Supermodel Revisited

Supermodel Revisited

While on vacation in August of 2010, at the Harbour Island home of the Sports Illustrated Swimsuit Reunion (All-Star Model Cover Model Reunion - Rebecca Romijn SI Swimsuit ... ), I came up with the idea of constructing a high-yielding Supermodel Portfolio. I used the rather weak analogy that constructing a supermodel portfolio was similar to constructing a supermodel photo shoot. Namely, find some very appealing assets that will help you achieve your goals, while making sure that you have enough diversity to manage risk. The goal was to construct a portfolio of securities that would deliver a current yield that was twice the level of inflation after fees, with a minimum level of volatility. This portfolio would be constructed using ETFs of High Yield Corporate Bonds, Mortgage REITs, Master Limited Partnerships, and Convertible Securities. The current yield (income being distributed) at that time was over 8%, while 10 year Treasuries at that time yielded 2.7%. I used my own assets, and those of one very trusting client, as guinea pigs. Here's a copy of that August 2010 post ...Rockhaven Views: Supermodel Portfolio

The Results:

After 21 months the High-Yield Supermodel Portfolio was up about 18%, or 10% annualized. As expected, most of the return has come from interest & dividends of about 8.5% per year. While I fully expected a fairly volatile ride due to the belief that higher yield equals higher risk, I was pleasantly surprised that the portfolios standard deviation (volatility) over this 21 month period was 3.07%, which compared very favorably to the S&P 500's volatility of 4.4%. The worst one month return (drawdown) was -5.4%, which also compared favorably to the S&P 500's worst month of -6.92%. 

So far so good, our High-Yield Supermodel Portfolio has achieved its goal of yielding more than twice the current inflation rate at a very manageable risk level. However our portfolio, like all aging supermodels, needs constant maintenance, diet, exercise, and an occasional tweak here and there. Over the last couple of years the portfolio has evolved to take advantage of what the markets are offering. We've also taken a more disciplined look at how we can manage volatility. Securities generally yield more for two reasons. One, investors perceive them to be of higher risk. In other words, investors question the ability of a company to continue paying at its current rate. Second, certain securities like REITs, MLP's, and Royalty Trusts, have certain tax advantages at the corporate level that enable them to pay a higher portion of earnings in the form of dividends. In our search for yield risk is a constant companion, but risk can be managed through diversification and disciplined tactical asset allocation.

The Portfolio:

Todays High-Yield Supermodel Portfolio is composed of the following assets:

High-Yield Corporate Bond ETF

Mortgage REIT ETF

High-Yield Preferred ETF

Master Limited Partnership (MLP) ETF

Emerging Market Bond ETF

Special Opportunities

Today the portfolio yields about 6.75%, which achieves our goal of a yield twice the inflation rate net of fees.

The Opportunity:

Yesterday the German government sold two year German Bunds with a yield of 0.00% (not a typo). Here in the US our Fed is determined to keep interest rates at zero for the foreseeable future (ZIRP), and the US ten year bond now yields 1.72%. The developed worlds governments are hard at work implementing financial repression; stealing from savers and rewarding debtors (they being the biggest debtors of all). 

There is still some hope for us savers. It's not risk free, and it does require a bit of work, but there are ways to generate yield while managing volatility.

Starting today I am taking on new clients that might be interested in a High-Yield Supermodel Portfolio, if this is something that may be of interest to you, or if you'd just like to talk, please give me a call.

Be careful out there, and keep the lights on,

Chris Wiles, CFA

412-260-7917

www.rockhavencapital.com

For prior Rockhaven Views visit:

www.rockhavencapmgmt.blogspot.com

This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management.  The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

We're Not Gonna Take It

We've got the right to choose and

There ain't no way we'll lose it

We're not gonna take it anymore

Twisted Sister - We're Not Gonna Take It - Live at W:O:A

Ok, for some reason the weeks seem to be flying by. I've had a lot of things on my mind of late, so I thought I would just highlight a few in today's note.

Just a reminder, safety is the better part of valor, and we have been getting safer and safer in our portfolios. Equities are under 30%, and cash is at 20% and probably heading higher. If you'd like to chat give me a call.

First, is it just me or does it seem that we've entered the carnival's house of mirrors. Everything we see seems to be distorted. Especially the economic recovery, and the stock market.

This great chart from Doug Short shows the markets rally after each level of Fed intervention. Clearly noticeable is the markets selloff when each QE program ends. Also, the magnitude of each advance wanes. With the market already selling off prior to the end of Operation Twist, and with Obama's reelection campaign in full swing, it wouldn't surprise me at all to see some new form of QE in the Feds June meeting. The big question is, will the market react positively, or has the stimulus drug worn off? After three years of stimulus and very little true growth, I think the patient is looking for something more substantive...diet & exercise! Unfortunately, I'm not sure we're going to get it.

The Feds easing, and the collapse of the Euro continues to lead all US interest lower. It's really tough to be a saver. The 10 year treasury at 1.70 is near record lows. This has surprised many, because of the belief that the printing of trillions of dollars will lead to inflation. While that is certainly true, the key question is when? Global economies are deflating first, inflation will come later. Don't be surprised if the 10 year approaches 1.5%, or even 1%, before it is all said and done.

This excess liquidity and a flattening yield curve is causing many investors to increase their levels of risk to try and make a buck. This is the unintended consequence of ZIRP. So it is no surprise that JP Morgan Chase stretched a bit trying to make a few tokens for their shareholders, and employees. No biggie here, they made some bets that morphed from hedges to directional trades, and they lost. It's OK for banks to make bets, it's their shareholders money. This is how the system is supposed to work. The problem arises when we deem any enterprise (banks or auto companies) as to big to fail. In a capitalistic society nothing is as sobering as failure. Failure cleanses the system and allows the strong/smart to rise. Supporting/protecting companies only leads to crony capitalism. As an aside I find it hilarious that President Obama is running a reelection ad touting his crony capitalism bailout of GM. Simply hilarious! Once the State starts choosing who to bailout, and who to invest in, we no longer live in a capitalistic society. Sadly that is where we are today!

College -- Is It Worth It?

Consider this business model. You have a product that nearly everyone believes is invaluable. It's a strange product in that the higher the price, the more sought after it is. It is extremely hard to determine if one manufacturer of this product is significantly better than another. The effectiveness of the product seems to depend a lot on the individual user. Oh, and here's the real kicker, wait for it. No matter how much you charge, the government is willing to lend to your buyers, no matter what that buyers ability to repay is! What a business model! Is it any surprise that college tuition is up 600% in the last 30 years? 

I could spend hours writing about this, but as I said earlier I'm trying to keep it short. Consider this option though. If you have a rather bright child who went to a good high school make them this offer. I'm going to invest $200,000 in your future, come to me with a business plan and we'll compare it to what the colleges are offering. Of course I don't expect them to come up with the next Facebook, but you'd be surprised how far an enterprising kid could go with $200,000. We could go to the nearest college campus and buy $1,000,000 (20% down) worth of rental properties and become a landlord. Who do you think will be further ahead after four years? Just some food for thought.

Graduation Time -- The perfect time for a simple message for our young ... Wake Up!

A commencement speech you probably won't hear. Every individual born today has a $50,000 debt on their head, that debt balloons to $138,000 per taxpayer. So at graduation time, you are faced with paying off your student loans, paying off the debts/promises of all those generations that came before you, and finding a job that will enable you to do both while still having a bit left over to buy yourself a much deserved beer. Not the most encouraging prognostication. Of course all of us old folks don't want you to be discouraged or to lose hope, we need you (your President certainly needs you). So we promise that we'll keep your student loan interest payments at a below market rate of 3.4%. Some of us on the left are even considering forgiving your student loans. Doesn't that sound nice, even generous on our part? Of course it does, it's all about keeping you believing in the Ponzi scheme. You see, we don't really have the money to keep your interest rates at 3.4%, and we certainly don't have the money to forgive your student loans, we're just adding it to your $138,000 tab.

Wake up! You really are our hope for the future. We (this country) really need for you to stand up and say enough already. You didn't sign up for this welfare state, and you're not going to pick up the tab for benefits that you'll never receive. You're a huge voting block, and you can sway this election. Austerity is painful, especially for your elders, therefore very few of your elders will be willing to join you, but you must persist. It is imperative that you save us from ourselves. 

You are our hope. I know you can do the math. Vote for the candidate that promises to take a hatchet to all of those promises made to your parents and grandparents. You don't need to pay their bills, you'll have plenty of your own to pay. Don't take it anymore! God Speed and Good Luck!

Be careful out there, and keep the lights on,

Chris Wiles, CFA

412-260-7917

www.rockhavencapital.com

For prior Rockhaven Views visit:

www.rockhavencapmgmt.blogspot.com

This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management.  The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

Take A Load Off Anny

"Hey, mister, can you tell me where a man might find a bed?"

He just grinned and shook my hand and, "No," was all he said.

Take a load off Anny

Take a load for free

Take a load off Anny

And you put the load right on me

American Rock & Roll lost a great one this month ... RIP Levon Helm The Band - "The Weight" (1968) Levon Helm Dead Age 71 (1940-2012) and a tribute by Bruce Springsteen 5:42 Watch Later Error The Weight - Springsteen - Newark NJ May 2, 2012by TheMagikRat2,828 views

Portfolio Alert-

Over the last couple of weeks, stocks, especially foreign stocks, are "feelin' about half past dead." Earlier this week we substantially lowered our weight in risk assets, and subsequently increased cash holdings from 8.5% to 19.5%. 

Remember, job one here at Rockhaven is to protect our assets, which often means to sell first and ask questions later.

The big picture, or macro view, is one of suffocating debt loads, slowing economic growth, and extremely uncertain political environments. For a while global equity markets and most risk assets ignored these risks, and focused instead on the massive central bank intervention that lead to rising asset prices. It was a very good 1st quarter, but there is only so much the Fed and their global colleagues can do. Over the last several weeks we've seen a decidedly negative environment arise in all risk assets. 

Not surprisingly we've seen many of our individual securities roll over in tandem, and go from bullish weights to neutral or even negative. While I clearly have views about the global economy and markets, I still rely on my indicators to control emotions and keep us in harmony with the markets. As of the end of March we had 8% in cash equivalents, we had 8.5% at the end of April, and after today's trades we're up to 19.5% in cash equivalents.

Tactical asset allocation is all about staying out of big drawdowns, and participating in long-term bull markets.

Here's where we stand today in our Global Tactical Asset Allocation Portfolios:

US Equities -- 25% Bullish,

 we are now at our full US equity weight. The US equity markets have rolled over a bit (they are about 4% off their highs), but none of our technical indicators have broken, yet.

Int'l Equities -- 3% Bearish,

 both developed and emerging equity markets have broken decisively. In fact they went immediately from bullish to bearish, subsequently our allocation fell from 20% to 3%.

US REITs --  6% 

Bullish, we are still at our full US REIT target of 6%. REITs continue to be a huge beneficiary of the Feds ZIRP.

Int'l REITs -- 4% Bullish, international REITs are in bullish territory, again benefiting from low rates, but they are approaching neutral territory.

Gold --7% Neutral, Gold is neutral and has been trading in a rather tight range, but it is approaching bearish territory.

Commodities -- 7% Neutral, the appearance of economic weakness has caused commodities to fall

. Unless current trends reverse we'd expect to be in bearish territory soon.

US Fixed Income -- 23.5% Bullish, US Treasuries have rallied to near record low yields again. High-yield bonds & MLP's are trending towards neutral. Overall US fixed-income is at 23.5% out of a maximum of 25%.

Int'l Fixed Income -- 4% Bullish, We continue to have zero exposure to European & Japanese bonds. Our entire exposure is Emerging Market bonds, which are still in bullish territory.

Cash Equivalents & Currencies -- 19.5%, cash levels have increased dramatically this week, and are divided between the US at 16.5%, and 3% in China.

In Summary - We took a load off...We significantly lowered our risk exposure, and if current trends continue we'd expect to get even more defensive.

If you'd like to sit down and talk about the markets, and your current risk exposure in more detail, please give me a call.

Be careful out there, and keep the lights on,

Chris Wiles, CFA

412-260-7917

www.rockhavencapital.com

For prior Rockhaven Views visit:

www.rockhavencapmgmt.blogspot.com

This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management.  The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.