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  • Prospect Capital: Don't Believe The Anti-Hype [View article]
    BDCs and mREITs pay out 90% of their taxable income, so long term capital appreciation is minimal. The best one can hope for is to buy in when the stock price is at a large discount to NAV. I believe it's wise to hedge such investments against capital loss most of the time but that does require an extra bit of market attention and transactions to be done most efficiently. An example how to do that is given below. One wonders what disaster Mr. Market is anticipating that warrants so many mREITs and BDCs trading at discounts of 20-30%, or whether it's just a mistake and a great time to buy. For those with a technical bent I note that PSEC and many mREITs and BDCs have major overbought signals on weekly momentum measures such as rsi, money flow and stochastics that have given rise to meaningful rallies since at least 2010.

    Here's an example of buying PSEC at current market with a hedge. Buy PSEC at 7.42 and buy enough Jan 2016 7.5 strike puts at about 0.75 or 0.8 to cover the number of shares bought. Dividends received in July-Dec equal 6*0.0833=0.4998. Total capital risk is put premium less the total dividends, or about 0.22=0.8-(7.5-7.42)-0.... plus cost of transactions in and out of positions. If PSEC rallies by by the premium amount, 0.72, to 7.64 by 1/15/16 you'll earn the entire 13.48% current dividend rate minus transaction costs. If stock price falls to 7.20 or less by option expiration, you'll lose 0.22 and transaction costs. You can also sell the Nov 2014 8-strike call for about 0.10 to decrease maximum loss to 0.12. The put hedge could be done as a spread to reduce premium, but also limits protection against downside risk. However, since PSEC pays monthly and options expire monthly there is plenty of opportunity to adjust the hedge or roll the covered calls up to a higher strike prices if the stock rallies.
    Jul 3, 2015. 10:20 AM | 1 Like Like |Link to Comment
  • The Outlook Of Greece [View article]
    "...the outcome will almost certainly be in favor of a new austerity package." The brain dead lenders who forced depression on the country and now are trying to force further impoverishment of pensioners in a repeated false hope that will improve prospects of repayment not only deserve to lose every penny of their loans, but should be prosecuted for human rights abuses.
    Jul 1, 2015. 11:30 PM | Likes Like |Link to Comment
  • Has CEFL Done As Badly As It Looks? [View article]
    I'd like to see a 2X long ETF with a liquid options market that uses the same index as PCEF, S-Network CEFX, which rebalances quarterly. Too bad the options market for PCEF is so inactive.
    Jul 1, 2015. 11:17 PM | 1 Like Like |Link to Comment
  • Prospect Capital - The Rate Hike Jitters Are Overdone [View article]
    Nobody knows why the stock is down to 29% discount to independently assessed NAV. Maybe it's nuts, but I'm OK witih it. Didn't like the dividend cut, but made up for that with put profits. Have been hedging with in the money puts since buying at 10.55 a couple years ago. Cost now down well below 7 with put profits, even lower after divs. Currently rolling out July 8 puts into August 7.5 puts and January 2016 7.5 puts. Note that I initiate roll over hedges using excess puts in order to be delta neutral and that makes more than the loss in the stock if the stock price goes down, and buy more puts only if the stock rallies more than the cost of the most recent hedge . I'm hoping for a terminal selling spike down to about 6.5 (I think the market makers will take out all the long term sell stops at 6.95 from 2009).

    "Prospect Capital actually stands to benefit if rates move higher given that most of its portfolio loans will adjust higher if the Federal Reserve does decide to do so." I believe that's incorrect. PSEC's loan rates adjust against the 1-year LIBOR rate, not the Treasury or Fed Funds rates, but have a LIBOR floor of 3.5% (please check me on this floor rate). So, it'll be a long time before we see LIBOR above the floor rate so that the loan rates go up.
    Jul 1, 2015. 12:36 AM | 2 Likes Like |Link to Comment
  • Better MLP: Northern Tier Energy Or Atlas Resource Partners? [View article]
    SuperAmerica, not Super Value (SuperValu,Inc. is a grocery wholesaler and retailer).
    Jun 30, 2015. 11:29 PM | Likes Like |Link to Comment
  • How Is ARMOUR Residential's Turnaround Going? [View article]
    Thanks for the review of ARR. I have this sinking feeling now that ARR has almost completely hedged their assets the bond markets are in for a nice rally and the 10/2 spread will tighten again. Bonds rallied all 2014 and it did not much good for mREITs. Then the 10/2 year spread has improved throughout 2015 but that hasn't helped earnings as much as the book value losses, and dividends have been cut anyway. I hedged the position until it broke 3.20 and then sold some and the hedge. I switched some assets to WMC and OAKS which are easier to hedge efficiently. I'll be looking at ARR again after the split to see if the options market develops a more efficient hedge and possibly switch some assets from IVR, CYS and PFF. Due to the trade off between book value losses and spread gains, and the inability to know the hedge positions of managers, I believe mREITs should be held with put hedges almost all the time.
    Jun 28, 2015. 11:22 AM | 1 Like Like |Link to Comment
  • PBOC cuts rates [View news story]
    Yes, they all bought right at the bottom and sold right at the top!
    Jun 28, 2015. 10:55 AM | Likes Like |Link to Comment
  • The Most Likely Outcome For Greece [View article]
    "The bigger problem is a lack of growth." Lack of growth? The last round of austerity gave Greece, what, about a 20% drop in GDP? I am constantly amazed and befuddled that people supposedly highly educated in finance and economics think that austerity is the answer to national debt problems and then decry lack of growth. You do not create growth with austerity programs, you create recessions, or depressions with successive austerity programs. What's needed is stimulus to increase the level of equilibrium economic activity. Then tax revenue goes up and debt service is easier. I recommend not only that the debt be rolled over with longer maturity, lower initial interest rates with step ups over time, but also additional loans from ECB and/or WB and fiscal stimulus programs consisting of tax cuts, tax free development zones and a package of government contracts from other countries. Oh, and restore pensions. Reducing pensions is quite simply financial murder of the Greek economy. If creditors want more austerity, then they richly deserve to lose every penny they lent to Greece.
    Jun 27, 2015. 09:40 AM | 4 Likes Like |Link to Comment
  • Greece: Should I Stay Or Should I Go... [View article]
    Those who said austerity would make matters worse were right. Now what's needed is a stimulus package including rolling over all near term maturity debt with low interest rates, at least partial restoration of pensions. and contracts from other Euro governments to Greek businesses. Why would any creditor prefer outright cancellation of their debt and then seize assets? Are we talking war on Greece by the Euro countries?
    Jun 21, 2015. 02:12 PM | 1 Like Like |Link to Comment
  • Dividends Are Not That Reliable [View article]
    It is entirely possible that the Aristocrats will hold or grow real dividends for the next 25 years. However, even if they do, it is also possible that the stock prices will drop 20% or more from recent peak levels, a very unpleasant experience for those making large additions near the peak and maybe disconcerting for those fully invested with cost bases within that span and not hedged. The real issue is at what price to buy them to have a good dividend yield and a margin of safety for capital. Also, for current holdings continued automatic reinvestment might not be a good idea if the stock has become overvalued. The work of Chuck Carnevale and associates with F.A.S.T. Graphs can help with gauging over/under valuation and give clues when to buy, or to sell if inclined or pressured to do so. Hedging holdings ahead of large dividend payments is often helpful, if not at other times.
    Jun 13, 2015. 06:43 PM | Likes Like |Link to Comment
  • Losing Confidence In Corporate Bonds [View article]
    I'm inclined to buy HYLD with monthly paid dividends and hedge with puts, put spreads or collars. 8.68% current yield (based on May dividend) and 9.9% annual yield based on 2014 total dividends versus today's cost. The 2.5 year effective duration should limit the downside when short rates rise.
    Jun 13, 2015. 06:13 PM | 1 Like Like |Link to Comment
  • Here Is Why I'm Buying American Capital Mortgage Investment And Selling iShares 20+ Treasury Bond Fund [View article]
    I grasp your theory but I have a few concerns. First, the movements of TLT in short and intermediate terms don't seem very closely correlated with movements of MTGE stock price (or any other mREIT stock price for that matter). For example, TLT rose about 23% from the middle of September, 2014 through the end of January 2015 (from about 110 to about 136) while MTGE went nowhere (18.00 to 18.00) during that time period. Some investors would have a tough time dealing with the paper loss on that pair.

    Secondly, I'm puzzled why you wouldn't just invest in an mREIT that has a good liquid options market and then hedge the stock price directly with puts, put spreads, or perhaps collars (granted, the disadvantage is that it takes much more trading over time; need a discount broker). I've done this with AGNC, NLY, CIM, ARR, JMI, IVR, NLY, CYS, TWO, HTS, WMC, REM and CMO. That seems much more efficient than shorting TLT or going long TBT.

    Thirdly, your theory rests on the assumption that the prices of mREIT stocks closely follow the prices of long term bonds, which is not very accurate. They seem to depend more on the spread between mortgage bond rates and short term borrowing rates available to the particular mREIT, the types of mortgage bonds held, the hedge positions, the amount of leverage, and market sentiment (currently most mREITs are trading at almost ridiculously large discounts to NAVs). Of course, the issue of constant prepayment rate ("CPRs") also enters in significantly and that seems to depend on the types of mortgage bonds being held and the changes in mortgage interest rates for refinances and macro economic issues for payoffs due to moves. It is this terrible complexity of mREIT operations that makes me just hedge the stock prices directly rather than trying to forecast a trend from fundamental factors.
    Jun 13, 2015. 10:14 AM | 2 Likes Like |Link to Comment
  • Bulls Hiding Behind Bears [View article]
    In this bull market several sectors have experienced drastic bear markets (50% or more losses) since 2013: mREITs, precious metals, oil and gas exploration and servicing, other commodity related stocks, several BDCs. One wonders whether there is now great opportunity in those sectors or whether they are a leading warning to other market sectors and the broad market.
    Jun 12, 2015. 09:19 AM | 3 Likes Like |Link to Comment
  • Will Rising Rates Murder Market? [View article]
    What rising US short rates might do, if LIBOR follows, is murder the finances of many millions of US homeowners still stuck in adjustable rate mortgages from the 2003-2006 binge, whose rates and payments will jump. Particularly impacted would be those who have legacy interest-only ARMs and HELOCs which have, or soon will, go into full 10-20 year amortization in addition to their rates rising, more than doubling payments. I suspect there are more of such remaining mortgages and HELOCs than there were of subprime mortgages that crashed when they went into rate adjustments and couldn't be refinanced.
    Jun 7, 2015. 12:32 PM | 1 Like Like |Link to Comment
  • China Containerized Freight Index Plunges To Multi-Year Low, Shanghai-EU Rates Totally Collapse, U.S. Rates Morose [View article]
    "Decision makers had been bamboozled into thinking that QE and interest rate repression would stimulate actual demand!"

    Only well diffused real income growth can stimulate demand in an over-indebted consumer sector, and the trend has been the opposite for 30 years, including the seven years during the much vaunted "recovery" from the Great Recession.
    May 23, 2015. 07:30 AM | 1 Like Like |Link to Comment
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