March 2011

March 23, 2011 10:45 a.m.
Cohen & Steers Preferred Securities & Income

In the April 2011 issue I recommended purchasing Cohen & Steers Preferred Securities & Income. Some of you report that you are unable to buy the fund through your preferred broker. Others want an alternative in your current mutual fund group. Here’s what I can advise for you.

The fund has several different share classes. Each has different loads, fees, and expenses. I recommended the C shares with the ticker CPXCX. These shares have no front-end load but do have a deferred load and a 12b-1 fee. They’re available on the Fidelity and TD Ameritrade platforms. The A shares (CPXAX) have a 4.5% front-end load. You want to avoid those. There also is an A shares, load-waived class of shares (CPXAX.LW) available on some of the retail networks, such as TD Ameritrade and Scottrade, though the broker charges a trading fee. These are the least expensive class for most investors if they’re available to you. There’s also an institutional class of shares (CPXIX) with a minimum investment of $1 million and generally available only through a financial advisor or to institutional investors.

There are few alternatives to the fund, because few funds invest in preferred shares. There are two closed-end funds managed by Flaherty & Carmine that invest in preferred stock. There’s the Preferred Income Fund (PFD) and Preferred Income Opportunity (PFO). These are not as diversified as the Cohen & Steers fund and use some leverage, so they’re more volatile. As closed-end funds their share prices are subject to fluctuations based on supply of and demand for the shares rather than the value of the assets owned.

There’s also an ETF, iShares S&P U.S. Preferred Stock Index (PFF). This fund is not leveraged, but it’s not as diversified as the Cohen & Steers fund. Also, since it follows an index, it holds a stock just because it’s in the index. The Cohen & Steers fund buys only stocks that pass management’s fundamental analysis.

I believe the Cohen & Steers fund is better than these alternatives because it is more diversified by industry and country. Its ability to hedge the risk of interest rate increases also is an advantage (and a factor in the higher expenses).

Those are the alternatives. There aren’t comparable funds at the major mutual fund firms.

As a general rule I recommend consolidating your investments at one broker or mutual fund company. It makes investing easier and more efficient and makes you less likely to procrastinate. It also gives you a better idea of your overall position than when your money is spread among different firms.

For this fund, I’m making an exception. When the fund isn’t available through your broker of fund company, I recommend investing directly through Cohen & Steers at www.cohenandsteers.com or 800-330-7348. I believe the fund’s diversification, hands-on management, and ability to hedge interest rate risk makes it preferable to the few alternatives.

March 18, 2011 11:05 a.m.
How Our Funds Are Handling Current Events

Recent events created an unusual amount of turmoil and uncertainty in the markets. Most of the events are not finance-related but have consequences for markets and economies. The uprisings in North Africa and the Middle East have the potential to disrupt trade and slow economic growth. The potential for instability in Libya set oil markets on edge and put a political uncertainty premium on the price of oil that many put at about 30%. On the heels of the political instability came the Japanese earthquake and tsunami followed by the nuclear power emergency. The long-term effects of these events are anybody’s guess, and that increases uncertainty. Markets don’t like uncertainty.

So let’s look at how our recommended investments responded to all these events.

The two funds to be concerned about in the Managed Portfolios are the pure stock funds: Dodge & Cox Stock and Needham Growth. I revised the sell signals for these funds in the April issue (now available on the web site). DODGX just missed hitting the new sell signal of $108 on March 16. NEEGX appears to have bottomed at this point comfortably above its new sell signal of $38. Continue watching the prices carefully so we aren’t caught in a serious correction.

DoubleLine Total Return Bond has been a stalwart. It’s been in a trading range while paying a monthly distribution of seven cents to eight cents per share. DBLTX rose in value as the Japan situation appeared to grow worse. The share price still is below its high of last fall, but because of the distributions has a positive total return.

It’s a similar story for TCW Strategic Income, which has a similar portfolio. TSI’s been rising steadily for months while paying a 7% yield. It from about $5.50 to $5.40 during the Japan crisis, but that’s a modest change.

High yield bonds usually have a high correlation with stocks, and Harbor High Yield did lose some value during the Japan crisis, falling from $11.25 to $11.17. Again, that’s a modest loss and follows a steady upward move in 2011. Plenty of money is flowing into high yield bonds in search of higher yields, so I’m not worried about this fund.

I recommend in the April issue selling Enterprise Products Partners LP. I give my reasons in the issue. EPD had some bizarre price behavior on March 15, but my selling recommendation isn’t related to that. The fund seems to have peaked after a strong run in 2010 and early 2011.

PIMCO All Asset All Authority lost about 1% during the Japan crisis after having a strong February and early March. It’s well-diversified and is focused on economic trends beyond current events.

Our worst-performing fund for the last year, Hussman Strategic Growth, is showing some life during the crisis. This is to be expected since the fund is fully hedge against a market decline. It’s gained about 1.68% in the last month, though it was higher on March 16. It’s well above its low of $11.84 hit in early February.

The newest addition to the portfolios, Cohen & Steers Preferred Securities & Income, hasn’t moved much, which is our goal for the fund. We should pick up a yield of 7% or so with what I hope will be a fairly steady net asset value for the fund.

In the Retirement Paycheck Portfolio, we’ve had some funds showing some volatility. Cohen & Steers Closed-End Opportunity went from about $13.70 to almost $13. It’s had a good recovery from the low and is comfortably above our sell signal. Gabelli Global Gold, Natural Resources, and Income flirted with its sell signal on March 15, but now is above it.

In the April issue I recommend selling Tortoise Energy and replacing it with Cohen & Steers Preferred Securities & Income. My reasons are the same as for selling Enterprise Products Partners from the Managed Portfolios. TYY also had strange price behavior on March 15.

Gold hasn’t been the safe haven in this crisis that many would have anticipated ahead of time. iShares COMeX Gold Trust hasn’t approached our sell signal, but it declined in price instead of rising. It’s having a nice rebound and of course stays in the portfolio. The rest of the funds in this portfolio already were reviewed.

In the hedge fund portfolio, the key funds to watch in the crisis are Third Avenue Value and Wintergreen. TAVFX declined about 5% from March 8 to March 16. It’s declined even more from its February high. It’s been doing worse than the S&P 500 since early February, because it’s invested primarily in Asia and in small company stocks. Wintergreen is doing better than the S&P 500 over the last year and also during the recent crises. It’s down less than 1% in the last month, while the index lost over 2%.

Cohen & Steers Realty Shares is another volatile fund, but it’s holding up well. It’s a little worse than Wintergreen, losing about 1.5% in the last month but doing better than the S&P 500. It’s gained about 1% for the year so far.

Price High Yield has been almost steady over the last month. It’s up over 1% without considering income distributions and about the same for the year to date. It’s been a much better investment than the S&P 500.

The collection of balanced/tactical allocation funds in the hedge fund portfolio also are holding value well. The best of PIMCO All Asset with is flat for the last month. Berwyn Income has lost about 1%, and FPA Capital is down just under 2%. Oakmark Equity & Income is down a little over 2% in the last month. American Century International Bond, our hedge against the dollar, is another surprise. Normal the dollar strengthens during such crises, and this fund declines. Instead, the fund gained about 3% in the last month.

In the Invest with the Winners portfolio, we sold iShares US Oil and Gas Equipment a few weeks ago, so the portfolio is half in cash. The iShares Silver Trust makes up the other part of the portfolio and performed similarly to gold. It lost value but avoided a sell signal and now is rebounding.

Our portfolios and the individual investments are performing as I hoped and expected. The only way to prepare for the series of global crises we’ve had recently is to have a balanced, diversified portfolio before the crises ever arrive. These events were unforeseeable, and markets respond faster than we can. Preserving our capital and avoiding panic and anxiety during these times are keys to long-term investment success. That’s why we’re content to give up strong gains in stock market rallies. We now we’re going to keep our gains, while those who ride stocks up almost always ride them down.

March 4, 2011 11:16 a.m.
An Overview of Where We Are

Much has happened in the last few weeks, so it’s a good time to review the economy and markets to see if changes need to be made in our portfolios.

Economic data continue to be strong with low inflation. That’s the bottom line. Manufacturing has been strong since the bottom of the recession, and it continues to grow. The latest durable goods report was weaker than expected, but the report usually is volatile. The long-term trends are the thing to watch, and they’ve been positive. Add the positive long-term trend with reports that corporations expect to increase capital spending, and we have reason to expect the manufacturing sector to stay strong for a while.

The service sector also sprang to life in recent months, as evidenced in the non-manufacturing Institute for Supply Management Survey. While it is rebounding from low levels, it’s recent growth rates have been historic highs.

Unemployment peaked, and we should soon see a meaningful decline in unemployment. We’ve reported in recent months that the firing rate has slowed enough to bring the employment market into balance at a very high level of unemployment. Now, it looks like there will be even fewer layoffs in coming months and businesses have enough confidence to bring some employees back. We saw a bit of that in this morning’s employment report, and we’ll likely see better numbers in coming months.

The employment situation is important, because household income remains at low levels and hasn’t been growing much. Absent fiscal support, such as payroll tax cuts, retail spending and other indicators probably would have decreased in recent months instead of increasing. But the positive news is consumer confidence is rising (though from very low levels), and retail sales have been growing at about 3% monthly.

Overall, it appears the monetary and fiscal stimulus are supporting economic growth of 3% or higher.

What about inflation? That’s the concern of many investors. In the U.S. overall consumer price inflation remains very low. It’s rising, and headline inflation is rising faster than core inflation (headline inflation minus food and energy). Headline inflation reflects a lot of commodity inflation. The gap between headline and core inflation now is about average, and spikes in commodity prices often don’t translate into the entire price structure and push core inflation higher. Prices for commodities tend to be volatile, and in the U.S. commodities make up a small percentage of final goods and of the average consumer’s basket of purchases.

Commodity prices have increased quite a bit, and that should push core inflation higher. But the additional increase from the commodity should be less than 1%. Given the very low level of inflation of recent years, a less than 1% increase won’t be significant.

The level of inflation we’re likely to see won’t be enough to cause the Federal Reserve to withdraw its monetary stimulus. It will adjust QE 2 depending on how the economy is doing, not on fears of imminent inflation. Given all the unused capacity that remains in the economy, I doubt rising commodity prices will be enough to cause the Fed to reduce stimulus. The stimulus will remain until the Fed is confident the economy can stand on its own.

There’s likely to be a bubble in the Consumer Price Index in coming months because of the way it is calculated. Housing price increases are measured largely using Owner’s Equivalent Rent. Since the financial crisis started, more people have been renting rather than owning homes. This trend has started to increase rents across the country. The higher rents are starting to feed into the CPI and will cause further bumps this year. But I think the Fed will look through this and see that housing prices still are weak, demand is low, and the trend for overall housing costs still is down.

Though the rolling crises in North Africa and the Middle East have disrupted the oil markets and caused a lot of concern, I don’t see a reason at this point to change our portfolios. There hasn’t been enough of a disruption to significantly reduce economic growth or increase inflation, though there will be modest reductions in growth and increases in inflation. It’s now likely the U.S. economy will continue growing beyond mid-year and unemployment will continue to decrease. Emerging economies, on the other hand, still are battling inflation, and this will cause problems for their equity markets and raise questions about their economic growth. Our diversified, balanced portfolios are holding up well in the situation, and there’s no reason to make changes now. Keep an eye on the sell signals, though, in case there are sudden changes due to the geopolitical action.