 PM | Likes Like |Link to Comment
  • Risk Premium Factor Model Shows S&P 500 Still Undervalued [View article]
    > just plugging that into a perpetuity model

    Are you saying a perpetuity cashflow (or op earnings as proxy)?

    >create a projection that shows dividends being paid sometime in the future

    I think I'm gathering you don't project growth in earnings or cashflow. You just use the present value of what you assume to be a constant perpetuity. I use discounted growing dividends, assuming the recent growth rate continues. You know I don't think it really matters, whether it is a flat forward cashflow, growing or whatever, they all are dominated by the first few terms of the Taylor expansion for practical discount rates so when you normalize you'll get mostly the same answer for whether stocks are over or undervalued in the short term.

    Again I was just curious if you know of any work that has been done focusing more on dividends or smoothed free cash flow trying to come up with the same risk premium. It will be more valid for individual stocks or narrow groups of stocks than what you did for broad market I agree.
    May 4 08:09 PM | Likes Like |Link to Comment
  • Risk Premium Factor Model Shows S&P 500 Still Undervalued [View article]
    Free cash flow should not be affected by mergers and acquisition which are capital structure changes. I agree it may be a little hard to come by, it seems you have to reconstruct it company by company. My comment about mergers was that it often results in large intangible assets on the books. The rate at which those are written down affects operating earnings, even though it should really be part of the capital sctructure.

    Yes capex can be lumpy, but if it is needed to sustain a business or is the engine of growth it tells you something. Over time the returns will smooth.

    What I like about your method is the comparison to interest rates. I don't want to get in argument about dividends since that is religon. For dividend income investors it would be interesting to run a similar analysis but you have to take out non-dividend stocks (like AAPL until recently) and probably some distorted dividend stocks like financials. I don't expect radically different results compared with operating income. My research seems that dividend stocks get over or undervalued at the same time non-dividend stocks are. There might be some subtle
    May 4 03:19 PM | Likes Like |Link to Comment
  • May Core Fixed Income Allocation Breakdown And April Performance Review [View article]
    Thanks - how is the correlation on TBF and TBT with the underlying?
    May 2 09:04 PM | Likes Like |Link to Comment
  • Risk Premium Factor Model Shows S&P 500 Still Undervalued [View article]
    Have you run a similar analysis using dividend yields rather than earnings, or some other metrics like free cash flow? Earnings can be distorted by one-time non-cash charges due to mergers.

    I am also curious if you looked at any subset of the SP500, like only dividend payers or non-financials.

    Interesting to see if they all correlate more or less.
    May 2 09:00 PM | Likes Like |Link to Comment
  • May Core Fixed Income Allocation Breakdown And April Performance Review [View article]
    You mentioned initiating a short on long Treasuries. Good idea. How does an individual investor practically accomplish that? The brokers I tried won't allow direct shorts. The funds I saw were not shortable. I did not find any short funds.

    Please advise with specifics.
    May 2 12:39 AM | Likes Like |Link to Comment
  • Single Factor Dividend Income Model. Part 1.  [View instapost]
    I'm not sure what you mean by correct. The biggest dollar amount financial dividend payers like WFC and JPM are in the process of restoring their dividends after they were ordered to virtually eliminate them. Your data will show unusually high growth rates for the next few years. Others like BAC will take longer to restore. But all the dividends are highly sensitive to a narrowing of the spread between short and long rates. Then you could see sudden cuts or at least the elimination of the growth. It may not be their choice.

    I do not think the long term basics of dividend growth have been radically altered by the great recession for other sectors, just financials.

    And by the way, although banking has been around since the Medicis in the 1400s. But in its current form, with public insurance (FDIC) and regulations on capital structure, it has only been around since the 1930s. It underwent two major changes, with the Savings and Loan deregulation in the early 80s and again in the 90s with the gradual elimination of Glass Steigal and changes to other regulations and the rise of Basel 1 and 2.
    Apr 29 09:05 PM | Likes Like |Link to Comment
  • A Fool And Free Money (27 Feb 2012) [View instapost]
    I am going to check with Interactive Brokers if they will sell me historical data. They do have quite a few data products I haven't used any yet.
    Apr 29 05:00 PM | Likes Like |Link to Comment
  • Single Factor Dividend Income Model. Part 1.  [View instapost]
    My understanding is bank dividends are regulated. Banks cannot pay a dividend unless their regulator says they have enough capital, which is a matter of the regulator's opinion. I would look at leverage, and growing leverage rates, as an indicator of a future dividend cut.

    The only way financials make money is through leverage. For non-financials, you would have some utilities and telcos also highly leveraged. Cyclical industrie like autos have hidden leverage - their customer's need credit.

    It's a big topic.

    Apr 29 04:52 PM | Likes Like |Link to Comment
  • Is Dividend Growth Investing Robust? (28 April 2012) [View instapost]
    OK, so you are re-buying assuming at 3%.

    I checked your numbers I think they are slightly incorrect in fig 3. Not sure why.

    For 50% reinvest cutters, year 2 should be 0.3147. For 100% loss on cutters, it should be 3.10200

    For the 50% case, the 50% cutting shares (3*50%=1.5) should be reinvested at 3%, not 3.3%. Then each year it grows at by +0.15%. Really it should be 3.0%*(1.005)^N*97 + 3.0%*(1.005)*(N-1)*1.5 and so on for each year but you chose to simplify it. Next year you addd the N-2 term and so on. I haven't spent time to try and make a clean mathematical formula for the series, i just use repetitve formulas in Excel.

    But even with your simpler 3.15%, 3.3% etc the numbers seem to be off. My calc shows the income is a tad lower than you do, so the maximum will be earlier in time. You should re-run it and see what you get.

    You raise an excellent point by pursuing this line of thinking that you have to add in "cutters" similar to how defaults are considered for bonds. Bonds also "season" meaning default rate increases over time. I have some work done that shows that it often takes between 10-20 years for a DG stock to outperform bond rates prevalent at the time. If we put the two together, if the maximum is before the crossover year, the stock may never outperform the bond.

    Cutter rates are similar to defaults in bonds, they have to be factored in. I think you have to actively cull the portfolio of potential cutters to consistently outperform bonds.
    Apr 29 04:42 PM | Likes Like |Link to Comment
  • Single Factor Dividend Income Model. Part 1.  [View instapost]
    I would be curious. It might reduce your dividend cutter problem to insignificance. Many of the large cap dividend cutters were financial related, and accounted for a major part of the SP500 total dividend yield by 2008.
    Apr 29 02:29 AM | Likes Like |Link to Comment
  • JP Morgan / Scottrade/ And Teléfonos De México (TMX) ADR - A Crime Case? [View instapost]
    If your stocks are held in street name, which I am 99% sure they are if you are with Scottrade, in theory Scottrade "owes" you the stock and therefore "owes" you the dividend. It should be their problem, unless they transferred the shares back into your name on delisting then it is your problem.

    I think it is reasonable for a broker to return stocks to you that do not fit the criteria of stocks they can hold.

    But I'm sure they have some fine print saying they don't owe it to you if they didn't receive the funds, period. Which is kind of unfair. Good luck going after any broker for anything from personal experience, they all hide behind this nice little fortress called NASD arbitration. HOWEVER.... I heard that in CA you can try filing small claims and the judge may wave arbitration entirely and force them to appear in your location, in which case your check will magically appear from Scottrade I assure you before your date. There is some precedent on an airline ticket case, I think it was Southwest or American try google it. It's $40 filing fee - go for it!
    Apr 28 09:19 PM | Likes Like |Link to Comment