Big Picture Synopsis
Stocks:
Stable Vix Pattern
Short Term: Neutral to Bullish (provided Congress does not behave irrationally)
Intermediate and Long Term: Bullish
Bonds:
Short Term: Neutral-Slightly Bearish
Intermediate Term: Bearish
Long Term: Extremely Bearish
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I changed my intermediate term outlook for bonds to bearish from slightly bearish. I also changed the short term outlook for bonds from "neutral" to "neutral-slightly bearish".
I believe that the Federal Reserve's purchases of mortgage backed securities and treasuries has substantially warped bond prices. As a buyer, the Federal Reserve does not want the highest yields, but the lowest possible yields. Given the depth and breath of its buying, the Federal Reserve is determining prices and yields for all bonds throughout the maturity spectrum.
As soon as QE ends, probably by the end of this year or in the 2014 first quarter, there will be a rise in bond yields to reflect true market prices. I suspect that the market will start to correct before the FED announces the end of QE, and that may have already started to happen.
The current inflation forecast embodied in the 10 year TIP price is for annualized inflation exceeding 2.5%.
10 Year TIP Minus .53% as of 1/29//13 Daily Treasury Real Yield Curve Rates
10 Year Treasury Nominal: 2.03% as of 1/29/12 Daily Treasury Yield Curve Rates
Break-Even=2.56%
When investment grade bond prices start to reflect the market's inflation outlook, and are no longer influenced by actual and anticipated QE programs, the bond losses for vintage issues will be severe, with the largest losses in higher quality longer term maturities. Intermediate and long term treasuries will go down more in price than high quality corporate debt with comparable maturities. The worst price impact will be felt on zero coupon long term treasury bonds.
A ten year treasury yield of 3.5% in one year will result in a substantial loss to a buyer now at 1.8%. I would consider a 3.5% 10 year to be a benign rate on a historical basis: 10-Year Treasury Constant Maturity Rate (more normal range 5% to 7.5% historically) A 5% ten year treasury rate would produce a lot of hang wringing by the pundits, but that rate is at least close to the long term average and would also be viewed as benign by me. A 5% yield on the 10 year treasury would not look benign to a buyer at 1.8%, needless to say.
I am basing this change in outlook on an opinion that QE will no longer even be arguably necessary in 2014. In my opinion, important and long term factors are already in place that will drive U.S. GDP growth for many years to come. That growth will be stronger than currently anticipated by the market.
Moreover, the FED's balance sheet just exceeded the obscene level of $3 trillion (FRB: Balance Sheet) and will approach the previously unimaginable and totally scary level of $4 trillion level by the end of 2013, assuming a continuation of its current buying frenzy. The Fed is now buying $85 billion a month in mortgage backed securities and treasuries. A $4 trillion balance sheet will look like debt monetization to virtually everyone, notwithstanding Bernanke's protestations to the contrary. FRB: Speech--Bernanke, Five Questions about the Federal Reserve and Monetary Policy--October 1, 2012 And, opposition to QE is unquestionably building at the FED as shown in the last minutes: FRB: FOMC Minutes, December 11-12, 2012
So, the underlying thesis is that QE will end within a year. The market will start to reflect that change before year end by decreasing bond prices and raising yields even before the FED makes any announcement.
If the FED continues its 0% to .25% through 2014, which I view as likely, inflation expectations may actually increase and undermine bond prices even further. The FED could lose its credibility as an inflation fighter and instead be viewed as a central bank promoting inflation.
I am just about totally turned off now by bonds. I look at my monitor list for exchange traded bonds and my basic response, as I scroll through the list, is to say "no way". The yields and the premiums to par value make those securities most unappealing to me.
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I changed my intermediate term outlook for bonds to bearish from slightly bearish. I also changed the short term outlook for bonds from "neutral" to "neutral-slightly bearish".
I believe that the Federal Reserve's purchases of mortgage backed securities and treasuries has substantially warped bond prices. As a buyer, the Federal Reserve does not want the highest yields, but the lowest possible yields. Given the depth and breath of its buying, the Federal Reserve is determining prices and yields for all bonds throughout the maturity spectrum.
As soon as QE ends, probably by the end of this year or in the 2014 first quarter, there will be a rise in bond yields to reflect true market prices. I suspect that the market will start to correct before the FED announces the end of QE, and that may have already started to happen.
The current inflation forecast embodied in the 10 year TIP price is for annualized inflation exceeding 2.5%.
10 Year TIP Minus .53% as of 1/29//13 Daily Treasury Real Yield Curve Rates
10 Year Treasury Nominal: 2.03% as of 1/29/12 Daily Treasury Yield Curve Rates
Break-Even=2.56%
When investment grade bond prices start to reflect the market's inflation outlook, and are no longer influenced by actual and anticipated QE programs, the bond losses for vintage issues will be severe, with the largest losses in higher quality longer term maturities. Intermediate and long term treasuries will go down more in price than high quality corporate debt with comparable maturities. The worst price impact will be felt on zero coupon long term treasury bonds.
A ten year treasury yield of 3.5% in one year will result in a substantial loss to a buyer now at 1.8%. I would consider a 3.5% 10 year to be a benign rate on a historical basis: 10-Year Treasury Constant Maturity Rate (more normal range 5% to 7.5% historically) A 5% ten year treasury rate would produce a lot of hang wringing by the pundits, but that rate is at least close to the long term average and would also be viewed as benign by me. A 5% yield on the 10 year treasury would not look benign to a buyer at 1.8%, needless to say.
I am basing this change in outlook on an opinion that QE will no longer even be arguably necessary in 2014. In my opinion, important and long term factors are already in place that will drive U.S. GDP growth for many years to come. That growth will be stronger than currently anticipated by the market.
Moreover, the FED's balance sheet just exceeded the obscene level of $3 trillion (FRB: Balance Sheet) and will approach the previously unimaginable and totally scary level of $4 trillion level by the end of 2013, assuming a continuation of its current buying frenzy. The Fed is now buying $85 billion a month in mortgage backed securities and treasuries. A $4 trillion balance sheet will look like debt monetization to virtually everyone, notwithstanding Bernanke's protestations to the contrary. FRB: Speech--Bernanke, Five Questions about the Federal Reserve and Monetary Policy--October 1, 2012 And, opposition to QE is unquestionably building at the FED as shown in the last minutes: FRB: FOMC Minutes, December 11-12, 2012
So, the underlying thesis is that QE will end within a year. The market will start to reflect that change before year end by decreasing bond prices and raising yields even before the FED makes any announcement.
If the FED continues its 0% to .25% through 2014, which I view as likely, inflation expectations may actually increase and undermine bond prices even further. The FED could lose its credibility as an inflation fighter and instead be viewed as a central bank promoting inflation.
I am just about totally turned off now by bonds. I look at my monitor list for exchange traded bonds and my basic response, as I scroll through the list, is to say "no way". The yields and the premiums to par value make those securities most unappealing to me.
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This is a link to a number of interesting charts prepared by Oppenheimer. I tend to see things better with pictures rather than words. oppenheimerfunds.com .pdf The chart at page 20 shows that many fixed income categories provided negative real rates of return as of 11/30/12. The chart at page 60 shows how asset classes have performed each year since 2002. Gold has been near or at the top in several of those years. Page 55 shows the performance by year of Muni bond sectors. A correlation chart of different types of bonds is shown at page 49. There is a negative correlation in the Credit Suisse Leveraged Loan Index to Barclay's U.S. Aggregate Government Bond Index. A chart at page 47 shows that high yield bonds and senior loans have traditionally outperformed treasuries in rising rate environments. Sector performance within the bond category since 2002 is shown at page 45. Emerging market bonds have been on top 6 out of the last 10 years. A reason to buy or to sell?
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FHA maintains a home price index. Federal Housing Finance Agency - House Price Index The FHA home price index rose .6% from October to November 2012, and 5.6% nationwide for the 12 months ending in November. fhfa.gov .pdf
Floyd Norris devoted his NYT column to a discussion of the emerging housing recovery. He noted one interesting statistic about new home construction. Between January 1959 through September 2008, there was only one month when new home starts fell below an annualized rate of 800,000. Beginning in October 2008, there were 47 consecutive months when new home starts fell below that level.
The Commerce Department reported last week that new residential sales for December were at a seasonally annual rate of 369,000. This was 7.3% below the upwardly revised November rate of 398,000, and 8.8% above December 2011. The November rate was revised upward by 22,000. For 2012, the government estimates that 367,000 new homes were sold which was 19.9% higher than the 2011figure. census.gov/.pdf
This chart show the devastation to this important sector of the economy caused by the bursting of the housing bubble:
New Homes Sold in the United States - St. Louis Fed
Even Alan Abelson had some positive comments about the uptrend in housing in his Barrons column this week. Abelson noted that new housing starts in 2009-2011 "barely" exceeded demolitions.
Just in Cleveland, condemned homes are coming down at 600 per year. Cleveland condemned homes Flint Michigan received last year a HUD grant to demolish 300 homes. A large number of foreclosed properties, including those abandoned and in foreclosure limbo, will ultimately just be torn down due in large part to vandalism.
New homes have not kept up with population growth or new household formations. Just look at the historic plunge in new home starts during the last recession and its aftermath:
Housing Starts: Total: New Privately Owned Housing Units Starts - St. Louis Fed
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This is a link to information at the New York Federal Reserve that shows the maturity breakdowns for the FED's QE4 treasury purchases:
FAQs: Purchases of Longer-term Treasury Securities - Federal Reserve Bank of New York
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FHA maintains a home price index. Federal Housing Finance Agency - House Price Index The FHA home price index rose .6% from October to November 2012, and 5.6% nationwide for the 12 months ending in November. fhfa.gov .pdf
Floyd Norris devoted his NYT column to a discussion of the emerging housing recovery. He noted one interesting statistic about new home construction. Between January 1959 through September 2008, there was only one month when new home starts fell below an annualized rate of 800,000. Beginning in October 2008, there were 47 consecutive months when new home starts fell below that level.
The Commerce Department reported last week that new residential sales for December were at a seasonally annual rate of 369,000. This was 7.3% below the upwardly revised November rate of 398,000, and 8.8% above December 2011. The November rate was revised upward by 22,000. For 2012, the government estimates that 367,000 new homes were sold which was 19.9% higher than the 2011figure. census.gov/.pdf
This chart show the devastation to this important sector of the economy caused by the bursting of the housing bubble:
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| New Home Sales |
Even Alan Abelson had some positive comments about the uptrend in housing in his Barrons column this week. Abelson noted that new housing starts in 2009-2011 "barely" exceeded demolitions.
Just in Cleveland, condemned homes are coming down at 600 per year. Cleveland condemned homes Flint Michigan received last year a HUD grant to demolish 300 homes. A large number of foreclosed properties, including those abandoned and in foreclosure limbo, will ultimately just be torn down due in large part to vandalism.
New homes have not kept up with population growth or new household formations. Just look at the historic plunge in new home starts during the last recession and its aftermath:
Housing Starts: Total: New Privately Owned Housing Units Starts - St. Louis Fed
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This is a link to information at the New York Federal Reserve that shows the maturity breakdowns for the FED's QE4 treasury purchases:
FAQs: Purchases of Longer-term Treasury Securities - Federal Reserve Bank of New York
The Fed has turned itself into a money making machine with its money printing and bond buying:
Federal Reserve Makes $88.9 Billion in Profit | Committee for a Responsible Federal Budget
The speech given by Bernanke on 10/1/12 highlights the purpose for QE4:
FRB: Speech--Bernanke, Five Questions about the Federal Reserve and Monetary Policy--October 1, 2012
The FED is manufacturing abnormally low rates for the primary purpose of lowering the debt burdens of American households. The purpose is to create conditions for a "sustainable" economic recovery through lowering debt service payments long term. With both the DSR and FOR ratios now at levels last seen before the Age of Leverage, the Fed's job is largely already achieved except for the under water homeowners.
Financial Obligation Ratio (FOR) and Debt Service to Disposable Income Ratio (DSR) Data:
Household Debt Service and Financial Obligations Ratios
This may now be the most important chart around:
Household Debt Service Payments as a Percent of Disposable Personal Income (TDSP) - FRED - St. Louis Fed
With HARP program set to expire at the end of this year, and possibly another 1 million or so under water homeowners refinancing this year under that Federal program, the FED's job will be largely complete and consequently there would be no legitimate reason for continuing QE 4 into 2014. More homeowners, who do not qualify under the HARP program, will be able to refinance this year due to a rise in home prices, a trend that accelerated in 2012.
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After more than three weeks from the dividend payment date, Fidelity finally credited me with the China Fund shares bought with the year end distribution:
I also received shares purchased with the last GE dividend:
As mentioned in a prior post, I had changed my reinvestment to cash but the broker went ahead and bought more shares with the last dividend. The OG took that event as a sign from the LORD to keep using the dividend to buy more shares.
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The Markit PMI data for U.S. manufacturing is showing a rebound. The reading for January 2013 was 56.1, a nine month high. New orders rebounded to 57.7. markiteconomics.com
The Markit PMI January manufacturing data for China hit a two year high. markiteconomics.com
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An article in Reuters claims that Detroit is edging close to a bankruptcy filing. I would expect more such filings in the years to come. Labor costs for city employees, including health care and pensions, is estimated to eat up almost 50% of Detroit's operating budget for the F/Y ending in June.
Federal Reserve Makes $88.9 Billion in Profit | Committee for a Responsible Federal Budget
The speech given by Bernanke on 10/1/12 highlights the purpose for QE4:
FRB: Speech--Bernanke, Five Questions about the Federal Reserve and Monetary Policy--October 1, 2012
The FED is manufacturing abnormally low rates for the primary purpose of lowering the debt burdens of American households. The purpose is to create conditions for a "sustainable" economic recovery through lowering debt service payments long term. With both the DSR and FOR ratios now at levels last seen before the Age of Leverage, the Fed's job is largely already achieved except for the under water homeowners.
Financial Obligation Ratio (FOR) and Debt Service to Disposable Income Ratio (DSR) Data:
Household Debt Service and Financial Obligations Ratios
This may now be the most important chart around:
Household Debt Service Payments as a Percent of Disposable Personal Income (TDSP) - FRED - St. Louis Fed
With HARP program set to expire at the end of this year, and possibly another 1 million or so under water homeowners refinancing this year under that Federal program, the FED's job will be largely complete and consequently there would be no legitimate reason for continuing QE 4 into 2014. More homeowners, who do not qualify under the HARP program, will be able to refinance this year due to a rise in home prices, a trend that accelerated in 2012.
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After more than three weeks from the dividend payment date, Fidelity finally credited me with the China Fund shares bought with the year end distribution:
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| Reinvestment Price $21.56 |
I also received shares purchased with the last GE dividend:
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| 4.448 Shares Bought at an Average Cost of $21.98 |
As mentioned in a prior post, I had changed my reinvestment to cash but the broker went ahead and bought more shares with the last dividend. The OG took that event as a sign from the LORD to keep using the dividend to buy more shares.
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The Markit PMI data for U.S. manufacturing is showing a rebound. The reading for January 2013 was 56.1, a nine month high. New orders rebounded to 57.7. markiteconomics.com
The Markit PMI January manufacturing data for China hit a two year high. markiteconomics.com
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An article in Reuters claims that Detroit is edging close to a bankruptcy filing. I would expect more such filings in the years to come. Labor costs for city employees, including health care and pensions, is estimated to eat up almost 50% of Detroit's operating budget for the F/Y ending in June.
1. Bought 100 of the ETF ASEA at $17.09 (Emerging Market Super Cycle Strategy)(See Disclaimer):
Security Description: The Global X FTSE ASEAN 40 ETF (ASEA) attempts to replicated, before fees and expenses, the performance of the FTSE ASEAN 40 index, which consists of the 40 largest companies in five Asian countries. Those countries are Indonesia, Malaysia, Philippines, Singapore and Thailand.
Sponsor's webpage: Global X ASEAN 40 ETF - ASEA (expense ratio .65%)
The Sponsor summarizes the investment case in this fact sheet: Global X Funds
Prior Trades: None-New ETF
Rationale: (1) Yet Another Play on the Growth Markets for the Current Century: I will eventually write a Gateway Post on the super cycle in worldwide growth originating from emerging markets. For now, the latest and longest discussion can be found in Item # 3, Bought 50 of the Stock ETF EELV at $27.2.
Risks: The risks are disclosed in summary fashion in the prospectus. I would call the risks normal for a stock ETF that invests in a narrow group of countries.
I am particularly concerned about country and currency risk. An example of country risk relevant to ASEA is the recent decline in Malaysia's stock market after a poll was released showing that the ruling political party may be in trouble. Reuters In times of stress, the USD is likely to gain in value against currencies like the Thai Baht or Malaysia's ringgit which was the case on 1/21/13 when the Malaysian market fell due to those election jitters. A detailed discussion of the political issues can be found in this recent Seeking Alpha article.That is just an example from one day of both the currency and country risk.
I am particularly concerned about country and currency risk. An example of country risk relevant to ASEA is the recent decline in Malaysia's stock market after a poll was released showing that the ruling political party may be in trouble. Reuters In times of stress, the USD is likely to gain in value against currencies like the Thai Baht or Malaysia's ringgit which was the case on 1/21/13 when the Malaysian market fell due to those election jitters. A detailed discussion of the political issues can be found in this recent Seeking Alpha article.That is just an example from one day of both the currency and country risk.
Future Buys: I may buy another 100 shares, probably in 50 share lots, only on downdrafts.
Yesterday's Close: ASEA: 17.01 +0.13 (+0.77%)
Yesterday's Close: ASEA: 17.01 +0.13 (+0.77%)
2. Sold 50 of the ETF SOIL at $14.59 and Bought 50 of the ETF GYLD at $27.03 and 50 More in the ROTH IRA at $27.13 (see Disclaimer):
I also added 50 GYLD subsequently in the ROTH IRA:
Unfortunately, this ETF was currently selling a small premium to its net asset value when I made my purchases.
Security Descriptions: The Arrow Dow Jones Global Yield ETF (GYLD) is a new ETF that was launched last May. Zacks.com This ETF will attempt to track the Dow Jones Global Composite Yield Index. The fund will have roughly equal weighting, with quarterly rebalancing, in five asset categories:
Each of those sectors will contain 30 holdings.
Sponsor's Webpage: Arrow Shares
On the date of my purchase, the exposure was 60.81% to equities and 39.11% to fixed income.
A list of holdings can be found at GYLD Holdings.
I took a snapshot of a few of the 150 positions:
The fund has been paying a variable monthly dividend. GYLD Distributions The ex dividend date will generally be early in the month. There was a special distribution of $.3427 that went ex dividend on 12/27/12, and no distribution is consequently planned for January 2013. As of 12/31/12, the distribution yield was calculated by the fund at 6.25%.
Each of those sectors will contain 30 holdings.
Sponsor's Webpage: Arrow Shares
On the date of my purchase, the exposure was 60.81% to equities and 39.11% to fixed income.
A list of holdings can be found at GYLD Holdings.
I took a snapshot of a few of the 150 positions:
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| As of 1/28/13 |
The expense ratio is high for an ETF at .75%.
Semi-Annual Report for the Period Ending 7/31/12: arrowshares.com pdf
Prior Trades: None for GYLD-New ETF:
I bought the SOIL ETF last September and received one small annual dividend. Bought 50 of the Stock ETF SOIL at $13.96
Rationale: (1) Increasing Income Generation: GYLD will have over a 5% greater yield than SOIL. I just received the annual dividend from SOIL, while GYLD pays monthly. I try to pick up securities that pay monthly whenever it makes sense to do so. My overall dominant strategy is to generate a constant cash flow that can be used to buy more income generating securities, creating a compounding effect over time. I can accomplish that objective better with securities that pay monthly better than lower yielding ones that pay annually.
SOIL's annual dividend was $.161224 per share, Distributions, or about 1.1% at a total cost of $14.69.
(2) I recently read some brokerage reports that are negative about potash demand and prices for this year. (negative: Seeking Alpha and Morningstar report at Seeking Alpha) I thought the Morningstar article contained an interesting fact: 70% of the phosphate reserves are in Morocco and the western Sahara.
(3) I have a much broader sector and securities exposure with GYLD.
Risks: (1) This ETF has the normal risks associated with a balanced world fund. The risks are generally discussed in the Prospectus at pp. 3-7. I would highlight the currency risks. The fund had approximately an 18% exposure to the EURO which has been gaining in value against the USD. EURUSD The Euros strength has been a tailwind for this fund's recent performance, as has the strength of the Australian Dollar against the USD. AUDUSD
A reversal of those favorable trends could result in a GYLD price decline unless the value of the securities priced in those currencies rise sufficiently to offset any currency conversion decline.
The currency exposures are set out in the sponsor's FACT Sheet.
A reversal of those favorable trends could result in a GYLD price decline unless the value of the securities priced in those currencies rise sufficiently to offset any currency conversion decline.
The currency exposures are set out in the sponsor's FACT Sheet.
Future Buys: I will likely buy up to 100 more shares of GYLD, in 50 share increments, but only at more than 5% below my last purchase prices.
Yesterday's close: GYLD: 27.36 +0.10 (+0.37%)
3. Sold 100 EMLP at $22 (see Disclaimer): I will just briefly discuss why I exited my position on this ETF:
The First Trust North American Energy Infrastructure Fund (EMLP) that invests in electric utilities, MLPs and other companies that derive at least 50% of their revenues from operating or providing services in support of infrastructure assets such as pipelines, power transmission, petroleum and natural gas storage. First Trust North American Energy Infrastructure Fund (EMLP) I noted when purchasing this ETF that it had a high expense ratio of .95%. Item # 3 Added 100 EMLP at $21.32
I over estimated the income generation for this ETF. The last quarterly distribution was only $.139 per share, somewhat higher than the prior month. EMLP Distributions That works out be about 2.55% annualized which is viewed as insufficient.
I also sold the 50 shares of EMLP bought in a satellite taxable account for the same reason. Item # 2 Bought 50 of the ETF EMLP at $20.87
Unless the expense ratio comes down and the yield goes up significantly, I am not likely to buy this ETF back.
4. Pared Trade ROTH IRA: Sold 50 of the ETF IYLD at $26.58 and Bought 50 of the ETF GAL at $31.89 (see Disclaimer):
The IYLD shares generated a profit of $11.97 plus dividends of $35 since my purchase on 7/17/12 at $26.06. That overall unsatisfactory total return is one reason for jettisoning the position.
Security Description: The SPDR SSgA Global Allocation ETF (GAL) is a fund of funds that owns stocks and bonds worldwide. (roughly 60% to stocks/40% to bonds)
GAL Holdings and Weightings as 1/24/13:
Sponsor's Web page: GAL - SPDR SSgA Global Allocation ETF | State Street Global Advisors (SSgA)
Annual Report (6/3012): www.spdrs.com.pdf
GAL dividends are paid quarterly. The last dividend was $.33+ cents per share that went ex dividend on 12/27/12.
Prior Trades: I purchased 50 shares of IYLD at $26.06. I included a snapshot of the ETFs owned by that fund of funds in that post. The holdings have changed since that time and I do not view the current weightings favorably:
I am negative about bond funds in general and hyper negative on junk bonds and long term treasuries.
Rationale: (1) Trading A Balanced Fund Tilted Toward Bonds for One With More Exposure to Equities and Particularly International Stocks. Given the low low yield in treasuries, which are heavily weighted in IYLD, I am actually picking up more yield with GAL.
(2) Expense ratio is lower for GAL than IYLD: The IYLD expense ratio is .66% before a .06% fee waiver in effect through 12/31/14. Part of that expense ratio is the .41% in expenses from the owned ETFs. iShares Morningstar Multi-Asset Income Index Fund (IYLD): Overview - iShares The GAL expense ratio is shown at .35%. GAL - SPDR SSgA Global Allocation ETF | State Street Global Advisors (SSgA)
Risks: The risks are normal ones for a balanced world funds.
Prospecutus.pdf (risks discussed at pages 17-19).
Another risk is that GAL may be liquidated in the event it fails to attract enough assets. The total net assets was shown at 20.66M as of 1/24/13.
Future Buys: Given my views about longer term treasury bonds, I am not likely to buy IYLD back for years. I will most likely average down by buying another 100 GAL shares in my usual manner, which would involve splitting that 100 shares into two 50 share lots.
Yesterday's Close: GAL: 31.91 +0.14 (+0.44%)
5. Added 100 TICC at $10.30-Taxable Account (See Disclaimer):
Security Description: TICC Capital (TICC) is a business development corporation. As such, it avoids double taxation on distributions made to its shareholders.
To maintain that tax status, the BDC must distribute at least 90+% of its taxable income as dividends. This tax advantage will result in higher dividends but will deplete capital that will result in these corporations selling more shares, frequently at prices below blow book value per share. This may or may not work out for existing shareholders. Adding more funds to invest will invariably work out for the managers of these funds however. The base management fee of 2% is calculated on gross assets, see page 9 of Form 10-K. Then there is an incentive fee.
TICC did sell 3.45 million shares back in August at $9.65 per share. www.sec.gov That was probably slightly below the net asset value per share at that time based on the third quarter earnings release.
As of 9/30/12, TICC's net asset value per share was $9.85, up from $9.3 as of 12/31/11. (page 3: 10-Q). A list of investments can be found in that last filed SEC Form 10-Q starting at page 4) The fund has few warrants and common stock positions (see pages 7-8). I would much prefer to see more common stock warrants as sweeteners for the loans. TICC does own a wide variety of CLO-Equity Investments that it values at $82+M as of 9/30/12 with a cost basis of $68+M.
A long term chart reveals a stock that was trading over $16 in 2007, plummeting to below $4 in Marcy 2009, and thereafter zooming to $12.88 by January 2011. Most of the trades over the past two years would be in a narrow channel between $8 to $10.5. TICC Interactive Chart - Yahoo! Finance
The dividend history is noted on the YF Chart by simply checking "dividends" under the "events" tab.
Barclay's started coverage of TICC earlier this month with an equal weight rating and a $11 price target. Given the dividend yield, actually hitting an $11 price in one year would be viewed as most positively.
Dividend History: TICC Capital Corp. | Investor Relations
The most recent dividend was $.29 per share. At that rate, the dividend yield would be about 11.26% at a total cost of $10.3.
Profile page at Reuters
Key Developments page at Reuters
Prior Trades: I still own 100 shares bought in the ROTH IRA: Bought 100 of the BDC TICC at $9.8-ROTH IRA (February 2012). Given their risks, I will generally hold a BDC for no more than 2 years in a retirement account and will simply try to make some profit on the shares while harvesting a number of dividends. I would like to sell the shares bought in the ROTH IRA north of $10.5 during 2013.
Recent Earnings Release: TICC announced preliminary 2012 4th quarter results shortly before my last purchase. The company estimates that its GAAP net income will be between $.2 and $.24 per share, while its "core net investment income" will be in the range of of $.24 to $.26. SEC Filed Press Release The company estimated that none of the distributions made in 2012 will be classified as returns of capital. In addition, TICC stated that it had sold "12 CLO BB" assets for an aggregate $40.7M during the quarter and will realize a gain of approximately $12M. (CLO=Collateralized Loan Obligations). That sale will result in an "incentive" fee payment of approximately $1.7M to TICC's managers.
Rationale: (1) It is almost entirely about the income. The dividend history, summarized at page 36 of the 2011 Annual Report, Form 10-K, shows a consistent rise in the payout in the 2010-2012 period, though the rates declined from $1.06 in 2008 and $1.44 in 2007 (page 39). Hopefully, the 2008 period was analogous to the 100 year flood for BDC investors.
Risks (1) The general risks applicable to BDCs and to TICC in particular are discussed in the Form 10-K starting at page 18. Potential conflicts of interest are discussed at pages 28-29. Risks relating to TICC's investments are summarized starting at page 30.
BDCs make high interest loans to mostly private borrowers. Solid blue chip borrowers are not receiving loans at greater than 10% interest rates. The typical BDC loan is made to a risky borrower. Even senior secured loans made to such borrowers would be rated as junk when and if reviewed by a credit rating agency.
Future Buys: I am more likely to dispose of the 100 shares held in the ROTH IRA rather than to add more shares.
Yesterday's Close: TICC: 10.57 +0.20 (+1.93%)
Politics and ETC:
1. Russia and the Strange Case of Sergei Magnitsky/John Chambers Thinks Russia is a Great Place for Business: Steve Liesman wrote an interesting article about Sergei Magnitsky, a Russian lawyer jailed for defending his client and later tortured and murdered in jail. CNBC Russia apparently knows who committed the murder and has refused to prosecute.
The U.S. responded to this brazen act by denying corrupt Russian officials travel visas to the U.S.
Putin responded by denying American's the right to adopt Russian orphans.
Instead of prosecuting those responsible for Magnitsky's murder, the corrupt Russian legal system has decided to put the dead Sergei Magnitsky on trial, something that was not even done during the Soviet era show trials, without question an incredible act of chutzpah unparalled in the annals of history.
Magnitsky' real crime was exposing the fraud of others, as noted in this article: Amnesty International He was arrested shortly after he testified before Russian officials about a large scale tax fraud. See also, UK - The Independent
John Chambers believes that Russia is easier to do business in Russia than the U.S. Cisco's Next Frontier | Fox Business Video As noted by Liesman, other businessman privately say that Russia is just not worth the trouble. Maybe Chambers statement is a legal form of bribery. Any criticism of Russia would likely result in a multitude of headaches, while any negative comment about Putin would likely cause the arrests of Cisco officials for "tax evasion".
Yesterday's close: GYLD: 27.36 +0.10 (+0.37%)
3. Sold 100 EMLP at $22 (see Disclaimer): I will just briefly discuss why I exited my position on this ETF:
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| 2013 Sold 100 EMLP $52.05 |
The First Trust North American Energy Infrastructure Fund (EMLP) that invests in electric utilities, MLPs and other companies that derive at least 50% of their revenues from operating or providing services in support of infrastructure assets such as pipelines, power transmission, petroleum and natural gas storage. First Trust North American Energy Infrastructure Fund (EMLP) I noted when purchasing this ETF that it had a high expense ratio of .95%. Item # 3 Added 100 EMLP at $21.32
I over estimated the income generation for this ETF. The last quarterly distribution was only $.139 per share, somewhat higher than the prior month. EMLP Distributions That works out be about 2.55% annualized which is viewed as insufficient.
I also sold the 50 shares of EMLP bought in a satellite taxable account for the same reason. Item # 2 Bought 50 of the ETF EMLP at $20.87
Unless the expense ratio comes down and the yield goes up significantly, I am not likely to buy this ETF back.
4. Pared Trade ROTH IRA: Sold 50 of the ETF IYLD at $26.58 and Bought 50 of the ETF GAL at $31.89 (see Disclaimer):
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| 2013 Roth IRA Bought 50 GAL at $31.89 |
The IYLD shares generated a profit of $11.97 plus dividends of $35 since my purchase on 7/17/12 at $26.06. That overall unsatisfactory total return is one reason for jettisoning the position.
Security Description: The SPDR SSgA Global Allocation ETF (GAL) is a fund of funds that owns stocks and bonds worldwide. (roughly 60% to stocks/40% to bonds)
GAL Holdings and Weightings as 1/24/13:
Sponsor's Web page: GAL - SPDR SSgA Global Allocation ETF | State Street Global Advisors (SSgA)
Annual Report (6/3012): www.spdrs.com.pdf
GAL dividends are paid quarterly. The last dividend was $.33+ cents per share that went ex dividend on 12/27/12.
Prior Trades: I purchased 50 shares of IYLD at $26.06. I included a snapshot of the ETFs owned by that fund of funds in that post. The holdings have changed since that time and I do not view the current weightings favorably:
I am negative about bond funds in general and hyper negative on junk bonds and long term treasuries.
Rationale: (1) Trading A Balanced Fund Tilted Toward Bonds for One With More Exposure to Equities and Particularly International Stocks. Given the low low yield in treasuries, which are heavily weighted in IYLD, I am actually picking up more yield with GAL.
(2) Expense ratio is lower for GAL than IYLD: The IYLD expense ratio is .66% before a .06% fee waiver in effect through 12/31/14. Part of that expense ratio is the .41% in expenses from the owned ETFs. iShares Morningstar Multi-Asset Income Index Fund (IYLD): Overview - iShares The GAL expense ratio is shown at .35%. GAL - SPDR SSgA Global Allocation ETF | State Street Global Advisors (SSgA)
Risks: The risks are normal ones for a balanced world funds.
Prospecutus.pdf (risks discussed at pages 17-19).
Another risk is that GAL may be liquidated in the event it fails to attract enough assets. The total net assets was shown at 20.66M as of 1/24/13.
Future Buys: Given my views about longer term treasury bonds, I am not likely to buy IYLD back for years. I will most likely average down by buying another 100 GAL shares in my usual manner, which would involve splitting that 100 shares into two 50 share lots.
Yesterday's Close: GAL: 31.91 +0.14 (+0.44%)
5. Added 100 TICC at $10.30-Taxable Account (See Disclaimer):
Security Description: TICC Capital (TICC) is a business development corporation. As such, it avoids double taxation on distributions made to its shareholders.
To maintain that tax status, the BDC must distribute at least 90+% of its taxable income as dividends. This tax advantage will result in higher dividends but will deplete capital that will result in these corporations selling more shares, frequently at prices below blow book value per share. This may or may not work out for existing shareholders. Adding more funds to invest will invariably work out for the managers of these funds however. The base management fee of 2% is calculated on gross assets, see page 9 of Form 10-K. Then there is an incentive fee.
TICC did sell 3.45 million shares back in August at $9.65 per share. www.sec.gov That was probably slightly below the net asset value per share at that time based on the third quarter earnings release.
As of 9/30/12, TICC's net asset value per share was $9.85, up from $9.3 as of 12/31/11. (page 3: 10-Q). A list of investments can be found in that last filed SEC Form 10-Q starting at page 4) The fund has few warrants and common stock positions (see pages 7-8). I would much prefer to see more common stock warrants as sweeteners for the loans. TICC does own a wide variety of CLO-Equity Investments that it values at $82+M as of 9/30/12 with a cost basis of $68+M.
A long term chart reveals a stock that was trading over $16 in 2007, plummeting to below $4 in Marcy 2009, and thereafter zooming to $12.88 by January 2011. Most of the trades over the past two years would be in a narrow channel between $8 to $10.5. TICC Interactive Chart - Yahoo! Finance
The dividend history is noted on the YF Chart by simply checking "dividends" under the "events" tab.
Barclay's started coverage of TICC earlier this month with an equal weight rating and a $11 price target. Given the dividend yield, actually hitting an $11 price in one year would be viewed as most positively.
Dividend History: TICC Capital Corp. | Investor Relations
The most recent dividend was $.29 per share. At that rate, the dividend yield would be about 11.26% at a total cost of $10.3.
Profile page at Reuters
Key Developments page at Reuters
Prior Trades: I still own 100 shares bought in the ROTH IRA: Bought 100 of the BDC TICC at $9.8-ROTH IRA (February 2012). Given their risks, I will generally hold a BDC for no more than 2 years in a retirement account and will simply try to make some profit on the shares while harvesting a number of dividends. I would like to sell the shares bought in the ROTH IRA north of $10.5 during 2013.
Recent Earnings Release: TICC announced preliminary 2012 4th quarter results shortly before my last purchase. The company estimates that its GAAP net income will be between $.2 and $.24 per share, while its "core net investment income" will be in the range of of $.24 to $.26. SEC Filed Press Release The company estimated that none of the distributions made in 2012 will be classified as returns of capital. In addition, TICC stated that it had sold "12 CLO BB" assets for an aggregate $40.7M during the quarter and will realize a gain of approximately $12M. (CLO=Collateralized Loan Obligations). That sale will result in an "incentive" fee payment of approximately $1.7M to TICC's managers.
Rationale: (1) It is almost entirely about the income. The dividend history, summarized at page 36 of the 2011 Annual Report, Form 10-K, shows a consistent rise in the payout in the 2010-2012 period, though the rates declined from $1.06 in 2008 and $1.44 in 2007 (page 39). Hopefully, the 2008 period was analogous to the 100 year flood for BDC investors.
Risks (1) The general risks applicable to BDCs and to TICC in particular are discussed in the Form 10-K starting at page 18. Potential conflicts of interest are discussed at pages 28-29. Risks relating to TICC's investments are summarized starting at page 30.
BDCs make high interest loans to mostly private borrowers. Solid blue chip borrowers are not receiving loans at greater than 10% interest rates. The typical BDC loan is made to a risky borrower. Even senior secured loans made to such borrowers would be rated as junk when and if reviewed by a credit rating agency.
Future Buys: I am more likely to dispose of the 100 shares held in the ROTH IRA rather than to add more shares.
Yesterday's Close: TICC: 10.57 +0.20 (+1.93%)
Politics and ETC:
1. Russia and the Strange Case of Sergei Magnitsky/John Chambers Thinks Russia is a Great Place for Business: Steve Liesman wrote an interesting article about Sergei Magnitsky, a Russian lawyer jailed for defending his client and later tortured and murdered in jail. CNBC Russia apparently knows who committed the murder and has refused to prosecute.
The U.S. responded to this brazen act by denying corrupt Russian officials travel visas to the U.S.
Putin responded by denying American's the right to adopt Russian orphans.
Instead of prosecuting those responsible for Magnitsky's murder, the corrupt Russian legal system has decided to put the dead Sergei Magnitsky on trial, something that was not even done during the Soviet era show trials, without question an incredible act of chutzpah unparalled in the annals of history.
Magnitsky' real crime was exposing the fraud of others, as noted in this article: Amnesty International He was arrested shortly after he testified before Russian officials about a large scale tax fraud. See also, UK - The Independent
John Chambers believes that Russia is easier to do business in Russia than the U.S. Cisco's Next Frontier | Fox Business Video As noted by Liesman, other businessman privately say that Russia is just not worth the trouble. Maybe Chambers statement is a legal form of bribery. Any criticism of Russia would likely result in a multitude of headaches, while any negative comment about Putin would likely cause the arrests of Cisco officials for "tax evasion".
Given that you are bearish on bonds because interest rates should increase over the next few years, why not make a substantial long term investment in an inverse bond fund such as TBT
ReplyDeleteI found TBT to be an undesirable security. During a brief period of ownership in 2009, the security started to lose tracking shortly after purchase by a significant amount.
ReplyDeleteI did use TBT briefly to hedge my long corporate bond portfolio and sold the position, bought at $36.68, at around $45 in April 2009. The security thereafter underwent a 1 for 4 reverse split last October.
At a split adjusted price, my 2009 sale was at around $180. The security is now trading at around $69. Yet, there is not that much difference in the yield of the 20+ year treasury.
The 20 year is now around 2.9%. It was slightly less than one per cent higher in April 2009, yet TBT is $111 lower.
I would recommend looking at a long term chart of TBT and then go to the federal reserve site which has historic rates for treasuries.
Anyone interested in using these flawed double and triple short ETFs need to have their timing perfect and to use them only briefly. I view them more as gambling rather than investments or even hedges. It would be better to just short TLT but I do not have a margin account.
It is also my view that the best way to hedge is to sell down the position in need hedging which is what I have been doing with bonds and bond funds. I sold today, for example, 500 shares of balanced Canadian ETF tilted toward bonds, and bought 200 of a Canadian stock dividend ETF. I mentioned in my last post selling 50 IYLD which has some of those long treasury ETFs and buying 50 GAL which is more heavily weighted in stocks. I move at glacier speed and this is an ongoing process.
I also sold my largest individual junk bond position this week, which will be mentioned briefly in my next post.
When I have more conviction, as to the time, that the FED will quit fixing bond prices, I may consider buying a triple short, but timing will be key. I am certainly not ready to do it now, since the bond market is still not a free market at the present time.
Thanks for your response. I knew that these type of securities had tracking problems, but I didn't realize that it could be so significant over time.
ReplyDeleteI've really enjoyed reading your blog over the past few years. I retired in late 2008 just as the market was plummeting. I learned about exchange traded bonds from your blog and after doing my research, I invested in quite a few of them, which has worked out very well. Like you, I expect interest rates to rise in the intermediate term so I am trimming some of my fixed income positions, especially closed end funds which use leverage. I'm trying to replace that income with other sources such as MLPs and dividend paying stocks.
Thanks again for publishing your blog. I look forward to reading it every week.
In my weekly post which I will publish tomorrow morning, I noted that the bond ETF TLT has declined 4% so far this year, more than sufficient to wipe out the dividend payments for an entire year. The interest rate risk in both intermediate and long term treasuries and investment grade corporate bonds are just not worth the risk in my opinion. I would prefer having my money in cash than in a ten+ year treasury.
ReplyDeleteI am in a trading mode for bond CEFs. I will discuss in tomorrow's post unloading my last GDO shares and substituting GSPRD for them. I may buy those GDO shares back, but there will have to be a significant expansion in the discount similar to what happened just before my last purchase.
I also bought 100 NBB at $20.85, a leveraged BABs CEF, that will liquidate in 2020, in an IRA. I intend to sell a similar one, NBD with the same liquidation date, held in a taxable account. Part of that trading activity is based on a simple recognition that cash is paying me nothing and will likely continue to do so for at least one more year and probably two. I will not keep those leveraged bond funds for long now and will be content exiting the position at any profit after collecting several monthly dividend payments. I am basically shifting my ownership to the ROTH IRA where the dividend is tax free from my taxable account.
Positive economic reports now are causing declines in bond prices. I suspect that there are two reasons. One involves the expected length of time the FED will be in the bond price fixing business. With continued improvement in the economy and the job market, QE will likely be first reduced and then eliminated altogether. The other has to do with inflation. Even if the FED believes that the economy needs QE in 2014, it is not going to be able to continue both QE and ZIRP if inflation is running over 2.5%.
I suspect that the bond market will start to sniff out the end of QE long before the FED makes an announcement, and interest rates will have already risen more closely to free market levels by the time the FED makes that announcement.
A 3.5% ten year treasury in 2014 would not surprise me at all. That would inflict a lot of damage on current buyers of high quality paper with similar maturities, but I would regard a 3.5% rate to be a benign rate, close to where rates would now be without the FED's price fixing activities.