All Quiet On the Western Front

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For those frustrated and tired with politics and the elections, stay away from the stock market.  As hard as it is to believe, the markets are worse than Trump and Clinton.  On one hand, some really smart, successful professionals are pounding the table that trouble is coming and investors should get out before the markets implode.  Yet last week the three major averages (Dow, S&P 500, Nasdaq) reached record closing levels on the same day.  Contrary to the warnings, this trifecta is usually a sign of a strong market.  1999 was the last time it happened.
While it has been a confounding year for the capital markets, the recent action has been a different vexation from the volatility in the first and second quarters.  After Brexit and July’s upside breakout of the 2-year trading range, U.S. stocks have been quietly moving sideways.  This slithery stretch is somewhat misleading.  While the financial media correctly broadcast that the averages are setting new records, those not following closely believe that the markets are having a terrific 2016.  Not that a mid-single digit return is that bad. But for those not faithfully following developments, one could easily believe all of the records translates into a blockbuster move.  As you can see, the year-to-date returns are respectable but not off the charts.
2016YTD
DJIA                       +6.5%
S&P 500                 +6.8%
Nasdaq Composite +4.6%
Russell 2000          +8.9%
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends
This calm stock market landscape is out of character.  In fact, according to The Wall Street Journal, volatility in the equity markets is the lowest in 20 years.  During the past 30 days there were only 5 trading sessions where the S&P 500 moved more than 0.5%.  That is the fewest in any 30-day period since 1995.[i]
These non-volatile markets have another notable feature.  Low trading volume.  Market volumes are typically lower during the summer as there are thinner trading desks and this year is no exception.  As an example, the trading volume in the SPY (the S&P 500 exchange traded fund and one of the most widely traded stocks) has been below its 50-day moving average for the past 30 days.
This quiet and calm has some worried that it is a prelude to trouble.  And to be sure, there have been cases of stock market problems after periods of tranquility.  Also, the S&P is up over 20% during the past 6 months as measured from the February lows to the recent highs.  It’s natural to expect a hesitation or correction after such a move.
As mentioned above, there have been several high profile investors emphatically telling everyone to get out of the markets.  George Soros, Carl Icahn, Jeff Gundlach, and Stanley Druckenmiller have all warned that they believe there is significant market risk and that investors should get out.  It’s important to note that these warnings began earlier in the year and prior to the recent run up to record levels, so they haven’t been accurate (yet!).
The bears have a lot of ammunition.  The capital markets are being manipulated and controlled by central banks and the markets are starting to lose confidence in these policy makers. Further, trillions of dollars of sovereign debt trade at negative yields as a result of central bank actions.  Fiscal deficits are at record levels, and economic growth, where it can be found, is anemic.
And despite this environment, we find U.S. stock markets at record levels.  This points to an additional concern – U.S. stocks are not a bargain.  There are countless ways to value securities such as price-to-earnings, price-to-sales, dividend yield, book value, etc.  None of them currently result in “undervalued”.
Given these intense cross currents is there any surprise that investors are confused?  Within the glass half-full world, we think that July’s breakout to the upside is important.  The S&P 500 had been in a 2-year trading range which was roughly 1,800 to 2,100.  That the move out of this range was to the upside is a material event.  Moreover, it advanced in the face of the negatives covered above.
Secondly, some think that the U.S. economy is ready to expand beyond the stagnant performance of the past few years.  This could be the unknown helping last month’s move.  If this does take place, global stock markets should continue to move higher.
Returning to the ursine view, there are plenty of reasons for pessimism and in addition to those economic obstacles, there is social acrimony.  The country is polarized and the divide is growing and will continue past the election.  This has a chance to impact issues beyond the economy and politics.  It is a risk that is difficult to quantify.
David Tepper, another high profile hedge fund manager, recently confessed he was unsure of the markets’ direction.  He offered that he wouldn’t be too long or too short and he concluded that having an above average cash balance made sense.  We would concur and add that keeping an open mind towards the markets will be a good approach.
[i] The Wall Street Journal, August 23, 2016
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Past performance is not indicative of future results. Investing involves risks, including the risk of principal loss. The strategies discussed do not ensure success or guarantee against loss. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index. Trading of derivative products such as options, futures or exchange traded funds involves significant risks and it is important to fully understand the risks and consequences involved before investing in these products. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. If assistance is needed, the reader is advised to engage the services of a competent professional

2nd quarter Kildare performance letter

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A common investment debate involves buy and hold vs. active management.  The buy and hold approach believes in investing for the long term while active management attempts to adjust positions according to various market conditions.  In a strange set of events, 2016 had something for both sides.  The year began with a gut wrenching drop, then a recovery, and finished the first six months with historic strength.  So rewards came to the properly timed trader as well as the investor who rode out the volatility.  This hindsight makes it sound simple, but neither strategy was easy to execute.
2016 started with the worst stock market decline ever to start a year.  By mid-February the Dow Jones Industrial Average and the S&P 500 had fallen by over 11%.  The Nasdaq and Russell were each down over 16%.  A partial list of investor anxiety included the impact of falling crude oil, weakening emerging markets, and U.S. interest rate increases.
The markets bottomed in February and then recovered the losses by mid-April.  From there markets treaded water until the Brexit vote in late June.  The unexpected vote to ‘Exit” caught the markets off guard and global stock markets fell.  But after only two days, stocks stopped the decline and, amazingly, reversed course.  The bounce quickly gained momentum and turned out be to a historic move.  The S&P 500’s last three days of June were gains of 1.78%, 1.7% and 1.36%.  This better than 4.5% spike was the third strongest end to a first half of the year for the S&P and the strongest since 1962!  This helped return three of the major averages to the plus side for the six months.
At the end of June here are the returns for the major averages:
2016YTD
Dow Jones Industrial Average  +2.9%
S&P 500                                    +2.7%
Nasdaq Composite                    -3.3%
Russell 2000                             +1.4%
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends
Someone looking only at the six month numbers, like a ‘buy and hold investor’, would conclude not much happened other than a small advance for most averages.  An active investor might be equally satisfied if they were able to navigate 2016’s volatility.  The reality is that it is difficult to time the markets on a short term basis so there are likely some active investors who underperformed a buy and hold approach.  That’s not to anoint the buy and holders as there were several ‘long term’ investors who could not take the pain that the markets were piling on.  They sold positions into February and missed out on the rebound.  Further, it seemed that both sides were selling into the Brexit result.
Client’s accounts followed a mix of some long term core positions as well as some adjustments that helped to stabilize returns and reduce risk.
One of the strategies that contributed to client accounts’ success in 2016 has been positions in closed end funds focusing on high yield corporate bonds, corporate loans, and taxable municipal bonds.  This asset class (high yield corporate debt) was a big loser in 2015 as these bonds were widely used to finance oil and gas exploration and production.  The drop in the price of crude oil increased concerns that the bond issuers might not be able to pay off these bonds.
However, the selling of the energy bonds caused weakness across all of the high yield sector.  While the energy related bonds did have increased risk, the widespread selling resulted in good opportunities in bonds from other industries.  Further investing in this debt through closed end funds presented enhanced value as many of the funds were selling at significant discounts to their net asset value.  This offered a compelling margin of safety.
After the markets bottomed and the economy offered signs of stabilizing, these bonds increased in price.  The closed end funds appreciated along with the underlying bonds.  These higher prices together with the 6 – 8% yields offered solid double digit total returns in the first half of 2016.
When choosing the funds, I focused on ones that did not have exposure to the energy sector.  Some that I used are Blackstone Strategic Credit Fund (BGB), Blackstone Floating Rate Fund (BSL), Blackstone Taxable Municipal Bond Trust, and the Eaton Vance Senior Income Trust (EVF).  We sold the Deutsche High Income Trust (KHI) after the price appreciation moved the fund up to a slightly overvalued level.
Looking towards the second half of 2016, both ‘buy and hold’ and ‘active investors’ are facing high levels of uncertainty.  Geopolitical conflict, terrorism, Brexit, negative interest rates, and a polarizing U.S. presidential election are just a partial list of unknowns facing the markets.
I think the post-Brexit move in the stock market (as hard as it is to explain) is significant.  And U.S. stocks have added to this move in July.   As mentioned above, stocks ended June with the third strongest three-day performance ever.  In the two other examples as well as the fourth best (1999), the S&P 500’s median gain in the second half of the year was 7.03%.  Admittedly, this is a pretty small sample but it is something to keep in mind.  I will continue to look for the opportunities that offer favorable risk and return situations throughout the next six months and beyond.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Past performance is not indicative of future results. Investing involves risks, including the risk of principal loss. The strategies discussed do not ensure success or guarantee against loss. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index. Trading of derivative products such as options, futures or exchange traded funds involves significant risks and it is important to fully understand the risks and consequences involved before investing in these products. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. If assistance is needed, the reader is advised to engage the services of a competent professional

Solar Capital Ltd.

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Solar Capital Ltd., despite its name, has nothing to do with the solar industry.  It is a business development company (BDC).  BDC’s are similar to a bank as they invest and lend to small and medium size organizations.  The difference is that many of these companies are young and growing quickly.  Often they lack the collateral that traditional banks look for.  BDC’s step in to meet the demand for capital.
The BDC stocks had a very difficult 2015.  Worries over higher interest rates together with uncertain economic growth provided headwinds.  Also, the drop in crude oil played a role.  Some BDC’s had loans to energy related companies and the drop in oil and gas increased the risk that these loans would be repaid.  2016 has seen a recovery in BDC stocks especially those without energy exposure.
Solar Capital employs a value-oriented, fundamental credit underwriting approach to make investments primarily in senior secured loans and subordinated debt of private, middle market companies.  They were one of the few BDC’s that increased their book value last year.  One of the reasons for this is that they have no energy exposure.  Further, 99% of their portfolio is performing with a weighted average yield of 10.5%.
SLRC’s stock is currently priced below its book value and has a dividend yield of 7.9%.  In their recently released quarterly report, the company grew earnings through expanding the loan portfolio and contributions from loan prepayments.  Looking forward, the company will look to continue to enlarge the investment portfolio which could increase earnings.
Solar Capital invests and lends to small and medium size companies.  Obviously, this is riskier than traditional commercial lending.  However, SLRC’s low valuation and above average dividend yield offsets some of these risks.  I think that Solar Capital is a good risk – reward opportunity for investors with a longer time horizon.
Please contact me if you would like further information.
 Sincerely,
Jeffrey J. Kerr, CFA
Jeffrey Kerr is a Registered Representative of and securities are offered through LaSalle St. Securities LLC, member FINRA/SIPC. Mr. Kerr is an Investment Advisor Representative of and advisory services are offered through Kildare Asset Management, a Registered Investment Advisor. Kerr Financial Group and Kildare Asset Management are not affiliated with LaSalle St. Securities LLC.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Past performance is not indicative of future results. Investing involves risks, including the risk of principal loss. The strategies discussed do not ensure success or guarantee against loss. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index. Trading of derivative products such as options, futures or exchange traded funds involves significant risks and it is important to fully understand the risks and consequences involved before investing in these products. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. If assistance is needed, the reader is advised to engage the services of a competent professional

MVP REIT II income opportunity

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The MVP REIT II is an income opportunity investment. It is a publically registered, non-traded real estate investment trust (REIT). Non-traded REITS do not trade on an exchange and can be illiquid.
MVP REIT II is focused on acquiring parking facilities (garages, lets, structures, etc.).  The U.S. parking industry is fragmented and includes more than 40,000 facilities.  Between 2014 and 2019, the parking industry is estimated to grow by 18%.  Some other industry trends include innovative technologies leading to improved control and payment automation.   Further benefits include steady cash flows from lease operators and geographic diversification.
The MVP REIT II currently yields 6% (currently it is 50% cash and 50% additional shares).  The dividend is paid monthly.
This offering closes on October 1, 2016.
MVP has experience in building a parking lot business.  MVP REIT I closed in September 2015 and has 25 properties.  It continues to pay an over 6% dividend yield.
The company intends on listing MVP REIT I for trading in the 4th quarter of 2016.  This might provide liquidity for MVP REIT II in 2017-2018.
If you are interested and would like to discuss in more detail please contact me at 607-231-6330 or [email protected].
Jeffrey Kerr is a Registered Representative of and securities are offered through LaSalle St. Securities LLC, member FINRA/SIPC. Mr. Kerr is an Investment Advisor Representative of and advisory services are offered through Kildare Asset Management, a Registered Investment Advisor. Kerr Financial Group and Kildare Asset Management are not affiliated with LaSalle St. Securities LLC.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Past performance is not indicative of future results. Investing involves risks, including the risk of principal loss. The strategies discussed do not ensure success or guarantee against loss. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index. Trading of derivative products such as options, futures or exchange traded funds involves significant risks and it is important to fully understand the risks and consequences involved before investing in these products. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. If assistance is needed, the reader is advised to engage the services of a competent professional