JPMorgan's Competitive Position Just Increased [View article]
Leftfield's user name is appropriate given the logic of the comment above. The analogy of a husband spending money on his wife for fabulous jewlery has little if any to do with a federal mandate that abruptly arose over the last three months whereby regulators will now demand money center banks 33% increase in capital reserves.
It may be too obvious to say, but apparently it still needs to be said, that banks do not make money for themselves or their shareholders when they must increase capital requirements. Under the fractional reserve system, the incremental funding required to meet higher capital reserves can create either positive and negative leverage.
The more funds a bank has to subtract from what it would normally use to lend, the less money it is going to make. It's that simple. So a bank like JP Morgan that has to put aside less additional funds to meet its capital reserves, will in fact, have greater potential to make profit than Bank of American or Citi.
10 High Yield Blue Chip Buying Opportunities: Dogs of the Dow Edition [View article]
Gunny,
Thanks for the well-researched follow up. You answered every question and in doing so gave even more reasons for investors to consider using the Dogs of the Dow as a unique and effective investment approach.
My only correction would be addressed to your comment to me that "twenty years is not a long enough track record?" I thought I had made it clear that Dogs' proven history is a positive attribute when I specifically stated that "this strategy does have enough of a track record to provde....." No agonization nor lack of grip of this end!
(But you raise an interesting point about how long is long enough to test an investment program. Having served as a fiduciary in various investment entities since 1982, it never ceases to amaze me how many untested and quite transparent investment theories are proposed by the sell side. Equally amazing is how many of the theories are accepted as the truth.
This is not just limited to the tech bubble burst following the pronouncement of the "new paradigm". In the mid eighties it was that junk bonds would never default, in the early 90's it was about the rising prominence of NASDAQ over the DOW, and in the late 00's it was the AAA credit worthieness of mortage backed securities as a superior yeild alternative to treasuries.
The mother of all assumptions is the now-defunct notion that double digit equity returns earned during the 80's and 90's would somehow continue to defy not only gravity but also regression to the mean. So a historical perspective that goes back two decades can actually be helpful.)
The observation that the annual rebalance may often result in the same names appearing in the new year is very important. When one analyzes the portfolo turnover in some of the better known managers of equity income funds, it makes you wonder if they are working on commission from the IRS. No individual who calls him or herself an "iinvestor" could tolerate such high levels of transactions.
As I concluded before, since most investors may not have the equity anaylsis skills of today's buy-side investment professionals, the Dogs provides a good way to create high dividends, the potential for capital gains and a low tax impact portfolio.
Thanks again for the time and work put into your response.
10 High Yield Blue Chip Buying Opportunities: Dogs of the Dow Edition [View article]
The charts do not establish that these names were the high yeilding stocks on January 3, 2011, the first trading day of 2011. Providing these names are in fact the real Dow Dogs as of 1/3/11, then the author makes a great observation that the pull back provides a good opportunity to employ this strategy half way into the year. Only three of these stocks, PFE, JNJ and KFT have advanced more (barely) than 10% since the beginning of the year. Most are flat or down slightly, less than 5%.
What would be even more interesting is to see what happens to one year's Dogs should they be held in the portfolio through the first trading day of the next year and beyond. Just as the strategy involves buying stocks with the highest yield at the beginning of the year, it also requires you sell them and reposition at the start of the new year. That need to liquididate seems to waste opportunity for further gains if you can show that those stocks have historically extended their run well into the next year.
Overall, this strategy does have enough of a track record to provide the non-professional investor the tools to employ a dividend strategy for selecting stocks from a "known quanity" universe that does not pose undue risk to an equity portfolio.
One can only be left incredulous by your example of an index rebalance involving the S&P replacing a $200 billion market cap company with a $200 million market cap company.
The S&P 500 is a market cap weighted index and there is no way in hell that a company worth $200 million would replace one worth 1000 times more.
It would follow that none of the "size" liquidations would ever happen to the extent of a one thousand to one or whatever would be the derivative notional exchange rate.
As you would know better than anyone, the rebalancing of the index is telegraphed well before the actual day, the week or even the month of the event.
I hope for the sake of everyone who is betting on a summer rally that it in fact occurs but to say that the building negativity that has expressed itself over the last six weeks will somehow be reversed by the technical exercise of an index rebalance at the base of quadruple witching is grasping for straws.
Higher CDS vs. Lower Bond Yields: Inefficient Market at Work [View article]
Neutrinoman,
If manipulation is the main criteria for which market, UST bond or CDS, "is wrong", then the weight of the evidence goes the other direction.
As most writers in this chain have established, the unregulated insurance market is a wide open opportunity for manipulation. If I have an interest in seeing a credit instrument tank, all I need to do is to put on a particular CDS, and then make one trade print in the underlying debt at a very low price.
Even better, as my CDS goes up in value, more low trades in the instrument start to print. At this point, I don't even need a default in the instrument to make money. I have a CDS going up with every lower trade printed. It is that easy.
To the extent that the Fed controls the very shortest end of the curve, there is manipulation but not at the long end. The long bond, meaning the 10 year, is still very much responding to supply and demand.
While one could try to make the case that the US Treasury is manipulating the bond market through the QE2 purchases of UST bonds, most, if not all of those purchases are contained to the five year and shorter end of the curve.
The ten year end of the curve is responding to suppply and demand, not manipulation.
5 Global CEFs Paying Monthly Dividends [View article]
Great point by Alpha Hog. In the earlier comment stream author Todd Johnson comments on the stocks underlying the portfolio as examples of the now risk-free characteristics of the new AOD portfolio. But the underlying stocks are not the risk. Alpine management is the risk.
The historic data demonstrates that the fund managers would maintain unsustainable distributions to keep assets under management and retain their fees. It is truly unfortunate that so many CEF buyers cannot or will not undertake research beyond the current distribution, but even more disconcerting that so many CEF managers play into it.
Asset managers, where you run a Fortune 500 Company or an SEC Investment Act Company, have a fiduciary duty to protect shareholders. The data clearly establishes the fact that AOD management kept distributions higher than sustainable given the dividend harvest technique employed. As a result, investors lost both income and principal. The losses were substantial.
In the spirit of everyone gets a second chance, I would like to go along with Todd's thesis that "that was then and this is now" but AOD has already had two chances and that is one too many.
Why a Good Mix of Bond Funds Belong in a Retirement Portfolio [View article]
To be more accurate, Bill is avoiding Treasury Bonds, not all bonds. He is still very much in favor of corporate and select soveriegn bonds. The distinction is important as he is sending a message to our elected officials.
At the outset of QE1, he wrote an important essay "Shake Hands with the US Government". At that point he was convinced that the bail out would provide the best investment given how bad the entire landscape looked. He was right for quite a while as the bank and corporate bail outs did produce debt instruments that have significantly increased in value.
The tools used in QE1 were meant to save the largest financial institutions from tanking. They were not meant to turn the economy around. Those are two entirely different problems with two entirely different solutions. The problem Bill Gross is having now is that QE2 uses the same approach, massive debt creation, to restimulate the economy. And it is not working.
As a result, we have now added trillions to the national debt, which means that any funds that would have gone to investment based growth are now going to pay debt service.
This is not an interest rate call on his part, but a comment on his feeling about how certain entities manage their balance sheets.
Why a Good Mix of Bond Funds Belong in a Retirement Portfolio [View article]
massey,
It's a good thing that you cannot wait to see these same charts over the next five years, because many people in their advanced retirement also cannot wait that same five years. For that reason, they have done well to avoid the noise about the imminent inflation.
As Old Trader's research amply proves, those who kept their powder dry, hung onto, and added more bonds, did extremely well while the sell-side has been screaming "bond bubble". The same cannot be said for the S&P where you have been offered the chance to lose 50% of your investment not once but twice over the last ten years.
Please tell me how inflation is coming back, and most importantly when. The two most heavily weighted components of inflation are housing (35%) and labor (40%). With record foreclosures and an ever increasing unemployment rate, it is difficult, if not impossible, to see housing and labor costs going up. Most would argue they are heading the other direction.
Fiduciaries allocate heavily to bonds because they can manage the risks associated with the fixed income universe. There is no guess work about what will or might happen. You have a stated coupon, a maturity date for return of principal and the ability to choose among a broad range of credit risk and corresponding yields.
Wealthy families, trusts and pensions with a mandate to make sure their money will be in tact, at the very least, five years from now will be looking at the facts that currently exist and not making wild guesses about what might be, especially when it comes to the incredibly bad calls made about inflation now going into their second decade.
Case in point, the charts provided also cover the inflation spike in mid 2007 when oil hit $147 and commodities began their record and still on going run up. I do not see any evidence that bonds got "hammered". Looking a year later on those charts, it is quite clear, however, what asset class gets "hammered" when economic activity begins to stall.
This is the world we are living in now, not five years from now.
A Closer Look at How Inflation Is Impacting Your Portfolio [View article]
Wintermutt's point is well taken. It is a mystery to me why we keep hearing alarms from the inflation panic camp. Housing represents over 30% of the CPI. As glaring a fact as this is, many commentators do not seem to grasp the effect of a perma-depressed housing market.
As the fanfare for another round of QE starts up, it is important to note that without some substantial increase in employment, the housing market cannot improve. Whether you count unemployment the way BLS does to arrive at 8.4% or to include the under-employed to come up with 14% plus, the end result is a general paucity of income, as Wintermutt calls it "wage stagnation."
These are not obscure facts but rather glaring signals that we see everyday. At some point, this will become self-evident to the commentators and transaction-pushers who for three years now have been warning us about the bond bubble.
Weekly Indicators: The Slowdown Has Been Confirmed [View article]
Not sure what prompted Peter Cooper's animus and xenophobic comment, but since the US GDP roughly approximates that of the EU, it does not seem a stretch to note that QE2 has not delivered the good news to the US economy that many had hoped for.
By way of analogy, one has to wonder what this means for our fellow capitalist working within well esconsed socialist governments. Ireland, Greece, Portugal, now Spain and the rest of the EU are about to learn, as we have, that no amount of tax-generated liquidity will solve the problems created by a lack of political will.
Typical sell side commentator. You only look for an upbeat spin and ignore the clear print in the income statement and balance sheets that spells trouble on both sides of the pond.
Defensive Stocks and Sector ETFs: Caution and Opportunities as QE2 Draws to a Close [View article]
Prudent Man makes a very good point that has plenty of empirical data to support it. The last two market corrections of 25% or more, both of which happened in the last 10 years, did not differentiate offensive from defensive, growth from value and most importantly, correlated from non-correlated. PM also makes a good point about the new meaning of "hedge fund. They do not manage risk, they magnify it.
Concentrated positions and extreme leverage were the hallmarks of Stanley Druckenmiller's succesful track record, arguably the best of any of the new generation of hedgies.After several black swans landed over the last few years, even he felt he could not use the high concentration/high leverage technique anymore which he frequently acknowledged in the reports about his retirement.
Without liquidity of some form or another, it doesn't matter what sector you are in. The lesson of the last several decades, going back to Long Term Capital, is that it has become harder and harder to anticipate the events that will quickly upset the market and stress the level of liquidity needed to keep the market from melting down. And when that happens, there is no appropriate amount of sector rotation that is going to bail you out.
Just One ETF: Looking for 3-5% Extra Alpha With Closed-End Fund Income ETF [View article]
Most seeking alpha investors actively research the Closed End Fund (CEF) universe for values as many CEF's sell and are bought at market prices which represent discounts to their Net Asset Value (NAV).
Moreover, if you have followed this area for the last 10 years, you will note that the NAV discounts (and premiums) will swing between fairly large ranges, creating the opportunities to buy or sell as your particular criteria may require.
The real problem with PCEF is that the prospectus allows it to buy CEF's with premiums as high as 20%. That is a non-starter from the outset.
You are better off doing you own research, not paying double fees and definitely not buying at premiums of 20%. There are too many other better values out there.
Like so many others, Kudlow is judging the strength of the economy by the recent past performance of the stock market. It has been well demonstrated that TARP, QE1 and QE2 have created a disconnect between the economy and the market.
What matters to the economy is the reliable source of income and the steady value of assets. TARP, QE1 and QE2 has created a bifurcated America with two classes of stakeholders, the institutions at the front of the trough and the individuals at the back of the line. Take a look at the income sources and asset of choice of each class and see for yourself.
The recent transfer of current and future tax reciepts from the public to large institutions at the head of the trough is the income that has made the market perform so well. The TBTF banks, brokers and insurance companies and other intermediaries like Fannie and Freddie, all derived their income the last three years through the bail out. Their asset of choice, financial assets: stocks and bonds, have performed well because they have enjoyed the support of income guarranteed by the tax payer.
For everyman, however, it should be clear that with 14% unemployed and underemployed there is no income guarrantee whatsoever. Not unsurprisingly, everyman's asset of choice, his or her house, has drastically underperformed the last three years. Last time I checked it was down another 6% year to date and about 28% since early 2009. Contrast this against the S&P performance during the same time.
During the last election, I brushed off the rhetoric about a nation of haves and have nots. Now I believe it, but with a different twist that it is not one class of people against another, but the government against its own people.
We should be grateful that we are not in Libya or Syria where the government has open-fired upon its own people, but somhow this has the same heavy handed feel to it.
There is a common belief that CEF's should not be held for the long term given their fee structures which are sometimes twice as high as most ETF's which run around 60 basis points. More recent ETF's offered by PIMCO and Schwabb are a third of that, making the CEF/ETF fee disparity even greater.
But like most generalities, you need to do a case by case analysis given that A) active management can make a difference over passive management in some noteable areas like emerging markets, B) CEF's purchased at a steep discount to NAV can offset higher their higher fees and C) not all CEF's charge through the nose for thier managers.
While I agree with many of the posters in this chain that there is support from collective experience that CEF's work best as trading vehicles, there is also specific data where a little research into a particular CEF can go a long way.
One of the launching points for value in CEF's is that once the brokers issue the IPO and collect the underwriting and sales fees, the sell-side research completely disappears. Without the instituitional support, most of these funds suffer from the same supply and demand dynamics as any other investment that is first highly touted and then orphaned.
And this is exactly where value can be created by investors who want to do some research. There are some terrific contributing editors on SA, and some complete shills as well, so this is a good place to start doing your research and developing judgment.
How to Buy Munis Despite the Turmoil [View article]
Great article overall, but I think that the generalized statements about leveraged bond CEF's do not serve the thoughtful investor well.
The key to any leveraged income investment is the match between low borrowing costs against high investment income. On the borrowing cost side, we have the federal reserve vowing to keep short term borrowing rates somewhere between zero and .25%, (that's one quarter of a percent interest rate). The fed has said repeatedly that they will keep rates as low as possible for as long as it takes.
On the income production side, the price of munis have dropped significantly since last October when the scare started. The result has been an increase in yields on the long end. This is true accross the fixed income investment spectrum. Muni CEFs that had a "current yield of 5.5% last fall are now available at 7%. Muni managers are able to find higher yielding bonds now that they have in several years.
Under this scenario of low borrowing costs and higher yields, why would I not seriously consider looking at leveraged muni CEF's? I realize that the cost of borrowing will not stay this low forever, but if you understand this investment you also have to appreciate the fact that the bond rates are going up as well and by an even larger factor.
This trend will most likely continue. Interestingly, many of the big national muni portfolios will see a large percent of their portfolios mature in the next five to seven years, meaning that the as those bonds mature, the managers will be taking the proceeds and investing them into higher yeilding munis to be issued in 2016 and onward.
Most investors fully realize and appreciate the risks of leverage. Unfortuntately a lot of CEF investors panic at the first sign of trouble. Rates jumped up very quickly with the 2007 oil spike and rather than keep their powder dry a lot of "investors" sold out at the absolutely wrong time for selling and the right time for buying. .
If we try thinking independantly, we see that the big risk in the muni market is not leverage but the bond purpose. General Obligation (GO's) bonds are at the top of the payment priority list. A state has great flexibility to find payment sources. The same cannot be said for specific authority bonds like hospitals and other single source revenue projects.
Another very important factor, if you intend to regularly buy and sell these funds, is the daily trading volume and how that affects the price you pay going in and getting out. While the national muni CEF's have a pretty good float, the daily volume of shares trading for the state specific muni CEF's is an entirely different matter. Some state specific funds will be pushed up or down in price by a trade of a few thousand shares.
For that reason, if you are going to purchase state specific muni's, it's a good idea to prepare yourself to hold on for the long haul. A investor who requires tax free income should be picking away with as low transaction costs as possible during volatile times like this.
Leverage is really not what is toxic in this environment. It is the bond general or specific purpose and the float that will cause you problems.
Great article and great discussions by the posters. There is a lot of reseach available on line out there so happy hunting everyone.
JPMorgan's Competitive Position Just Increased [View article]
It may be too obvious to say, but apparently it still needs to be said, that banks do not make money for themselves or their shareholders when they must increase capital requirements. Under the fractional reserve system, the incremental funding required to meet higher capital reserves can create either positive and negative leverage.
The more funds a bank has to subtract from what it would normally use to lend, the less money it is going to make. It's that simple. So a bank like JP Morgan that has to put aside less additional funds to meet its capital reserves, will in fact, have greater potential to make profit than Bank of American or Citi.
John Tobey's point is absolutely correct.
10 High Yield Blue Chip Buying Opportunities: Dogs of the Dow Edition [View article]
Thanks for the well-researched follow up. You answered every question and in doing so gave even more reasons for investors to consider using the Dogs of the Dow as a unique and effective investment approach.
My only correction would be addressed to your comment to me that "twenty years is not a long enough track record?" I thought I had made it clear that Dogs' proven history is a positive attribute when I specifically stated that "this strategy does have enough of a track record to provde....." No agonization nor lack of grip of this end!
(But you raise an interesting point about how long is long enough to test an investment program. Having served as a fiduciary in various investment entities since 1982, it never ceases to amaze me how many untested and quite transparent investment theories are proposed by the sell side. Equally amazing is how many of the theories are accepted as the truth.
This is not just limited to the tech bubble burst following the pronouncement of the "new paradigm". In the mid eighties it was that junk bonds would never default, in the early 90's it was about the rising prominence of NASDAQ over the DOW, and in the late 00's it was the AAA credit worthieness of mortage backed securities as a superior yeild alternative to treasuries.
The mother of all assumptions is the now-defunct notion that double digit equity returns earned during the 80's and 90's would somehow continue to defy not only gravity but also regression to the mean. So a historical perspective that goes back two decades can actually be helpful.)
The observation that the annual rebalance may often result in the same names appearing in the new year is very important. When one analyzes the portfolo turnover in some of the better known managers of equity income funds, it makes you wonder if they are working on commission from the IRS. No individual who calls him or herself an "iinvestor" could tolerate such high levels of transactions.
As I concluded before, since most investors may not have the equity anaylsis skills of today's buy-side investment professionals, the Dogs provides a good way to create high dividends, the potential for capital gains and a low tax impact portfolio.
Thanks again for the time and work put into your response.
FAMCO
10 High Yield Blue Chip Buying Opportunities: Dogs of the Dow Edition [View article]
What would be even more interesting is to see what happens to one year's Dogs should they be held in the portfolio through the first trading day of the next year and beyond. Just as the strategy involves buying stocks with the highest yield at the beginning of the year, it also requires you sell them and reposition at the start of the new year. That need to liquididate seems to waste opportunity for further gains if you can show that those stocks have historically extended their run well into the next year.
Overall, this strategy does have enough of a track record to provide the non-professional investor the tools to employ a dividend strategy for selecting stocks from a "known quanity" universe that does not pose undue risk to an equity portfolio.
How a Quadruple Witching Works [View article]
One can only be left incredulous by your example of an index rebalance involving the S&P replacing a $200 billion market cap company with a $200 million market cap company.
The S&P 500 is a market cap weighted index and there is no way in hell that a company worth $200 million would replace one worth 1000 times more.
It would follow that none of the "size" liquidations would ever happen to the extent of a one thousand to one or whatever would be the derivative notional exchange rate.
As you would know better than anyone, the rebalancing of the index is telegraphed well before the actual day, the week or even the month of the event.
I hope for the sake of everyone who is betting on a summer rally that it in fact occurs but to say that the building negativity that has expressed itself over the last six weeks will somehow be reversed by the technical exercise of an index rebalance at the base of quadruple witching is grasping for straws.
FAMCO
Higher CDS vs. Lower Bond Yields: Inefficient Market at Work [View article]
If manipulation is the main criteria for which market, UST bond or CDS, "is wrong", then the weight of the evidence goes the other direction.
As most writers in this chain have established, the unregulated insurance market is a wide open opportunity for manipulation. If I have an interest in seeing a credit instrument tank, all I need to do is to put on a particular CDS, and then make one trade print in the underlying debt at a very low price.
Even better, as my CDS goes up in value, more low trades in the instrument start to print. At this point, I don't even need a default in the instrument to make money. I have a CDS going up with every lower trade printed. It is that easy.
To the extent that the Fed controls the very shortest end of the curve, there is manipulation but not at the long end. The long bond, meaning the 10 year, is still very much responding to supply and demand.
While one could try to make the case that the US Treasury is manipulating the bond market through the QE2 purchases of UST bonds, most, if not all of those purchases are contained to the five year and shorter end of the curve.
The ten year end of the curve is responding to suppply and demand, not manipulation.
FAMCO
5 Global CEFs Paying Monthly Dividends [View article]
The historic data demonstrates that the fund managers would maintain unsustainable distributions to keep assets under management and retain their fees. It is truly unfortunate that so many CEF buyers cannot or will not undertake research beyond the current distribution, but even more disconcerting that so many CEF managers play into it.
Asset managers, where you run a Fortune 500 Company or an SEC Investment Act Company, have a fiduciary duty to protect shareholders. The data clearly establishes the fact that AOD management kept distributions higher than sustainable given the dividend harvest technique employed. As a result, investors lost both income and principal. The losses were substantial.
In the spirit of everyone gets a second chance, I would like to go along with Todd's thesis that "that was then and this is now" but AOD has already had two chances and that is one too many.
FAMCO
Why a Good Mix of Bond Funds Belong in a Retirement Portfolio [View article]
At the outset of QE1, he wrote an important essay "Shake Hands with the US Government". At that point he was convinced that the bail out would provide the best investment given how bad the entire landscape looked. He was right for quite a while as the bank and corporate bail outs did produce debt instruments that have significantly increased in value.
The tools used in QE1 were meant to save the largest financial institutions from tanking. They were not meant to turn the economy around. Those are two entirely different problems with two entirely different solutions. The problem Bill Gross is having now is that QE2 uses the same approach, massive debt creation, to restimulate the economy. And it is not working.
As a result, we have now added trillions to the national debt, which means that any funds that would have gone to investment based growth are now going to pay debt service.
This is not an interest rate call on his part, but a comment on his feeling about how certain entities manage their balance sheets.
FAMCO
Why a Good Mix of Bond Funds Belong in a Retirement Portfolio [View article]
It's a good thing that you cannot wait to see these same charts over the next five years, because many people in their advanced retirement also cannot wait that same five years. For that reason, they have done well to avoid the noise about the imminent inflation.
As Old Trader's research amply proves, those who kept their powder dry, hung onto, and added more bonds, did extremely well while the sell-side has been screaming "bond bubble". The same cannot be said for the S&P where you have been offered the chance to lose 50% of your investment not once but twice over the last ten years.
Please tell me how inflation is coming back, and most importantly when. The two most heavily weighted components of inflation are housing (35%) and labor (40%). With record foreclosures and an ever increasing unemployment rate, it is difficult, if not impossible, to see housing and labor costs going up. Most would argue they are heading the other direction.
Fiduciaries allocate heavily to bonds because they can manage the risks associated with the fixed income universe. There is no guess work about what will or might happen. You have a stated coupon, a maturity date for return of principal and the ability to choose among a broad range of credit risk and corresponding yields.
Wealthy families, trusts and pensions with a mandate to make sure their money will be in tact, at the very least, five years from now will be looking at the facts that currently exist and not making wild guesses about what might be, especially when it comes to the incredibly bad calls made about inflation now going into their second decade.
Case in point, the charts provided also cover the inflation spike in mid 2007 when oil hit $147 and commodities began their record and still on going run up. I do not see any evidence that bonds got "hammered". Looking a year later on those charts, it is quite clear, however, what asset class gets "hammered" when economic activity begins to stall.
This is the world we are living in now, not five years from now.
FAMCO
A Closer Look at How Inflation Is Impacting Your Portfolio [View article]
As the fanfare for another round of QE starts up, it is important to note that without some substantial increase in employment, the housing market cannot improve. Whether you count unemployment the way BLS does to arrive at 8.4% or to include the under-employed to come up with 14% plus, the end result is a general paucity of income, as Wintermutt calls it "wage stagnation."
These are not obscure facts but rather glaring signals that we see everyday. At some point, this will become self-evident to the commentators and transaction-pushers who for three years now have been warning us about the bond bubble.
FAMCO
Weekly Indicators: The Slowdown Has Been Confirmed [View article]
By way of analogy, one has to wonder what this means for our fellow capitalist working within well esconsed socialist governments. Ireland, Greece, Portugal, now Spain and the rest of the EU are about to learn, as we have, that no amount of tax-generated liquidity will solve the problems created by a lack of political will.
Typical sell side commentator. You only look for an upbeat spin and ignore the clear print in the income statement and balance sheets that spells trouble on both sides of the pond.
FAMCO
Defensive Stocks and Sector ETFs: Caution and Opportunities as QE2 Draws to a Close [View article]
Concentrated positions and extreme leverage were the hallmarks of Stanley Druckenmiller's succesful track record, arguably the best of any of the new generation of hedgies.After several black swans landed over the last few years, even he felt he could not use the high concentration/high leverage technique anymore which he frequently acknowledged in the reports about his retirement.
Without liquidity of some form or another, it doesn't matter what sector you are in. The lesson of the last several decades, going back to Long Term Capital, is that it has become harder and harder to anticipate the events that will quickly upset the market and stress the level of liquidity needed to keep the market from melting down. And when that happens, there is no appropriate amount of sector rotation that is going to bail you out.
That is the world we live in now.
FAMCO
Just One ETF: Looking for 3-5% Extra Alpha With Closed-End Fund Income ETF [View article]
Moreover, if you have followed this area for the last 10 years, you will note that the NAV discounts (and premiums) will swing between fairly large ranges, creating the opportunities to buy or sell as your particular criteria may require.
The real problem with PCEF is that the prospectus allows it to buy CEF's with premiums as high as 20%. That is a non-starter from the outset.
You are better off doing you own research, not paying double fees and definitely not buying at premiums of 20%. There are too many other better values out there.
FAMCO
How Strong Is the U.S. Economy? [View article]
What matters to the economy is the reliable source of income and the steady value of assets. TARP, QE1 and QE2 has created a bifurcated America with two classes of stakeholders, the institutions at the front of the trough and the individuals at the back of the line. Take a look at the income sources and asset of choice of each class and see for yourself.
The recent transfer of current and future tax reciepts from the public to large institutions at the head of the trough is the income that has made the market perform so well. The TBTF banks, brokers and insurance companies and other intermediaries like Fannie and Freddie, all derived their income the last three years through the bail out. Their asset of choice, financial assets: stocks and bonds, have performed well because they have enjoyed the support of income guarranteed by the tax payer.
For everyman, however, it should be clear that with 14% unemployed and underemployed there is no income guarrantee whatsoever. Not unsurprisingly, everyman's asset of choice, his or her house, has drastically underperformed the last three years. Last time I checked it was down another 6% year to date and about 28% since early 2009. Contrast this against the S&P performance during the same time.
During the last election, I brushed off the rhetoric about a nation of haves and have nots. Now I believe it, but with a different twist that it is not one class of people against another, but the government against its own people.
We should be grateful that we are not in Libya or Syria where the government has open-fired upon its own people, but somhow this has the same heavy handed feel to it.
FAMCO
CEFs: Follow the NAV [View article]
There is a common belief that CEF's should not be held for the long term given their fee structures which are sometimes twice as high as most ETF's which run around 60 basis points. More recent ETF's offered by PIMCO and Schwabb are a third of that, making the CEF/ETF fee disparity even greater.
But like most generalities, you need to do a case by case analysis given that A) active management can make a difference over passive management in some noteable areas like emerging markets, B) CEF's purchased at a steep discount to NAV can offset higher their higher fees and C) not all CEF's charge through the nose for thier managers.
While I agree with many of the posters in this chain that there is support from collective experience that CEF's work best as trading vehicles, there is also specific data where a little research into a particular CEF can go a long way.
One of the launching points for value in CEF's is that once the brokers issue the IPO and collect the underwriting and sales fees, the sell-side research completely disappears. Without the instituitional support, most of these funds suffer from the same supply and demand dynamics as any other investment that is first highly touted and then orphaned.
And this is exactly where value can be created by investors who want to do some research. There are some terrific contributing editors on SA, and some complete shills as well, so this is a good place to start doing your research and developing judgment.
Best of Luck,
FAMCO
How to Buy Munis Despite the Turmoil [View article]
The key to any leveraged income investment is the match between low borrowing costs against high investment income. On the borrowing cost side, we have the federal reserve vowing to keep short term borrowing rates somewhere between zero and .25%, (that's one quarter of a percent interest rate). The fed has said repeatedly that they will keep rates as low as possible for as long as it takes.
On the income production side, the price of munis have dropped significantly since last October when the scare started. The result has been an increase in yields on the long end. This is true accross the fixed income investment spectrum. Muni CEFs that had a "current yield of 5.5% last fall are now available at 7%. Muni managers are able to find higher yielding bonds now that they have in several years.
Under this scenario of low borrowing costs and higher yields, why would I not seriously consider looking at leveraged muni CEF's? I realize that the cost of borrowing will not stay this low forever, but if you understand this investment you also have to appreciate the fact that the bond rates are going up as well and by an even larger factor.
This trend will most likely continue. Interestingly, many of the big national muni portfolios will see a large percent of their portfolios mature in the next five to seven years, meaning that the as those bonds mature, the managers will be taking the proceeds and investing them into higher yeilding munis to be issued in 2016 and onward.
Most investors fully realize and appreciate the risks of leverage. Unfortuntately a lot of CEF investors panic at the first sign of trouble. Rates jumped up very quickly with the 2007 oil spike and rather than keep their powder dry a lot of "investors" sold out at the absolutely wrong time for selling and the right time for buying. .
If we try thinking independantly, we see that the big risk in the muni market is not leverage but the bond purpose. General Obligation (GO's) bonds are at the top of the payment priority list. A state has great flexibility to find payment sources. The same cannot be said for specific authority bonds like hospitals and other single source revenue projects.
Another very important factor, if you intend to regularly buy and sell these funds, is the daily trading volume and how that affects the price you pay going in and getting out. While the national muni CEF's have a pretty good float, the daily volume of shares trading for the state specific muni CEF's is an entirely different matter. Some state specific funds will be pushed up or down in price by a trade of a few thousand shares.
For that reason, if you are going to purchase state specific muni's, it's a good idea to prepare yourself to hold on for the long haul. A investor who requires tax free income should be picking away with as low transaction costs as possible during volatile times like this.
Leverage is really not what is toxic in this environment. It is the bond general or specific purpose and the float that will cause you problems.
Great article and great discussions by the posters. There is a lot of reseach available on line out there so happy hunting everyone.
FAMCO