PowerShares 1-30 Laddered Treasury Portfolio (PLW)
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- Long and Junk Bond ETFs: Stepchildren of Fixed Income Investing [view article]
- Searching for the Best Bond ETF [view article]
- Treasury Bonds: The Short of the Century [view article]
- Alternatives and Absolute Return with ETFs [view article]
- Treasuries: Profiting From the Bear's Next Victim [view article]
loading ...Recent PLW Articles
- Ron Ryan Hasn't Soured on Allure of Bond ETFs
- Searching for the Best Bond ETF
- Alternatives and Absolute Return with ETFs
- Treasury Bonds: The Short of the Century
- Treasuries: Profiting From the Bear's Next Victim
- Long and Junk Bond ETFs: Stepchildren of Fixed Income Investing
- PowerShares Winds Down U.S. Expansion With Muni, Treasury, Emerging Market Bond Funds
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Long and Junk Bond ETFs: Stepchildren of Fixed Income Investing [view article]
Good News For Income InvestorsLooking for good news in today's markets is like searching for the proverbial needle in a haystack. Needless to say, practically all investment grade equities and nearly all closed end funds that specialize in providing regular recurring monthly income have been reduced in market value by this prolonged correction. The quake has spread in all directions from its financial epicenter, and the mounting doom and gloom has taken its toll on even the most rational investment decision makers. Try to keep in mind that the purpose of income investing is the income that your portfolio produces not an increase in the securities' market values---
So here's the good news (and for anyone with a 40% or higher income asset allocation, or an income portfolio being used for living expenses), it really is very good news. Base income levels, from the beginning of the stock market correction in June '07 until mid-July '08, have barely changed at all. In fact, they have probably risen in properly asset allocated portfolios. I have examined the regular recurring monthly income distributed by 56 taxable income CEFs and 61 tax-free income CEFs, and the conclusions are pretty remarkable.
In spite of the fact that the vast majority of my favorite monthly income producers are lower in market value than I would like, the amount of income they are distributing to shareholders has not moved lower meaningfully--- even though the Federal Reserve has reduced interest rates by approximately 60% during the past twelve months. Here are the numbers: (1) 48% of the taxable-income CEFs are distributing precisely the same amount per share as they did a year ago. Fourteen issues have increased their payouts and fifteen have reduced them.
The net result is a decrease of just fourteen cents (2.5% of the total monthly payout). The average current yield on the portfolio, as of mid July '07, is 9.86% without considering any capital gains distributions. Additionally, the group is selling at market prices that reflect an average discount of nearly 11% from NAV. Is that special or what? The bonds, preferred stocks, government securities are priced 11% below their current market values.
(2) The numbers are similar with regard to the 61 tax-free income CEFs: 46% have not altered their payout over the past twelve months; eighteen have reduced their payout slightly, and 15 have increased the monthly dole. The net difference for the group over the past year is less than one cent, or a percentage change of two-tenths of one percent. Remarkable. This group is selling at an average discount from NAV of 9.1% and has a current tax-free yield of 5.51%.
(3) Of 117 individual issues, about half have produced stable income. The others have accounted for a total payout reduction of less than 15 cents--- a measly 1.7%. Why is this amount of little consequence? Two reasons really.
First of all, a properly asset-allocated income portfolio does not disburse all of the base income it receives, so there is income available to reinvest in more shares of income producing securities. This process assures a growing cash flow to calm your fear of rising prices. The other reason is a bit more hypothetical. The Fed has lowered rates significantly, a process that normally produces higher prices for income securities. Eventually, those lower interest rates (even if global pressures convince politicians to take back some of the reductions) should produce higher prices (i.e., profit taking opportunities) in these securities.
Admittedly, even if your asset allocation has been fine tuned for years, lower portfolio market values in this area make stock market valuation shrinkage feel even worse. But the value of stable cash flow becomes painfully clear for investors who misguidedly depend on capital gains for their spending money. Properly asset allocated portfolios contain enough base income generators to pay the bills. The purpose of capital gains is to produce proportionately more base income generators.
The purpose of this email is simply to bring some needed sunlight into an investment environment that is far gloomier than I think it needs to be. If you want the details, you'll have to request them personally.
Steve Selengut
www.sancoservices.com
www.kiawahgolfinvestme.../
Professional Portfolio Management since 1979
Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"
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Searching for the Best Bond ETF [view article]
When writing a financial piece, make it a principle to avoid misspelling the word principal throughout the piece-- if you wish to be taken seriously. ReplySearching for the Best Bond ETF [view article]
excellent article and information, very educational and useful, thank youinflation, of course, is a more than valid concern re return – but assuming inflation will remain a problem forever is like assuming the stock market will rise or fall forever also
in a deflationary environment, which I believe is more an issue than most people do I think, these type funds of these type interest paying treasuries have been and would be in demand
the belief in perpetual inflation is useful for someone wanting or trying to create monetary dilution, keeping everyone focussed on spending and accepting inflation as normal
at my age, and thus for all practical purposes, this may be true :-) however, I tend to believe that deflation alternates w/inflation in our current fiat environment (and may well have under the various gold standards, I’m not sure)
thus, re the treasuries value, I think, like most everything else, they’ll vary over time
and gold is great, literally; but I tend to prefer it for insurance at this point, over any increase in value; the insurance being storage of value
and toilet paper (as per the commentator above), well, I try not to be out of it :-)
info re international treasury etf's would be interesting, esp if they were for countries w/as close a risk base to that of the u.s. as could be found
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Searching for the Best Bond ETF [view article]
It would also help the credibility of the article and the author if the tickers referred to the correct ETFs. Pretty shallow analysis with a lot of padding.Also, where are the international treasury & international treasury inflation-linked ETFs? Reply
Searching for the Best Bond ETF [view article]
"Less clear of course is what specifically it will cost an investor to own a piece of this vast market and what that debt is worth in terms of some other asset (such as euro debt or gold)..."Or, say, the goods and services you typically buy - rent, food, fuel, electricity, water, clothing, etc. The bond market is obsessed with the "quality" of Treasuries - the certainty, as you point out, that there is no default risk. So what? If you hold an Argentine bond and the Kirchners default on it, how much bread can you buy with the total coupon + principal payments you received? If you hold a Treasury bond paying 4% while prices are rising 12%, how much bread can you buy with that? What if that 12% becomes 20%? That's all that matters: purchasing power. The certainty that you'll get your $1000 back 30 years from now is irrelevant. What will it be worth?
The market has forced real interest rates on even very long-duration debt deeply into negative territory. It's hard to imagine being sufficiently bearish on the world economy that one would be willing to eat 7% a year in lost coupon purchasing power and the substantial risk of capital loss just to avoid finding something better to do with the money. Buying toilet paper would be a better choice; you'll always need it and it isn't getting cheaper.
Long PST and TBT. Long gold. Other short Treasury positions. Reply
Treasury Bonds: The Short of the Century [view article]
The discussion is missing the key point of this "short of the century". The Fed can control the fed fund rate, but it cannot control the yield of the US treasury, which is determined by the market. The US treasury rate is further driven by the short-term rate which is FF and the inflation expectation of the market. Thus even if Fed does not raise FF - which translates to higher forecast for future inflation i.e. the residual effect of expansive monetary policy, the long rate will go higher. On the other hand if Fed raise FF rate then long rate will also go higher as well, however the spread between short and long rate might flatten. So which point is not made clear? The long rate for the UST has no way to go but ... where? Safe for a financial crisis again emerging in the near future, which might happen too, you can never say never with this financial climate, however the Fed is determined to save the financial institutions (and the system) so any flight to quality will be relatively short lived. Full disclosure - I am short the UST. ReplyMcMillan
Alternatives and Absolute Return with ETFs [view article]
Thanks for the feedback Aquater and good selection in mentioning PRPFX.Rather than a 'hodge podge concoction', the portfolio has been carefully crafted with a great deal of attention given to offsetting non-correlated asset classes, macro level themes and specialty plays managed using a top down economic forecasting approach.
By only managing 20 ETFs allows for a very simple model to be handled by our portfolio team and one that only requires reallocation on a quarterly basis. Inclusion of sectors only recently appearing in the ETF universe is also providing significant alpha to the composition in the first half of the year.
To provide greater detail on the specific weightings and recent modifications I can be reached off list at mcmillan@agilewealth.c... Reply
Alternatives and Absolute Return with ETFs [view article]
Too messy a portfolio. Seems it is made just to impress a novice by including some currently fashionable sectors and including a complex array of etf's whose overall coherence is not explained or may not be explainable. As a challenging alternative, look at a simpler but highly effective vehicle like PRPFX (Permanent Portfolio). It already as a great record. The proposed hodge podge concoction, on the other hand, will certainly fail unless changed uncannily by correctly anticipating fast changing future events. Any thinking intellect can do better. ReplyAlternatives and Absolute Return with ETFs [view article]
Great info, thank you. ReplyTreasury Bonds: The Short of the Century [view article]
Interesting take. I believe that investors are just truly confused and uninformed. How could you possibly predict how to short treasury bonds when investors actions are not corresponding with market signals. When the Fed makes statements that they will be tougher on inflation, yields shoot up. When the opposite happens, yields go down. this is exactly the opposite of what should be happening.Check out this article for a more in depth analysis of what investors are doing and how they are getting screwed by the treasury bonds, which off a lower return than current inflation levels.
www.greenfaucet.com/bo... Reply
Bottle
Treasury Bonds: The Short of the Century [view article]
I stand factually corrected on both cases and also stand 100% behind the logic and resonablensess of the conclusions of the article:- Tips are pegged to CPI-U which includes food and gas. Please note that this is in no way central to the arguments in the article. I stand by the main argument that inflation is not accuratelly measured for the several reason pointed, and that the focus on core inflation (which is systematically tauted byt the FED and in the media) MAY (I repeat MAY) have some impact on investors perception of inflation and therefore the required return on their bond investments. This just one a several arguments provided and not the main one by any means.
- In the example provided where I mention duration it should read maturity. Maturity is a VERY rough approximation of the sensitivity of a bullet bond price to interest rates (it has the advantage of being very intuitive which is good for an article of this nature); in longer maturity bonds it does differs samewhat from duration.
Duration (McCaulay Duration) as you point out needs to take into account not just the principal repayment but interest coupon; it is the sum of the cash flows discounted by the yield multiplied by the time cashflow divided by the price of the bond (i.e a PV wighted average maturity). In this case, assuming a 4% coupon and that the bond trades at par it would imply a duration of about 8.4 years, and therefore an estimated change in the price of the bond of 25.2% rather than 30%.
Off course Mcauley duration is also an approximation, to be more precise one should use modified duration and to be even more precise one should use convexity, so you can decide how precise you would like to be. The numbers were used to give an idea of the order of magnitude and this in no way changes the merits of the argument, I believe.
Thank you for adding precison to the discussion.
With regards to the second comment (by "djzvue") on the use of leverage, I just wanted to clarify that he must have misread, on the contrary I did NOT recommend the use of leverage and did in fact highlight the increased risk of levergage in such a trade.
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Treasury Bonds: The Short of the Century [view article]
The duration of a T-note is NOT equal to its nominal maturity unless the bond has zero coupon. Coupled with the error about the inflation rates used for TIPS, one concludes this is a poorly researched article. ReplyTreasury Bonds: The Short of the Century [view article]
For TIPS inflation adjustment, the Treasury Direct site notes: "The index for measuring the inflation rate is the non-seasonally adjusted U.S. City Average All Items Consumer Price Index for All Urban Consumers (CPI-U), published monthly by the Bureau of Labor Statistics (BLS)." This is not the core rate; it does not strip out food and energy. ReplyTreasury Bonds: The Short of the Century [view article]
It's important to remember that long bonds are also a place people put their money during flights to quality/away from risk. So, in addition to inflationary pressures, these rates have recently been highly correlated with the broad equity markets. When people feel bullish, they pull money out of fixed income and put it into equities, which drives interest rates up. When markets have bad days, you see the reverse.Another way to play this, by the way, is a new ETF: TBT Reply
Treasury Bonds: The Short of the Century [view article]
your anti-bond argument has been out there for so long that I believe Marc Faber now suspects it is flawed. The analogy of blackhole physics may be more apt now--the destruction of credit and financial systems (so much more than just cyclical falloffs of growth), moving now from housing into commerical credit, pensions, municipalities, etc could be such a powerful destructive centripetal force that the more visible sparkles of inflation (generated by desperate remedies and their effects) still at work on the periphery will in time be sucked in and extinguished. The struggle between these forces seems almost cosmic, the leveraging you recommend highly risky, anything but shooting fish in a barrel. Money mgr Gary Shilling, who has been good on deflation and the bond market in the past, is now saying buy long T-bonds. He's not a theorist but worth listening too. Thanks for laying out your view. Reply