Stocks:
Stable Vix Pattern
Vix Asset Allocation Model Explained Simply
Mark Hulbert and the Use of the VIX as a Timing Model
Short Term: Neutral
Intermediate and Long Term: Bullish
Bonds:
Short Term: Neutral
Intermediate Term: Slightly Bearish
Long Term: Extremely Bearish
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This site provides the U.S. historical tax rates starting in 1913 and also adjusts those rates for inflation: U.S. Federal Individual Income Tax Rates History, 1913-2011 (Nominal and Inflation-Adjusted Brackets) | Tax Foundation
It is interesting to go back in time and see how much you would have paid in taxes at your income level. Say you had a taxable income of $100,000 in 2011. The highest marginal rate is shown as 25%.
Let's go back to the halcyon days of 1954, remember The Adventures of Ozzie and Harriet when everything was supposedly much better when Eisenhower was President. The nominal marginal rate was 89% at $100,000 which does not sound as good as the 2011 rate of 25% on that amount. The inflation adjusted number would be a 43% marginal rate for someone making in 1954 the equivalent of $100,000 in today's dollars (1954 bracket: $12,000 to $14,000)
The inflation adjusted income for the 89% tax bracket in 1954 was calculated by the TaxFoundation at $834,125. If you really want to hear someone squeal now, try implementing that 89% rate on $834,125+ level now.
I raised this point in a comment to an article written by the perpetual bear Alan Abelson in this week's Barron's. Those who write comments to Alan's columns are kindred spirits. One gentleman, Brian, called my point a "bit deceptive", because I did not take into account the ratio of the federal budget to GDP. What does that really have to do with the relative tax burden of households in the 1950s and now?
Brian sounded like a real scholar to the RB, a rather typical perpetual pessimist who spin tells of death and destruction in our near future and has probably been doing so for decades and will continue doing so until their last breath. There are similar in that respect to cult members who predict the end of the world on a certain day and do not change their beliefs after the world survives their future forecast.
Why would any nitwit focus on the actual reality of a household's tax burden in the 1950s and the checks that they wrote to the federal government to pay taxes rather than the ratio of the budget to GDP which any right thinking person would do?
I can almost hear my father, sitting at his desk on April 15, 1955, looking at both his household and business tax returns, writing checks which lowers his wealth number, and then saying "well, I am sure glad that the federal budget to GDP ratio is sound, that is almost like having money in the bank to grow the business and to spend on my family". Ridiculous and asinine are two words that come into mind when I read this pessimist's typical condescending retort in Barron's.
Back in the 1950s, long before the job destroying, private equity parasites came into being, the real Job Creators managed to produce really good results in the 1950s and early 1960s before inflation started to fester in a major way.
The WWII generation who came of age during the Great Depression, however, were not whiners and cry babies, a fair description of so many today.
Did they pay higher or lower taxes compared to today? Those positive results produced a long term secular bull market that generated substantial annualized returns. And their tax burdens were higher during that period compared to now without question.
There are far more powerful forces at work, in both the up and down cycles, than taxes and political parties. And those forces explain more than tax policy.
Another important point is that the American people have shown their ability to adapt to whatever the knuckleheads in Washington throw their way.
The S & P 500 returned an annualized 14.4% after inflation between 1/1/49 and 1/1/66:
Annualized Returns of the S&P 500
It is odd, as Bruce Bartlett pointed out in his NYT column this week, that there is hard long term data showing that "sharp tax increases in the stock market have often followed big tax increases". Now, isn't that a hoot. How is that even possible? His observation does support my point that the world is more complex and is not explained by simplistic GOP dogma.
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I have been reading a lot of articles and comments published at SeekingAlpha. The LB has gone from about 4 comments to 300 in about a month.
A few articles and fewer comments are actually intelligent and well informed. True Believers are present in abundance, people who have never made any effort to secure relevant and material information before forming a judgment. Their political beliefs and ideologies govern their investment approach. Well informed, unbiased, objective and intelligent people can have a rational disagreements. It is impossible to have a rational disagreement with an irrational person.
A few articles and fewer comments are actually intelligent and well informed. True Believers are present in abundance, people who have never made any effort to secure relevant and material information before forming a judgment. Their political beliefs and ideologies govern their investment approach. Well informed, unbiased, objective and intelligent people can have a rational disagreements. It is impossible to have a rational disagreement with an irrational person.
Another theme comes from investors who sound like failed investors. Just from their verbiage, LB drew a rational hypothesis that they are expert practitioners of "error creep" and nothing else. ERROR CREEP and the INVESTING PROCESS; Item # 3 Making Decisions with Incomplete Information; Acquiring Relevant Information; BlackJack and Stock Investing: Lessons Learned & Applied Those folks try to convince everyone to avoid stocks altogether.
A sub-group claims that Financial Armageddon is just around the corner, due either to the much hated Obama of course, whose policies would be despised even when embodying GOP principles, or the monetary policies of the Federal Reserve. Possibly, some of those people have acquired bits an pieces of information consistent with their pre-existing beliefs, while dismissing all inconsistent evidence, assuming of course they made any effort to acquire that information in the first place which is doubtful.
As a general rule, these uninformed and hopelessly dogmatic people will become indignant or angry whenever inconsistent reliable information is pointed out to them and will even go so far as calling the dispenser of that accurate information a liar. While their approach is fine for them when discussing politics, not much harm can come of it other than electing a few hundred kindred spirit Know Nothings to Congress, it is a disastrous approach when applied to investing. Actually, some harm can come of it.
There are a huge number of perpetual pessimists at SeekingAlpha. Those folks will never be successful at investing. If someone had followed Alan Abelson's advice since 1982, they would have been out of stocks for the S & P move from 120 to 1450.
Is that a good thing or a bad thing? Is his pithy sarcasm far worse, to the nth degree, than worse than worthless to the nth degree?
I can not recall a single instance when Abelson has been positive about stocks. He reached ridiculous a long time ago.
Is that a good thing or a bad thing? Is his pithy sarcasm far worse, to the nth degree, than worse than worthless to the nth degree?
I can not recall a single instance when Abelson has been positive about stocks. He reached ridiculous a long time ago.
Perhaps those investors, who have failed, buying in October 2007 and selling in October 2008, have psychological issues about missing the S & P 500 surge from the 676.53 close on March 9, 2009 and that explains why they are now forecasting the end of the world. If it does not end this year, then for sure it will be 2014.
It is natural for humans to blame their own failures on others, or on events outside their control, even though they had never even taken a baby step along the long and difficult road toward becoming a successful investor.
It is natural for humans to blame their own failures on others, or on events outside their control, even though they had never even taken a baby step along the long and difficult road toward becoming a successful investor.
For the few people who have balance and are interested in forming opinions based on the best available evidence, it is best to just ignore the opinions of the perpetual pessimists and simply refuse to be influenced by their warped views about just about everything.
Nothing will convince them to change. It is important, however, to at least digest the material and relevant facts underlying the bear case. Bear this in mind however. The perpetual bears will not mention evidence inconsistent with their beliefs or will disparage that evidence as unworthy of any consideration. Frequently, their summary of facts will be skewed in obvious ways to conform to their beliefs. They call that analysis.
Nothing will convince them to change. It is important, however, to at least digest the material and relevant facts underlying the bear case. Bear this in mind however. The perpetual bears will not mention evidence inconsistent with their beliefs or will disparage that evidence as unworthy of any consideration. Frequently, their summary of facts will be skewed in obvious ways to conform to their beliefs. They call that analysis.
I recently read two articles written by a young man and published by Seeking Alpha. In one of those article, he claimed that Americans are broke. Seeking Alpha That was just asinine, but consistent with the author's view of the world.
I could not help myself, so I left some comments knowing that I was wasting my time.
First I pointed out that the Census Bureau estimates that 32% of American households own their homes free and clear of any mortgage. I am one of those broke people. U.S. Census Bureau Releases Detailed Information on Nation's Housing; Monthly Housing Costs Reach $1,000 for Homeowners - Housing - Newsroom - U.S. Census Bureau
You would think that fact would be a least a small chink in the author's thesis, but you would be wrong in making that assumption. The perpetual pessimists will ignore any data that undermines their belief, always have and always will.
You would think that fact would be a least a small chink in the author's thesis, but you would be wrong in making that assumption. The perpetual pessimists will ignore any data that undermines their belief, always have and always will.
I thought then that I would just highlight some charts that show the long term success of Americans in growing wealth. He did not like those charts either.
 |
| Real Disposable Income |
 |
| Real GDP |
For anyone who wishes to open their eyes, the wealth creation is all around. It can be found on the American stock exchanges with the new companies formed just in my lifetime that now dominate new industries that did not exist when I was born.
America has been and will continue to be a wealth creation machine.
I see the wealth creation everyday when I drive around Nashville, just looking at the commercial and residential structures and remembering what the city looked like 10 years ago. The difference is just stunning when I recall the 1950s or the 1960s. None of the above are even viewed as relevant.
America has been and will continue to be a wealth creation machine.
I see the wealth creation everyday when I drive around Nashville, just looking at the commercial and residential structures and remembering what the city looked like 10 years ago. The difference is just stunning when I recall the 1950s or the 1960s. None of the above are even viewed as relevant.
I next produced data showing the American consumer is now in the best shape since the early 1980s based on the Federal Reserve's Debt Service Obligations (DSR) and Financial Obligation Ratio (FOR).
I pointed out where anyone can find that data at the Federal Reserve. Household Debt Service and Financial Obligations Ratios
Anyone can see that both ratios have returned to the levels prevalent before the Consumer Age of Leverage started in the mid-1980s. No doubt, that would be important information to anyone interested in facts about Americans going broke, or so you would think. More disposal income and less debt would seem inconsistent with the going broke thesis.
Anyone can see that both ratios have returned to the levels prevalent before the Consumer Age of Leverage started in the mid-1980s. No doubt, that would be important information to anyone interested in facts about Americans going broke, or so you would think. More disposal income and less debt would seem inconsistent with the going broke thesis.
For those who are not willing to look at tables containing numbers, I referenced this chart for those who like to look at pictures:
Neither the FOR or the DSR show any inclination to stop their downward slides.
Doesn't that data for both the FOR and DSR ratios show that U.S. consumers have become liquified and now have more money to spend and save? That is the conclusion that I would draw since it is the both obvious and the only rational conclusion to draw.
Now, the author of the article about Americans going broke did not like my picture chart above, so he devoted another article to dismissing it. Seeking Alpha All of his followers thought that the article was insightful and well researched. He claimed in essence that these lower ratios were bad and consistent with his thesis since the "data" shows that all of those lower debt ratios were due to foreclosures. I could barely contain myself and left a long comment in response.
First, with millions of households refinancing at lower rates, and consequently lowering their debt service ratios, it is just ridiculous to assert that the lower ratios are due solely to foreclosures.
Under water homeowners are using the federal HARP program to refinance at lower rates. Home Affordable Refinance Program (HARP) FHA reported in December that 790,169 mortgages were refinanced under HARP between January 2012 through October 2012. Altogether, FHA reported that 1.8M has been refinanced since inception with 81,000 of those in October 2012. fhfa.gov Refinance.pdf
With updates recently installed in automated underwriting systems at the GSCs, the pace is picking up. SFGate
Under water homeowners are using the federal HARP program to refinance at lower rates. Home Affordable Refinance Program (HARP) FHA reported in December that 790,169 mortgages were refinanced under HARP between January 2012 through October 2012. Altogether, FHA reported that 1.8M has been refinanced since inception with 81,000 of those in October 2012. fhfa.gov Refinance.pdf
With updates recently installed in automated underwriting systems at the GSCs, the pace is picking up. SFGate
But, that is not even important to the SA author, and his long article is just proof of how far pessimists will go to justify their position. Of course, lower debt service ratios mean Americans have more money to spend and to save. If I had a 30 year mortgage at 8% and refinance it today at 3.5%, am I better off or worse off. Silly question! End of discussion.
It does not matter how Americans got to a historically low Debt Service Ratio. If a heavily indebted consumer takes a bankruptcy, and sheds those debts, that consumer has more disposable income to save or to spend, just like that homeowner who has their mortgage payments lowered by refinancing. The SA article was just proof of a pessimists mind set to me. The author just went off in a totally irrelevant tangent, much enjoyed by his like minded readers, who were simply looking for confirmations of their inbred pessimism.
If I mention DSR and FOR ratios to a perpetual pessimist, the reaction will be similar to putting worms in their head. Their brains, ossified possibly at birth, can simply not handle information inconsistent with their cherished beliefs that have greater force for them than the 10 Commandments have for evangelicals.
When an investor looks at these long term cycles, the here and now loses its relevance. It does not matter what happens in the stock market over the next ten minutes, or even the next year. These cycles and the forces underlying them last for over a decade and returns need to measured in those time increments rather than minutes, days and months.
It does not matter how Americans got to a historically low Debt Service Ratio. If a heavily indebted consumer takes a bankruptcy, and sheds those debts, that consumer has more disposable income to save or to spend, just like that homeowner who has their mortgage payments lowered by refinancing. The SA article was just proof of a pessimists mind set to me. The author just went off in a totally irrelevant tangent, much enjoyed by his like minded readers, who were simply looking for confirmations of their inbred pessimism.
If I mention DSR and FOR ratios to a perpetual pessimist, the reaction will be similar to putting worms in their head. Their brains, ossified possibly at birth, can simply not handle information inconsistent with their cherished beliefs that have greater force for them than the 10 Commandments have for evangelicals.
When an investor looks at these long term cycles, the here and now loses its relevance. It does not matter what happens in the stock market over the next ten minutes, or even the next year. These cycles and the forces underlying them last for over a decade and returns need to measured in those time increments rather than minutes, days and months.
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I no longer own FPCPRA, a 7.1% coupon trust preferred originally issued by Florida Progress and now a Duke Energy obligation as a result of two subsequent mergers. I believed that the security would be called by Duke after its finalized its acquisition of Progress Energy. Sold 100 FPCPRA at $25.9 As expected, Duke Energy will redeem this security at its $25 par value plus accrued interest of $.374722 per share.
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According to the Labor Department, the U.S. economy added 1.9 million private jobs in 2012, while governments shed 63,000, marking the 4th consecutive yearly decline. In December, employers added 155,000 jobs. The number of unemployed persons stood at 12.2 million. Employment Situation Summary The labor participation rate was 63.6%. The average workweek increased by .1 of an hour. Average hourly earnings rose by 7 cents to $23.72. The U-6 number remained at 14.4%. Table A-15. Alternative measures of labor underutilization
This is a long term chart of average hourly earnings of private production and nonsupervisory employees:
The chart for all private employees would show a higher average hourly wage: Average Hourly Earnings of All Employees: Total Private
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An interesting tidbit from Forbes magazine is that German automakers produced twice as many vehicles in 2010 as their counterparts in the U.S. while being paid twice as much.
Goldman is bullish on China in 2013.
Somewhere in the comments to the blog, I mentioned to a reader that I had sold my position in Nordea Bank. That was an error. I found the shares this morning:
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I will not be posting any further comments at SiliconInvestor, nor will I be visiting that site again.
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I suppose that Notre Dame learned a thing or two about SEC football last Monday. I am glad that Vandy did not play Alabama in 2012. In one of the most surprising turnarounds in football history, the Commodores were 9 and 4 in 2012, beating North Carolina State convincingly in the Music City Bowl and winning five games against SEC opponents, smashing Tennessee, and beating Kentucky, Mississippi, Auburn and Missouri. Vandy finished the year ranked at 20 in the USA Coaches poll. I would rank them at 15, and simply recognize that it will take time to garner some respect, particularly when a typical season in the past was 2 and 9 or 3 and 8. The new coach James Franklin probably deserves the Noble Prize for Football, taking the Commodores to two straight bowl games, the first such occurrence in history, in his first two years as head coach.
While Vandy does not play BAMA next year, they do play Texas A & M, Georgia and Florida. Winning one of those would be a miracle.
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An article about Nashville's economy appears on the front page of the NYT's today. NYTimes.com When looking at Nashville's success, I call it a City State to separate it from Tennessee when analysing its economy. Sure, the economy is impacted by what is happening elsewhere but the primary drivers are found within the four corners of this City State. There are several growing satellite cities whose economies are closely tied to Nashville's success, but also have their own unique beneficial characteristics. Two of those growing cities are in Williamson County, a short drive from downturn Nashville. One is where HQ is located and is known as Brentwood and the other is Franklin, both cities have "AAA" credit ratings. The two other main satellites are Murfreesboro and Gallatin. In effect, the economy of the Nashville City State encompasses most of Middle Tennessee.
1. Sold 100 of 150 of the Trust Certificate IPB at $26.82 ROTH IRA (see Disclaimer):
Security Description: IPB is an Exchange Traded Bond in the Trust Certificate form of ownership.
Unlike other trust certificates that represent a beneficial interest in a bond from one issuer, the Merrill Lynch Depositor Inc. 6.0518% Index Plus Trust Series 2003-1 (IPB) has as its underlying securities 15 long term corporate bonds with make whole provisions and U.S. treasury strips. There is no call warrant attached to the Trust Certificate. Prospectus The treasury strips do not pay any cash interest which reduces the current yield of this TC. The current coupon is 6.0518% on a $25 par value. As the bonds mature, the trustee will pay out the proceeds to the IPB owners and the interest coupon would decline as a result.
I recently received the semi-annual
I bought 100 of those shares at $16.99 (August 2009). I also bought shares at higher prices. Bought 50 of the TC IPB at $21.3; Bought: 50 of the TC IPB at $23.11 in IRA (October 2010). I have previously pared 50 of the higher cost shares.
Rationale: (1) Profit Taking:
I bought 100 of those shares at $16.99 (August 2009).
I also bought shares at higher prices. Bought 50 of the TC IPB at $21.3; Bought: 50 of the TC IPB at $23.11 in IRA (October 2010). I have previously pared 50 of the higher cost shares. I am now down to 50 shares owned in the ROTH IRA
(2) Profit Taking Juxtaposed Against Interest Rate Risk: At a $26.82 price, the current yield of this TC is around 5.64%. IPB Stock Quote
My primary concern has been expressed in this blog many times. In his January newsletter Bill Gross cautioned bond investors about the potential inflationary impacts of the Fed's money printing machine, recommending that investors avoid long term bonds and focus instead on shorter/intermediate terms. PIMCO | Investment Outlook - Money for Nothin’ Writing Checks for Free
I am in general agreement with Bill Gross on this subject, as noted in a recent comment left at SiliconInvestor: Income Investing Message Board - Msg: 28641926 Goldman Sachs apparently told investors to sell bonds. Dump Bonds Now-CNBC
I have the FINRA links to the corporate bonds owned by this trust in an earlier post. Calculations On How to Recreate Trust Certificate IPB Those long term bonds include ones issued by Verizon, Goldman Sachs, Boeing, Citigroup, Credit Suisse, GE Capital, Time Warner, Boeing and JNJ.
It is also important to keep the current low interest rates in perspective and recognize that the long term bull market in bonds started in 1982. Unless anyone has forgotten or did not know, we have just started 2013.
I discussed the importance of perspective in another SiliconInvestor post: Income Investing Message Board - Msg: 28642336
This perspective can be easily acquired simply by looking at some charts:
5-Year Treasury Inflation-Indexed Security, Constant Maturity (DFII5) - FRED - St. Louis Fed
10-Year Treasury Inflation-Indexed Security, Constant Maturity (DFII10) - FRED - St. Louis Fed
10-Year Treasury Constant Maturity Rate (DGS10) - FRED - St. Louis Fed
30-Year Treasury Constant Maturity Rate (DGS30) - FRED - St. Louis Fed
5-Year Treasury Constant Maturity Rate (GS5) - FRED - St. Louis Fed
3-Month Treasury Constant Maturity Rate (DGS3MO) - FRED - St. Louis Fed
BofA Merrill Lynch US Corporate BBB Effective Yield (BAMLC0A4CBBBEY) - FRED - St. Louis Fed
BofA Merrill Lynch US High Yield Master II Effective Yield (BAMLH0A0HYM2EY) - FRED - St. Louis Fed
30-Year Conventional Mortgage Rate (WRMORTG) - FRED - St. Louis Fed
15-Year Fixed Rate Mortgage Average in the United States (MORTGAGE15US) - FRED - St. Louis Fed
Bond bear markets have long cycles.
While others would disagree, I would go back to around 1941 as the start for the last long term secular bond bear market. I would end that cycle in 1982. Call it 40 years or thereabouts, obviously a longer cycle than the average stock cycle.
As with all long term bear cycles, there will be a series of shorter term bull cyclical moves within the context of a dominant downtrend. Investors will be drawn into those cycles, failing to recognize that the move up in price will only be temporary. Sell the rips is the trading motto in long term secular bear markets too. That sell the rip and buy the dips trading approach may have worked successfully until around 1965, when the best approach would have been to take a 17 year vacation from the bond market.
See Long Term CPI Data:
Consumer Price Index, 1913- | The Federal Reserve Bank of Minneapolis
Annual Percentage Increases in CPI 1966-1982:
2. Bought 50 of the Floating Rate Bond ETF BKLN at $25.05 (see Disclaimer)
Security Description: The PowerShares Senior Loan Portfolio (BKLN) is a floating rate bond ETF. This particular fund owns mostly junk rated senior secured bank loans.
On the date of my purchase, only 4% of the portfolio had a Baa rating from Moody's and the rest were rated in junk territory with 7% at Caa. There are other ETFs that own investment grade floaters but there yields are close to or even less than 1%.
This particular sector of the bond ETF market is discussed in the following articles:
Floating Rate Bond ETF? - Zacks.com
Floating-Rate Bank Loan Fund - Seeking Alpha
Bond ETFs In A Bond-Eroding Economy
ETF Trends
Sponsor's website: BKLN | Senior Loan Portfolio
BKLN Holdings: PowerShares Exchange-Traded Funds | BKLN - Senior Loan Portfolio Holdings
The fund pays a monthly dividend at a variable rate: BKLN
The holdings list had 141 names. I would anticipate a few bankruptcies since these companies are highly leveraged due in most cases to leveraged buyouts by private equity firms. Many of those firms are now private while others, such as HCA, have already gone public again after a leveraged buyout. I recognized a few names in that list that have already declared bankruptcy. First lien creditors will be in a best position to recover, but the losses for them after a default could still be severe which is why many of the bank first lien loans are deeply rated into junk.
The total expense ratio is shown at .76%
The current 12 month yield is around 4.8%.
Prior Trades: NONE. This 50 share purchase is just a starter position. will add another 50 if and when the price approaches $24.
Rationale: (1) Floating Rate Securities Mitigate Interest Rate Risk: These bank loans will generally have a Libor float provision. As a short term rate rises, such as the 3 month Libor rate, the yield will increase which gives these loans some interest rate protection. There will be a point, however, when the rise in rates would cause a significant increase in the credit risk. The impact of rising rates on credit risk will vary from company to company. A countervailing force would be a rise in rates due to an improving economy which hopefully would be increasing the firm's profits and thereby reducing the credit risk. In other words, a mixed bag of variables that probably are weighted on the positive side provided the rise in rates is largely offset by higher profits.
(2) Potential for Higher Income Generation When Short Rates Start to Return to Normal Levels
Risks (1) Credit Risks: Even with senior secured first lien loans, there are substantial credit risks involved in the securities owned by this fund. The owned loans are almost all junk rated, due in to the excessive leverage used by the borrowers. That leverage would be traceable in significant part to leveraged buyouts where the acquired company is loaded up with debt as part of its acquisition by a private equity firm (some called them leeches). Frequently, a solvent company is placed on the edge of survival by this process, unable to pay down debt with cash flow and constantly in need of debt refinancings.
The prospectuses discusses the abundant risks starting at page 77-80: invescopowershares.com/pdf Investors need to read the risk sections contained in prospectuses.
The risks are somewhat mitigated by the diversity of the portfolio, the number of holdings, and the first lien status of the loans.
Future Buys: I will add another 50 if and when the price falls below $24. I will not buy more than 100 due to the risks.
I am more likely to buy more shares of a U.S. investment grade fund, but only when I am convinced that the FED is about to embark on one of its long interest rate increase cycles.
There are several floating rate ETFs that own investment grade bonds:
Market Vectors® Investment Grade Floating Rate ETF (FLTR)
iShares Floating Rate Note Fund (FLOT)
FLRN - SPDR Barclays Investment Grade Floating Rate ETF
As noted below, I went ahead and bought a Canadian floating rate bond fund with better credit quality and a higher yield.
3. Added 100 of the Stock CEF IGD at $8.91 (see Disclaimer):
Security Description: The ING Global Equity Dividend & Premium Opportunity Fund (IGD) is a buy-write worldwide stock closed end fund.
SEC Filed Shareholder Report for the Period ending 8/31/12: SEC
Sponsor's webpage: ING Global Equity Dividend and Premium Opportunity Fund - Fund Profile - Overview
IGD page at the CEFA
IGD Page at Morningstar (rated 4 stars: average three year discount 1.75%; dividend supported by a return of capital)
This fund currently pays a monthly dividend of $.084 per share, down from $.093 in September 2012. Distributions I would not count on that distribution remaining at that level given that it is being supported by a return of capital. Assuming it was continued for one year, the dividend yield would be about 11.31% at a total cost of $8.91 per share.
Prior Trades: While I have earned a good income from this CEF, it has not yet been a successful investment for me. Hopefully, the European equities will become a bonus rather than a drag in the coming years, as suggested in a recent Barron's cover story. Barrons
I can find only two references to prior purchases in the blog.
Added 50 IGD at $8.78 (December 2011)
Bought 100 IGD at $10.94 (August 2010)
Rationale: (1) Income Generation With Appreciation Potential: The dividend yield is around 11.31% at a total cost of $8.91. Performance has been weak for the past five years due largely to matters outside of the fund's control due to owning stocks worldwide. What may have been a drag for the past five years may turn into a tailwind over the next five. This would be entirely possible with IGD's European equities.
(1) Selling at A Larger Than Average Discount to Net Asset Value: While I prefer to buy stock CEFs at greater than 10% discount to net asset value, I will make an exception when the fund is selling at a much higher discount than its three year average and the discount is close to 10%. The average three year discount for IGD is 1.75% and the shares were trading at a 8.81% discount to net asset value.
Data Day Prior to Purchase 1/3/13
Closing Net Asset Value Per Share: $9.71
Market Price: $8.82
Discount: -9.17%
Data Day of Purchase 1/4/2013
Closing Net Asset Value Per Share: $9.76
Market Price: $8.89
Discount: -8.81%
Risks and Disadvantages (1) Subpar Performance: The five year performance number is a -.79%. Performance I would give that a poor rating. I am making allowances now since the fund is a worldwide fund with significant exposure to Europe which would be a drag leading to unsatisfactory past results overall.
(2) The Normal Sundry List of Risks: The normal risks of buy-write stock CEFs that invest worldwide are also present, which include of course currency risk, stock risk, country risk, risks associated with a buy write strategy and the risks generally applicable to CEFs including an expansion of the discount to par value.
Future Buys: I am not going to make anymore open market purchases. I am going to start reinvesting the dividend, making an exception to my rule requiring a greater than 10% discount to net asset value, since IGD is close to that number and the discount is currently substantially above IGD's average three year discount to net asset value of 1.75%.
4. Bought 200 of the Canadian Bond ETF XFR at 20.13 CADs (Canadian Dollar (CAD) Strategy)(see disclaimer):
As noted above, the settlement currency was in Canadian dollars that I already own. I presently have a surplus of CADs earning nothing.
This will be a low yielding security. I am not likely to be able to pay my nursing home expenses with the dividends paid by this fund. When rates start to go up in Canada, and eventually that will happen, I will be paid more than now. The current dividend yield at a total cost of $20.13 CADs is around 1.6% according to Marketwatch. I did not add up the variable monthly dividends to verify that number. I already know that it is low.
Security Description: The iShares DEX Floating Rate Note Index Fund (XFR) owns high quality floating rate Canadian bonds.
Sponsor's Website: XFR Overview - iShares ETFs (EXPENSE RATIO= .2%; holdings 44 )
Sponsor's Fact Sheet: ca.ishares.com .pdf
Holdings: XFR Holdings
Current Credit Ratings:
Monthly Distributions: XFR Distributions
Top Ten Holdings:
The Canada Housing Trust (CHT) is a special purpose entity created and managed by the Canada Mortgage and Housing Corporation (CMHC) which is an agency of Canada's government. CMHC guarantees the timely payment of interest and principal on the bonds issued by CHT. The obligations of CMHC constitute direct and unconditional obligations of the Government of Canada. Hence, the Canada Housing Trust bonds will carry the same rating as Canada which is AAA.
(see discussion at www.td.com.pdf)
Prior Trades: None
Rationale: (1) High Quality Bonds and Interest Rate Risk Mitigation: The attractiveness of this security is that it has high quality securities (preservation of capital), pays me something which is better than nothing, and will pay me more when rates go up. Unlike a fixed coupon bond, this fund mitigates interest rate risk due because the bonds will increase their coupons as short term rates increase.
Risk: (1) Current Probable Negative Real Interest Rates: Well, this is true. But, I am earning more of a negative real rate of return with my CAD stash which earns nothing.
(2) Artificially Low Short Term Rates Likely to Persist: Short term rates are being held artificially low by central banks around the world now. Short term rates would be much higher based on future inflation expectations. The ten year TIP break-even is currently 2.5% which is the market's estimate of the average inflation rate in the U.S. over the next ten years. I do not have the Canadian break-even rate. Due to financial repression of the responsible members of developed nations around the world by central bankers, I am not now receiving the benefits from this security that would otherwise be available in a free interest rate market, and that is unfavorable.
(3) Currency Risks: I am a long term holder of Canadian dollars. From my viewpoint, I do not face any currency risk for my CAD stash since I have no intention of converting those CADs back into USDs unless it would be insane not to do it. (e.g. 1 CAD buys 1.5 USD in a spike down that makes no long term sense). However, anyone who is not similarly situated faces currency risk. It would not take much of a decline in the CAD/USD exchange rate to wipe out the negligible annual dividend yield.
The Canadian Dollar strategy is designed to increase my CAD position with dividends and some profit taking over a long period of time. The following snapshots are recent dividend payments made in CADs:
5. Sold Remaining U.S. Steel 7.5% Senior Bond Maturing in 2022 at 106.5-ROTH IRA (see Disclaimer):
I bought this bond in September 2012. I was satisfied with total return so I sold it. Item # 1 Bought 1 U.S. Steel 7.5% Senior Bond Maturing 3/15/22 at 99
This post is already long enough. I will discuss another trade from yesterday in next week's post since it involves another play on the emerging market "super cycle" thesis.
Politics & Etc:
1. Marsha Blackburn: Among the many True Believers in the House of Representatives is the Congresswoman from the Seventh Congressional District in Tennessee. Marsha is the kind of person that would gladly cause a debt default by the U.S. government unless the Democrats agreed to slash entitlement spending and programs for the poor while of course giving more tax breaks to the wealthiest of Americans.
I am not going to mince words on this subject. Any politician who refuses to vote for a debt increase has committed an act equivalent to treason against this nation. The repercussions from a first ever U.S. default would be far more damaging to the nation's interests than all of the acts of treason committed against U.S.
She opposed the recent fiscal cliff deal preferring to let tax rates go up for all Americans unless the rich also received an extension of the Bush tax cuts. She would have allowed the United States to fall into the financial abyss in 2008 rather than support TARP or any program designed to avert a Great Depression other than the granting of more tax breaks to the Job Creators.
She supported Ryan's voucher plan for Medicare in 2011 that would have substantially raised the Medicare costs for her constituents who were then younger than 55 which plan granted more tax breaks to the rich. Item # 1 GOP's Plan To Bankrupt the Middle Class (data taken from the CBO and the Kaiser Foundation, www.kff.org/medicare/.pdf) In short, she is a True Believer, a fanatic and zealot of the worst kind.
Marsha joined 66 other Republicans as the only no votes that would grant FEMA more money for Sandy flood relief. Congressional Bills and Votes - NYTimes.com Many of those same GOP members, including Marsha, voted for legislation that provided funding for disasters in their own districts but not for the Sandy victims. The zealot and Ayn Rand devotee Paul Ryan was another no vote.
Is that vote un-American? In my book, an unwillingness to support disaster victims with federal aid, unless some other program is first cut, is contrary to core American values. I remember Eric Cantor wanted to condition aid to the Joplin tornado victims on spending cuts in other areas.
Jon Stewart skewered Cantor's position on Joplin: Cantor Won't?
Having made the foregoing comments, I would also blame Obama and the Democrats for a debt default unless they offer some serious spending cuts and at least offer to take a baby step in changing entitlement spending on a long term basis. The baby step would be using chained CPI as the inflation adjustment.
2. Chained CPI: For decades, it has been known that chained CPI provides a more accurate way to measure cost of living than traditional CPI. Since traditional CPI yields a larger number for its cost of living adjustments for federal programs and tax brackets, it is favored by the American voters and the politicians who cater to their desires to have more benefits that are paid with borrowed money. The use of chained CPI would save about $300 billion over ten years. FactCheck.org
An article published by PolitiFact shows that neither republicans nor democrats want to support that sensible change for the usual and obvious political reason. It would be viewed negatively by the current recipients of SS who vote in large numbers.
3. Guns For Teachers in Tennessee: As expected the GOP in Tennessee has taken up the NRA clarion call to put armed guards in every school in America. Of course, when a nut case guard with a gun starts shooting, it will not be instructive to them in any way. The GOP is taking the recommendations of the NRA further, with proposed legislation to arm teachers provided they undergo some kind of training. Well, I remember my teachers from school, and I can not recall a single one who would be capable of handling a firearm in a competent manner.
I do recall an assistant football coach in Alabama who taught history in 9th grade and knew nothing of course about the subject. He was a gun enthusiast but probably not some one you would want packing in the classroom. I recall vividly his defense of the Vietnam war: "people get killed in car wrecks everyday and we don't stop driving cars, do we?". The LB was of course already well versed on matters and lashed into this idiot in full cross examination mode.
Guns in bars? This was the most important priority of Tennessee state republicans and was accomplished by them first, followed by guns in parks and children's playgrounds; and now grade school teachers will be packing soon enough.
I recall the justification for guns in parks. A bear came out of nowhere once and caused a little girl to get scared. No one was hurt as I recall. If the adults had been packing, they could have shot the bear, made it really mad, so that it would have killed the little girl. When a person's brain is ossified at birth, reasoning will generally not be one of that person's stronger qualities.
A few years ago, I saw a simulation where a group of students were in a classroom. Those students knew what was about to happen. A gunman was going to walk into the classroom and shoot the teacher and then point the laser gun at the students. A trained police officer was seating in the back. As the first shot rang out, the students scattered all over. The police officer would take out his laser gun and start firing. Who did he hit? He hit the fleeing students and the shooter more often than not successfully shot the officer. In those situations, even trained people have trouble processing information and it would be even more difficult when the situation is real. As I recall, and I may be wrong about this facet of the simulation, there was an army Ranger who took out the shooter with one shot and missed the students. Very few people could remain calm enough, process all of the information under stress and then react quickly with accuracy. I understand that those advocating arming teachers are running their own simulations now to show that the teachers can handle the matter.
4. Bill Gross on Fed Bond Buying: Bill Gross was quoted by a reporter at CNBC that the Fed was buying "80% of everything the Treasury issues right now". Okay, I understand what is propping up the treasuries at ridiculously low levels. My question is not whether this is good policy or not. I am starting to wonder whether it is sane or insane?
According to the Labor Department, the U.S. economy added 1.9 million private jobs in 2012, while governments shed 63,000, marking the 4th consecutive yearly decline. In December, employers added 155,000 jobs. The number of unemployed persons stood at 12.2 million. Employment Situation Summary The labor participation rate was 63.6%. The average workweek increased by .1 of an hour. Average hourly earnings rose by 7 cents to $23.72. The U-6 number remained at 14.4%. Table A-15. Alternative measures of labor underutilization
This is a long term chart of average hourly earnings of private production and nonsupervisory employees:
The chart for all private employees would show a higher average hourly wage: Average Hourly Earnings of All Employees: Total Private
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An interesting tidbit from Forbes magazine is that German automakers produced twice as many vehicles in 2010 as their counterparts in the U.S. while being paid twice as much.
Goldman is bullish on China in 2013.
Somewhere in the comments to the blog, I mentioned to a reader that I had sold my position in Nordea Bank. That was an error. I found the shares this morning:
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I will not be posting any further comments at SiliconInvestor, nor will I be visiting that site again.
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I suppose that Notre Dame learned a thing or two about SEC football last Monday. I am glad that Vandy did not play Alabama in 2012. In one of the most surprising turnarounds in football history, the Commodores were 9 and 4 in 2012, beating North Carolina State convincingly in the Music City Bowl and winning five games against SEC opponents, smashing Tennessee, and beating Kentucky, Mississippi, Auburn and Missouri. Vandy finished the year ranked at 20 in the USA Coaches poll. I would rank them at 15, and simply recognize that it will take time to garner some respect, particularly when a typical season in the past was 2 and 9 or 3 and 8. The new coach James Franklin probably deserves the Noble Prize for Football, taking the Commodores to two straight bowl games, the first such occurrence in history, in his first two years as head coach.
While Vandy does not play BAMA next year, they do play Texas A & M, Georgia and Florida. Winning one of those would be a miracle.
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An article about Nashville's economy appears on the front page of the NYT's today. NYTimes.com When looking at Nashville's success, I call it a City State to separate it from Tennessee when analysing its economy. Sure, the economy is impacted by what is happening elsewhere but the primary drivers are found within the four corners of this City State. There are several growing satellite cities whose economies are closely tied to Nashville's success, but also have their own unique beneficial characteristics. Two of those growing cities are in Williamson County, a short drive from downturn Nashville. One is where HQ is located and is known as Brentwood and the other is Franklin, both cities have "AAA" credit ratings. The two other main satellites are Murfreesboro and Gallatin. In effect, the economy of the Nashville City State encompasses most of Middle Tennessee.
1. Sold 100 of 150 of the Trust Certificate IPB at $26.82 ROTH IRA (see Disclaimer):
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| 2013 ROTH IRA Sold 100 IPB at $26.82 |
Security Description: IPB is an Exchange Traded Bond in the Trust Certificate form of ownership.
Unlike other trust certificates that represent a beneficial interest in a bond from one issuer, the Merrill Lynch Depositor Inc. 6.0518% Index Plus Trust Series 2003-1 (IPB) has as its underlying securities 15 long term corporate bonds with make whole provisions and U.S. treasury strips. There is no call warrant attached to the Trust Certificate. Prospectus The treasury strips do not pay any cash interest which reduces the current yield of this TC. The current coupon is 6.0518% on a $25 par value. As the bonds mature, the trustee will pay out the proceeds to the IPB owners and the interest coupon would decline as a result.
I recently received the semi-annual
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| IPB Interest Payment $113.47 |
I bought 100 of those shares at $16.99 (August 2009). I also bought shares at higher prices. Bought 50 of the TC IPB at $21.3; Bought: 50 of the TC IPB at $23.11 in IRA (October 2010). I have previously pared 50 of the higher cost shares.
Rationale: (1) Profit Taking:
I bought 100 of those shares at $16.99 (August 2009).
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| ROTH IRA IPB Holdings as of 1/3/13 |
I also bought shares at higher prices. Bought 50 of the TC IPB at $21.3; Bought: 50 of the TC IPB at $23.11 in IRA (October 2010). I have previously pared 50 of the higher cost shares. I am now down to 50 shares owned in the ROTH IRA
(2) Profit Taking Juxtaposed Against Interest Rate Risk: At a $26.82 price, the current yield of this TC is around 5.64%. IPB Stock Quote
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| 2013 ROTH IRA Realized Gain 100 IPB $968.23 |
My primary concern has been expressed in this blog many times. In his January newsletter Bill Gross cautioned bond investors about the potential inflationary impacts of the Fed's money printing machine, recommending that investors avoid long term bonds and focus instead on shorter/intermediate terms. PIMCO | Investment Outlook - Money for Nothin’ Writing Checks for Free
I am in general agreement with Bill Gross on this subject, as noted in a recent comment left at SiliconInvestor: Income Investing Message Board - Msg: 28641926 Goldman Sachs apparently told investors to sell bonds. Dump Bonds Now-CNBC
I have the FINRA links to the corporate bonds owned by this trust in an earlier post. Calculations On How to Recreate Trust Certificate IPB Those long term bonds include ones issued by Verizon, Goldman Sachs, Boeing, Citigroup, Credit Suisse, GE Capital, Time Warner, Boeing and JNJ.
It is also important to keep the current low interest rates in perspective and recognize that the long term bull market in bonds started in 1982. Unless anyone has forgotten or did not know, we have just started 2013.
I discussed the importance of perspective in another SiliconInvestor post: Income Investing Message Board - Msg: 28642336
This perspective can be easily acquired simply by looking at some charts:
5-Year Treasury Inflation-Indexed Security, Constant Maturity (DFII5) - FRED - St. Louis Fed
10-Year Treasury Inflation-Indexed Security, Constant Maturity (DFII10) - FRED - St. Louis Fed
10-Year Treasury Constant Maturity Rate (DGS10) - FRED - St. Louis Fed
30-Year Treasury Constant Maturity Rate (DGS30) - FRED - St. Louis Fed
5-Year Treasury Constant Maturity Rate (GS5) - FRED - St. Louis Fed
3-Month Treasury Constant Maturity Rate (DGS3MO) - FRED - St. Louis Fed
BofA Merrill Lynch US Corporate BBB Effective Yield (BAMLC0A4CBBBEY) - FRED - St. Louis Fed
BofA Merrill Lynch US High Yield Master II Effective Yield (BAMLH0A0HYM2EY) - FRED - St. Louis Fed
30-Year Conventional Mortgage Rate (WRMORTG) - FRED - St. Louis Fed
15-Year Fixed Rate Mortgage Average in the United States (MORTGAGE15US) - FRED - St. Louis Fed
Bond bear markets have long cycles.
While others would disagree, I would go back to around 1941 as the start for the last long term secular bond bear market. I would end that cycle in 1982. Call it 40 years or thereabouts, obviously a longer cycle than the average stock cycle.
As with all long term bear cycles, there will be a series of shorter term bull cyclical moves within the context of a dominant downtrend. Investors will be drawn into those cycles, failing to recognize that the move up in price will only be temporary. Sell the rips is the trading motto in long term secular bear markets too. That sell the rip and buy the dips trading approach may have worked successfully until around 1965, when the best approach would have been to take a 17 year vacation from the bond market.
See Long Term CPI Data:
Consumer Price Index, 1913- | The Federal Reserve Bank of Minneapolis
Annual Percentage Increases in CPI 1966-1982:
2. Bought 50 of the Floating Rate Bond ETF BKLN at $25.05 (see Disclaimer)
Security Description: The PowerShares Senior Loan Portfolio (BKLN) is a floating rate bond ETF. This particular fund owns mostly junk rated senior secured bank loans.
On the date of my purchase, only 4% of the portfolio had a Baa rating from Moody's and the rest were rated in junk territory with 7% at Caa. There are other ETFs that own investment grade floaters but there yields are close to or even less than 1%.
This particular sector of the bond ETF market is discussed in the following articles:
Floating Rate Bond ETF? - Zacks.com
Floating-Rate Bank Loan Fund - Seeking Alpha
Bond ETFs In A Bond-Eroding Economy
ETF Trends
Sponsor's website: BKLN | Senior Loan Portfolio
BKLN Holdings: PowerShares Exchange-Traded Funds | BKLN - Senior Loan Portfolio Holdings
The fund pays a monthly dividend at a variable rate: BKLN
The holdings list had 141 names. I would anticipate a few bankruptcies since these companies are highly leveraged due in most cases to leveraged buyouts by private equity firms. Many of those firms are now private while others, such as HCA, have already gone public again after a leveraged buyout. I recognized a few names in that list that have already declared bankruptcy. First lien creditors will be in a best position to recover, but the losses for them after a default could still be severe which is why many of the bank first lien loans are deeply rated into junk.
The total expense ratio is shown at .76%
The current 12 month yield is around 4.8%.
Prior Trades: NONE. This 50 share purchase is just a starter position. will add another 50 if and when the price approaches $24.
Rationale: (1) Floating Rate Securities Mitigate Interest Rate Risk: These bank loans will generally have a Libor float provision. As a short term rate rises, such as the 3 month Libor rate, the yield will increase which gives these loans some interest rate protection. There will be a point, however, when the rise in rates would cause a significant increase in the credit risk. The impact of rising rates on credit risk will vary from company to company. A countervailing force would be a rise in rates due to an improving economy which hopefully would be increasing the firm's profits and thereby reducing the credit risk. In other words, a mixed bag of variables that probably are weighted on the positive side provided the rise in rates is largely offset by higher profits.
(2) Potential for Higher Income Generation When Short Rates Start to Return to Normal Levels
Risks (1) Credit Risks: Even with senior secured first lien loans, there are substantial credit risks involved in the securities owned by this fund. The owned loans are almost all junk rated, due in to the excessive leverage used by the borrowers. That leverage would be traceable in significant part to leveraged buyouts where the acquired company is loaded up with debt as part of its acquisition by a private equity firm (some called them leeches). Frequently, a solvent company is placed on the edge of survival by this process, unable to pay down debt with cash flow and constantly in need of debt refinancings.
The prospectuses discusses the abundant risks starting at page 77-80: invescopowershares.com/pdf Investors need to read the risk sections contained in prospectuses.
The risks are somewhat mitigated by the diversity of the portfolio, the number of holdings, and the first lien status of the loans.
Future Buys: I will add another 50 if and when the price falls below $24. I will not buy more than 100 due to the risks.
I am more likely to buy more shares of a U.S. investment grade fund, but only when I am convinced that the FED is about to embark on one of its long interest rate increase cycles.
There are several floating rate ETFs that own investment grade bonds:
Market Vectors® Investment Grade Floating Rate ETF (FLTR)
iShares Floating Rate Note Fund (FLOT)
FLRN - SPDR Barclays Investment Grade Floating Rate ETF
As noted below, I went ahead and bought a Canadian floating rate bond fund with better credit quality and a higher yield.
3. Added 100 of the Stock CEF IGD at $8.91 (see Disclaimer):
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| 2013 Bought 100 IGD at $8.91 |
Security Description: The ING Global Equity Dividend & Premium Opportunity Fund (IGD) is a buy-write worldwide stock closed end fund.
SEC Filed Shareholder Report for the Period ending 8/31/12: SEC
Sponsor's webpage: ING Global Equity Dividend and Premium Opportunity Fund - Fund Profile - Overview
IGD page at the CEFA
IGD Page at Morningstar (rated 4 stars: average three year discount 1.75%; dividend supported by a return of capital)
This fund currently pays a monthly dividend of $.084 per share, down from $.093 in September 2012. Distributions I would not count on that distribution remaining at that level given that it is being supported by a return of capital. Assuming it was continued for one year, the dividend yield would be about 11.31% at a total cost of $8.91 per share.
Prior Trades: While I have earned a good income from this CEF, it has not yet been a successful investment for me. Hopefully, the European equities will become a bonus rather than a drag in the coming years, as suggested in a recent Barron's cover story. Barrons
I can find only two references to prior purchases in the blog.
Added 50 IGD at $8.78 (December 2011)
Bought 100 IGD at $10.94 (August 2010)
Rationale: (1) Income Generation With Appreciation Potential: The dividend yield is around 11.31% at a total cost of $8.91. Performance has been weak for the past five years due largely to matters outside of the fund's control due to owning stocks worldwide. What may have been a drag for the past five years may turn into a tailwind over the next five. This would be entirely possible with IGD's European equities.
(1) Selling at A Larger Than Average Discount to Net Asset Value: While I prefer to buy stock CEFs at greater than 10% discount to net asset value, I will make an exception when the fund is selling at a much higher discount than its three year average and the discount is close to 10%. The average three year discount for IGD is 1.75% and the shares were trading at a 8.81% discount to net asset value.
Data Day Prior to Purchase 1/3/13
Closing Net Asset Value Per Share: $9.71
Market Price: $8.82
Discount: -9.17%
Data Day of Purchase 1/4/2013
Closing Net Asset Value Per Share: $9.76
Market Price: $8.89
Discount: -8.81%
Risks and Disadvantages (1) Subpar Performance: The five year performance number is a -.79%. Performance I would give that a poor rating. I am making allowances now since the fund is a worldwide fund with significant exposure to Europe which would be a drag leading to unsatisfactory past results overall.
(2) The Normal Sundry List of Risks: The normal risks of buy-write stock CEFs that invest worldwide are also present, which include of course currency risk, stock risk, country risk, risks associated with a buy write strategy and the risks generally applicable to CEFs including an expansion of the discount to par value.
Future Buys: I am not going to make anymore open market purchases. I am going to start reinvesting the dividend, making an exception to my rule requiring a greater than 10% discount to net asset value, since IGD is close to that number and the discount is currently substantially above IGD's average three year discount to net asset value of 1.75%.
4. Bought 200 of the Canadian Bond ETF XFR at 20.13 CADs (Canadian Dollar (CAD) Strategy)(see disclaimer):
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| 2013: Bought 200 XFR:CA at 20.13 CADs |
As noted above, the settlement currency was in Canadian dollars that I already own. I presently have a surplus of CADs earning nothing.
This will be a low yielding security. I am not likely to be able to pay my nursing home expenses with the dividends paid by this fund. When rates start to go up in Canada, and eventually that will happen, I will be paid more than now. The current dividend yield at a total cost of $20.13 CADs is around 1.6% according to Marketwatch. I did not add up the variable monthly dividends to verify that number. I already know that it is low.
Security Description: The iShares DEX Floating Rate Note Index Fund (XFR) owns high quality floating rate Canadian bonds.
Sponsor's Website: XFR Overview - iShares ETFs (EXPENSE RATIO= .2%; holdings 44 )
Sponsor's Fact Sheet: ca.ishares.com .pdf
Holdings: XFR Holdings
Current Credit Ratings:
Monthly Distributions: XFR Distributions
Top Ten Holdings:
The Canada Housing Trust (CHT) is a special purpose entity created and managed by the Canada Mortgage and Housing Corporation (CMHC) which is an agency of Canada's government. CMHC guarantees the timely payment of interest and principal on the bonds issued by CHT. The obligations of CMHC constitute direct and unconditional obligations of the Government of Canada. Hence, the Canada Housing Trust bonds will carry the same rating as Canada which is AAA.
(see discussion at www.td.com.pdf)
Prior Trades: None
Rationale: (1) High Quality Bonds and Interest Rate Risk Mitigation: The attractiveness of this security is that it has high quality securities (preservation of capital), pays me something which is better than nothing, and will pay me more when rates go up. Unlike a fixed coupon bond, this fund mitigates interest rate risk due because the bonds will increase their coupons as short term rates increase.
Risk: (1) Current Probable Negative Real Interest Rates: Well, this is true. But, I am earning more of a negative real rate of return with my CAD stash which earns nothing.
(2) Artificially Low Short Term Rates Likely to Persist: Short term rates are being held artificially low by central banks around the world now. Short term rates would be much higher based on future inflation expectations. The ten year TIP break-even is currently 2.5% which is the market's estimate of the average inflation rate in the U.S. over the next ten years. I do not have the Canadian break-even rate. Due to financial repression of the responsible members of developed nations around the world by central bankers, I am not now receiving the benefits from this security that would otherwise be available in a free interest rate market, and that is unfavorable.
(3) Currency Risks: I am a long term holder of Canadian dollars. From my viewpoint, I do not face any currency risk for my CAD stash since I have no intention of converting those CADs back into USDs unless it would be insane not to do it. (e.g. 1 CAD buys 1.5 USD in a spike down that makes no long term sense). However, anyone who is not similarly situated faces currency risk. It would not take much of a decline in the CAD/USD exchange rate to wipe out the negligible annual dividend yield.
The Canadian Dollar strategy is designed to increase my CAD position with dividends and some profit taking over a long period of time. The following snapshots are recent dividend payments made in CADs:
5. Sold Remaining U.S. Steel 7.5% Senior Bond Maturing in 2022 at 106.5-ROTH IRA (see Disclaimer):
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| 2013 Sold |
This post is already long enough. I will discuss another trade from yesterday in next week's post since it involves another play on the emerging market "super cycle" thesis.
Politics & Etc:
1. Marsha Blackburn: Among the many True Believers in the House of Representatives is the Congresswoman from the Seventh Congressional District in Tennessee. Marsha is the kind of person that would gladly cause a debt default by the U.S. government unless the Democrats agreed to slash entitlement spending and programs for the poor while of course giving more tax breaks to the wealthiest of Americans.
I am not going to mince words on this subject. Any politician who refuses to vote for a debt increase has committed an act equivalent to treason against this nation. The repercussions from a first ever U.S. default would be far more damaging to the nation's interests than all of the acts of treason committed against U.S.
She opposed the recent fiscal cliff deal preferring to let tax rates go up for all Americans unless the rich also received an extension of the Bush tax cuts. She would have allowed the United States to fall into the financial abyss in 2008 rather than support TARP or any program designed to avert a Great Depression other than the granting of more tax breaks to the Job Creators.
She supported Ryan's voucher plan for Medicare in 2011 that would have substantially raised the Medicare costs for her constituents who were then younger than 55 which plan granted more tax breaks to the rich. Item # 1 GOP's Plan To Bankrupt the Middle Class (data taken from the CBO and the Kaiser Foundation, www.kff.org/medicare/.pdf) In short, she is a True Believer, a fanatic and zealot of the worst kind.
Marsha joined 66 other Republicans as the only no votes that would grant FEMA more money for Sandy flood relief. Congressional Bills and Votes - NYTimes.com Many of those same GOP members, including Marsha, voted for legislation that provided funding for disasters in their own districts but not for the Sandy victims. The zealot and Ayn Rand devotee Paul Ryan was another no vote.
Is that vote un-American? In my book, an unwillingness to support disaster victims with federal aid, unless some other program is first cut, is contrary to core American values. I remember Eric Cantor wanted to condition aid to the Joplin tornado victims on spending cuts in other areas.
Jon Stewart skewered Cantor's position on Joplin: Cantor Won't?
Having made the foregoing comments, I would also blame Obama and the Democrats for a debt default unless they offer some serious spending cuts and at least offer to take a baby step in changing entitlement spending on a long term basis. The baby step would be using chained CPI as the inflation adjustment.
2. Chained CPI: For decades, it has been known that chained CPI provides a more accurate way to measure cost of living than traditional CPI. Since traditional CPI yields a larger number for its cost of living adjustments for federal programs and tax brackets, it is favored by the American voters and the politicians who cater to their desires to have more benefits that are paid with borrowed money. The use of chained CPI would save about $300 billion over ten years. FactCheck.org
An article published by PolitiFact shows that neither republicans nor democrats want to support that sensible change for the usual and obvious political reason. It would be viewed negatively by the current recipients of SS who vote in large numbers.
3. Guns For Teachers in Tennessee: As expected the GOP in Tennessee has taken up the NRA clarion call to put armed guards in every school in America. Of course, when a nut case guard with a gun starts shooting, it will not be instructive to them in any way. The GOP is taking the recommendations of the NRA further, with proposed legislation to arm teachers provided they undergo some kind of training. Well, I remember my teachers from school, and I can not recall a single one who would be capable of handling a firearm in a competent manner.
I do recall an assistant football coach in Alabama who taught history in 9th grade and knew nothing of course about the subject. He was a gun enthusiast but probably not some one you would want packing in the classroom. I recall vividly his defense of the Vietnam war: "people get killed in car wrecks everyday and we don't stop driving cars, do we?". The LB was of course already well versed on matters and lashed into this idiot in full cross examination mode.
Guns in bars? This was the most important priority of Tennessee state republicans and was accomplished by them first, followed by guns in parks and children's playgrounds; and now grade school teachers will be packing soon enough.
I recall the justification for guns in parks. A bear came out of nowhere once and caused a little girl to get scared. No one was hurt as I recall. If the adults had been packing, they could have shot the bear, made it really mad, so that it would have killed the little girl. When a person's brain is ossified at birth, reasoning will generally not be one of that person's stronger qualities.
A few years ago, I saw a simulation where a group of students were in a classroom. Those students knew what was about to happen. A gunman was going to walk into the classroom and shoot the teacher and then point the laser gun at the students. A trained police officer was seating in the back. As the first shot rang out, the students scattered all over. The police officer would take out his laser gun and start firing. Who did he hit? He hit the fleeing students and the shooter more often than not successfully shot the officer. In those situations, even trained people have trouble processing information and it would be even more difficult when the situation is real. As I recall, and I may be wrong about this facet of the simulation, there was an army Ranger who took out the shooter with one shot and missed the students. Very few people could remain calm enough, process all of the information under stress and then react quickly with accuracy. I understand that those advocating arming teachers are running their own simulations now to show that the teachers can handle the matter.
4. Bill Gross on Fed Bond Buying: Bill Gross was quoted by a reporter at CNBC that the Fed was buying "80% of everything the Treasury issues right now". Okay, I understand what is propping up the treasuries at ridiculously low levels. My question is not whether this is good policy or not. I am starting to wonder whether it is sane or insane?
