Yield Hunting Newsletter | February 2019 Commentary And Sheets

Typically the monthly newsletter is used to focus on economic views, portfolio construction, and retirement strategy. The weekly commentaries (out each Sunday evening) are more specifically directed towards closed-end funds and individual security opportunities. To all our new members, you have joined at an exceptionally good time. For existing members, we believe the first half of 2019 will be significantly better than the back half of 2018.

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"And finally, no matter how good the science gets, there are problems that inevitably depend on judgement, on art, on a feel for financial markets."

                            -  Martin Feldstein

Portfolio Construction And Strategy Is Key

January was a very different month compared to December and the recovery that we opined would likely come, arrived and then some.  The market is still not back to all-time highs but it has made up a significant amount of ground.  This is primarily due to the Fed doing an about face and going full-on dovish.  The 'Powell Put' has now been established.  

The Fed chairperson is clearly a learn-on-the-post position and Powell is learning quick after a bunch of missteps in Q4.  Following a semi-market crash in December, Fed officials quickly came out to repair the damage.  On the FOMC meeting on January 30th, the dovish stance was reiterated with the word "patient" mentioned 8 times.  Clearly they do not plan on raising in March (and by extension February) and could be on hold until June.  

The key language dropped mentioned their tightening bias and in a marked shift from their balance sheet "autopilot" comment, signaled increased flexibility regarding the it's normalization.  This helped move the market by more than 430 points.  The FOMO -induced rally has accelerated in recent days as investors (both retail and professional) rush into the market in order to not fall further behind waiting for the December low retest.

The combination of this Fed-pivot, a strong earnings season, an end to the government shutdown, and trade talks advancing have created a slew of tailwinds.  And like tax loss selling in December exacerbating the decline, FOMO is accelerating the climb.  The market's P/E has moved up 2 points to 16x 2019E $173 EPS.  We think it would be difficult for the market P/E to expand too much more and think a 17x number is a ceiling for now given all the market risks.

What does all this mean for our strategy?  Well, in one-word: positive.  If you would allow me two words it would be "very positive".  The Fed gave the markets a very bright green light and one that they are highly unlikely to reverse in the next 6 months.  My base case is one more hike this year, perhaps in June but maybe more likely now in September.  

The current environment is well supportive of a high-quality fixed income closed-end fund portfolio earning in excess of 8%.  Even with the run in prices closing some large discounts, most funds are still cheap given the new Fed policy.  We think the market will continue to recognize this - slowly- as typically happens with the CEF marketplace, further closing discounts.  The VIX is likely to be the driver of these discount closures over the next 2-4 months.  To me, it seems highly likely that the CEF market will at least reach the high valuations they achieved last year and perhaps beyond.  `

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Here is the link for the new portfolio list:

February Google Sheet

Introduction

We are continuously revamping and trying to improve our service given the amount of information we provide along with the complexity of it. In the next couple of months, we want to introduce a procedure for implementing the "system" in a straightforward manner.

Most financial advisors do a significant amount of work on the front-end even if their 'systems' are cookie-cutter for all clients. This is what most do-it-yourself investors lack. They lack the plan and the structure preferring to lop together a bunch of stocks, bond funds, and cash into an allocation.

Please note that the Google Sheet is new this month as it is every month. There is a date at the top in the title of the sheet as well as the date in the spreadsheet itself. On the first of each month, we create a new sheet and link. Please bookmark it or access if via the "tools" drop down in the service.

New members should start with the "Welcome to Yield Hunting! Alternative Income Opportunities" and should read our primer titled: "Yield Hunting | How to Get Started- A Primer on DIY Income" under the "Getting Started" menu drop down.

On the Google Sheet, we now have an "Instructions" tab as a quick guide for more novice investors.

Please visit our new website at YieldHunting.com. It has all of our public articles and retirement articles.

Lastly, we now have 85 reviews on our service with nearly all being five-star. If you haven't left a review, we would very much appreciate you doing so. Click the link below which should allow you to write feedback.

We are going to start to separate out the newsletter and manage three real time portfolios: Core, Mini Core, and Flexible. Look for more direction on managing these along with more ideas centered around swapping and deep value. The general objective is to be buy and hold while also taking better advantage of opportunities in specific sectors- avoiding losses in others.

Yield Hunting: Alt Inc Opps - Marketplace Reviews

A Focus On Creating A Durable Portfolio

When it comes to extreme volatility of the type we saw in the fourth quarter, there are two key variables that need to be in place to weather the storm.  The first is a durable portfolio - one that won't produce a large and permanent capital loss.  The second is the emotional component whereby investors tend to do the wrong thing at EXACTLY the wrong time.  

From a durable portfolio perspective, risk management is key.  Now, we could put 100% of our capital in treasuries, munis, and CDs and risk can become an afterthought.  However, the overwhelming majority of you do not have enough capital at today's still ultra-low interest rate environment to make your retirement financial plans work.  

Conversely, yield at any cost is another pitfall we constantly see.  Achieving yields in the low-teens comes at a cost.  If equity total returns are pegged at 10% long-term (50-years plus) and 8% near-term (15-years plus), then a portfolio of junk bonds yielding 12% per year should come with a warning disclaimer, like a pack of cigarettes.  If your portfolio yields more than the lowest level of the markets capital structure, then you are taking a significant amount of risk. 

The question becomes, does that large yield come with a substantial risk of a permanent capital loss.  What do we mean by that?  When the stock market falls by 30% and you are invested in an S&P tracker fund, you are more likely than not, simply going to hold your investment.  Why?  Because you believe that the fund (and by extension the market) will recover as it has for more than a century.  Declines are followed by recoveries which are followed by more declines and recoveries.  All the while, the bias of the market long-term is to the upside.  When it comes to what we invest in, we want to make sure there's always the assumed recovery and not a chance that the market will assign a permanent discount to what we own.  For an example, think of the ownership of non-agency mortgage bonds BEFORE the Financial Crisis.  of course, buying them after the crisis, at a substantial discount to par, is a different story.  

Today we are most cautious on select areas of the bond market, namely the CLO space.  Those that traffic in the equity tranches of the CLO market are likely to be burned badly in the next recession.  Other concerns are highly levered large cap companies that reside in industries that are not growing.  Those would be in the automotive, telecom, and utility spaces.  

Diversifying or avoiding these pitfalls is paramount to navigating the next downturn safely.  Weathering the storm with these sorts of securities is much harder.  Instead, building a diverse income stream from multiple non-correlated sources remains the key.  Let's run through an example.

I met with this individual who was 60 years old and wasn't overly wealthy.  She has about $600K in IRAs and another $300K in non-qualified assets.  She requires about $6000 per month, or $72K per year, to live on.  Immediately, that would raise a red flag as $72K divided by $900K is an 8% withdrawal, well into the danger zone.  

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But here's the rub.  This 60-year old had multiple sources of income that weren't tied to her portfolio.  Long ago, she had purchased a variable annuity from John Hancock that now had about $300K in it.  Settling that for the income option generated over $1500 per month.   Down to a need of $4500.  She also had her now deceased husband's military pension which provided $1,200 per month plus unlimited care at the VA.  Down to a need of $3,200 per month.  She will also apply to get her Social Security early which will provide another $1050 per month upon her 62nd birthday.  Down to a need of $2,150 per month.  Lastly, she had a website where she quilts and sells items that generates about $300-$500 per month.  Down to a need of $1,850.  

After all is said and done, she needs just $22,200 of that $72,000 from her portfolio lowering her withdrawal rate to just 2.4%.  That is well into the safe zone and approaching the "very safe" area.  Even though this woman is likely to have 30-plus years of retirement, by creating multiple income streams, you can reduce the amount of stress you place on the portfolio thereby reducing your overall risk significantly.  

This is also one of the reasons we have stressed that younger members look at overfunded life insurance, rental real estate, and other assets.  Older members should also consider low-cost annuities as a means to purchase a pseudo-defined benefit pension.  

The second variable that we opened this section with is the emotional component.  Investing is an emotional endeavor and can lead to some costly investment decisions during market swoons.  We continue to believe that the largest benefit of having a financial advisor (or a service like ours) is the hand-holding during bear markets and the avoidance of irrational decision-making. 

For the average retail DIY investor, investing can be fun when the market is rising but tortuous, both financially and mentally, when declining.  Blackrock has a plethora of data on their website for individual investors.  This chart shows how the average investor has performed when compared to major indices.  The 2.11%, from a Dalbar study, is flawed but likely not substantially far off.  What happens is that investors tend to wallow in despair and eventually become despondent, angry, and then sell to "save what is left".  What the actual return number is, is irrelevant.  

This is evident in the fund flows when charted against the S&P 500.  What the chart shows is when the market is rising, they tend to get excited and let emotions dictate their actions.  They then increase their allocation to riskier assets at just the wrong time.  Conversely, when the market declines, investors panic and rush for the exits, typically at the same time.  

The typical investor rides the roller-coaster of emotion, influencing their trading behavior:

How to avoid the most common pitfall.  You should write the answers to these point downs and create your own plan:

  1. Establish Long-Term Objectives.  What is the bogey we are shooting for?  Do you want a certain level of spending and withdrawal rate?  Similar to the example above, do you want $10K per month but a withdrawal rate of just 3%?  2%?   Specifying exactly WHY you are investing and what is the goal of the money is extremely important and a key first step.                                                                           

  2. Have a plan!  What will you do when the market falls 20%?  30%?  40%?  Will you reallocate?  Do nothing?  Reinvest dividends and income?  A plan can help remove the emotional component to market volatility.                                                                            

  3. Diversification!  This is a buzzword that gets thrown around a lot and can mean many things.  Here, we are talking about establishing multiple income streams from those non-correlated sources.  That could include pensions, annuities, Social Security, rental income, etc.  The more income fingers you have, the greater risk you can afford to take in your portfolio- and yet sleep well at night.                                                                        

  4. Avoid the herd. If everyone is in the same boat, it is likely going to sink.  Following what others are doing just because they are making money can lead to poor investment decision making.  One of the most recent phenomenons in this area is the retail arbitrage.  If you have not heard of this, it is where people go to large retail stores and buy up all of a certain item and resell them online.  It can be extremely profitable and stories are now widespread of people making thousands of dollars a day doing it.  In my mind, once it becomes well known and news stories abound, it is likely too late.   Bitcoin is another great example of herd mentality.  Being contrarian and buying when others are selling and selling when others are wholesale buying still remains the best way to make money.                                                                                                             

  5. Don't Be Afraid To Lose Money!  This is one of the most common pitfalls we tend to see.  There is a sports analogy that is often used by football announcers where they say they're not playing to win, they're playing not to lose.  It basically means the team is playing too conservatively.  The prevent defense, prevents wins.  The team is not playing to win, but just trying to avoid losing.  Instead, investors should focus on winning as the moment you try not to lose you have become an emotional investor.  Getting rid of that fear of losing money is a first step.  If you are constantly afraid of losing, you'll never take risks with your capital.  Without that risk taking, you are not going to allow your money a chance to grow.  That is where a strategy and risk management come into play.     

Portfolio Construction - Asset-Liability Matching or Liability-Driven Investing

We espouse an investing theory that essentially mimics the strategy employed by various private pensions, called Asset Liability Matching ("ALM") also known as Lability-Driven Investment ("LDI").  The popular and widely used portfolio construction technique advocated by Modern Portfolio Theory ("MPT") is not always the most practical.  

What are we talking about?  MPT suggests placing assets into low correlation assets to produce the most efficient portfolio on the efficient frontier.  In layman's terms, this means the best return for the level of risk.  Most financial advisors use the same system.  And when they need income to pay a liability, they simply sell some assets and rebalance back to the target allocations.  

MPT asserts that at a certain level of risk aversion, you are going to maximize your risk.  The theory is right in that all else equal, if someone who has a risk tolerance of 6%, they then for a portfolio with a risk of 6% want the highest return.  The problem is that this theory ignores the other side of the balance sheet (liabilities) and how that can effect those returns.  We have highlighted one of these effects in showing sequence of returns which is something that MPT essentially disregards.

The theory came into existence in the early 1950s, when the concept of retirement was a relatively new idea and even still, if someone did stop working, their retirement "career" lasted less than a decade primarily because life expectancy was much lower.  Demographic trends, inflation, health care costs, and a host of other variables have drastically changed the idea of retirement over the last 60+ years.  

This is why pension funds do not use MPT but instead use liability- driven investment strategies, also knows as ALM.   ALM focuses on the other side of the balance sheet- the liabilities, both current and future.  This is why the strategy is superior when it comes to creating a portfolio for retirement needs.  It is only now filtering down to the advisor/retail market, from the institutional as future returns on equities will likely be lower.  

In aggregate, the ALM approach reduces total risk by focusing on those recurring liabilities.  For a retiree, if you could meet your annual spending needs through the use of CDs and treasury bonds, many would.  In other words, they applied the least amount of risk needed to meet their needs as opposed to the MPT approach which takes the most amount of risk tolerated.  That is not to say you would necessarily invest in the treasury bonds, but it would be your starting point- from the lowest level of risk, not the greatest.  

I espouse splitting the difference for most investors.  If you can meet your needs for a long retirement - you should be forecasting at least to age 100- and you are content with treasury bond returns, then do it.  But I prefer a system where a certain piece of the portfolio is invested in equities and other long-term growth compounders.  That includes the Core Portfolio that generates a roughly 8% yield where a portion of that income can be periodically reinvested.  

Moving away from an asset-only approach to a strategy that considers both the assets and the specific liabilities of your retirement plan is going to be crucial over the next decade.  For one, a recession is likely to occur within the next 3 years.  We expect a 40%+ decline for the S&P 500, even if the recession is a mild one.  

Why do we advocate having capital in the long-term growth compounders?

The ALM approach is largely a fixed income one.  It tends to better match assets (through income) with liabilities (mostly spending needs).  Pension funds then match duration and risk profile to the present value of those liabilities in order to reduce risk further because of timing mismatches.  In addition, future inflation can eventually erode purchasing power, the offseting of which is the primarily responsibility for the long-term compounders.

We believe this will be the next big trend in financial advising.  It is a more customized, outcome-oriented approach to investing.  It is a way for advisors to earn their fees and combat the robo-advisor trend.  Most financial advisors still today only care about the asset management portion of their responsibility- the selection of mutual funds, ETFs, and stocks to create the portfolio.  They then compare that to the benchmark.  Too much emphasis is placed on this portion of job description.  

Ron Carson of Carson Wealth Management, one of the largest registered investment advisors in the country, states that the AUM model is worth only 20 bps.  That model is when a financial advisor selects an asset allocation, selects the securities that will make up that asset allocation, and then rebalances (most often annually).  We call that baby sitting the assets.  Most advisors still charge around 1% for that privilege.  

Retirees want income, plain and simple.  And they want it to increase with inflation.  From a high level perspective, this is fairly simple.  From a practical and implementation perspective, it can be difficult to accomplish.  This is why we use a levered bond portfolio in the Core Income Portfolio.  The 8% yield should produce more than enough income allowing the reinvestment of some of the yield to add to your aggregate share totals, increasing the forward payouts. 

Obviously, if your portfolio is large enough, the need for an ALM approach is reduced.  Even a meager 2% dividend yield can cover your liabilities means you are in a whole different world in terms of strategy.  From its most basic form, ALM is derived as a bond ladder.  The problem with a bond ladder today is that it locks you into the current interest rate regime.  If rates rise, you've locked in the lower rates for a number of years.  

Drilling Down To YH

Investors that espouse this ideal and want to replicate it themselves should follow these simple rules and instructions when creating their portfolios.  Above all else, risk management and mitigation, especially at this point in the business cycle, is paramount to all else.  Reducing FOMO (fear of missing out) is a key aspect of this risk management strategy.  This is why we have used that JP Morgan quote several times in the last year.

"Nothing so undermines your financial judgement as the sight of your neighbor getting rich.”

Sequence of returns risk can be devastating, more so than interest rate and even credit risk to some extent. We highlight the risks in our retirement focused article, "Retirement: Sequence of Returns Risks In Retirement."

For those in the de-cumulation phase of their life, this is the most crucial risk factor to consider. If you are withdrawing 3-4% of your portfolio per year, and the typical bear market and initial recovery lasts 24 months, you just withdrew 6-8% or more of your capital at very low prices. That capital is not there for the recovery and can lead to a permanent capital loss.

For those in the accumulation phase, and with significant time until retirement, we typically advocate keeping a steady course. If you properly segment your assets into three buckets, with three different risk profiles, you can position yourself to be in a very advantageous situation come retirement.

What are those three buckets?

  1. Home run or risky segment: This is typically a business owner, salesperson, or some other commission based or salary-fluctuating endeavor. Or perhaps it is a passive interest in a venture like oil and gas development, real estate development, and or private equity. Business owners are risk-takers but they like to do so on their terms, which means they are typically out of the market.

  2. Portfolio segment: This is your diversified portfolio. Obviously there are varying degrees of risk here but for the most part, this is your moderate risk bucket. We have seen portfolios in nearly identical phases of life contain 100% individual muni bonds to 100% growth stocks. Clearly individual dependent.

  3. Safe bucket: Anything that generates a return but is not on the roller-coaster of the equity markets. A sleep-well-at-night segment. There are many differing things that can be placed in here including simply holding cash, short-term bond funds, and even some individual munis.

To start the process, really drill down on what you need per year from your portfolio.  This is your gross annual spending (gross of taxes) minus any other sources of income.  Hopefully, that number is less than 3.5% of the portfolio value today.  If it is not, you may need to adjust your spending over time or have a plan B.  

We can then split the portfolio into three segments:

  1. Safe Bucket

  2. Core Portfolio

  3. Peripheral

The Core sits at the center of the portfolio and should be no more than 35% of your total liquid assets.  Our rule of thumb is to maximize your exposure to leveraged assets at 35%.  If you are unsure if a CEF is levered or not, you can go to CEFConnect.com, enter the ticker, and then click on Fund Basics.  On the left side, there is a section called leverage.  If there is nothing, it is unlevered.  If there is an "effective leverage (USD)" value and an effective leverage %, then it is levered.  If the fund is over 20% levered, we consider it fully leveraged.  From 1% to 20%, it is only partially.  

You can then go in and calculate the effective leverage of your portfolio by calculating the weighted average of the positions.  For example, go line by line and calculate the weight of each holding as a percentage of the total portfolio and multiply it by the leverage of the fund.  Add up all the lines and you get your effective portfolio leverage.  

Once you have the backdrop, to get to that ALM investment strategy, attempt to generate enough income to cover your annual spending needs.  

We want to stress investors to read the primer several times:

Yield Hunting:  A Primer

If you do not understand an aspect, leave a question in the comment of the article so others can benefit from it.  

For those just starting out, the discounts in the CEF world are no longer the screaming deals they once were.  It may take some time to fill out the Core and even some of the peripheral positions.  But be patient!  

Round out the Core with individual preferreds (1-2% each position) totaling around 10-12%.  REITs or REIT funds, totaling another 15%-20%.  Equities, if your plan calls for it.  Bond mutual funds like those on the Peripheral tab list. Other CEFs, as well as your safe bucket.   

The Core Portfolio

The month can be summed up by the following chart with both the high yield and floating rate indices; a very strong start followed by flatness and then another leg higher near the final days.  The high yield and floating rate ETFs jumped 3% out of the starting gates in January but had not done much since then until the last week.  The Leveraged Loan index remains well below par as capital continues to flow out of the space.  Once the capital flight ceases, the index should see a rebound.  

The top holdings in the Core Portfolio did very well on both price and NAV.  Discounts tightened for virtually all funds.  These funds account for the majority of our holdings at 58% of the total portfolio.  

The next set of funds including ARDC, AIF, KIO, and BTZ:

And the last bunch of funds, MMD, MHI, GBAB, BLW and MCI*:

*MCI was sold on Jan 14th

For the month, the Core Income Portfolio rose 7.24%, trailing the S&P 500 by just over a point.  We recovered all that we lost in December, November and most of October in one fell swoop.  By comparison, the Barclay's US Aggregate Bond index rose by 1.06% in the month.  

The Core Income Portfolio is meant to be a very low trading portfolio where we are positioned for income primarily, and second capital appreciation. This does tend to miss some of the 'best opportunities' and what we call convergence trades that are more tactical bets.  We instead will be issuing these calls as we see them for those that are interested in those bets.  Our current top funds are below.

The fourth quarter saw a rapidly moving market as concerns about the U.S. economy came to the fore in the quarter.  The wider spreads in the bond markets led to nearly all fixed income asset classes selling off.  Municipal bond exposure was the only positive area during the quarter.  As rates started to fall after initially rising through October, munis saw renewed interest and rising underlying values.  Lastly, tax loss selling took hold in December and widened out discounts to extraordinary levels.  

We are taking advantage of the closing discounts to re-align some positions in the most beaten down areas based on our premise that there would be a snap back in January as tax loss selling abated.  And again, given the FOMC meeting last Wednesday, we think CEF discounts are likely to tighten beyond the 52-week average levels.  That should be supportive of pricing trends for at least the next few months.  

We reduced our exposure to PCI and PDI in the month by taking off the addition made to PCI during the market swoon.  PCI was reduced to 14%, from 18% while PDI was reduced by 1% to 9%.  The value that these funds once traded is no longer there and the funds are back to their rich valuations that we saw towards the end of the summer.  

So why not reduce to zero?  Because there is nothing like these funds in terms of long-term holds.  In addition, the funds continue to provide that long-term income stream much needed by most of us.  We will re-add once the funds see another unwarranted sell-off.  

We also still believe ARDC is one of the best values in the market.  We increased the allocation again to take advantage of the discount convergence opportunity in addition to a juicy yield.  

Apollo was one of our top funds (below) for the month.  We continue to like the NAV movement and think the discount could close a few points in the next few months, especially if high yield spreads come in further and floating rate prices rise back towards par. 

On DBL for the Mini Core, the fund has recovered three-quarters of the pricing lost after they cut the distributions.  At a 1.6% discount, the fund no longer is a screaming buy (and is much closer to a sell).  The 52-week average premium is +2% so we think there's may a point or two more to go but that's it.  

In general, we try to keep overall trading to a minimum but do like to tweak the allocations based on valuations and underlying sector exposure. The Flexible Portfolio is likely to see more trading opportunities (buying and selling) and will be more of a focus for some of our members.

Core Summary:

  • PCI to 14% from 18%

  • PDI to 9% from 10%

  • ARDC to 7% from 6%

  • AIF to 7% from 5%

Mini Core Summary:

  • PCI reduced to 13% from 16%

  • PDI reduced to 9% from 10%

  • DBL reduced to 5% from 7%

  • AIF increased to 8% from 7%

  • ARDC increased to 9% from 7%

Top "Quality" Funds

(1)  Western Asset High Yield Def Opp (HYI):  This fund self-liquidates in September 2025 given the limited term structure.  It invests primarily in high yield bonds but does have some emerging market debt, bank loans, and investment grade corporates.  The portfolio is 17.5% CCC and some of the top holdings are communications firms like Altice SA which bears some watching. The effective duration is 4.1 years.  There is no leverage in the fund.  The yield is 7.71% but coverage is ~107% and UNII trending up from the current -8.2 cents.  At that coverage ratio, the true yield is 8.25%.  With the fund self-liquidating in 6.5 years, you are getting nearly 2% of kicker to your yield for a total return just north of 10%.  Despite the credit quality, we think this is compelling even compared to equities.  Additionally, I do not think we will have to wait until 2025 to see that discount close.  It is likely that within the next two years, the discount will tighten significantly as we have noted that the sweet spot for these term trusts are around 2-4 years out.  

(2) Apollo Tactical Income (AIF):  This 8.95% yielding fund is currently earning 104% of the distribution, has positive UNII of 9 cents, and has both of those trending higher for a trifecta of what to look for.  Again, the fund deals in lower quality debt of mostly health care and financial services companies.  The discount is near 13% compared to a one-year average of 11.3% and longer-term average near 10%.  The fund is levered by 33% and does have relatively high expenses, which can account for some of the discount.  

(3)  PIMCO Corporate & Income Strategy (PCN):  This PIMCO CEF is yielding 8.72% and trades at a ~9% premium to NAV.  While we typically do not recommend a fund that trades at a premium to NAV, PIMCO is often different in this regard.  The fund has coverage of 106.7% and UNII of 13 cents through the end of December.  Most importantly, the fund is trading well below the one-year average premium offering up some total return opportunity.  We think the premium could rise as much as 5-7 points.  Non-agency MBS makes up nearly 20% of the fund and ABS makes up another 18%. 

Top Convergence Trade Opportunities

These are funds that have solid total return opportunities that could be realized shorter-term.  

(1)  Blackrock Floating Rate Strategy (FRA):  This may be a new name to some but the fund has been around awhile.  A relatively lower-risk floating rate fund, the shares yield just 6.20%.  That is on the lower end of the category but the fund is earning nearly 110% of the distribution.  NII yield is actually over 6.8% making it a little more competitive.  In addition, the discount convergence opportunity is over 5 point creating a compelling total return opportunity.  It is possible that they increase the distribution on the fund given the fundamentals in which case that 5 points of discount opportunity could be captured quickly.

(2)  Highland Floating Rate Opp (HRFO):  This was in our top funds list last month and it has moved up nicely (from $12.96 to $13.92, plus a distribution).  However, we do think there is some juice left in the move with the discount at 3.5%.  Our target is a 1% premium, leaving 4.5 points of juice left to squeeze.  The yield on the fund 6.65% through a managed distribution policy.  Last month, the z-score reached an abismal -4.10 that is typically indicative of a large distribution cut.  But there was none in the case of HFRO.  The fund returned over 10% in a month.

(3) Blackrock Floating Rate Income (BGT):  Similar to FRA above, this lower yielding fund is greatly outearning the distribution.  In addition, UNII is nicely positive and the discount very wide compared to average levels.  This is another total return opportunity as we think we could see 3-4 points of discount tightening perhaps driven by a higher distribution.  This fund already raised back in July from $0.618 from $0.0583 (an increase 6%).  The one-year discount is just -1.30.

Reviewing Last Month Performance:

1-  Nuveen Real Asset Income and Growth (JRI)

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2- Highland Floating Rate Opportunities (HFRO)

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3- DoubleLine Credit Opps (DBL)

Fun With Charts:

1-  US expansion is about to be the longest ever (this summer)

2-  Nordea forecasts one hike this year

3-  The correlation of the S&P 500 to the probability of a rate increase:

4-  Wells Fargo thinks there will be two hikes:

5-  Cumulative Fed tightening (including balance sheet reductions)  

6-  Future equity returns are likely to be very low:

7-  The latest 7-year GMO asset class return net performance forecast:

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8- The yield curve steepened following the FOMC meeting on Wednesday:

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9-  The conference boards labor differential and the yield curve show a tight correlation.

10-  A nice summary of the history of Netflix's price increases:

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Seattle continues to build, build, build.....

Humor:

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