I have just completed this weekly post so I decided to go ahead and publish it before Monday. If I continue to keep my head in a shell, doing mostly nothing, I may not have another post until late next week. I may update one of my tables before then, probably the table of stock fund holdings which has not been updated for several months. Item # 5 Stock Funds Table (October 18. 2012 Post)
Big Picture Synopsis
Big Picture Synopsis
Stocks:
Stable Vix Pattern (bullish)
Short Term: Hoping for a 10%+ Correction
Intermediate and Long Term: Bullish
Bonds:
Short Term: Slightly Bearish
Intermediate Term: Bearish
Long Term: Extremely Bearish
Difficult Path to Interest Rate Normalization:
I have revised my short term outlook for bonds from neutral to slightly bearish, indicating in my opinion a probability of a correction. The process of rate normalization may have started in early May. That process will occur in two stages depending on maturity.
The first stage will impact intermediate and long term interest rates, as the market finally comes to a realization that QE is not a perpetual monetary policy. The process will start before the FED tapers its asset purchases and will likely accelerate as the FED winds down and then eliminates QE. I am assuming that no rational FED member would continue QE past the 2014 second quarter. The FED's balance sheet is already bloated with those securities. System Open Market Account Holdings - Federal Reserve Bank of New York
The second stage will involve short term maturities that will continue to produce negative real rate of returns as the FED continues ZIRP into 2015. The shortest maturities (3 and 6 month T bills) will be firmly anchored near zero for as long as ZIRP continues while the 2 and 5 year notes will be restrained from finding their true market prices. The 5 year treasury note would still have a nasty loss in value, as shown by the action in May, but I suspect that it will not find its true market price until ZIRP ends.
The five year treasury note rose .4% in yield last month (.65% to 1.05%) while the 10 year rose .5% (1.66% to 2.16%). That rise is not due to the market revising its inflation forecast up but solely due to the upcoming long process of rate normalization. The market has actually been nudging down its future inflation forecasts throughout May as shown in the TIP pricing for the 5 to 30 year maturities. The five year is down to an average CPI increase of 1.87% as of 5/31/13 from 1.98% on 5/1/13.
5-Year Treasury Constant Maturity Rate- St. Louis Fed
Bonds accelerated their declines last week, either an ongoing correction that started in early May or merely the opening salvo in a long term secular bear market remains open to question. In last week's post, I noted how the minor increases in the treasury yields were reflected in bond ETF prices based on the fund's average duration. See Item # 3 under the Heading "Interest Rate Risk and Duration" at Sold 100 NBD at $21.86-Roth IRA
The impact on bond prices was significant, based on just a .37% yield rise in the 10 year treasury, and the losses accelerated last week particularly in bond CEFs that have a tendency to increase their discounts when the net asset value is declining as individuals rush toward the exit, selling in many cases without regard to price, yield, duration or anything remotely resembling substance.
I would simply update the losses for the month of May, starting on 5/2/13 and ending on 5/31/13 for some of those ETFs:
10 Year Treasury:
Yield 5/2/13: 1.66%
Yield 5/31/13 2.16%
Change + .5%
Daily Treasury Yield Curve Rates
As noted by Floyd Norris in his NYT column, a buyer at May's ten year note auction has already suffered a realized loss greater than an entire's year interest payments, which is not that difficult when starting at such a low rate. (3/8/13 10 year note auction: 1.81% yield)
30 Year Treasury
Yield 5/2/31: 2.82%
Yield 5/31/13: 3.2%
Change: +.48%
ZROZ: ZROZ Quote
Duration: 27.5 years (5/30/13)
Closing Price 5/2: $112.96 (5/31/13)
Closing Price 5/31: $99.91
Change: - 11.55%
Sponsor: PIMCO 25+ Year Zero Coupon U.S. Treasury Index
One of the Worst Bond ETFs, if not the worse, to Own When Rates are Rising
TLT: TLT Quote
Duration: 16.68 Years (5/30/13)
Closing Price 5/31: $114.45
Closing Price 5/2: $123.85
Change: -7.59%
Sponsor: iShares Barclays 20+ Year Treasury Bond Fund
LWC: LWC Quote
Duration: 13.78 years (5/29/13)
Closing Price 5/31: $39.51
Closing Price 5/2: $41.97
Change: -4.09%
Sponsor: SPDR Barclays Long Term Corporate Bond ETF
LQD: LQD Quote
Duration: 7.63 years (5/30/13)
Closing Price 5/31 $117.85
Closing Price 5/2 $122.31
Change: -3.65%
Sponsor: iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD)
For an investment grade corporate bond fund with a 1.9 year duration, the price barely declined in May. The insignificant loss at that duration number tells me that the yield is tied almost entirely to ZIRP rather than QE. SCPB Historical Prices | SPDR Barclays Short Term Corporate Bond (sponsor's webpage: SCPB - SPDR Barclays Short Term Corporate Bond ETF)
Difficult Path to Interest Rate Normalization:
I have revised my short term outlook for bonds from neutral to slightly bearish, indicating in my opinion a probability of a correction. The process of rate normalization may have started in early May. That process will occur in two stages depending on maturity.
The first stage will impact intermediate and long term interest rates, as the market finally comes to a realization that QE is not a perpetual monetary policy. The process will start before the FED tapers its asset purchases and will likely accelerate as the FED winds down and then eliminates QE. I am assuming that no rational FED member would continue QE past the 2014 second quarter. The FED's balance sheet is already bloated with those securities. System Open Market Account Holdings - Federal Reserve Bank of New York
The second stage will involve short term maturities that will continue to produce negative real rate of returns as the FED continues ZIRP into 2015. The shortest maturities (3 and 6 month T bills) will be firmly anchored near zero for as long as ZIRP continues while the 2 and 5 year notes will be restrained from finding their true market prices. The 5 year treasury note would still have a nasty loss in value, as shown by the action in May, but I suspect that it will not find its true market price until ZIRP ends.
The five year treasury note rose .4% in yield last month (.65% to 1.05%) while the 10 year rose .5% (1.66% to 2.16%). That rise is not due to the market revising its inflation forecast up but solely due to the upcoming long process of rate normalization. The market has actually been nudging down its future inflation forecasts throughout May as shown in the TIP pricing for the 5 to 30 year maturities. The five year is down to an average CPI increase of 1.87% as of 5/31/13 from 1.98% on 5/1/13.
5-Year Treasury Constant Maturity Rate- St. Louis Fed
Bonds accelerated their declines last week, either an ongoing correction that started in early May or merely the opening salvo in a long term secular bear market remains open to question. In last week's post, I noted how the minor increases in the treasury yields were reflected in bond ETF prices based on the fund's average duration. See Item # 3 under the Heading "Interest Rate Risk and Duration" at Sold 100 NBD at $21.86-Roth IRA
The impact on bond prices was significant, based on just a .37% yield rise in the 10 year treasury, and the losses accelerated last week particularly in bond CEFs that have a tendency to increase their discounts when the net asset value is declining as individuals rush toward the exit, selling in many cases without regard to price, yield, duration or anything remotely resembling substance.
I would simply update the losses for the month of May, starting on 5/2/13 and ending on 5/31/13 for some of those ETFs:
10 Year Treasury:
Yield 5/2/13: 1.66%
Yield 5/31/13 2.16%
Change + .5%
Daily Treasury Yield Curve Rates
As noted by Floyd Norris in his NYT column, a buyer at May's ten year note auction has already suffered a realized loss greater than an entire's year interest payments, which is not that difficult when starting at such a low rate. (3/8/13 10 year note auction: 1.81% yield)
30 Year Treasury
Yield 5/2/31: 2.82%
Yield 5/31/13: 3.2%
Change: +.48%
ZROZ: ZROZ Quote
Duration: 27.5 years (5/30/13)
Closing Price 5/2: $112.96 (5/31/13)
Closing Price 5/31: $99.91
Change: - 11.55%
Sponsor: PIMCO 25+ Year Zero Coupon U.S. Treasury Index
One of the Worst Bond ETFs, if not the worse, to Own When Rates are Rising
TLT: TLT Quote
Duration: 16.68 Years (5/30/13)
Closing Price 5/31: $114.45
Closing Price 5/2: $123.85
Change: -7.59%
Sponsor: iShares Barclays 20+ Year Treasury Bond Fund
LWC: LWC Quote
Duration: 13.78 years (5/29/13)
Closing Price 5/31: $39.51
Closing Price 5/2: $41.97
Change: -4.09%
Sponsor: SPDR Barclays Long Term Corporate Bond ETF
LQD: LQD Quote
Duration: 7.63 years (5/30/13)
Closing Price 5/31 $117.85
Closing Price 5/2 $122.31
Change: -3.65%
Sponsor: iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD)
For an investment grade corporate bond fund with a 1.9 year duration, the price barely declined in May. The insignificant loss at that duration number tells me that the yield is tied almost entirely to ZIRP rather than QE. SCPB Historical Prices | SPDR Barclays Short Term Corporate Bond (sponsor's webpage: SCPB - SPDR Barclays Short Term Corporate Bond ETF)
Oddly, the inflation index for personal consumption expenditures, discussed below, is flashing deflation as more of a concern than inflation, assuming the government's numbers are somewhere close to being accurate. I am naturally skeptical since my personal consumption price index seems to be out of kilter with the government's numbers.
I filled my Saturn up last Friday, using regular gas of course. I would not own a car requiring premium. RB leased a new and pretty red Jaguar once for three years, and it required premium gas.
The regular gas for the seven year old Saturn cost $3.35 per gallon last Friday, basically unchanged from the level paid over the past few month. For some silly reason, I received scant comfort by the government's low inflation number, caused in significant part by an alleged decline in energy costs, when paying that $3.35 per gallon. I do recall paying less than $.30. Sure, that was more than a few full moons ago, but it is still important to keep the alleged current inflation numbers in perspective.
One of the best scenarios for transitioning to market based interest rates would involve a decline in inflation during the transition period that would narrow the gap between normalized rates and the rate caused by FED intervention.
Over the past several weeks, I have left a number of comments to SA articles expressing concern that the market would freak out just by a return to normalized interest rates. I used the phrase "normalized interest rates" to mean rates that would exist in a free market without FED intervention, either through QE and/or the setting of an abnormally low federal funds rate near zero (ZIRP-Zero Interest Rate Policy).
What would the market rate be for a 10 year treasury when the market is forecasting an average annualized inflation rate of 2.2% over that 10 year period. The answer is not the current rate or anything close to it based on history.
Investors would generally want an average 2.5% spread over the anticipated inflation rate to provide them with an adequate real rate of return plus some percentage for unanticipated inflation. The exact amount will vary as shown by the numbers below
A 2.5% spread to inflation expectations would bring the 10 year up to around 4.7%. It would most likely freak the market out to see a rate even close to 4.7% anytime soon. A rapid increase from 2.16% to 4.7% over a several month period would likely generate widespread panic, starting with bond investors of course who would be losing a great deal of money and spilling over to other markets including the easily spooked stock investors.
Over the past several months, the inflation forecast built into the price of the 10 year TIP has been declining. I recall calculating the number back in January when it was about 2.5%. It closed last Friday at 2.21%.
Ten Year TIP Yield= -.05%
Daily Treasury Real Yield Curve Rates
Ten Year Nominal Yield= 2.16%
I filled my Saturn up last Friday, using regular gas of course. I would not own a car requiring premium. RB leased a new and pretty red Jaguar once for three years, and it required premium gas.
The regular gas for the seven year old Saturn cost $3.35 per gallon last Friday, basically unchanged from the level paid over the past few month. For some silly reason, I received scant comfort by the government's low inflation number, caused in significant part by an alleged decline in energy costs, when paying that $3.35 per gallon. I do recall paying less than $.30. Sure, that was more than a few full moons ago, but it is still important to keep the alleged current inflation numbers in perspective.
One of the best scenarios for transitioning to market based interest rates would involve a decline in inflation during the transition period that would narrow the gap between normalized rates and the rate caused by FED intervention.
Over the past several weeks, I have left a number of comments to SA articles expressing concern that the market would freak out just by a return to normalized interest rates. I used the phrase "normalized interest rates" to mean rates that would exist in a free market without FED intervention, either through QE and/or the setting of an abnormally low federal funds rate near zero (ZIRP-Zero Interest Rate Policy).
What would the market rate be for a 10 year treasury when the market is forecasting an average annualized inflation rate of 2.2% over that 10 year period. The answer is not the current rate or anything close to it based on history.
Investors would generally want an average 2.5% spread over the anticipated inflation rate to provide them with an adequate real rate of return plus some percentage for unanticipated inflation. The exact amount will vary as shown by the numbers below
A 2.5% spread to inflation expectations would bring the 10 year up to around 4.7%. It would most likely freak the market out to see a rate even close to 4.7% anytime soon. A rapid increase from 2.16% to 4.7% over a several month period would likely generate widespread panic, starting with bond investors of course who would be losing a great deal of money and spilling over to other markets including the easily spooked stock investors.
Over the past several months, the inflation forecast built into the price of the 10 year TIP has been declining. I recall calculating the number back in January when it was about 2.5%. It closed last Friday at 2.21%.
Ten Year TIP Yield= -.05%
Daily Treasury Real Yield Curve Rates
Ten Year Nominal Yield= 2.16%
Daily Treasury Yield Curve Rates
Break-Even= 2.21% (the annual average CPI over the next ten years for the buyer of the 10 year TIP to break-even with the buyer of the ten year non-inflation protected note: J.P. Morgan | Tips on TIPS)
A continued decline in inflation expectations will ease to some degree the transition to normalized rates when the FED first tapers and then ends QE. Still, I expect the transition to be a difficult and stressful one. Last Friday's action may be a precursor of things to come as the market starts the adjustment process to market based interest rates.
I have noted in several SA comments that the 10 year treasury was yielding 5% to 7% most of the time between 1991-1999, yet the stock market prospered during those years. Inflation averaged less than 3% during that period:
Consumer Price Index, 1913- | The Federal Reserve Bank of Minneapolis
I took a snapshot of the average annual 10 year treasury yield data directly from the Federal Reserve website: FRB: H.15 Release--Selected Interest Rates--Historical Data
Chart: 10-Year Treasury Constant Maturity Rate
I left some recent comments at an SA article discussing this issue: How To Position Your Stock Portfolio To Win With Rising Interest Rates - Seeking Alpha
*******************
Break-Even= 2.21% (the annual average CPI over the next ten years for the buyer of the 10 year TIP to break-even with the buyer of the ten year non-inflation protected note: J.P. Morgan | Tips on TIPS)
A continued decline in inflation expectations will ease to some degree the transition to normalized rates when the FED first tapers and then ends QE. Still, I expect the transition to be a difficult and stressful one. Last Friday's action may be a precursor of things to come as the market starts the adjustment process to market based interest rates.
I have noted in several SA comments that the 10 year treasury was yielding 5% to 7% most of the time between 1991-1999, yet the stock market prospered during those years. Inflation averaged less than 3% during that period:
1990
|
130.7
|
5.4%
|
1991
|
136.2
|
4.2%
|
1992
|
140.3
|
3.0%
|
1993
|
144.5
|
3.0%
|
1994
|
148.2
|
2.6%
|
1995
|
152.4
|
2.8%
|
1996
|
156.9
|
2.9%
|
1997
|
160.5
|
2.3%
|
1998
|
163.0
|
1.6%
|
1999
|
166.6
|
2.2%
|
Consumer Price Index, 1913- | The Federal Reserve Bank of Minneapolis
I took a snapshot of the average annual 10 year treasury yield data directly from the Federal Reserve website: FRB: H.15 Release--Selected Interest Rates--Historical Data
Chart: 10-Year Treasury Constant Maturity Rate
I left some recent comments at an SA article discussing this issue: How To Position Your Stock Portfolio To Win With Rising Interest Rates - Seeking Alpha
*******************
Some Recent Economic Data:
Real GDP growth for the first quarter was revised down to 2.4% from the 2.5% first estimate. Consumer spending was revised up to 3.5% from 3.2%, the fastest rate in two years, but government spending was down to a 4.9% annual rate from the prior estimate of a 4.1% decline. The PCE index rose by 1.3% excluding food and energy and 1% overall (appendix table A). The increase in inventories was revised from $50.3B to $38.3B which may help boost the current quarter's GDP. The savings rate was estimated at 2.3% (table 10). Domestic final sales, which excludes inventories, was revised up to 1.8% from 1.5%. The increase in residential construction was revised down to a 12.1% annualized rate from the prior estimate of a 12.6% increase. There will be one more revision next month. News Release: Gross Domestic Product; (with tables: bea.gov .pdf)
The Commerce Department reported that real disposable income increased .1% in April after rising .3% in March. Real personal consumption expenditures (PCE) increased .1% in April, down from a .2% increase in March. Unadjusted for inflation, PCE declined by .2% in April on a seasonally adjusted basis. The price index for PCE decreased .3% in April, the largest decline since December 2008, and increased less than .1% excluding food and energy. The PCE price index is up only .7% over the past 12 months. The core PCE price index was up 1.1% over the past year. Core prices have decreased month-over-month for 10 out of the last 13 months. Personal current taxes increased $10.4B in April and $10.8B in March. The personal savings rate was 2.5% in April, unchanged from March. Personal savings (DPI less personal outlays) totaled $306.9B in April. (full release with tables.pdf)
The National Association of Realtors reported that its pending home sales index rose to .3% in April and is now 10.2% above its April 2012 level. NAR Research: Pending Home Sales Edge Up in April | realtor.org The NAR's Chief Economist predicts that existing home sales will rise over 7% in 2013, with the median price increasing 8%.
Chicago PMI was reported at 58.7 in May, much stronger than the consensus forecast of 50.
Eurostat reported that unemployment in the EU17 rose to 12.2% in April, the highest level since that agency started to collect information in 1995. The EU27 unemployment rate was reported at 11%, unchanged from March. The unemployment rate in Spain hit 26.8%; 17.8% in Portugal; and 12% in Italy. The last available data for Greece was from February when the unemployment rate was reported at 27%.
Separately, Eurostat reported that inflation rose at an annualized rate of 1.4% in May.
I am simply waiting now for better opportunities to buy with the cash recently raised from selling a number of securities. I am almost entirely in what I call the full turtle mode, meaning I am not sticking my head out of the shell to forage anywhere.
************
Intel:
I reinvested the last Intel dividend payment to buy more shares, but just changed my option back to cash:
I would prefer to take the cash rather than to buy shares at that average cost number. My total average cost per share is near $17.8.
In this week's Barrons, Jack Hough argues that Intel's stock price "could" double "in five years, and perhaps sooner". The LB would ban he word "could" and the phrase "up to"from the English language unless the user paid a fine.
The Hough article, and a few other bullish articles published by SA authors who seem to comprehend Intel's new products including Ashraf Eassa's articles, are causing the Old Geezer considerable consternation.
It is not easy for the OG to come up with a game plan for the Intel position, but one was developed after incurring much anxiety last year after reading LB's Intel lecture. SPECIAL POST ON LB'S INTEL LECTURE
The plan was to sell a 50 share lot bought at a total cost of $16.04 and a 30 share lot bought at $14.73 (10/22/08) when the price rose back into the $25 to $28 range.
Now, if the price is going double, the OG does not want to look like a putz by selling those shares for $26, though that would be excusable given the OG's well known brain handicaps, caused, as previously noted, by billions of brain cells being baked and fried in the summer sun over 40 years ago. So now the OG is in what the LB calls his typical confused state mulling the life's many quandaries, including why God does not help out the OG by giving more stock advice. The OG was after all grateful for the sign about investing GE's dividend given several months ago. GE
Given the lack of activity here at HQ, the next post may not be published until the later part of next week.
1. Added 50 of the Stock CEF CHN at $21.2 (see Disclaimer):
The Commerce Department reported that real disposable income increased .1% in April after rising .3% in March. Real personal consumption expenditures (PCE) increased .1% in April, down from a .2% increase in March. Unadjusted for inflation, PCE declined by .2% in April on a seasonally adjusted basis. The price index for PCE decreased .3% in April, the largest decline since December 2008, and increased less than .1% excluding food and energy. The PCE price index is up only .7% over the past 12 months. The core PCE price index was up 1.1% over the past year. Core prices have decreased month-over-month for 10 out of the last 13 months. Personal current taxes increased $10.4B in April and $10.8B in March. The personal savings rate was 2.5% in April, unchanged from March. Personal savings (DPI less personal outlays) totaled $306.9B in April. (full release with tables.pdf)
The National Association of Realtors reported that its pending home sales index rose to .3% in April and is now 10.2% above its April 2012 level. NAR Research: Pending Home Sales Edge Up in April | realtor.org The NAR's Chief Economist predicts that existing home sales will rise over 7% in 2013, with the median price increasing 8%.
Chicago PMI was reported at 58.7 in May, much stronger than the consensus forecast of 50.
Eurostat reported that unemployment in the EU17 rose to 12.2% in April, the highest level since that agency started to collect information in 1995. The EU27 unemployment rate was reported at 11%, unchanged from March. The unemployment rate in Spain hit 26.8%; 17.8% in Portugal; and 12% in Italy. The last available data for Greece was from February when the unemployment rate was reported at 27%.
Separately, Eurostat reported that inflation rose at an annualized rate of 1.4% in May.
I am simply waiting now for better opportunities to buy with the cash recently raised from selling a number of securities. I am almost entirely in what I call the full turtle mode, meaning I am not sticking my head out of the shell to forage anywhere.
************
Intel:
I reinvested the last Intel dividend payment to buy more shares, but just changed my option back to cash:
 |
| Avg Cost for 2.569 Shares= $24.207 |
In this week's Barrons, Jack Hough argues that Intel's stock price "could" double "in five years, and perhaps sooner". The LB would ban he word "could" and the phrase "up to"from the English language unless the user paid a fine.
The Hough article, and a few other bullish articles published by SA authors who seem to comprehend Intel's new products including Ashraf Eassa's articles, are causing the Old Geezer considerable consternation.
It is not easy for the OG to come up with a game plan for the Intel position, but one was developed after incurring much anxiety last year after reading LB's Intel lecture. SPECIAL POST ON LB'S INTEL LECTURE
The plan was to sell a 50 share lot bought at a total cost of $16.04 and a 30 share lot bought at $14.73 (10/22/08) when the price rose back into the $25 to $28 range.
Now, if the price is going double, the OG does not want to look like a putz by selling those shares for $26, though that would be excusable given the OG's well known brain handicaps, caused, as previously noted, by billions of brain cells being baked and fried in the summer sun over 40 years ago. So now the OG is in what the LB calls his typical confused state mulling the life's many quandaries, including why God does not help out the OG by giving more stock advice. The OG was after all grateful for the sign about investing GE's dividend given several months ago. GE
Given the lack of activity here at HQ, the next post may not be published until the later part of next week.
1. Added 50 of the Stock CEF CHN at $21.2 (see Disclaimer):
Snapshot of Trade:
Snapshot of Current Position: The following snapshot, taken shortly after the 50 share add, shows my current position including the shares purchased with the dividends:
The total cost numbers shown in this snapshot would include commission costs.
This table shows that I have used $433.03 in dividends to purchase additional shares and had at the time of this snapshot an unrealized loss of $286.8. The dividends were mostly long term capital gain distributions taxed at a maximum 15% for most U.S. taxpayers. My total return after tax would be positive but not by much.
This fund has paid two large capital gains since my initial purchase, which is not tax efficient for a new share buyer. Given my small position, I really do not care that much one way or the other. It is nonetheless undesirable to buy a CEF a couple of months before a large distribution, which is what happened to me when I purchased the first 50 share lot in late October 2011 and the fund declared shortly thereafter a large distribution. I am in effect buying into a tax event that depletes my capital. I would have been better off to buy shares after the ex dividend date when I could have bought shares closer to $21 rather than $26.
Security Description: The China Fund owns stocks issued by companies headquartered in China, Hong Kong and Taiwan. The fund uses some leverage. As of 4/30/13, the fund had a 42.7% weighting in China, 25.6% in HK and 23.8% in Taiwan.
Data Day Before Purchase (5/29/13)
Closing Net Asset Value Per Share: $24.4
Closing Market Price: $21.18
Discount= -13.2%
Data Day of Purchase (5/30/13)
Closing Net Asset Value Per Share: $24.39
Closing Market Price: $21.36
Discount: -12.42%
Sponsor's Website: The China Fund
CHN Page at CEFConnect
CHN China Fund Page at Morningstar (rated 3 stars, average 3 year discount -8.73)
2012 Dividend: $3.2668 per share The China Fund, Inc. Declares Distributions
2011 Dividend: $2.9964 per share; The China Fund, Inc. Declares Distributions
The China Fund, Inc. - Dividend history 2000-2010 The short and long term capital gains distributions were almost $12 per share in 2007 ($11.84 per share together). That is not surprising given the parabolic move in the SSE Composite Index that year.
Chart: HANG SENG INDEX Index
Chart: TSEC weighted index Index
I took the following snapshot of the top ten holdings as of 4/30/13:
Taken from PDF at CHN's Website and also found in a SEC Filing
I had to look up some of those companies including the following:
601818:Shanghai Stock Quote - China Everbright Bank Co Ltd - Bloomberg
867:Hong Kong Stock Quote - China Medical System Holdings Ltd - Bloomberg
861:Hong Kong Stock Quote - Digital China Holdings Ltd - Bloomberg
2688:Hong Kong Stock Quote - ENN Energy Holdings Ltd - Bloomberg
1109:Hong Kong Stock Quote - China Resources Land Ltd - Bloomberg
Except for ENN Energy and China Medical, the P/E ratios were in the single or low double digits. I will occasionally buy HK listed stocks. I do not have any current positions after selling Hutchison Whampoa twice last year. Sold 50 HUWHY at $19.91 October 2012-Bought 50 HUWHY at $17.35 September 2012; Sold 100 HUWHY at $20.72 March 2012-BOUGHT 100 HUWHY at $17.84 January 2012
The only top 10 CHN holding on my monitor list for a potential purchase is Sun Hung Kai Properties. I would not buy the HK listed shares, Sun Hung Kai Properties, but the pink sheet listed ADS shares: SUHJY Sun Hung Kai Properties For the most part my exposure to Shanghai and HK listed stocks will be through funds. My largest exposure other than CHN would be through two Matthews mutual funds, Matthews Pacific Tiger Investor and Matthews Asian Growth & Inc Investor (see snapshot in Item # 5 St Bought 100 APF at $14.55 as of 12/5/12) As mentioned in that prior linked post, I did pare the Matthews Pacific Tiger fund in 2007 down to 150 shares and have added only some of those shares back with purchases in 2009. The average 10 year average annualized return for MAPTX is 18.9%. Performance - Matthews Pacific Tiger Fund
I do not personally own the Matthews China Fund (MCHFX), rated 4 stars by Morningstar, and favorably reviewed by a Morningstar analyst in a recent article titled "Our Picks for China Exposure". MSN. As of 4/30/13, MCHFX has two top ten positions in common with CHN: China Mobil and China Resources Land. Composition - Matthews China Fund
Last SEC Filed Form N-Q: The China Fund (period ending 1/31/13)
Last SEC Filed Shareholder Report: The China Fund (ER at 1.41%, page 17)
Snapshot of Total Return Numbers from Shareholder Report:
Prior Trades: The other shares currently owned were bought in two odd lot trades: Bought Back CHN at $25.975 October 2011; Added 30 CHN at $22.62 (March 2012).
Prior to those purchases, I briefly owned a 50 share lot that had been sold at $30. SOLD CHN at $30 (August 2010)- Bought 50 of the CEF CHN at 28.53 (April 2010)
Rationale: China's stock market has been a laggard, and the Chinese economy is slowing. The lackluster two year stock returns is illustrated by several charts:
SPDR S&P China ETF Chart
iShares FTSE China 25 Index Fun ETF Chart
Assuming no major problems resulting from government intervention, I would nonetheless expect China's GDP to grow at a far faster pace than anywhere in the developed world, and more of that growth will originate from domestic demand in the coming years rather than exports. The middle class is rising rapidly in several Asian countries including China. (see HSBC_report_Consumer_in_2050 .pdf)
By buying 50 or 100 shares a year, I am not making much of a "bet" on the current direction being up or down for Chinese equities. That kind of nibbling is a recognition that the near term may be problematic, and I will probably never be in a position to predict when another robust rally is just on the horizon.
The Brookings Institute estimated in a study that China's consumer consumption will surpass that of the U.S. by 2020. By 2022, China is estimated to have 630M middle class consumers. Pacific Money
The OECD predicts that China's GDP will exceed that of the U.S. by 2016. I doubt that will occur by 2016 but would consider 2018-2020 to be a probable date. China surpassed the U.S. as the biggest trading nation in 2012: Bloomberg
Risks: Needless to say, there are country risks associated with investing in Chinese stocks. There are always heightened risks buying a fund that focuses on one or a small group of countries, compared to a widely diversified ETF like the Vanguard All World ex-US ETF (VEU), which I own, that owns about 2355 foreign stocks. There are of course the normal risks associated with stocks and the currency risk applicable to a U.S. holder of foreign assets whose value is priced in another currency (though that risk is less now due to the peg of the HK dollar to the USD and the probable rise in the Yuan in the event it was allowed to float freely or to increase more)
Another risk is the probable deflating of China's real estate bubble. I discussed China's ghost towns as a justification for selling the LT Xinyuan Real Estate several weeks ago. Sold 100 XIN at $5.82 (3/25/13)(Last Friday's Close: XIN: 4.39 -0.02). I noted then a 60 minutes story on the ghost towns: China's real estate bubble - 60 Minutes
China's real estate bubble is also discussed in a recent Seeking Alpha. The SA article referenced a paper published by the St. Louis Fed that noted China's housing prices had significantly "outstripped income growth" to the point where housing prices are currently 11 times annual income, and up to 23 times in major cities like Beijing and Shanghai. Vacancy rates were also high at between 20-30% which is not surprising given the number of ghost towns. On the flip side, the middle class is growing so fast that those ghost towns could fill up fairly fast.
Future Buys: I may continue buying small odd lots in this CEF once a year, provided conditions in China do not deteriorate much from current expectations.
2. Pared Trade Roth IRA: Sold 50 GJR at $20.48 and Bought 50 PFLT at $14.24 (see Disclaimer):
Snapshot of Pared Trade:
Snapshot of GJR Profit: This was not a successful trade even though I cleared a profit.
Bought 50 of the TC GJR at $19.31 (August 2011)
Security Descriptions: PennantPark Floating Rate Capital (PFLT) is a BDC that primarily owns floating rate senior debt issued by middle market private companies. A list of holdings can be found starting at page 6 of the last filed Form 10-Q. Under normal market conditions, the company expects that at least 80% of its assets will be invested floating rate loans and investments with similar characteristics. The firm expects that at least 65% of the portfolio will be in senior secured loans.
Monthly dividends are currently being paid at the rate of $.0875 per share, which is up from the prior rates of $.085, $.0825, and $.08 previously paid over the past year.
At the current rate of $.0875 per share, the dividend yield at a total cost of $14.24 is about 7.37%.
The Synthetic Fixed-Income Securities Inc. Fltg Rate STRATS Series 2006-1 for Procter & Gamble Secs. Seies 2006-1 (GJR ) is a Synthetic Floater in the Trust Certificate legal form of ownership, a category of Exchange Traded Bonds, that pays a .7% spread over the 3 month treasury bill, up to a maximum coupon of 7.5%, on a $25 par value. The underlying security is a senior fixed coupon PG bond that matures on 8/15/34. www.sec.gov Since the three month treasury bill is hugging zero, this security was paying me less than a $1 per month. I bought it again when I believed that ZIRP would end in 2013, but now it looks like 2015 or possibly even later. I still own 50 shares each of the synthetic floaters GJS, GYB and GJT in the Roth IRA.
The most detailed discussion available about PFLT can be found in this exhaustive article published by Seeking Alpha, written by an individual who knows more about BDCs that I do and certainly more than I want to know. Given the risks of BDCs, I will buy small positions, particularly in the IRAs, and will trade them for whatever profit is available after collecting several dividends, preferably over a year of dividends and a sufficient profit on the shares to bring my total return up to 10% or higher.
Recent Public Offerings: In March, PFLT sold 3M shares at $14, plus an over allotment option of up to 450,000 additional shares.
PFLT-09.30.2011-10K (Last SEC Filed Annual Report)
Prior Trades: This is my first purchase of PFLT.
I have had several small trades in GJR, none of which produced a noteworthy profit. The first purchase was in March 2009: Bought 100 GJR at $11.28/ Did Right Brain Call the Bottom (March 2009)(RB left part of the title in that March post to simply highlight that the RB did call the bottom while the Nerd Machine was hiding under the sheets crying for its mama). I sold those shares quickly for only a $38.96 profit.
I later bought and sold 45 shares held in a IRA (June 2009), realizing a $98.73 gain, so GJR has been largely a bust unlike many other synthetic floaters where I have realized significant percentage gains.
I would have done okay by simply keeping the original 100 shares bought at $11.28 and then selling those shares at $20.48. So part of the problem was LB thinking and trading too much.
Last Earnings Report of PFLT: SEC Filed Press Release
Rationale: I try to balance my fixed coupon bonds owned in retirement accounts with securities that are interest rate sensitive. While I do not expect a spurt in short term rates for some time, I am not certain what will happen. I never have certainty about the future. I can only make a judgment about probabilities and possibilities. A significant rise in intermediate and long term rates is considered a high probability event within a one to two year period. A low short term rate is considered a high probability event for two more years. Two of my remaining three synthetic floaters in the ROTH IRA (GJT & GJS) do not have a minimum rate but pay a spread over a short term rate. Consequently, I own only 50 shares of each one given my assessment of the probabilities of an unexpected spike in short term rates. By exchanging GJR for PFLT, I pick up more yield, over 6% currently, while keeping some inflation protection.
Another move that I have made in the IRAs is to reduce holdings in bond funds with longer durations plus some profit taking in other funds. I discussed selling the leveraged Build America Bond fund NBD in last week's post due to its long duration. Sold 100 NBD at $21.86-Roth IRA In the Roth IRA, I also sold NLYPRD and 300 of the bond CEF MMT. Sold 300 of the Bond CEF MMT at $7.57-ROTH IRA I may pick up another shorter duration bond CEF in the event the carnage continues this week.
Risks: BDCs have a host of risks associated with them. I have discussed those repeatedly in connection with other purchases. In case some one needs reminding, this BDC covers the risks starting at page 20 and continuing through page 36 in its Annual Report. Form 10-K
Future Buys: I will consider rounding the PFLT lot up to 100 shares after a significant dip in price.
3. Sold 331+ of the Stock CEF EXG at $9.772-Regular IRA (see Disclaimer): Based on my negative near term outlook for stocks, I decided to reduce my stock exposure some in an IRA, where my primary objective is capital preservation and secondarily income generation.
Snapshot of Trade:
Snapshot of Profit: I reinvested some of the dividend payments to buy additional shares:
The discount to net asset value per share was at -14.42 when I last purchased shares on 12/12/12. The net asset value per share was then $10.36. This is what I hope to see for CEFs bought in the retirement account. EXG paid me monthly dividends since 12/12/12; the net asset went up after those dividend payments and the discount to net asset value went from -14.42 to -6.4%.
Added 100 of the Buy-Write Stock CEF EXG @ $8.98-Regular IRA (December 2012); Added 100 EXG at $8.91 August 2012.
I still have a small EXG position in the ROTH IRA.
52 Week High Discount=16.65%
3 Year Average= 10.6%
Data Day Before Sale (5/30/13):
Closing Net Asset Value= $10.60
Closing Market Price=$9.77
Discount= -7.83%
Data Day of Sale (5/31/13)
Closing Net Asset Value= $10.44
Closing Market Price= $9.64
Discount: -7.66%
Discount at Sale Price of $9.77: -6.4%
EXG Page at CEFConnect
EXG Page at Morningstar (rated 3 stars, avg. 6 mo. discount -11.08)
Sponsor's Web Page: Tax-Managed Global Diversified Equity Income Fund | Eaton Vance
EXG went from a quarterly dividend to a monthly payment in January 2013. The monthly distribution rate is currently $.0813, with the last ex dividend date on 5/22/13. Eaton Vance Tax-Managed Global Diversified Equity Income Fund
Snapshot of Current Position: The following snapshot, taken shortly after the 50 share add, shows my current position including the shares purchased with the dividends:
The total cost numbers shown in this snapshot would include commission costs.
This table shows that I have used $433.03 in dividends to purchase additional shares and had at the time of this snapshot an unrealized loss of $286.8. The dividends were mostly long term capital gain distributions taxed at a maximum 15% for most U.S. taxpayers. My total return after tax would be positive but not by much.
This fund has paid two large capital gains since my initial purchase, which is not tax efficient for a new share buyer. Given my small position, I really do not care that much one way or the other. It is nonetheless undesirable to buy a CEF a couple of months before a large distribution, which is what happened to me when I purchased the first 50 share lot in late October 2011 and the fund declared shortly thereafter a large distribution. I am in effect buying into a tax event that depletes my capital. I would have been better off to buy shares after the ex dividend date when I could have bought shares closer to $21 rather than $26.
Security Description: The China Fund owns stocks issued by companies headquartered in China, Hong Kong and Taiwan. The fund uses some leverage. As of 4/30/13, the fund had a 42.7% weighting in China, 25.6% in HK and 23.8% in Taiwan.
Data Day Before Purchase (5/29/13)
Closing Net Asset Value Per Share: $24.4
Closing Market Price: $21.18
Discount= -13.2%
Data Day of Purchase (5/30/13)
Closing Net Asset Value Per Share: $24.39
Closing Market Price: $21.36
Discount: -12.42%
Sponsor's Website: The China Fund
CHN Page at CEFConnect
CHN China Fund Page at Morningstar (rated 3 stars, average 3 year discount -8.73)
2012 Dividend: $3.2668 per share The China Fund, Inc. Declares Distributions
2011 Dividend: $2.9964 per share; The China Fund, Inc. Declares Distributions
The China Fund, Inc. - Dividend history 2000-2010 The short and long term capital gains distributions were almost $12 per share in 2007 ($11.84 per share together). That is not surprising given the parabolic move in the SSE Composite Index that year.
Chart: HANG SENG INDEX Index
Chart: TSEC weighted index Index
I took the following snapshot of the top ten holdings as of 4/30/13:
Taken from PDF at CHN's Website and also found in a SEC Filing
I had to look up some of those companies including the following:
601818:Shanghai Stock Quote - China Everbright Bank Co Ltd - Bloomberg
867:Hong Kong Stock Quote - China Medical System Holdings Ltd - Bloomberg
861:Hong Kong Stock Quote - Digital China Holdings Ltd - Bloomberg
2688:Hong Kong Stock Quote - ENN Energy Holdings Ltd - Bloomberg
1109:Hong Kong Stock Quote - China Resources Land Ltd - Bloomberg
Except for ENN Energy and China Medical, the P/E ratios were in the single or low double digits. I will occasionally buy HK listed stocks. I do not have any current positions after selling Hutchison Whampoa twice last year. Sold 50 HUWHY at $19.91 October 2012-Bought 50 HUWHY at $17.35 September 2012; Sold 100 HUWHY at $20.72 March 2012-BOUGHT 100 HUWHY at $17.84 January 2012
The only top 10 CHN holding on my monitor list for a potential purchase is Sun Hung Kai Properties. I would not buy the HK listed shares, Sun Hung Kai Properties, but the pink sheet listed ADS shares: SUHJY Sun Hung Kai Properties For the most part my exposure to Shanghai and HK listed stocks will be through funds. My largest exposure other than CHN would be through two Matthews mutual funds, Matthews Pacific Tiger Investor and Matthews Asian Growth & Inc Investor (see snapshot in Item # 5 St Bought 100 APF at $14.55 as of 12/5/12) As mentioned in that prior linked post, I did pare the Matthews Pacific Tiger fund in 2007 down to 150 shares and have added only some of those shares back with purchases in 2009. The average 10 year average annualized return for MAPTX is 18.9%. Performance - Matthews Pacific Tiger Fund
I do not personally own the Matthews China Fund (MCHFX), rated 4 stars by Morningstar, and favorably reviewed by a Morningstar analyst in a recent article titled "Our Picks for China Exposure". MSN. As of 4/30/13, MCHFX has two top ten positions in common with CHN: China Mobil and China Resources Land. Composition - Matthews China Fund
Last SEC Filed Form N-Q: The China Fund (period ending 1/31/13)
Last SEC Filed Shareholder Report: The China Fund (ER at 1.41%, page 17)
Snapshot of Total Return Numbers from Shareholder Report:
 |
| Returns Through 10/31/12: 10 Yr Annualized at NAV=18.76% |
Prior Trades: The other shares currently owned were bought in two odd lot trades: Bought Back CHN at $25.975 October 2011; Added 30 CHN at $22.62 (March 2012).
Prior to those purchases, I briefly owned a 50 share lot that had been sold at $30. SOLD CHN at $30 (August 2010)- Bought 50 of the CEF CHN at 28.53 (April 2010)
Rationale: China's stock market has been a laggard, and the Chinese economy is slowing. The lackluster two year stock returns is illustrated by several charts:
SPDR S&P China ETF Chart
iShares FTSE China 25 Index Fun ETF Chart
Assuming no major problems resulting from government intervention, I would nonetheless expect China's GDP to grow at a far faster pace than anywhere in the developed world, and more of that growth will originate from domestic demand in the coming years rather than exports. The middle class is rising rapidly in several Asian countries including China. (see HSBC_report_Consumer_in_2050 .pdf)
By buying 50 or 100 shares a year, I am not making much of a "bet" on the current direction being up or down for Chinese equities. That kind of nibbling is a recognition that the near term may be problematic, and I will probably never be in a position to predict when another robust rally is just on the horizon.
The Brookings Institute estimated in a study that China's consumer consumption will surpass that of the U.S. by 2020. By 2022, China is estimated to have 630M middle class consumers. Pacific Money
The OECD predicts that China's GDP will exceed that of the U.S. by 2016. I doubt that will occur by 2016 but would consider 2018-2020 to be a probable date. China surpassed the U.S. as the biggest trading nation in 2012: Bloomberg
Risks: Needless to say, there are country risks associated with investing in Chinese stocks. There are always heightened risks buying a fund that focuses on one or a small group of countries, compared to a widely diversified ETF like the Vanguard All World ex-US ETF (VEU), which I own, that owns about 2355 foreign stocks. There are of course the normal risks associated with stocks and the currency risk applicable to a U.S. holder of foreign assets whose value is priced in another currency (though that risk is less now due to the peg of the HK dollar to the USD and the probable rise in the Yuan in the event it was allowed to float freely or to increase more)
Another risk is the probable deflating of China's real estate bubble. I discussed China's ghost towns as a justification for selling the LT Xinyuan Real Estate several weeks ago. Sold 100 XIN at $5.82 (3/25/13)(Last Friday's Close: XIN: 4.39 -0.02). I noted then a 60 minutes story on the ghost towns: China's real estate bubble - 60 Minutes
China's real estate bubble is also discussed in a recent Seeking Alpha. The SA article referenced a paper published by the St. Louis Fed that noted China's housing prices had significantly "outstripped income growth" to the point where housing prices are currently 11 times annual income, and up to 23 times in major cities like Beijing and Shanghai. Vacancy rates were also high at between 20-30% which is not surprising given the number of ghost towns. On the flip side, the middle class is growing so fast that those ghost towns could fill up fairly fast.
Future Buys: I may continue buying small odd lots in this CEF once a year, provided conditions in China do not deteriorate much from current expectations.
2. Pared Trade Roth IRA: Sold 50 GJR at $20.48 and Bought 50 PFLT at $14.24 (see Disclaimer):
Snapshot of Pared Trade:
Snapshot of GJR Profit: This was not a successful trade even though I cleared a profit.
 |
| 2013 ROTH IRA 50 Shares GJR +$44.48 |
Security Descriptions: PennantPark Floating Rate Capital (PFLT) is a BDC that primarily owns floating rate senior debt issued by middle market private companies. A list of holdings can be found starting at page 6 of the last filed Form 10-Q. Under normal market conditions, the company expects that at least 80% of its assets will be invested floating rate loans and investments with similar characteristics. The firm expects that at least 65% of the portfolio will be in senior secured loans.
Monthly dividends are currently being paid at the rate of $.0875 per share, which is up from the prior rates of $.085, $.0825, and $.08 previously paid over the past year.
At the current rate of $.0875 per share, the dividend yield at a total cost of $14.24 is about 7.37%.
The Synthetic Fixed-Income Securities Inc. Fltg Rate STRATS Series 2006-1 for Procter & Gamble Secs. Seies 2006-1 (GJR ) is a Synthetic Floater in the Trust Certificate legal form of ownership, a category of Exchange Traded Bonds, that pays a .7% spread over the 3 month treasury bill, up to a maximum coupon of 7.5%, on a $25 par value. The underlying security is a senior fixed coupon PG bond that matures on 8/15/34. www.sec.gov Since the three month treasury bill is hugging zero, this security was paying me less than a $1 per month. I bought it again when I believed that ZIRP would end in 2013, but now it looks like 2015 or possibly even later. I still own 50 shares each of the synthetic floaters GJS, GYB and GJT in the Roth IRA.
The most detailed discussion available about PFLT can be found in this exhaustive article published by Seeking Alpha, written by an individual who knows more about BDCs that I do and certainly more than I want to know. Given the risks of BDCs, I will buy small positions, particularly in the IRAs, and will trade them for whatever profit is available after collecting several dividends, preferably over a year of dividends and a sufficient profit on the shares to bring my total return up to 10% or higher.
Recent Public Offerings: In March, PFLT sold 3M shares at $14, plus an over allotment option of up to 450,000 additional shares.
PFLT-09.30.2011-10K (Last SEC Filed Annual Report)
Prior Trades: This is my first purchase of PFLT.
I have had several small trades in GJR, none of which produced a noteworthy profit. The first purchase was in March 2009: Bought 100 GJR at $11.28/ Did Right Brain Call the Bottom (March 2009)(RB left part of the title in that March post to simply highlight that the RB did call the bottom while the Nerd Machine was hiding under the sheets crying for its mama). I sold those shares quickly for only a $38.96 profit.
I later bought and sold 45 shares held in a IRA (June 2009), realizing a $98.73 gain, so GJR has been largely a bust unlike many other synthetic floaters where I have realized significant percentage gains.
I would have done okay by simply keeping the original 100 shares bought at $11.28 and then selling those shares at $20.48. So part of the problem was LB thinking and trading too much.
Last Earnings Report of PFLT: SEC Filed Press Release
Rationale: I try to balance my fixed coupon bonds owned in retirement accounts with securities that are interest rate sensitive. While I do not expect a spurt in short term rates for some time, I am not certain what will happen. I never have certainty about the future. I can only make a judgment about probabilities and possibilities. A significant rise in intermediate and long term rates is considered a high probability event within a one to two year period. A low short term rate is considered a high probability event for two more years. Two of my remaining three synthetic floaters in the ROTH IRA (GJT & GJS) do not have a minimum rate but pay a spread over a short term rate. Consequently, I own only 50 shares of each one given my assessment of the probabilities of an unexpected spike in short term rates. By exchanging GJR for PFLT, I pick up more yield, over 6% currently, while keeping some inflation protection.
Another move that I have made in the IRAs is to reduce holdings in bond funds with longer durations plus some profit taking in other funds. I discussed selling the leveraged Build America Bond fund NBD in last week's post due to its long duration. Sold 100 NBD at $21.86-Roth IRA In the Roth IRA, I also sold NLYPRD and 300 of the bond CEF MMT. Sold 300 of the Bond CEF MMT at $7.57-ROTH IRA I may pick up another shorter duration bond CEF in the event the carnage continues this week.
Risks: BDCs have a host of risks associated with them. I have discussed those repeatedly in connection with other purchases. In case some one needs reminding, this BDC covers the risks starting at page 20 and continuing through page 36 in its Annual Report. Form 10-K
Future Buys: I will consider rounding the PFLT lot up to 100 shares after a significant dip in price.
3. Sold 331+ of the Stock CEF EXG at $9.772-Regular IRA (see Disclaimer): Based on my negative near term outlook for stocks, I decided to reduce my stock exposure some in an IRA, where my primary objective is capital preservation and secondarily income generation.
Snapshot of Trade:
Snapshot of Profit: I reinvested some of the dividend payments to buy additional shares:
 |
| 2013 Regular IRA 331+ Shares EXG +$294.46 |
The discount to net asset value per share was at -14.42 when I last purchased shares on 12/12/12. The net asset value per share was then $10.36. This is what I hope to see for CEFs bought in the retirement account. EXG paid me monthly dividends since 12/12/12; the net asset went up after those dividend payments and the discount to net asset value went from -14.42 to -6.4%.
Added 100 of the Buy-Write Stock CEF EXG @ $8.98-Regular IRA (December 2012); Added 100 EXG at $8.91 August 2012.
I still have a small EXG position in the ROTH IRA.
52 Week High Discount=16.65%
3 Year Average= 10.6%
Data Day Before Sale (5/30/13):
Closing Net Asset Value= $10.60
Closing Market Price=$9.77
Discount= -7.83%
Data Day of Sale (5/31/13)
Closing Net Asset Value= $10.44
Closing Market Price= $9.64
Discount: -7.66%
Discount at Sale Price of $9.77: -6.4%
EXG Page at CEFConnect
EXG Page at Morningstar (rated 3 stars, avg. 6 mo. discount -11.08)
Sponsor's Web Page: Tax-Managed Global Diversified Equity Income Fund | Eaton Vance
EXG went from a quarterly dividend to a monthly payment in January 2013. The monthly distribution rate is currently $.0813, with the last ex dividend date on 5/22/13. Eaton Vance Tax-Managed Global Diversified Equity Income Fund
Is your statement that the investment grade of an average duration of 1.7 years didn't move as being attributed to ZIRP instead of QE is bc of the large losses in the long end ?
ReplyDeleteZIRP will last longer than QE, most likely for another two years or so. It is ZIRP that anchors the short end of the curve to abnormally low levels. The five year treasury gained .4% in yield during March while the two year treasury gained .1% by going from a .2% to a .3% yield.
ReplyDeleteZIRP will have the most impact on the shortest maturities.
The 3 month treasury bill was at .03% on 5/1 and .03% on 5/31.
The 6 month bill actually fell in yield, going from .06 to .04%. The one year bill declined to .07% from .08% on 5/1.
The two year is heavily influenced by the federal funds rate. The impact of ZIRP is significantly less on the 3 year, which rose .2% in May, and that maturity and the five year need FED purchases to keep them at abnormally low levels.
I cite in the blog the NY FED' site that shows the maturity numbers for the treasury securities purchased by the FED. You can see that the FED is buying these shorter term notes.
As long as the FED continues ZIRP, the 3 month T Bill through the 2 year note will continue to be anchored near zero and will provide negative real rate of returns. This is why an investment grade short term bond with less than a 2 year duration lost so little in March compared to funds with higher durations.
As the duration and maturity length extends further out, ZIRP will lose more of its ability to impact rates. QE is the monetary policy that has the purpose of lowering yields for those maturities to abnormally low levels. Without QE, the yield curve would be very steep with the short term maturities near zero and the longer maturities finding their market levels at much higher levels than now.
QE is expected to end by many, including me, within the next nine months while ZIRP will continue into 2015 and then federal funds will likely be raised slowly. Without QE, the five to 30 maturity spectrum would rise to market based rates and the market will start that rate normalization process before the FED ends QE. The rise in yields and decline in prices for the 4 year and higher durations last month is due to the rate normalization process tied to the anticipated end of QE not ZIRP. The rise in treasury yields was fairly constant for the 5 through 30 year maturities. The markets expectations for inflation went down for those maturities last month so inflation has to be excluded as an explanation.