Non-Investment Grade Bonds Will Beat High-Grade Bonds In 2015

By Michael Aneiro, Barron's

Morningstar today peers into its corporate bond crystal ball and sees a better future ahead for high-grade bonds than their high-yield brethren in 2015. Morningstar says credit spreads show corporate bonds are fairly valued, but the recent tailwind from declining interest rates “was the main driver for corporate bond returns” but now that favorable condition “has likely run its course.” From Dave Sekera, director of corporate bond strategy at Morningstar:

"...We expect high-yield bonds to provide a better return than investment grade in 2015. The issuers most affected by falling oil prices have taken the brunt of losses over the past few weeks, and the additional carry in the index will help offset any further widening if oil prices fall more. In addition, while we don’t foresee interest rates spiking higher, we do expect interest rates to drift upward through the year. High-yield bonds have a lower duration and will be less affected by rising rates. This factor, along with our forecast of moderate economic growth in the U.S., should hold down default rates, and it leads us to believe that high-yield bonds should hold their value better than investment-grade bonds..."

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AdvisorShares Peritus High Yield (HYLD) is a component of the D2 Capital Management Multi-Asset Income Portfolio. Current yield on the portfolio is 4.94% and year to date the portfolio is up 6.89% (as of 29 December 2014).

Disclosure:  I own the D2 Capital Management Multi-Asset Income Portfolio

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

U.S. Muni-Bond Market Is on a Tear

By Aaron Kuriloff, Wall Street Journal

Municipal bonds are on a winning streak that many investors bet will run into the new year.

The debt issued by U.S. cities, states and local entities such as sewer systems has posted its longest string of monthly gains in more than two decades in 2014, outpacing gains in corporate bonds and U.S. government debt, according to data from Barclays PLC.

Investors are flocking to the $3.6 trillion municipal-bond market at a time of low interest rates, uneven global growth and concern that the nearly uninterrupted rise in many stocks and bonds since the financial crisis will come to an end. The debt is especially attractive because interest payments typically don’t generate federal taxes and, in some cases, aren’t subject to state taxes.

That, along with forecasts for relatively flat issuance of new bonds, is expected to support the rally in 2015 despite concerns about the impact of an increase in short-term interest rates by the Federal Reserve, which many economists and investors expect in the middle of next year.

Municipal bonds have returned 8.71% this year through Friday, including price gains and interest payments, according to Barclays. That compares with a total return of 15.3% for the S&P 500, 6.97% for highly rated corporate debt and 4.6% for U.S. Treasury debt.

Demand from individual investors, mutual funds and banks and insurance companies has remained robust, said Ashton Goodfield, co-head of the municipal-bond department at Deutsche Asset & Wealth Management, a unit of Deutsche Bank AG . That has helped investors overcome last year’s fears about losses from Detroit or Puerto Rico. The U.S. commonwealth passed a law in June allowing some public agencies to restructure their finances.

“I think people are understanding that there’s not going to be a rash of bankruptcies in the market,” Ms. Goodfield said. “It’s a confirmation that municipal credits are generally solid.”

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The D2 Capital Management Tax Free Income Portfolio is currently yielding 4.66% (Trailing 12 month Tax Equivalent Yield at 28% Tax Bracket, as of 26 December 2014).  Year to date the portfolio is up 9.42%

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

Munis Surprise with Strong 2014

By Christine Albano, Financial Advisor Magazine

The strength of the municipal market in 2014 caught many analysts off guard as the unexpected and historic decline in long-term yields heightened demand and made for an attractive year that was highlighted by 9% returns.

Municipals delivered solid performance overall thanks to the strength of the long duration and high-yield segments of the $3.63 trillion municipal market.

Municipals delivered positive returns for the 11th straight month, returning 0.77% in November, Justin Hoogendoorn, CFA and managing director at BMO Capital Markets wrote in a monthly bond market outlook report dated Dec. 15.

Total returns stand at 9.14% this year, which is boosted to a tax-adjusted 11.67%, he said.

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The D2 Capital Management Tax Free Income Portfolio is currently yielding 4.66% (Trailing 12 month Tax Equivalent Yield at 28% Tax Bracket, as of 23 December 2014).  Year to date the portfolio is up 9.50%

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

The Key To Being A Successful Investor

By Jim Rogers

People are constantly asking me what to invest in, and I always answer the same way. I say: Do not listen to me – do not listen to anybody.

The way you become a successful investor is by investing only in what you yourself have a wealth of knowledge about.

Everybody knows a lot about something. Cars, fashion, whatever it is – you know a lot about something. If you do not know what it is you know a lot about, just step back and take a look at your daily life.

When you walk into a doctor's waiting room, what magazines do you pick up? If you turn on a television, what kinds of programs do you watch? Soon you will probably figure out what your real interests are, what you are really knowledgeable about.

Now you are ready to become a successful investor. If you are keen on cars, read everything you can about the automobile industry. You will know when something is about to happen that constitutes a major, positive change.

Then start following up. Read more about whatever you find. Maybe a new fuel-injection system is being developed, one that is superior to and cheaper than what is currently in use, and you know that when it goes into production, it will take up a large share of the market.

Or it could be something like a new highway. Maybe people can drive someplace where they could never drive before. Maybe new hotels or shopping centers are certain to open up there. The fundamental strategy is this: stay with what you know and expand on it.

If somebody calls you up and says, oh, my gosh, there is this great new computer process...ignore it. You do not know anything about computers. Cars are what you know.

Concentrate on what you know and any changes you see – you will see a major change coming long before I ever will, long before anybody on Wall Street will, because care are your passion; they are what you are sitting around reading about all the time.

Learn to think in the appropriate terms; this is something new; this is something different; this is a shift in direction. Anything new or different leads to consequences down the road.

You have to learn to think around corners. You will know before anybody on Wall Street when something good is happening. You will also know when to sell, because you will see before anybody else that the great change you noticed a few years ago is starting to reverse itself – someone is building a cheaper product, the competition has intensified.

Let's say you have done that. After ten years you have made ten times your money. Now is when you are most vulnerable. You think: I have to find something else. I have to do it again. This is wonderful. This is so easy.

It is the great mistake people make.

Now and then a time comes when doing nothing is the wisest course.

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The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

A President’s Third Year in Office Is a Strong One for the Market

By Simon Constable, Wall Street Journal

As President Obama gears up for his penultimate year in office, it could be time to cast a ballot for stocks.

That suggestion has nothing to do with the administration’s policies or whether investors agree with them. Rather, it’s about history.

Specifically, we’re talking about the so-called presidential stock cycle, which suggests that stocks do better on average in the president’s third year in office (regardless of whether it is a first or second term) than in any other year. The pattern has held with remarkable consistency.

Since 1900, the S&P 500 has rallied an average 10.7%, excluding dividends, in the president’s third year, compared with a gain of 4.1% to 7.8%, on average, in the other years, according to an analysis provided by S&P Capital IQ. What’s more, returns in the third year were positive 75% of the time. A look at the data back to 1945 shows a similar pattern.

Why does this happen? The theory says that tough legislation typically is forced through in the first two years of a presidency, when the incumbent is still riding the victory wave. The 2010 Affordable Care Act is an example of this phenomenon.

As for the third and fourth years, the idea is that the officeholder starts to do whatever is necessary to really boost the economy in an effort to get re-elected. The data show that during those periods, policies have been most dovish or pro-growth, says Mebane Faber, at El Segundo, Calif.-based Cambria Investment Management. With second-term presidents the logic is weaker, but it’s still arguable that they will try to boost growth to help their party in the next election.

The S&P Capital IQ data show that the third-year market rally is front-loaded, with eight percentage points of the 10.7% gain coming in the first half of the year, on average.

Of course, just because there is a tendency for things to happen a certain way doesn’t guarantee that they will—especially with a second-term president. After all, 75% positive returns means that returns were flat or negative 25% of the time.

And this time around, what the government can do to help the economy may be limited, says Jack Ablin, chief investment officer at BMO Private Bank in Chicago.

“There isn’t a lot of ammo left with interest rates already at zero, and we are running fiscal deficits in the hundreds of billions of dollars,” he says. “All the stops are already out.” In other words, the Federal Reserve can’t make the cost of borrowing much lower, and the federal government probably won’t borrow more to stimulate growth.

Still, there might be hope for a third-year jump in stocks.

“The president is a lame duck, and if he really does want to end his office on a higher note then he is better off working with the Republicans,” says Sam Stovall, U.S. equity strategist at S&P Capital IQ in New York. He points to tax overhaul and approval to complete the Keystone oil pipeline as areas that might see progress.

Tax overhaul might cause a “surge of business confidence” as corporations decide to put their increasingly large cash balances to work, he says. And a completed pipeline could increase supplies of energy to the country, lowering prices.

Still, he adds, “it would have to be in 2015. Nothing will likely get approved in the election year,” as both sides duke it out for votes.

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The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

REITs: Attractive Yields in a Low-Rate Environment

By Tom Lydon, ETF Trends

Despite fears of a rising rate environment, interest rates remain stubbornly low. Investors who believe rates will remain subdued going into the new year can utilize a broad real estate investment trust exchange traded fund to generate some extra income.

The Vanguard REIT ETF (VNQ), with a 3.13% 12-month yield, provides a cheap and decent way to track the broad REITs market.

“Right now, Morningstar’s equity analysts believe that the U.S. REIT sector as a whole is slightly overvalued,” according to Morningstar analyst Robert Goldsborough. “However, our analysts also see pockets of opportunity in certain areas of the REIT landscape, including health care, retail, and cell tower properties.”

For instance, VNQ includes a 13.5% weight toward health care REITs and 25.9% in retail REITs.

Along with its diversified sub-sector exposure, VNQ includes a relatively spread out market capitalizations, including 43.4% large-caps, 34.3% mid-caps, 19.0% small-caps and 3.3% micro-caps.

REITs provide a liquid alternative to owning physical commercial real estate properties. REITs investments also share similar attributes with stocks and bonds. Since REITs are required to distribute at least 90% of their income from rent payments to investors, these real estate investments can generate attractive yields.

Potential investors should not mistake REITs as an alternative to traditional fixed-income assets like Treasuries. The REITs asset class has been 41% more volatile than the S&P 500 over the past three years and 5.5 times more volatile than the U.S. bond market.

“Potential near-term risks include slower-than-projected growth, setbacks in the U.S. economy, and rising interest rates,” Goldsborough added.

Rising rates raise REITs’ debt financing costs. However, a flat interest rate outlook would benefit REITs in an expanding economic environment as rising rents and property prices would support the asset class.

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Vanguard REIT ETF (VNQ) is a component of the D2 Capital Management Multi-Asset Income Portfolio. Current yield on the portfolio is 5.01% and year to date the portfolio is up 7.77% (as of 5 December 2014).

Disclosure:  I own the D2 Capital Management Multi-Asset Income Portfolio

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

Muni Funds Could Maintain Strength Going Into 2015

By Tom Lyden, ETF Trends

For 2015, Janney Montgomery Scott overweights muni bonds and believes high-yield corporate debt are “also reasonably attractive,” reports Michael Aneiro for Barron’s.

“Municipal-bond yields are generally lower than those sported by their taxable counterparts because of their tax benefits,” according to Morningstar analyst Thomas Boccellari.

The muni funds can be used as a core fixed-income allocation to help alleviate some tax costs.

Additionally, Janney projects that muni-to-Treasury yields to trend lower next year – a falling ratio reflect an outperforming munis market, due to improved confidence in municipal creditworthiness and default fears abate.

“Once again, tax-exempts represent our strongest conviction overweight call for 2015, an outgrowth of the value of tax-exempt income at a time when upper bracket tax rates are at their highest levels since 1986,” Janney Montgomery Scott said in the article.

Janney expects credit fundamentals to remain sold through 2015.

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The D2 Capital Management Tax Free Income Portfolio is currently yielding 4.37% (Trailing 12 month Tax Equivalent Yield at 28% Tax Bracket, as of 2 December 2014).  Year to date the portfolio is up 8.93%

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association.