Stocks & Equities
In the low-interest-rate environment of recent years, investors have had to exercise patience when waiting for attractive fixed-income opportunities to arise. I often write about specific opportunities worth exploring and attempt to provide a variety of fixed-income ideas so that all the various types of income-focused investors have some food for thought.
Last month, I was interviewed for Seeking Alpha’s “Positioning for 2014” Series. The focus of the interview was fixed income, with an emphasis on bonds. One of the many questions I was asked had to do with broadly identifying where in the world of fixed income investors could find the best yields relative to the risk of acquiring those securities. Part of my response included the following:
So many preferred stocks and exchange-traded debt are currently trading at moderate-to-large discounts to their liquidation preference/call price/maturity price with yields in the 6% to 8% range. I think it is time to begin building an allocation to those securities.
Toward the end of last year, I was of the opinion that a significant amount of window dressing and tax-loss selling was negatively affecting the price of various fixed-income securities, with preferred stocks in particular being pressured. Given my outlook for at best moderate GDP growth and inflation that is nothing to worry about over the coming years (health care being the one exception), 6% to 8% yields from preferred stocks and exchange-traded debt make a lot of sense for an income-focused investor. I don’t think investors should load up a portfolio with those securities. But a modest allocation is worth considering.
As I mentioned in the opening paragraph, exercising patience is a must when searching for attractive income opportunities in today’s generally low-interest-rate environment. On the other hand, when those opportunities arise, investors should act quickly. As 2014 has already taught preferred stock investors, if you don’t act quickly, the best opportunities can disappear.
Since bottoming on December 30, the iShares U.S. Preferred Stock ETF (PFF) is up 3.22%. That’s a nice gain for just two weeks of trading but certainly nothing to write home about. When looking at my favorite preferreds, equity-REIT preferreds, the returns are much more striking. Below is a table outlining the performance since their lows on either December 30 or December 31 of the seven equity REITs with risk-reward profiles I found compelling enough to buy in 2013.
To illustrate, in yield terms, just how large the moves have been in the aforementioned REIT preferreds, let me start with Vornado Realty Trust, a REIT with a portfolio of over 100 million square feet of commercial real estate. The move from $18.63 to $20.29 was the equivalent of a drop of 59.2 basis points in yield, from 7.246% to 6.654%. In comparison, the 30-year Treasury bond (TLT) is trading roughly 17 basis points lower than its high on December 31. Even the two worst performers of the group, Digital Realty’s Series G preferred and Realty Income’s Class F preferred have fallen 29.4 and 29.7 basis points respectively in just over two weeks.
Despite the recent steep drop in yields, the lowest yielder of the bunch still offers a respectable 6.529% (Public Storage – Series W preferred). If you find the credit risk appropriate, the preferreds mentioned above still provide real yields that many investors will find attractive. This is especially true for those who see, at worst, only moderate upside in benchmark yields over the coming years.
Investors wishing to conduct research on the companies mentioned in this article may be interested in the following two sources: (1) Some of the commentaries I have written on these companies can be found here, and (2) Brad Thomas, a Seeking Alpha contributor who regularly writes about REITs, may have detailed articles regarding the seven aforementioned companies. His articles can be found here.
Other articles via The Financial Lexicon:
- 3 Things Every Stock Market Investor Should Consider
- The Financial Lexicon Positions For 2014: Individual Bonds Are The Way To Go
- Toll Brothers Bonds: Is 5.51% An Attractive Yield?
- The Case For A 0% Bond Allocation Is Weak
I am an investor/trader with more than a decade of experience in the financial world. I have experience investing in and trading equities, options, and a variety of fixed income and alternative investment products.
I also write for LearnBonds.com.
With the Detroit Auto Show going on (also known as the North American International Auto Show), there has been much attention on the U.S. auto industry and the comeback in the level of sales. In fact, there has been a lot of hype regarding this over the past year.
However, when looking at a longer-term chart of auto sales (see chart above), we can see that although car sales have crawled back, they are not back to the level of the heydays before the Global Credit Crisis and Great Recession.
The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results.
Richardson GMP Limited, Member Canadian Investor Protection Fund.
Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.
One of the factors contributing to yesterday’s selloff (the largest one-day selloff since last September) was some research from Goldman Sachs highlighting “lofty” valuations. (Usually Goldman is a lot more rosy with its outlook, so this received a great deal of attention from the press).
One the charts accompanying the research (see chart above) illustrates how high the Price-to-Earnings ratio is for the U.S. market when compared to other years since 1976. As we can see, it was only during the heights of the tech bubble when the Price-to-Earnings ratio was higher.
That said, the Price-to-Earnings ratio would have been a lot lower if it was not for the U.S. Federal Reserve’s money-printing policy of Quantitative Easing. Normally, towards the end of Secular Bear Markets (like the one that we have been in since March 2000), the Price-to-Earnings ratio for the market approaches 9, and possible even as low as 8. This sets up some risk for equity investors in the U.S. as the rate of Quantitative Easing is “Tapered.” Unless there is some spectacular earning growth very soon, it will be difficult to justify the high Price-to-Earnings ratio as the amount of liquidity for investment stops growing.
The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results.
Richardson GMP Limited, Member Canadian Investor Protection Fund.
Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.
“In the 1500s, Motonori, a feudal lord of the era, sought to teach his sons the virtues of
cooperation. He gave each of his sons an arrow and invited them to break them, which they did
easily. He then gave each son three arrows and invited them to do the same. Try as they might,
they could not break three at once. This, he told them is the value of cooperation. One arrow is
easily broken, but three held together are stronger than the strongest warrior alone can break.”
Japanese folktale (from ClearBridge Investments, Oct 2013)
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Commentary & Analysis
Is it time to buy the Japanese yen?
Though many are optimistic and there are positive signs, Mr. Market hasn’t yet issued its final verdict on Japan’s three-arrow strategy.
Source: ClearBridge Investments, October 13, 2013 Institutional Perspectives
So far the first arrow from the bow has proven a success; the yen has weakened and stock prices have soared. In fact, these two price series, seemingly impacted by aggressive monetary policy, are highly correlated as you can see in the chart below comparing the Nikkei 225 Stock Index and USD/JPY:
It’s not just liquidity that’s driving stocks, earnings have improved for Japanese companies and investors are betting this will continue as Japanese multi-nationals become increasingly powerful competitors thanks to the currency.
But as Newton’s Third Law of physics says, “For every action, there is an equal and opposite reaction;” Japan’s current account deficit is climbing along with the falling value of the currency.
From Bloomberg today:
Japan’s current-account deficit widened to a record in November as imports climbed, underscoring challenges for Prime MinisterShinzo Abe as he tries to drive a sustained economic rebound.
The 592.8 billion yen ($5.7 billion) shortfall in the widest measure of trade, reported by the Ministry of Finance in Tokyo today, was larger than the median forecast of 368.9 billion yen in a Bloomberg News survey of 24 economists. The deficit is the biggest in comparable data back to 1985.
Is this a problem? Maybe! Why? The second arrow (flexible fiscal policy) is predicated on sustainable government debt. Local funding has been the bedrock for Japanese government bonds. If Japan has to go hat in hand to international investors for funding, because of the rising current account deficit, it will likely force up interest rates on Japanese paper, increasing the cost of government funding. This concern is real, when you consider the following factoid from the Bank of Japan:
The share of Japanese households with no financial assets rose to a record high of 31 percent. Falling incomes forced people to spend their savings. The major reason for this rise: declining regular income.
Success of corporate Japan on the one hand adds to government revenue in terms of taxes. But it also takes away, as it reduces the pool of corporate savings for Japan to draw upon. Thus, the big bet is on improving the economy as the domestic pool of savigs is waning.
And though we are seeing headline inflation pick up in Japan (another tool for fiscal flexibility), let’s put this into perspective. Below is a chart showing Japanese CPI going back to June 1967.
Governments tend to like inflation as it allows them to payoff outstanding government debt more easily. But one wonders if Japan can be successful here given the powerful global deflationary forces still in play, especially if demand from China is indeed waning as many analysts speculate.
And of course the huge appreciation of the Chinese currency (yuan) compared to the Japanese yen probable doesn’t help Chinese growth, though it does make Japanese goods look very competitive to Chinese citizens. Overall, I would suspect the Chinese government isn’t too happy when it views the chart below:
The Nikkei was clobbered last night—down 3.08%. Will $-yen follow? At least near-term that is our bet. And the surprise for 2014 could be the yen strengthens at lot more than people expect if those arrows remain in the quiver.
Currency Services Performance Update:
Black Swan Currency Options Service… 5-Wins and No losses…so far…
We have taken off four trades since the service began in October; all of them have been winners:
Black Swan Forex 2014 Closed Positions
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Jack Crooks
Black Swan Capital
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Black Swan Capital’s Currency Currents is strictly an informational publication and does not provide personalized or individualized investment or trading advice. Commodity futures and forex trading involves substantial risk of loss and may not be suitable for you. The money you allocate to futures or forex trading should be money that you can afford to lose. Please carefully read Black Swan’s full disclaimer, which is available at http://www.blackswantrading.com/disclaimer
- In 1973, as heavyweight boxing champion Joe Frazier was knocked to the canvass by George Foreman, Howard Cosell uttered the now-famous words, “Down goes Frazier!” For those of you who are unfamiliar with that brutal event, please click here now.
- Are current investors in the American stock market on the verge of taking a beating like Joe Frazier did? Please click here now. That’s the daily chart of the Dow.
- The first trading week of January is critical, because it’s when large institutional money managers decide how to place sizable risk capital for the coming calendar year.
- Clearly, the first two weeks of this key time frame have showcased a “wet noodle” performance by the Dow, and yesterday’s horrific meltdown has opened the door to further declines.
- My stokeillator (14,7,7 Stochastics series) at the bottom of that Dow chart is flashing a sell signal.
- After making solid money in 2013, institutional investors are probably very concerned about the possibility of a “taper to zero” Fed theme replacing “QE to infinity”.
- Friday’s jobs report was also a disaster for stock market investors, and it could get much worse if the Fed tapers again at the next FOMC meeting on January 29.
- I predicted the December taper, and I have argued that the Fed is likely to taper QE all the way to zero, over the next 12 – 18 months.
- I’ve also shocked a lot of people, by suggesting that the taper is bullish for gold and bearish for the Dow, because it’s likely to be based more on rising money supply velocity than rising economic growth.
- In a rising GDP environment, a falling unemployment rate with a falling labour force participation rate isinflationary. It indicates that a smaller labour force is increasing the money supply velocity. That’s more bad news for weak-handed investors who sold gold stocks in December’s “tax loss” season, and bought the Dow.
- If the Dow could be viewed as a financial version of Joe Frazier, what asset class should be viewed as George Foreman, the heavyweight brawler who pounded Frazier into the canvass?
- For the possible answer, please click here now. That’s the daily GDXJ chart. Look at the volume that occurred yesterday in junior gold stocks. That’s one of the largest daily volume bars in the history of GDXJ, and it’s upside volume!
- I’ve highlighted the solid breakout from a bullish wedge pattern, and some minor trend highs have been exceeded, which is also bullish.
- The position of the stokeillator suggests a minor pause or pullback should occur soon. After that, I think GDXJ could rise towards the red HSR (horizontal support and resistance) in the $40 area.
- Please click here now. This weekly chart of GDXJ looks superb. There’s an even bigger wedge pattern in play, and a major stokeillator buy signal.
- A rise towards HSR in the $55 area is easily possible, and the size of the wedge pattern suggests that an even bigger rally, towards $70, is a realistic target.
- In the world of inelastic gold demand, the “big boys” are the citizens of India. National elections are being held there in the spring. Does the current bullish technical posture of many junior gold stock charts suggest that institutions are beginning to flow liquidity into gold stocks, anticipating a Narendra “pro gold” Modi win? I think so.
- On that note, please click here now. That’s the weekly gold chart. Note the substantial buy signal being flashed by the stokeillator. There’s also a potential inverse head and shoulders bottom pattern forming. The target of that pattern, if it activates, is sell-side HSR in the $1330 area.
- Many investors in the gold community seem to hold a view that, “one more decline is coming, and then we’re on our way to new highs”. I think that type of thinking is more emotion than analysis, and it’s precisely why the current rally can continue to as high as $1330, after a brief pullback.
- While 2014 is likely to be “so-so”, for gold and silver bullion investors, it should be a superb year for gold and silver stock investors.
- While gold bullion ETFs may experience more selling, value-oriented funds are likely to buy the miners, as dropping oil prices, unprofitable asset sales, and management shake-ups make the companies vastly more efficient. That’s good news for mining stock shareholders.
- As an example, Caterpillar is now working with Shell Oil, to develop dual-fuel mining machinery, where LNG (liquefied natural gas) would replace diesel fuel most of the time. “Many of our customers are asking for natural-gas powered equipment in order to reap the financial and environmental benefits….” – Chris Curfman, Caterpillar VP, MRO News, Dec 30, 2013.
- Over the next few years, I expect to see a lot more of this type of news coming. Institutional investors like to invest in gold stocks because they are steady and profitable businesses. Gold mining investors don’t need America to burn like Rome did, to make a lot of money.
- Gold mining companies need rising demand for gold jewellery from a growing Chindian middle class, dropping fuel costs, and better management. Yesterday’s truly gargantuan volume in GDXJ shares suggests that key institutional investors believe all these bullish keys are essentially in place now. Is George “junior gold stocks” Foreman ready to knock Joe “Dow” Frazier to the canvass? Well, if the first two weeks of January are an indication of what is coming for the rest of the year, the answer is clearly, yes!
Special Offer For Website Readers: Please send me an Email to freereports4@gracelandupdates.com and I’ll send you my free “Seniors Super Six” report. I’ll show you which key moving averages I use on the monthly charts of the biggest gold stocks, and how I tweak them. Major buy signals are very close, and I’ll highlight my key trigger points!
Thanks!
Cheers
St
Stewart Thomson
Graceland Updates
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Stewart Thomson is no longer an investment advisor. The information provided by Stewart and Graceland Updates is for general information purposes only. Before taking any action on any investment, it is imperative that you consult with multiple properly licensed, experienced and qualifed investment advisors and get numerous opinions before taking any action. Your minimum risk on any investment in the world is: 100% loss of all your money. You may be taking or preparing to take leveraged positions in investments and not know it, exposing yourself to unlimited risks. This is highly concerning if you are an investor in any derivatives products. There is an approx $700 trillion OTC Derivatives Iceberg with a tiny portion written off officially. The bottom line:
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