Tuesday, May 26, 2009

Afternoon Potpourri May 26 2009/ Bought MSPRA RJZ & ADX/ COMMODITIES AS AN ASSET CLASS

1. Bought 100 MSPRA at $12.88 to diversify floating rate equity preferred sub-asset class:  I think that I am just about done buying floaters.  Today, primarily as a diversification move, I bought 100 shares at $12.88 of of the floating rate equity preferred, MSPRA, a security issued by Morgan Stanley.  This security pays the greater of a 4% guarantee or .7% above 3 month LIBOR.  This one is listed with those securities that pay qualified dividends at the quantumonline site. Preferreds eligible for the 15% Tax Rate Table - QuantumOnline.com This is a link to the prospectus: www.sec.gov 

This is a typical equity preferred floater in terms of its advantages and disadvantages. Advantages and Disadvantages of Equity Preferred Floating Rate Securities

Since this one has a par value of $25 with a 4% guarantee, the yield at a $13 cost would be $1 divided by $13=  7.69%.  At a 5% LIBOR the rate would increase to 10.96% at a $13 cost. At a 7% LIBOR, the rate increases to 14.8%.  This was at best a marginal buy.

2.  Added to closed end investment company Adams Express (ADX): I had some funds come into the account from the liquidation of an ETF by a sponsor.  I just put those funds into my existing position in Adams Express (ADX) by buying shares at $8.34. As of yesterday, ADX was selling at a 15.63% discount to its NAV. This is a link to their web page: Adams Express Company - Welcome

This leaves my previous $3000 cash allocation available for investment in stocks intact.

3. GM Bankruptcy:  It is hardly surprising that the GM bondholders turned down the offer of stock for their bonds.  Although no one knows, I would anticipate that the GM bankruptcy will take much longer than currently expected and the bondholders will throw a wrench into any quick exit. 

4. Commodities as a Non-Correlated Asset class: For this discussion, I am relying mostly on the data contained in this blog: Seeking Alpha

That blog takes mostly 60 month periods and compares the correlation of the DJIA with the Reuters CRB Index.  The writer assumes that the coefficient  of correlation needs to be greater than .325 for positive correlation and -.325 for negative correlation. That judgment causes the writer of the post to reach different conclusions than I would looking at the same data. Admittedly, I have no background in statistics which puts me at an advantage or disadvantage according to your perspective. 

For my purpose in asset allocation, I am interested in any asset with a negative correlation to stocks, since that asset might have value to me as a hedge. SDS and TWM are good hedges for a stock portfolio for example. Some significant positive correlation between stocks and an alternative asset class at times would indicate a possible use of the asset class as a means to achieve more diversity. Based on the data contained in the referenced article from SeekingAlpha, for the period from around 2001 to June 2008, commodities provided from my point of view a meaningful positive correlation with stocks.  This would mean that the commodity asset class would not be useful as a hedge in my stock portfolio, though commodities could be useful to achieve more diversification.  The data shows four periods where commodities would be useful as a hedge, with what I would call meaningful negative correlation. 

In recent months, both commodities and stocks have been increasing in value together.  During the 4th quarter, both commodities and stock moved in the same direction-down, which means positive correlation of the unhelpful variety.  

So, like a number of asset classes, commodities add nothing to asset allocation at times, and can be used as a hedge or to diversify a portfolio at other times. I can not say looking at the data that commodities can be used in any mechanical way in an asset allocation and their use has to be dependent in large part just on market conditions for limited periods of time.  

The data on the ETN that I recently bought, RJI, which is linked to the Rogers International Commodity Index, shows a 49.1% decline over the past year. ELEMENTS ETN Products

That is a very high positive correlation with stocks at a time when you would want strong negative correlation. So, this kind of data confirms the correctness of my decision to dump entirely my positions in commodities early last year. In a recession, commodity prices will probably go down most of the time, though there will occasionally be exceptions such as a period of stagflation where the economy may be sinking while commodity prices are still rising.  But, mostly I would expect commodity prices to fall during a recession, and this was what happened during the current economic downturn.
For now, it appears that commodities are running with stocks but that may change.  Stocks may stall and commodities may continue a bull run from oversold conditions. That would be a benefit to some diversification now into commodities. 

5.  Added 200 RJZ AT $6.96-the ETN Linked to the Rogers International Commodity Index-Metals Total Return: This one is linked to the metals index. ELEMENTS ETN Products  This would include almost 19% in both copper and aluminum; about 9.48% in silver, lead and zinc; 14.22% in gold; 8.53% in platinum, and the remainder in tin, nickel and palladium. This one is up almost 19% year to date, but had a hard time during the stock meltdown last year with a negative return of  36.93% over the past one year.  While many talk about metals being a non-correlated asset, it would be better to say that sometimes there is positive correlation which could add diversity and balance during a bull market for stocks and commodities, or both could be positively correlated to the downside as shown in the later half of 2008 and  early 2009 which adds nothing to the asset allocation other than more losses to an already decimated stock portfolio.  So, there appears to me to be a great deal of volatility in whether or not to use commodities in the asset allocation and the purpose of any such use, as a hedge or for purposes of diversification. I am adding some commodities now for purposes of diversification.  I will manage all commodity positions in an effort to reduce risk, in the manner that I am accustomed to doing for an asset class which causes me discomfort. 

6. Volatility of Correlation between Asset Classes: I am going to spend more time studying the volatility of correlation which I now view as an important subject for asset allocation that I need to know more about than I do now. It would for example have made no sense to keep commodities as an asset class for the second half of 2008.  Although I have not seen the actual correlation statistics for that period, I would expect a strong positive correlation with stocks, with both asset classes falling hard in value.  So, it is obvious that asset mixes have to be managed with an eye on the changing and often volatile relationships between asset classes. 

  I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. I have never worked for a financial institution and never will.  In these posts, I am acting as an unpaid financial journalist and an occasional political commentator.   I am also aggregating financial news stories that I view as important and providing readers of these posts with links to those articles, sort of a filtered, somewhat intelligent, free search engine.  Any discussion made by me of particular securities  is not a recommendation to buy or to sell.  Trade at your own risk.  Consult with your financial advisor prior to making any purchase or sale. I will try to identify my sales too but it may take a few minutes after I implement them to create a post explaining my reasons.  The sale may before or after the post.  Before buying or selling any stock, even one recommended by a trusted financial advisor,  please research it and make up your own mind which is what I always try to do.  Research would include reading reports, reviewing financial records, earnings estimates, sec filings and prior earnings releases and news.  In this post, and all others by me, I am merely describing my reasons for purchasing  or selling securities, and the potential pitfalls that I identified prior to purchase or the reasons for a sale.  The securities mentioned in this and all posts written by me may not be suitable for others based on their unique financial position and risk profile.  By way of example, it is unlikely that I will ever need the funds contained in my retirement accounts. Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments.  Information contained in my posts has been obtained from sources believed to be reliable but cannot be guaranteed.  It is always important to follow the investment process. the investment process/links to further information on canadian energy or royalty trustsInvestment Process Part II: Bonds and Bond Like Investments   NOT A RESEARCH SERVICE/Add of PWE Last Week   These posts by me do not constitute investment advice, nor shall they be construed as a guarantee of future results, or as an offer of any transaction in securities.   All content in these posts is provided for informational and entertainment purposes only, and it is a form of entertainment for me.  Anyone interested in a topic may want to review all discussions contained in the blog about it by using a relevant search term in the box at the top. Opinions are subject to change and they certainly evolve over time as information is assessed and analyzed for compatibility with prior opinions, the only process for a serious investor, and a topic of frequent discussion in this post.

No comments:

Post a Comment