Fixed-Income Funds for Long Term Investors

     Many fixed-income funds have fallen sharply ever since the Fed Chairman Bernanke talked about "tapering."  The iShares 20+ U.S. Treasury ETF (TLT) has lost 17% since May.  Yet retirees still need income form their investments and many investors don't want to be too exposed to the stock market.  What should they do?  That's the subject of my recent interview with TheStreet.com.

click here for TheStreet.com article

     In my interview I was asked for my favorite ETFs for income and long-term investing.  I believe income investors must include dividend-paying equities, but I limited my choices to fixed-income ETFs.  Here are the two I chose:

     PowerShares Senior Loan Portfolio (BKLN).  This is one of the most popular ETFs in 2013, gathering $3.6 billion in assets.  BKLN yields 4.6 percent and provides some protection against rising rates because it invests in floating-rate bonds.  Because most of the bonds are not investment grade, the risk to this fund is a slowing economy.

     iShares US Dollar Emerging Market Bond ETF (EMB).  Rising interest rates led to selling in most fixed-income funds and for many this selling is deserved.  But not in all.  I believe the selling in emerging market bond funds is overdone.  EMB is the largest emerging market bond fund with $4.1 billion in assets and it primarily hold U.S. dollar denominated government debt, much of it investment grade.  It yields 5.3 percent.

--David Vomund is an Incline Village-based fee-only money manager.  Information is found at www.ETFportfolios.net or by calling 775-832-8555.  Clients hold the positions mentioned in this article.  Past performance does not guarantee future results.  Consult your financial advisor before purchasing any security.

For Every Problem ...

H.L. Mencken, "For every problem there is an answer -- simple, clear...and wrong." 

 

     Stocks have been falling for most of August.  Not by a lot and with very little trading, but the relentlessness of the selling makes the decline seem worse than it is (down 3.9 percent from high to low).  We're told the reason is clear: interest rates are rising.  Rising rates make for an easy headline.  The media never mention that a little profit-taking after a 20-percent rally this year was understandable and in fact healthy.  They are also missing the real point --- the economy.   

     The media expect a stronger economy, but recent economic reports tell a different story.  New home sales tanked last month as mortgage rates rose.  Retail sales are disappointing and durable goods orders saw its biggest drop in nearly a year.  The employment picture is the key to future growth.  New job creations are mostly in low-paying, part-time work in retailing, hotels and restaurants with few full-time positions.  I am certain the Fed looks beneath the headline numbers and sees just how weak the jobs picture is.  All this shows a weakening economy, not one about to accelerate.  Even so...

     The Fed still sees a second-half pickup to 3 percent GDP growth and 3.5 percent next year, but in their July meeting half the members began to question the official forecast.  If growth is much less (below 2 percent, as it is now), bonds would rally and rates would fall as investors realize that their optimism for the economy isn't justified.  How stock investors will take that remains to be seen.  So far, those who see the prospect of slow GDP (and therefore profit) growth are selling.  I believe that for lack of a good alternative in fixed income or cash equivalents they'll turn again to better-yielding stocks.  My favorites include Spectra Energy (SE) and Chesapeake Energy (CHK). 

     There have been several sell-offs in this great bull market, most recently in May and June and before that last fall, but all were brief and followed by new highs.  Sell-offs in bull markets are usually fast and this one has been typical.  In the past, the media were always ready with a reason (never just profit-taking).  The reason this time, they say, is that interest rates are rising.  End of story.  Wrong.  The market is telling us that economic growth won't pick up as much as the Fed expects.  That's the real story. 

 — David Vomund is an Incline Village-based fee-only money manager.  Information is found at www.ETFportfolios.net or by calling 775-832-8555.  Clients hold the positions mentioned in this article.  Past performance does not guarantee future results.  Consult your financial advisor before purchasing any security. 

 

 

Profit Taking and Recovery

     Stocks continue to do well as investors continue to put some of their idle cash to work in stocks.  That is not a new story, nor for that matter is it one that is winding down.  Look for buying to increase and prices to move still higher for the same reason they've done well for a few years, i.e. there is no alternative.     

     Investors shrugged off May's profit-taking triggered by Bernanke's comments about Fed bond buying to which people overreacted.  The Fed must have been surprised by the quick sell-off in both stocks and bonds, because in appearances since May Bernanke and others made it clear that short-term rates won't be rising for years.  Recently he said that the 7.6 percent unemployment rate "overstates" the health of the economy and argues for more accommodation not less and low rates for a long time.  And he's right.  Look beneath the headline numbers for hiring (mostly part-time) and the picture is bleak.  The broadest measure of the labor picture shows that 14.3 percent are either out of work or in a part-time job when they really want to work full time. 

     Bonds have not fared well as stocks rallied.  Treasurys have been especially hard hit and with good reason since they had been the most overvalued.   

     What catalyst could drive stocks higher?  A slight rise in the market's price-earnings ratio would do it, that on top of a small boost in earnings estimates for next year that will be reflected in prices before year-end.  There is another factor.  Hedge funds and institutions have been underinvested in stocks for years.  There is $2.6 trillion in money-market funds, two-thirds held by institutions.  The cash-heavy professionals are returning, though slowly.  Individuals control one-third of the money-market trillions.  Some are re-discovering stocks as well.  Buying by pros and amateurs will support the market when profit-taking occurs and propel it higher at a rate faster than earnings growth would dictate.  Presto!  Multiple expansion.

     Bottom line: As long as alternative investments remain unattractive (think years), stocks will do well.  They'll do best if GDP growth here and overseas picks up even if that makes interest rates rise, because profits would be rising, too.  That, plus some multiple expansion, is what many investors are banking on.  They'll be right.

David Vomund is an Incline Village-based fee-only money manager.  Information is found at www.ETFportfolios.net or by calling 775-832-8555.  Clients hold the positions mentioned in this article.  Past performance does not guarantee future results.  Consult your financial advisor before purchasing any security.