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Wednesday, October 22, 2014

There are No One Decision Stocks

Occasionally I peruse what goes on at places like Seeking Alpha where individual investors produce homegrown stock analysis and recommenstations.

A craze over there for a long time has been "dividend growth stocks" often household name companies which are seen as guaranteed to produce a growing stream of income often with the extra imprimatur than Warren Buffett owns them. If the price declines...no matter..it's temporary market movement and besides there's that dividend.. And of course as the name implies the many individuals posting and reading there think it is relatively easy to generate alpha--better than maket returns on a risk adjusted basis. And since there is no systematic way to track the stock picks generated by the many that write on the site there would be no way to test if anyone actually is successful in doing so.

Earnings reports over the last few days show that investing is seldom if ever so simple.

 I am certainly a believer that price can deviate from value...certainly there is no economic rationale for the price fluctuations we have seen in the overall market of the past couple of weeks. And no doubt many stocks have been knocked down in prices that don't reflect value during that selling.I also do not in any way consider myself a stock picker...

But sometimes price does reflect underlying fundamentals (in the long term it does) and sometimes there are changes that can impact the long term prospects for a company.

I am not a stock picker in my approach but the recent news on IBM, McDonalds and Coke seems to point towards some real change in prospects

For IBM the problems seem most daunting . As Andrew Ross Sorkin reports in the NYT dealbook. IBM may gave known how to keep shareholders happy through dividends and buybacks...but it took its eye off the ball in terms of building the business.


The company’s revenue hasn’t grown in years. Indeed, IBM’s revenue is about the same as it was in 2008.
But all along, IBM has been buying up its own shares as if they were a hot item. Since 2000, IBM spent some $108 billion on its own shares, according to its most recent annual report. It also paid out $30 billion in dividends. To help finance this share-buying spree, IBM loaded up on debt.
While the company spent $138 billion on its shares and dividend payments, it spent just $59 billion on its own business through capital expenditures and $32 billion on acquisitions. (To be fair, Ms. Rometty has been following a goal set by her predecessor, Samuel J. Palmisano, to return $20 a share to stockholders by 2015. Ms. Rometty abandoned it only on Monday.)
All of which is to say that IBM has arguably been spending its money on the wrong things: shareholders, rather than building its own business.
Mr Buffett as Sorkin notes has been a big fan of IBM because of its stock buybacks and dividend growth investors have their eyes on the dividend. But as Buffett in his latest letter to investors  has noted (quoted by Sorkin)
“In the end, the success of our IBM investment will be determined primarily by its future earnings.”
The question for Ms. Rometty is whether she can figure out how to turn around IBM — not just its numbers, but also the company itself.
Both McDondalds (MCD) and Coke (KO) seem to be facing trends in consumer tastes away from their core products. More disturbing to long term investors is that the CEOs of both companies seem to be surprised by the developments and arent too clear on what they will be doing to turn things around.
Here's a great graphic from the WSJ illustrating the dilemma for both

Here is the WSJ on MCD  and here on KO I wont review the ugly details here.

One sign that is not very positive for KO is the CEOs statement that a cost cutting program will be implemented to improve profitability. Given the size of the companies revenues there would have to be massive cuts in expenses to have much impact on earnings. In my experience citing cost cutting to generate a major improvement in earnings is a sign that management doesnt have any real ideas on how to grow the company.

In any case these three examples point out that stock picking is never as simple as it looks, there are no one decisions stocks....and most investors are likely better off with a diversified portfolio of passive ETFs and/or index funds.

Tuesday, October 21, 2014

High Yield Bonds Individual Investors Selling and Professional Investors Buying Again ?

Two recent reports in the FT note the large swings in high yield bond markets, particularly in the high yield bond ETFs which offer an easy way for retail investors and traders to invest in the high yield market. The result is often high volatility and large moves in the prices of these bonds. Recent weeks have shown a large selloff, as occurred in August (graph below is of HYG the largest high yield bond ETF). At that time the selloff driven by retail investors and short term traders pushed prices down to levels that many professional portfolio managers saw as attractive. Many are expressing similar views in reaction to the recent selloff.



Ft Reports:(Oct 17) Junk bonds caught in flight from risk

©Getty
A sell-off in US stocks this week hit the junk bond markets as investors shunned the riskier securities amid fears about the outlook for the global economy.....
Markets have stabilised after mutual funds and ETFs investing in junk bonds experienced record outflows.

Renewed selling this week has highlighted some of the potential pitfalls faced by holders of the securities – which are sold by companies with fragile balance sheets and a higher probability of default – in a risk-averse environment.
Investors withdrew a further $549m from high-yield funds and ETFs in the week ended October 15. That brings this year’s total outflows to $5.5bn.
However, the junk bond market still has many supporters. Mark Haefele, global chief investment officer at UBS Wealth Management, said the sell-off boosted the attractiveness on the debt.
With spreads on the bonds versus comparable US Treasuries at about 500bp and default rates still expected to remain low, total return on junk bonds could rebound and reach the 5-6 per cent mark in the coming six months, he said.
High-yield market analyst Marty Fridson estimated that, after being extremely overvalued for most of the year, the high-yield market had swung to “moderately undervalued”.
And this month Pimco said fundamentals remained compelling – given its view “for a lower-growth global economy and subdued interest rates over the foreseeable future – an outlook we call the New Neutral – the case for high-yield bonds is a compelling one, both as a tactical and strategic allocation”.

The FT also reported (Oct 20) that fickle retail investors as well as short term traders can produce large swings in the high yield market as they trade in and out of high yield bond ETFs

Embedded Investors turn to junk ETFs amid sell-off

Investors are increasingly turning to exchange traded funds to dip in and out of junk bonds in times of market stress, according to new research from Fitch Ratings....

Such ETFs give investors the ability to dart cheaply and easily in and out of assets that would be more difficult for them to obtain in the so-called “cash market”.
Fitch’s analysis finds that trading activity in junk, or high-yield, bond ETFs increased sharply during 2013’s “taper tantrum” as well as three shorter periods of market volatility in January, July and then in September and October of this year.
The research suggests investors may be using ETFs as a convenient way to express changing views on low-rated corporate debt at a time when liquidity, or ease of trading, in the cash market is believed to have deteriorated....

The amount of junk bonds traded rose to $8.6bn on October 15, up from a daily average this year of $5.6bn, according to Trace data.
The amount of shares traded of BlackRock’s high-yield corporate bond ETF, known as HYG, reached more than $1bn on the same day, up from an average $5.6m.




More on HEDJ Currency Hedged Europe ETF

 I wrote recently about the strategy of investing in Europe through a currency hedged ETF ticker HEDJ

At ETF,COM an analysis makes the following points:
....it’s important not to become mired in euro pessimism. The important issue for tactical ETF asset allocators is to understand the risks and the opportunities. Heightened central bank activity always creates both. From that perspective, consider a more hopeful investment outlook:
  • The eurozone is not an economic island. Contrary to sagging wages in the West, Asian incomes have been on a tear over the last decade. The OECD forecasts that 80 percent of the growth in middle class spending globally through 2030 will be driven by Asia. European consumer companies are ideally positioned to benefit from this trend, ...
  • Valuations matter. The Eurozone has been accused of “turning Japanese.” While it’s true that the new, dismal normal of the eurozone is sluggish growth and more frequent recessionary relapse, the probability of eurozone stock markets following the Japanese experience is extremely low. Why? Simply because valuation is the best predictor of longer-term returns. During Japan’s epic decline, equity valuations started from lofty levels, and debt was concentrated in the corporate sector. Those conditions are not present in the eurozone today....
  • Currency depreciation has gloriously arrived. ...With major policy divergence between the Fed and the ECB, a new era of currency depreciation is upon us (see Hahn’s April 2014 piece on ETF.com, “Position Now For a Weaker Euro”). Looking toward next year, the benefits of a weaker euro and, potentially less austerity, will feed through into the data and show up as improved profits. 

Sunday, October 19, 2014

Here's An Interesting One

Alibaba IPO..the largest IPO of all time was on September 19
All time high on the S+P 500 September 19

Alibaba closed at a bit under 94 on its first day of trading..it closed on Oct 17 at $88.85

Blackrock Also Sees Opportunities in High Yield Bonds


From Blackrock

The Sell-Off Continues, But an Opportunity Appears

October 15, 2014

by Russ Koesterich

of BlackRock


  • In recent weeks, investors have been contending with two trends: anxiety over a change in Fed policy and evidence of a slowdown in the global economy.
  • While global growth is likely to remain below historic norms, it is not collapsing. This suggests that investors should be positioned for a slow growth environment, not another recession.
  • This, in turn, implies taking some selective risk in asset classes that have become less expensive as a result of the sell-off.
  • One example of an asset that warrants another look: U.S. high yield bonds......
At the same time, the current environment presents the opportunity to take another look at asset classes that had sold off and now look more attractive. One such asset class that had come under pressure, but is now looking relatively appealing, is high yield bonds. The yield difference between high yield bonds and higher-quality, lower-yielding U.S. Treasuries (known as the spread), has widened out to the highest level in a year. This indicates high yield bonds offer better value and yields now than just a few weeks ago. Given that corporate America remains strong and default rates low, high yield now looks likely to provide a reasonable level of income relative to the rest of the fixed income market

Saturday, October 18, 2014

WSj Gives some "Market Analysis and Current"Professionals' Forecasts But Also Includes the Greatest Market Forecast of All Time

Here
 From the article
"It comes as little surprise to Wall Street veterans that the selloff began just after leading strategists at the major investment banks had upgraded their year-end stock market forecasts yet again.
In September, 15 top strategists had raised their year-end target for the S&P 500 to an average of 2010. At the end of last year, they were forecasting 1934. But in just over a month since the upgrades, the S&P has instead tumbled from 2000 to 1887."

The author offers this "insight" for investors
If this is merely a regular correction in the course of a regular economic expansion, the answer may be: Not much further.
Corrections of 5% to 20% are a normal part of the stock market. ...
But it is plausible that this correction might be the start of something much worse.
But the aurthor does make not of the most accurate stock market forecast of all time:
Legendary Wall Street mogul J.P. Morgan once asked for a stock-market forecast, confidently predicted that share prices would fluctuate. And he’s been right ever since

Friday, October 17, 2014

What Is Going on with Etf HYLD Advisorshares Short Term High Yield ?

I have written several times about HYLD advisorshares short term high yield  bond fund. I has sold off sharply in the last few weeks even in advance of the recent stock market selloff. It has also underperformed other high yield bond ETFs as of late. However even with the sharp decline in price (see below) the high yield on the fund is relatively low. The ytd total return is -2% and over the past 12 months the fund is +.1%

 The fund is composed of higher yielding bonds which are considered to have higher credit risk. In periods of panic High Yeild bonds will decline more than treasury bonds and investment grade corporate bonds. The recent readjustments at the major fund manager PIMCO likely led to some large sales of bonds in their portfolio and dislocations in the high yield bond market.

However HYLD has performed worse than other ETFs in its category. I would attribute that to 3 factors all of which should be monitored
  • A concentration in holdings in the energy sector at a time of large declines in energy prices.A bloomberg video report mentions specific losses in energy related high yield bonds.
  • Inclusion in the portfolio of some dividend paying stocks mostly in the energy industry into the portfolio.
  • A lower dividend paid in September vs previous months. The manager attributes this to a missed payment on a bond they held. The bond has been sold at a loss and the impact of that on the portfolio is already reflected in price and asset value. Also many of the stocks held in the portfolio pay dividends quarterly so many of those dividends were paid after last month’s dividend payment on the 27 of September.


At present I don’t see much reason for changes in the fund that is part of the strategic bond allocation. The main long term risk factor for this sector is cashflow to pay interest and principal on the bonds. As the fund adjusts its portfolio the yield on its bonds should increase. Of course the fund is not for the faint of heart and investors should weight that in consideration of the decision as to whether to hold the fund, it likely should be only part of a bond allocation that includes investment grade corporate and US treasury bonds.

My communications with the fund manager indicates their expectation(there are no guarantees) that future dividends will be at the rate of previous months which is around $.45 a share which makes the yield on an annual basis of close to 9% annualized based on current prices. I am in contact with the fund manager on a regular basis.

I am monitoring the HYLD carefully particularly around the next dividend date which is in the latter part of the month. Another disappointment with the dividend would be a reason to reassess an allocation to HYLD.

The fund manager Peritus recently published an update on their blog as to theirviews. The article emphasizes that they concentrate on prospects for cashflow in dividends and interest payments rather than short term price performance. They include the following graph from JP Morgan indicating historical and forecasted default rates




They note that recent price movements have moved the spread of high yield over treasury bonds to over 5%. That has likely increased with the fall in treasury yields of the last few days. The manager views the volatility as an opportunity to make new purchases and has added bonds with yields higher than the spread indicated by the indexes.

Pertius expresses confidence in its holdings in the energy sector despire recent large declines in oil prices.