Looking for Yield?

Investing Strategies Bonds & Fixed Income Investments
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The Fed is clueless about the real economy. So it cut interest rates as a pre-election favor to the current regime. That means savers now have to scramble even harder for yield. But where to look when inflation is running around 8% (as measured by the 1990’s CPI, not today’s lies)?

In most cases, ‘yield’ is taxed as ordinary income. That means –depending on one’s tax situation-- that a nominal return of around 13% is needed just to break even on a purchasing power basis. CD’s don’t offer that, nor T-bills, nor money market funds, nor even most junk bonds. But there are plenty of divvie stocks and divvie ETFs that offer more than that if one focuses on ‘total return’ instead of just ‘yield’. In fact, I own bunch of them.

The downside of playing the ‘total returns’ game is ‘market risk’. But the downside of not playing the game with one’s idle cash is the assured loss of ‘purchasing power’. If market risk worries you more than becoming poorer each week as your dollars buy less and less at the grocery store and gas pump, then do nothing and wait for our dear gov’t to bail you out with another series of stimmie checks, loan deferrals, etc. That’s their plan, and that’s what they intend unless, of course, the current regime gets replaced and efforts to audit the Fed gain traction.

Arindam

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6% fed tax free looks attractive to me. And “total return” could be significant as the fed continue to cut rates. How low will they go?

BLE seems to have potential for 42% capital gains if all goes well.

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Paul,

That’s the tricky thing about this investment/trading stuff. Everyone’s tax situation is different, as is everyone’s personally experienced inflation rate (PEIR), i.e., the YOY cost increase of their own basket of goods and services.

For years, my PEIR was running round 4.5% that’s I’d bump up to 5% for planning purposes. These days, for not being as diligent with my tracking as I should be, I’m guessing my PEIR is running 8% to 10%, due to things like an average nationwide increase in auto insurance rates of 22%, ditto the same for food, etc.

In the near term, the Fed will be cutting rates. But a lot of smart money says that rates will be going higher again, soon enough, as the Empire’s deficit spending trashes the $US. But ‘up’ or ‘down’ with rates, the investing/trading game has now become defense. (IMHO, 'natch)

Charlie

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Thanks, Charlie. Yes, increased borrowing to fund the nation’s deficits has to be a concern.

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“BLE seems to have potential for 42% capital gains if all goes well.”

Paul,

I thought you were seriously over-estimating the potential gains for BLE, for it being a bond fund, not a tech fund, and not even a spec-grade bond fund at that. But the numbers seem to look like this.

The Oct div will be $0.54 cents. Let’s assume an entry at the current price of 11.27 , a div rate that doesn’t change over the next 12 months, and the price doesn’t drop, creating a capital loss. That projects a div yld of 57%. Holy moly! That’s serious money.

… later. The market makers wouldn’t split the spread. In at 11.28. Much thanks for the tip. So let me do you one in return. Take a look at ULTY. The Sep div was $0.983. The current price is 10.44. The month div rate varies widely, but it’s been around a buck. That projects an ann. div yld over 100%. Totally wild. Likely unsustainable.

Standard Disclaimers to anyone who has stumbled onto this thread. Do your due diligence and size your positions prudently. Things like BLE, ULTY, etc. aren’t “investments,” they’re speculative bets. (IMHO, 'natch.)

Charlie

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At present the monthly dividend is $0.054 or $0.6480 annually. When the yield curve returns to normal and they are able to borrow at short term rates and invest in long bonds, I expect the dividend to increase.

The cap gain estimate of 43% today is based on the current $11.27 vs the all time high of $16.10 on Aug 1, 2021.

As to bid ask spread, yes market orders always work against you. But usually a limit order at a fair split will get filled. To day the spread was 11.25 to 11.30.

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Opps. My bad. I misread the projected div as $0.54, not $0.054. That’s not worth fussing with, and I’ll take my (small) opening position flat tomorrow.

Much thanks for explaining the basis of your cap gains estimate. Frankly, I’d bet against BLE retagging its former high, not when the US has been in recession since last OCT and worsening. The $16 something high was probably due to yield hounds chasing prices in a depressed, interest-rate environment, which doesn’t describe the year ahead.

I’d disagree that market orders are a disadvantaged tool. Sometimes, the fills --esp. at Schwab-- are better than what I was trying to get with limit orders. A lot depends on who the marker makers are, how liquid the stock/ETF is, how fast the market is that day, etc. I probably do 500 trades a year, the bulk of them with market orders, especially when the spread is just a penny.

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Follow up.

Money “in the market” is money at risk.

Money in supposedly “safe” instruments like T-bills or CDs is decidedly not safe. All of the issuers have defaulted in the past, and they will do so again, especially now that the ‘bail-ins’ law is on the books. (Bank deposits are the property of the institution, not the individual, nor is the FDIC solvent.) Also, meanwhile, and wherever that money is parked, inflation will take its toll.

The longer money is “in the market”, the longer it suffers price-risk. (Hence, the attraction of taking one’s account flat at end of day.) Yes, day trading has its own stresses and risks, one of which is opportunity cost. But what to do when windfall profits happen, such as one-day gains greater than 8% or so? If the profit is grabbed and the money furloughed into T-bills, CDs etc, might enough of an annual return be earned at minimal risk?

The long-term, average return for owning stocks is around 10% (unless the Fed is goosing returns with easy money policies.) Buffet on many occasions has argued that 8% should be expected. But if a one day trade offers 8% or so and the money is parked for the rest of the year in relatively safe instruments offering 5% or so, then maybe, just maybe, the happy combo of decent enough returns and an easy, unworried sleep can be achieved. That’s the project I’m currently exploring.

There’s a guy who goes by the handle of Quillnpenn who stumbled onto an investing/trading method he calls Simon Sez (after the children’s game, Simple Simon Says). Its essence is classic, Ben Graham-style, chart-based, value investing, wherein one uses two simple rules to buy low and sell high. For sure, no method is perfect, and one’s inevitable losses need to be managed. But the method gets me into and out of trades with minimal grief or hassle.

As an example, yesterday I bought something at 2.20 that I sold today for 2.45. Do the math. That’s a 11.4% gain. When that money is furloughed for the rest of the year at 4.75% (as the recent 13 week bill offers), then an annual –not annualized-- gain of 16% would be achieved. That’s good enough for the girls I go dancing with. Another of my positions jumped 8% plus, but the chart suggested holding another day or two. Of the other dozen or so buys I did, two were down by (4%) or so and were immediately sold. The others are doing pretty much what a chart predicted they might do today and showing gains of 2%-4%.

Caveats. Never, ever believe what anyone tells you about their gains or losses. They’re lying, every time. But Quill’s method is a solid, evidenced-based way to make buy/sell decisions that might work for you, or it might not. That’s up to you. But I do see his method as a way to cope with the uncertainties that lie ahead of us with a portion of one’s money rather than do the no-brainer of chasing yield using the usual conventional vehicles in what looks to be a declining interest-rate environment, at least for a while.

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I agree that getting to $16/sh is not very likely. That would require a return to ultra low interest rates. But for the last 90 days BLE is up 6.98%, an excellent number for a bond fund. A reaction to falling interest rates. I’m in the black and hoping for more of the same. Who know how long it will take. Or how patient I will be. My largest bond position in a long long time. And uninversion of the yield curve is a definite plus.

On market orders, with thinly traded stocks they are risky. Market order authorizes the market maker to trade against you at whatever price is chooses. 5% above or below market is very possible. But maybe your brokers appreciate your business and would never try that. Pity the poor little guy who gets stuck with it because he doesn’t know better. So someone teaches him a lesson. One he/she probably will never forget.

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Paul,

These days, very few trades are handled by humans. It’s mostly done by algos that do have a human programmer who determined what the algo will accept as a bid or respond to as an offer.

As for newbies getting clipped, we all were there once and either learned or didn’t when market orders are effectively used. I’ve got accounts with Schwab, Fido, Etrade, IB, and FirstTrade, and I’ve used market orders with all of them with no complaints about abusive fills and, as I said, I do hundreds of trades per year. The myths about newbies being given bad fills on market orders are just that, myths. (IMHO, 'natch.)

Charlie

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Paul,

I really can’t let that go unchallenged.

Where “the market” is on any tradable --be it a stock, bond, ETF, futures contract, options contract, currency, whatever-- varies constantly throughout the regular session, as do the bid and ask spreads, which widen or tighten as the algos try to predict where prices are headed next.

Trades outside the regular session are a whole 'nother matter, and there liquidity truly is thin, and all brokers --uniformly, AFAIK – only permit limit orders accompanied with an explicit warning why that is so.

What newbies need to pay attention to is timing their entries and exits with respect to where prices are with respect to the day to day, intermediate trend instead of worrying about the intra-day stuff and possibly paying a penny or two more, or nickel or two more, than the best price of the day. That, and even more importantly, not screwing around with stocks being bought for their narrative and supposed future prospects rather than present, observable facts that confirm financial health and the likelihood of continued survival.

In other words, fundamentals matter. Except at market extremes, they are what makes the price chart, not the other way around. Peter Lynch used to hammer on that point, and he did quite well, though he fully admitted he often overpaid. Get the fundamentals right, and pricing doesn’t have to be very precise.

Charlie

Post script. The bid/ask was 34.11 x 34.13, and I wanted to get out. Rather than screw around with a limit order and end up being too clever by half, I wrote the order as a market order and got filled at 34.12. That was a fair fill and typical of my experience with using market orders.

You might ask why the market makers were willing to split the spread for me. The answer is obvious. They knew prices were going to go higher, which is now the case with the bid/ask at 34.13 x 34.15.

Had I waited, I could have gotten a better price than I did. But also, if I had waited, I could have gotten a worse price. That’s the reality of this investing/trading stuff. “Prices vary”, as Bernard Baruch once quipped. So you make your decisions and move on, not worrying about what coulda been.

So here’s an example in the opposite direction. With the bid ask now at 13.55 x 13.60, prices are lower than where I got out.

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One last comment on market orders vs limit orders. Of the major retail brokers, Schwab, Fido, etc., only Firstrade --AFAIK-- allows the use of limit orders with fraction shares. That’s a handy thing when one’s entry/exit prices really do matter. Also, they are one of the few brokers that will trade OTC stocks commish free. OTOH, their fixed-income commish schedule sucks majorly, and Fido (or IB) really is the best place to execute. So, as always, who is “the best broker” depends on one’s needs.

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Charlie, you are still talking about issues large enough to attract multiple competing market makers. All listed stocks have market makers or specialists. Some are very thinly traded. Then you can be dealing with one market maker and you had better be careful.

BLE average volume is 82k shares per day. Today they are at 22k and will probably do 40k or so. And Barrons used to report many issues smaller than that. A few dozen thousand share trades per day.

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Paul,

Your belief is that you would be disadvantaged by using market orders instead of limit orders, and you believe that belief should be the belief of others as well. My own experience --from doing hundreds of trades per year-- contradicts that belief. There are times when limit orders are a necessity. There are times when a market order is the correct, proper, and most efficient order type.

So, who’s to say either of us is right or wrong?

Doesn’t make a bit of difference, right? because neither of us is the other fellow (or gal), each of whom will have differing needs, opportunities, goals, and experiences.

By and large, I pay scant attention to ‘liquidity’ as measured by ‘average shares traded’ (per day, or month, or some similar aggregation period.) What matters to me is who the market maker is and how easy he/she is to work with. As an example, there are some ETFs that track the major currencies. (Not as many as there used to be, but still some.) Try trading some. Some all but trade by appointment but are nonetheless easy to get in and out of. Other far more liquid vehicles --as measured by avg shares traded – are a true nightmare and obstacle course to get in and out of. So, as always, “it depends”.

Still another example. If you use a decent trading platform, such as TOS, you can see the depth of market on both sides of the order queue and how the tape is printing and can easy tell when using a limit order might offer an advantage and when it might not.

In sum, there is nothing about investing or trading that is governed by a single, ‘no-exceptions’ rule. Always, always, always, someone will find that what doesn’t work for him or her is exactly what someone else is doing and is doing it well.

“Should one use market orders or limit orders?” The only correct answer is YES. (LOL)

Charlie