Tuesday, September 30, 2014

Moody's Upgrades J.C. Penney Bonds

Moody's Investors Service recently changed J.C. Penney's rating outlook to stable from negative. 

The change in outlook was prompted by the successful closing of $400 million senior unsecured notes which will be used to fund the partial tender offer for J.C. Penney's $200 million 6.875% notes due October 2015, $200 million 7.675% notes due August 2016, and $285 million 7.95% notes due April 2017. 

At the same time, Moody's changed the Speculative Grade Liquidity rating to SGL-2 from SGL-3 due to improved operating performance and extension of the debt maturity schedule.

Sunday, September 28, 2014

Five Reasons Bill Gross is not likely to have the success at Janus that worked for PIMCO.

1. He is going to work from his home in California while the Janus headquarters remains in Denver.

2. The research staff at Janus pales in comparison to the team at PIMCO

3. Large institutions are not likely to leave the worlds largest fixed income manager - PIMCO for a firm with it's largest fixed income funds that measure in millions versus trillions.

4. Janus appeals largely to retail investors

5. Interest rates are directly opposite where they were when Bill Gross started PIMCO.

Tuesday, September 9, 2014

Low Fund Expenses Result in Higher Returns

One of best ways to win in a low return environment is to keep fees and expenses low. A longstanding pillar for my investments is that reduced mutual fund expenses will improve investment returns.

Unnecessary high mutual fund expenses can ravage investment performance like Pac-man zombies. Furthermore, commissions on investment products can incentivize brokers to promote inappropriate and expensive funds in a world in which most funds are like bananas being displayed in a grocery store.

I have read many studies that show that funds with lower costs tend to outperform funds with higher costs. While there is no Mendoza line for costs, consider this example:

Send two teams of runners out to run a marathon, but require one team to carry 25-pound backpacks. Which team do you think is likely to have the better average time?

Mutual funds with high cost are like runners carrying backpacks. They will drag down your long-term investment performance.

With thousands of funds to choose from expenses can vary wildly. While some stock market index funds feature expense ratios as low as 0.1% (that’s $10 for every $10,000 invested in the fund), the majority of investors are not utilizing these funds.
According to a recent study by Morningstar Research, of every $1 in net investment that flowed into mutual funds last year, 95 cents went into funds that were ranked in the bottom fifth of their category by cost. In most cases the higher cost is used for commissions and marketing for brokers.

The mutual funds with the highest cost are the ones that have a load or sales charge. The simplest load to understand is the front-end load. Nothing too complicated about this one - the day that you buy the mutual fund, you pay a sales fee, anywhere between 3% and 8%…...really!

Wait there is more...Many brokers also recommend back-end load funds. This is a real masterpiece, a state-of-the-art deception product. The expenses mentioned above are parsed from mutual funds annually. In my view, the only purpose of a back-end load appears to be to confuse investors and make them think they are buying a no-load fund when they are not.

Regardless of a front-end or back-end load, investors in these funds are generally not aware that they are needlessly paying excessive fees and expenses.

Friday, August 15, 2014

Mid-Year Review Part ll

The Stock Market - Slow and Steady Blue Chips Win the Race

This year's stock market leaders include utilities, energy, healthcare and other blue chip dividend payers. These sectors have been among the brightest stars of 2014 in part, because of the surprising decline in interest rates. Secondly, to rebound despite slow economic growth, many larger U.S. companies have become involved in takeovers, spinoffs, and other forms of financial engineering to bolster their stock price.

After the stock market turned rocky for a few weeks in April, it regained its footing to slowly climb higher in May and June. However, following a revised report showing negative U.S. GDP growth in April, I would not be surprised if stocks experienced another case of vertigo.

While stocks are not wildly overvalued, neither are they charmingly cheap. Meanwhile, the U.S. economy is getting incrementally better, although certainly not as quickly as economist had thought. Across the ponds, robust growth internationally is also lacking.

Again, patience and selectiveness can be helpful when choosing to invest new money or money from matured bonds.

For the second quarter, the Dow gained 2.2 percent, the S&P 500 rose 4.7 percent and the Nasdaq shot up 5 percent.

For the first half of the year, the Dow rose 1.5 percent while the S&P 500 jumped 6.1 percent and the Nasdaq climbed 5.5 percent.

The Bond Market - What Does the Fox Say?

The bond market is acting as if it expects that growth from the global economy is not going to be very strong for the immediate future.

Most institutional investors never expected the 10-year Treasury bond to retreat from 3%, which was the yield at the beginning of the year, to 2.5%. Bill Gross - head of PIMCO, one the country's largest bond funds, refers to the current economic situation as the "New Neutral" - sluggish but stable global growth and continued low interest rates.

Under the New Neutral, Gross says that investors should expect stocks to return about 5% a year and bonds to earn about 3% to 4% annually.

Goldman Sachs expects the 10-year U.S. note to yield 3.25% at year-end, up from a recent 2.5%.

Bank of America Merrill Lynch is forecasting overall 2014 total returns on U.S. investment-grade bonds to be 1.5% and returns on high-yield bonds to be 4% to 5%.

For the first-half of the year corporate-bond markets performed well alongside an unexpected rally in U.S. Treasury debt. U.S. investment-grade corporate bonds returned 5.6%, almost as much as the S&P 500 stock index, while European junk debt returned 6.2%.

As mentioned above, the yield of the benchmark 10-year Treasury note fell from 3% at the start of the year to 2.44% in May before rebounding in June to around 2.5%.