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  • You're Missing The REIT Point: Investor Sentiment Is On Our Side [View article]
    zap -- Sorry, I had 2nd thoughts about the above reply, and was revising it when it timed-out it.

    My considered reply is as follows:
    As you know, the formula for duration combines (only) Par Value, Yield to Maturity, Annual Interest Rate, and Maturity in Years--it does not include recognition of the credit rating of the bond.

    You also know there is far more to pricing a bond than its duration--junk bonds do not turn upside down the risk/reward relationship required of all investments.

    Junk does not move in lock-step with Treasuries--unlike what you implied, the greater yield of junk does not result in universally greater reward compared to the LESSER RISK of investment grade bonds of equal duration.

    For example, check out the recent huge price declines in the junk bonds of Linn Energy and Seadrill, and compare them to the change in price of Treasuries for the same duration.
    Jul 30, 2015. 05:54 PM | Likes Like |Link to Comment
  • You're Missing The REIT Point: Investor Sentiment Is On Our Side [View article]
    zap -- Your argument is ethically challenged. You are comparing long-duration Treasuries to short-duration junk.

    You would like to suggest in a rising rate environment, high-yield bonds having junk credit ratings will decline by no greater percentage than Treasuries of equal duration--I'm not buying what you're selling.
    Jul 30, 2015. 05:20 PM | Likes Like |Link to Comment
  • You're Missing The REIT Point: Investor Sentiment Is On Our Side [View article]
    geezer -- I am not a trader. Mine is a Growth & Income strategy--I own only dividend-payers, and all my positions are the same as held by typical DGIs. I've also supported DGI hundreds of times; it's a cousin works.

    You've clearly attached negative connotations to "total return" (which is no more than the sum of price return and distributions).

    I am perplexed as to what exactly you object to in my comment, which referred to valuation. Your reference to "VERY DANGEROUS" strikes me as nonsensical.

    IMO, if you prefer to buy at whatever price is offered, you also prefer to bob like a cork on the ocean, having confidence the winds and currents will (eventually) deliver you to the port you originally desired. It happens I prefer to be the captain of my fate.

    I wish you good luck and good fortune.
    Jul 30, 2015. 05:15 PM | Likes Like |Link to Comment
  • You're Missing The REIT Point: Investor Sentiment Is On Our Side [View article]
    Gary -- I didn't calculate it...simply lifted it from the ever and deservedly popular CCC List.
    Jul 30, 2015. 03:56 PM | Likes Like |Link to Comment
  • You're Missing The REIT Point: Investor Sentiment Is On Our Side [View article]
    Brad -- Thank you.

    Though I presented my 'probable scenario', I also recognize there is elevated risk in REITs such as Realty Income, should my rate scenario proves too optimistic...

    For example, though the Fed effectively controls short-term rates, those rates are not material to companies financing long-term needs such as land and buildings (it is difficult for the Fed to influence long term rates).

    If inflation and long-term rates advance more quickly than the Fed anticipates/desires, there is added risk REITs such Realty Income may encounter difficulty in maintaining a DGR greater than inflation (O's one-year DGR=2.1%)--given average annual rent escalators of about 1%, and only about 10% of annual leases eligible for renewal negotiation annually.
    Jul 30, 2015. 02:37 PM | Likes Like |Link to Comment
  • You're Missing The REIT Point: Investor Sentiment Is On Our Side [View article]
    Adam -- I did not suggest you had done so; only qualified my own comment.
    Jul 30, 2015. 01:19 PM | 1 Like Like |Link to Comment
  • You're Missing The REIT Point: Investor Sentiment Is On Our Side [View article]
    ...also evidence of the Wall Street adage "talking his book" -- NAREIT (National Association of Real Estate Investment Trusts) is the public relations mouthpiece of the REIT industry. NAREIT, like other industry associations, exists on the fees paid by members. One of its responsibilities is to pump out papers shining the most favorable light upon REITs (which though factual, is not to suggest they are outright dishonest).

    As for the interaction between rising rates on 'safe' investments (e.g., 10-year Treasury Note), and high-yield investments (e.g., junk bonds, REITS, BDCs, MLPs, and some C Corps)...that higher rates create downward price pressure on the high-yielders is a basic principle of investment 101.

    For evidence, one need only look at the spring 2013 "Taper Tantrum"--the result of the Fed considering a plan to slowly ratchet-up rates from ZIRP to a normalized 3%. The market immediately ignored the 'slow' part and assumed the high-yielders should be priced to the higher ending-rate.

    The consequent result: Using most everyone's favorite REIT, Reality Income as an example -- O was trading at $55 before the announced tapering, was immediately re-priced at $40 (a -27% haircut), and continued to decline to $36 (-35%), before ending the 2013 at $37.

    Therein lies both risk and potential opportunity.

    Traders will attempt to sell around the anticipated highs and buy around the lows; rinse and repeat.

    Unfortunately, long-term SDIs are inconsistent. Many have a (deserved) reputation of buying high and selling low--the Wall Street adage describes them as "the last to buy and last to sell". IMO, the better of them will take a more pragmatic view--using FV as a guide, they would (always) refrain from initiating or adding to positions in fully-valued REITs (knowing rates will rise sooner or later, would not be buying them in this market)--they would await better valuations.

    In my 'probable scenario', rates do rise and consequently high-yielders suffer price decline as some SDI longs* (including some institutions) begin selling high-yield shares and increase allocations to lower-risk investments (either bonds or equities); meantime others postpone buying high-yield shares while awaiting evidence earnings/FFO continue to rise in a rising rate environment, and thus can continue to support rising attractive dividend growth rates.

    It is also probable total returns of high-yielders will decline somewhat due to a reduced portion being derived from price growth and a larger portion from distributions.

    Theoretically, and absent stagflation or recession, O and most other REITs would raise rents at a rate greater than their rising cost of capital, and begin posting attractive metrics that support rising dividends.


    * These would include a number of equity longs who prefer debt investments, but were 'chased' into equities in 2008 and thereafter, but are more comfortable with a large allocation to debt, and welcome an opportunity to return to their comfort zone.
    Jul 30, 2015. 11:23 AM | 4 Likes Like |Link to Comment
  • BHP Billiton's 'Dividend Bonanza' And Other Scenarios [View article]
    RAS -- Agreed. In general, the CEO should be aware of what the BoD is doing...and especially so when the CEO is also the board chair.

    However, if you recall the recent financial crisis and the various programs of the Treasury and Fed used to rescue the US economy (some say the world economy), and knowing GE Capital held about $600 billion in real estate loans, credit-card debt, and other assets. Its toxic loans, commercial paper, and complex derivatives chopped $269 billion from GE's market value and nearly threw it into bankruptcy--but was saved by participation in federal bailout programs.

    It is not a secret GE participated in federal bailout programs, and that participation in those programs would (appropriately) came with strings attached, and likely included reduced or eliminated dividends.

    Were GE Capital a bank, it would rank as one of our largest America--and you may know it was recently declared a too big to fail "systemically important financial institution (SIFI).

    Starting in October 2008, GE Capital used a federal program to support its commercial paper. A month later, GE Capital received $139 billion in F.D.I.C. insurance of its debt(!). Both are described by the NY Times:

    Perhaps you are unaware GE quietly become the biggest beneficiaries of one of the government's key rescue programs for banks--the Temporary Liquidity Guarantee Program (TLGP). GE Capital used the program to avail itself of federal guarantees on over $80 billion of loans (and about 25% of all the debt backed by the TLGP. GE worked its way into the rescue program by owning two relatively small Utah banking institutions. Some would say GE used loopholes in the U.S. regulatory system to obtain historic intervention in the financial crisis. (See Washington Post)

    If your politics color your view of items printed by the Times or Post, you may prefer this March 2009 article from the Economist. Note it begins with reference to GE's having lost its AAA credit rating the previous month, and slashed its dividend the same month. It goes on to chronicle GE's missteps, and offers some prescient observations on GE's future.

    Thus, given the use of taxpayer monies to bailout GE's finance subsidiary, IMO it is clearly appropriate the government should instruct GE to slash its dividend, and that federal notification to that effect may have been received in the interval between Immelt's comments and GE's BoD meeting is also plausible (alternatively, it is equally likely, given the credit downgrade only the month earlier, the BoD arrived at the dividend decision without federal influence).

    OTOH, as you recently wrote an entire article based upon your erroneous assertion realized and unrealized returns are apples and bananas that cannot be summed (as mutual funds clearly do daily to establish their NAV), that may be a bridge too far for yourself.
    Jul 29, 2015. 12:27 PM | 4 Likes Like |Link to Comment
  • BHP Billiton's 'Dividend Bonanza' And Other Scenarios [View article]
    Putting politicians aside (they have license to lie with impunity)...

    Publicly-owned companies and their officers are not permitted 'free speech' rights with regard to disclosure of sensitive information (including selective disclosure). Rather their speech is governed by disclosure laws and regulations monitored and enforced by the Securities and Exchange Commission (SEC), as updated and expanded within Sarbanes-Oxley in 2001.

    Most notable: For shareholders and prospective shareholders to expect CEOs to phrase their comments in anything other than as favorable as can be done without compromising honesty and SEC regulations demonstrates the gullibility of the shareholder (thus I cringe when I read articles using CEO quotes to buttress author's opinions).

    Furthermore, should a CEO suggest or even hint, publicly or privately, a pending dividend-cut, acquisition or sale, or other market-moving action before the BoD officially approves that action would almost certainly cause a premature share price action, and would expect to be fired or retired for such an imprudent act (even if he and/or the company were not fined by the SEC).*

    Typically, CEOs are not the smartest person in the room--but discretionloyalty, and honesty, are essential to their position.,


    *A frequently recited example is Jeff Immelt (GE), who expressed confidence in the dividend only a week or so before the BoD cut it from 31 cents to 10 cents in 2009. If he had prior knowledge the dividend was soon to be cut it (as is recited at virtually every SA opportunity), and thus knowingly gave false confidence to shareholders, the SEC and BoD would almost certainly have taken appropriate action.
    Jul 28, 2015. 06:28 PM | 5 Likes Like |Link to Comment
  • The Electric Utility Business Model Is Under Increasing Pressure [View article]
    I am in general agreement with the thrust of the article. (Google a list of articles discussing the growing problems of traditional utes--new technologies for electrical storage systems will advance those problems.)

    State regulatory commissions are reluctant to recognize the problem they've created by allowing excess power to put into the grid for credit while not also contributing to the significant fixed cost incurred by the utilities (perverse incentives encourage others to leave the grid whose costs are spread among fewer customers).

    I am long 3 utes (D, NEE & SO) and prefer new investments be directed to energy midstreams and rails--both of which are quasi-utes.
    Jul 28, 2015. 02:21 PM | 1 Like Like |Link to Comment
  • Durability Test: Realty Income [View article]
    Brad -- I'm pleased to be long Realty Income (O).

    Simon Property Group (SPG) has provided superior long-term performance for both total returns and DGRs.

    However, I own O for the combination of income and relative safety.

    Therefore I especially appreciate O's higher current yield and that O greatly outperformed both the market and SPG in 2008 (when the market's total return was -38%, SPG -34%, and O's was -8% per Morningstar).

    Over the last 5 years, O has under-performed the market (S&P500) by -3.9% pts, and SPG by -8.1% pts average annual TR. However, O has also out-performed the market for both the past 10 and 15 years by 2.5% pts and 8.1% pts. OTOH, O under-performed SPG by -1.8 and -3.6% pts for those longer periods.

    I plan to add to my Realty Income position when next undervalued.

    Jul 28, 2015. 02:06 PM | 1 Like Like |Link to Comment
  • The Beginning Of The Next Cyclical Bear Market [View article]
    "The market history of cyclical bear market declines during secular bear markets indicates prices are likely to decline approximately 30% or 50%."

    Maybe, and maybe not. The market is still in 'pause' (<5% decline) may 'dip' (5% decline) may 'correct' (10% decline)...and a bear market may be on the horizon (20% decline).

    However IMO, the theme and conclusions in this article are pure conjecture (including the above quote), and based upon a VERY brief trend.

    Taken in totality, it amounts to a biased guess.

    Jul 27, 2015. 09:41 AM | 7 Likes Like |Link to Comment
  • Weighing The Week Ahead: What Is The Message Of The Market? [View article]
    As always, thanks Jeff...and BTW, more than the usual number of comments seem to suggest a full moon!
    Jul 26, 2015. 04:39 PM | 5 Likes Like |Link to Comment
  • Weighing The Week Ahead: What Is The Message Of The Market? [View article]
    Thanks jj -- BTW, talk is cheap! Just how can we enforce your "guarantee" against our losses?
    Jul 26, 2015. 04:25 PM | 3 Likes Like |Link to Comment
  • Dividend Investing At Work - June 2015 [View article]
    TDE -- It's been 5 days...In view of your inability to provide support for your claim:
    'spin-offs generally have limited downside for those owning the parent PRIOR to the spin-off'.
    I assume you agree your claim is bogus, and you will cease and desist future references to it.
    Jul 24, 2015. 12:58 PM | Likes Like |Link to Comment