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Friday Fixed Income

Three fixed income picks.

music selection:  “Little Bitty Pretty One” — Thurston Harris

I keep approximately 40% of my portfolio in fixed income, mostly closed end funds trading at a discount to NAV.  This provide sufficient current income to ride out a downturn in the markets.  It is “sleep at night” money.  This is essential to any trader as the best trades are often the ones you don’t make.  You need discretion to pass if the risk reward ratio is unfavorable.

Each Friday, I highlight three fixed income picks where I’d consider putting new money today.  These are names that in my opinion are yield rich and attractively priced.  This week’s selections are below.

RiverNorth/DoubleLine Strategic Opportunity Fund, Inc. (OPP) is a closed end fund that is invested in various bonds globally.  It pays a managed distribution on a monthly basis.

  • Discount to NAV – 7.25%
  • Yield – 9.91%
  • Effective leverage – 24.44%

Aberdeen Inc Credit Strategies (ACP) returns this week.  The fund seeks current income and capital appreciation in a basket of senior loans.

  • Discount to NAV – 6.72%
  • Yield – 10.08%
  • Effective leverage – 30.07%

Eaton Vance Tax Advantaged Bond and Option (EXD) also returns from last week.  The fund seeks current income through a short-term, high quality bond strategy and a rules-based option overlay strategy.

  •  Discount to NAV – 7.10%
  • Yield – 11.52%
  • Effective leverage – none

Devour your prey raptors!

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Write Puts Tractor Supply (TSCO)

Initiating a new position in Tractor Supply.

music selection:  “Riders On The Storm” — The Doors

weigh-in:  207.0 (1.2)

Tractor Supply is a specialty retailer that serves rural communities.  It is bucking the death of retail trend with strong sales growth and attractive gross margins.  It is also insulated against competition from Amazon.  Most of the items it sells are large and heavy and cannot be shipped cost efficiently as one off deliveries.  It just doesn’t make any sense to send a wood chipper or fence by UPS.

Today I sold TSCO180209P00080000 for 3.13 a share.  The trade will be in force for 25 days and yields an expected 57.12% annualized while enjoying 4.30% downside protection.  The two contracts provide 626 in options income which has February shaping up as a good month.

Devour your prey raptors!

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Friday Fixed Income

Three Fixed Income Picks

music selection:  “Children Of The Damned” — Iron Maiden

A trader needs the discretion to not make a trade if nothing attractive is on offer.  It makes no sense to pick up nickles in front of a steamroller.  I like to keep 40% of my portfolio in fixed income within Closed End Funds bought at a discount to NAV.  This provides a significant portion of my budget in case I need to sit back and let the markets cool off before making trades.

Each Friday, I recommend three CEFs that are yield rich and trading at an attractive price.  This week, two names are making return appearances and I offer up one new possible trade.

Aberdeen Inc. Credit Strategies (ACP) is a closed end fund that invests in senior loans.  It pays monthly and the distribution type is “income only”.

  • Discount to NAV – 5.95%
  • Yield – 10.01%

Franklin Limited Duration Inco (FTF) is a closed end fund that invests high yield corporate bonds, floating rate bank loans and mortgage and other asset backed securities.  It pays monthly and the  distribution type is “managed distribution”.

  • Discount to NAV – 4.04%
  • Yield – 10.53%

EV Tax Advantaged Bond & Option (EXD) is a closed end fund that invests in high quality bonds with a rules based options overlay strategy.  It pays quarterly and the distribution type is “managed distribution”.

  • Discount to NAV – 6.61%
  • Yield – 11.25%

Devour your prey raptors!

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Update Discounted Bonds

A good till canceled order cleared today.

music selection:  “Yesterday, Today, Tomorrow” — Mike & The Mechanics

There hasn’t been much to report in my speculations into deeply discounted bonds.  The risk premium is at record lows with the junkiest of debt only paying a few points more than Treasuries.  I’m not a buyer right now.  One of my existing positions finally sold though.

On 9SEP2016 I bought two units of AOI 9.875 coupon 15JUL2021 maturity bonds.  I paid 88 cents on the dollar plus 4 dollars in commissions and 32.37 in accrued interest.  Today I sold for 95 cents on the dollar, paying 9.75 in commissions.  I collected 197.52 in coupons in the holding period.  The trade was in force for 489 days and yields 12.11% annualized (15.3% gross).

I consider that an excellent return for such a low risk investment.  At some point the credit cycle will turn and spreads on risk premium will once again be wide.  That will be time to back up the truck on bonds that are distressed but still well collateralized.

Devour your prey raptors!

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Stopped out Capital One Financial (COF)

Another loser.

music selection: “Break Our Hearts Down” — Bullet Height

There are some bloggers out there that only report their successful trades and sweep their losses under the rug.  That is pretty dishonest.  I like to share when I step in brontosaurus poo.  Today is one of those days.

Capital One Financial leads the industry in making credit cards available to subprime borrowers.  They are also active in lending money for subprime auto loans.  I sold shares short on 10JUL2017 expecting the credit cycle for subprime borrowers to roll over.  There are signs the segment is falling apart with rising delinquencies but a rising tide lifts all boats.  COF is a beneficiary of a widespread rally.  I stopped out as of yesterday’s close and bought to close today.

Shares were originally sold for 82.16.  I bought to close at 103.13.  The trade was in force for 185 days and yields on an annualized basis minus 50.35% on a 1,279 loss.  I’m still in the trade for my short of Ford (F) but it is closing in on its trailing stop as well.  I may get shaken out before the subprime lending bubble pops.  It hurts but I’ve learned to honor my stops.  A lizard has to live to trade another day.

Devour your prey raptors!

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Sell Express Scripts (ESRX) short

I have exited ADM.

music selection:  “Tumbling Dice” — The Rolling Stones

weigh-in:  208.2 (1.6)

First up is house cleaning.  I exited my trade in Archer-Daniels-Midland (ADM) with a 352 dollar loss, net of all options premiums collected.  The covered call at 40 resulted in shares being called away at a 1,000 dollar loss but premiums to date collected make up the difference.  The loss is 3.91% or 0.64% annualized.  I’m glad to have some portfolio deadweight gone.

Express Scripts (ESRX) strikes me as a dog.  At first blush it appears to be a great business trading at a fair price.  But if you dig deeper you see it is troubled.  The main customer (Anthem) makes up about 30% of revenue and is very upset with them.  They are leaving after their contract ends in a couple years to take the services provided by ESRX in house.  But they are also suing ESRX for over a billion dollars for abusive pricing.  The company recently settled with the department of justice to make some troubling accusations about conflict of interest go away.  And other healthcare companies are making moves to do away with their pharmacy benefit managers and insource the process.  Finally, there are upstarts who provide the service ESRX offers on a fee only basis that looks to undercut the traditional industry model.  I expect the stock to fall.

I sold short 100 shares at 75.68 this morning.  Options premiums are also fat so I taking a new approach and writing a covered put on the position as well to earn premium.  This is the exact opposite of a covered call strategy.  I sold ESRX180216P00072500 for 1.40 a share.  The play will be in place for 40 days and yields an expected 18.25% annually while enjoying 6.12% downside protection.  The is room for an additional 2.50 in short term capital gains if the price falls in the optioned period.

Devour your prey raptors!

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New Feature – Fixed Income

I’m introducing a new regular Friday feature at the raptor.

music selection: “Tumbling Dice” — The Rolling Stones

I’ve been getting more questions about the non-options portion of my portfolio.  I rarely report on that as the positions are mostly fixed income positions that are held with a wide stop loss and are intended as permanent positions rather than for trading.  A “nothing changed again” blog post has always seemed sort of dull to me so I have refrained.

But I think it is important for an early retiree to have a reliable stream of income that is not dependent on trading.  The best traders are the ones who have the discretion to sit back and not trade anything at all if nothing attractive is on offer.  You don’t want to pick up nickles in front of a steamroller.  So I have built a base of my portfolio, about 40% by cost basis into fixed income type investments.  This allows me live modestly without trading when and if necessary.

I like to invest in fixed income via Closed End Funds that are trading below their Net Asset Value (NAV).  You get diversification, an opportunity to buy assets below their liquidation value, and low cost leverage without the possibility of a margin call.  So I am going to start offering three selections in the closed end fund space each Friday that are yield rich and attractively priced.

Aberdeen Inc. Credit Strategies (ACP) is a closed end fund that invests in senior loans.  It pays monthly and the distribution type is “income only”.

  • Discount to NAV – 6.32%
  • Yield – 10.01%

Brookfield Real Assets Income (RA) is a closed end fund that invests in mortgages and mortgage securities.  It pays monthly and the distribution type is “managed distribution”.

  • Discount to NAV – 6.83%
  • Yield – 10.12%

EV Tax Advantaged Bond & Option (EXD) is a closed end fund that invests in high quality bonds with a rules based options overlay strategy.  It pays quarterly and the distribution type is “managed distribution”.

  • Discount to NAV – 6.00%
  • Yield – 10.91%

What do you think of the new feature, raptors?

Devour your prey raptors!

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Update UVXY

I rolled my long UVXY put position.

music selection:  “I Saw The Light” — Todd Rundgren

UVXY is a horribly designed security.  It should be criminal.  The ticker attempts to track the daily movement in the ^VIX by purchasing the 14 and 40 day futures on the ^VIX and rolling the position daily.  Contango in the futures markets ensures that most of the time, they will sell a “cheap” asset to buy a more “expensive” one.  They compound the misery by using double leverage.  The security falls around 85% a year with great consistency.  I have come close to covering my entire budget by betting against this dog.

On 1NOV2017, I purchased UVXY190118P00010000 for 5.55 a share.  The underlying was around 15 making this about a third out of the money.  My position moved into the money this week and I have been looking for an exit since.  Today, I sold the puts for 6.35 a share.  The trade was in force for 63 days and yields 83.51% on an annualized basis.  I cleared 4,400 in profit on 55 puts.

I rolled down and out to UVXY200117P00006000 for 4.35 a share.  I bought 76 contracts for 33,060.  I’ll be looking to sell somewhere around the point UVXY hits 5.15.  This will probably be on a split adjusted basis as the underlying is overdue for another reverse split.

This is my highest conviction trade and has made me reliable 50+% annualized returns for years.  I’d likely not be FIRE without this trade.

Devour your prey raptors!

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Sold puts Grub Hub (GRUB)

My Grub Hub position expired over the weekend.

music selection:  “Boogie Wonderland” — Earth, Wind & Fire

Grub Hub (GRUB) is a high growth company with great profitability.  It provides for great options income as well.  I sold GRUB180202P00071000 for 2.90 a share.  The trade will be in force for 32 days and yields an impressive expected 46.59% annually while enjoying 4.49% downside protection against a negative move in price.

I’m introducing a new regular feature on Friday.  Don’t miss it.

Devour your prey raptors!

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Financial Transparency as of 31DEC2017

Another year in the bag and it was a good one.

music selection:  “In Too Deep” — Genesis

weigh-in:  209.8 +2.2 – very disappointing  year for weight loss.

ASSETS:

Wells Fargo (taxable): This is down 31 dollars, a 0.10% loss versus last month. For the  year, this account is up 1,547 to 30,681.  That is an annual gain of 5.31%.  That is excellent considering this account holds almost exclusively fixed income investments.

Interactive Brokers (taxable): This is up 15,408 to 323,837 a gain of 5.00% versus last month. The annual gain is 54,311, good for 20.15%.

Interactive Brokers (tIRA): I show 480 in gains here this month to 163,045 which is good for a 0.30% monthly gain.  The annual result is 22,828 in gains good for 16.28%.

Checking: I’m up here to 12,013, a gain of 13.51% on the month. The annual mark is a 3,570 gain in cash good for 42.28% versus last December’s mark.

Total Assets: Good news over all as I’m up to 529,576 at the end of December. Good for an overall monthly gain of 3.37%.  On an annualized basis I’m up 82,256 or 18.39%.  If you back out the spending that was deducted from the asset base to get a full picture of total gains, the annualized gain was 23.62%.  Once again, I beat the S&P with a 60/40 equity/bond portfolio while lowering my risk.  Why would I invest any other way?

 

LIABILITIES:

House: Paid

Car: Paid

Taxes: A back of the envelope calculation shows I have enough tucked away with Uncle Sugar to allow for a 4-5 thousand refund.  I’ll leave that on deposit with the Service as partial prepayment for 2018.  I’ll only need to make quarterlies on about 5-6 thousand more that way.  My withdrawal rate will be a lot better than planned now that I don’t have to put away 10 thousand.

 

WITHDRAWAL RATE:

My annual spending came to 23,410, just below the 25,000 target.  Against a liquid networth of 529,576, that is a withdrawal rate of 4.42%.  Current annualized distributions, dividends, and interest come to 30,112 or 120.45% of budget.  I also earned 35,212 in options income during the year or 140.85% of budget.

 

SPENDING:

It was a record month.  Spending was only 810 dollars for the month of December.  That helped get me back on track after two spendy  months in a row.  My total spending for 2017 was 23,410, well under the 25,000 budget.

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