Managing Expectations

The markets are confounding bears and bulls alike. Stocks are at record highs, but the correction many investors are expecting may not be as bad as they fear.

With stocks at record highs and investors unconvinced that the milestone is deserved, the throngs looking to "sell in May and go away" seemed raring to go…in April.

That impulse is particularly strong this spring. In each of the past three years, U.S. stocks peaked in April and then corrected 10% to 19%. The Dow Jones Industrial Average has just snagged its best first quarter in 15 years, and the Standard & Poor's 500 has levitated 23% since June. Even optimists must wonder if this rally is due for a pause.

Yet if markets exist to confound the most number of people, this year's spring break may last just long enough to bother the bulls, but stay shallow enough to annoy the bears. After all, the 2010 spring was consumed with the European debt crisis. A year later, the Arab Spring sent oil prices soaring while the U.S. put on quite a show of squandering its triple-A credit rating. Last year, Europe's recession was complicated by fears of a Chinese hard landing and U.S. political uncertainty. Today, the planet's problems haven't been resolved, but many of the macro-economic risks have at least receded.

Jeffrey Kleintop, LPL Financial's chief market strategist, thinks the odds of a fourth consecutive spring correction are small, but a minor 5% pullback is likely. Consumer confidence is declining, and a subdued volatility is evidence of complacency. But five of the 10 cues he's watching -- like central-bank stimuli, energy prices, current economic and market conditions, jobless claims, and inflation expectations -- continue to support stocks.

Yet the market remains antsy. The year's leading sectors -- health care, up 15%, and consumer staples, up 14% -- both are defensive.

Individuals and pensions also remain underinvested in stocks. Barry Ritholtz, CEO of Fusion IQ, calls this "the most hated rally in Wall Street history." Even as stocks climbed, "many participants are unable to pry their eyes from the wreckage in the rear-view mirror." Our central bank's wilful manipulation of economic cycles has subverted order. Today, thinking investors are wary, and bears outraged.

The result is a roundly disliked market that's "under-owned by investors, not unreasonably priced, with few alternatives to equities," Ritholtz says. "Does that sound like the recipe for a market crash to you?" 

Source:  Kopin Tan, Barrons

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida.

D2 Capital Management is a Member of the Southside Businessmen's Club and the Beaches Business Association

Warren Buffett Has 2 Basic Rules That Investors Always Fail To Follow

Listen to Jim Cramer or his cohorts on CNBC and you’ll hear statements like, “It’s not that hard for investors to pick stocks that will beat the market!”  Unless you possess the skills of Warren Buffett, that’s not true.

But in the book "Think, Act and Invest Like Warren Buffett," which is illustrated by Carl Richards, Larry Swedroe says you indeed can invest like Buffett ー just not by stock-picking.

Swedroe is a principal and director of research for the $18-billion St. Louis-based financial planning firm Buckingham Asset Management, LLC.

Why individual investors aren’t like Buffett.

Swedroe says retail investors invariably fail because they can’t adhere to two of Buffett’s basic rules: Don’t listen to forecasts, and don’t try to time the market.

Buffett once said, “the only value of stock forecasters is to make fortune-tellers look good.” Most investors would do better by ignoring investment advice offered by CNBC and similar outlets, Swedroe says, because it tells them nothing about where the market is headed.

Research proves the fallibility of forecasters. Swedroe cites data from Philip Tetlock and William Sherden that show that no economic forecasters have established a consistent track record. The better-known forecasters have actually been the least accurate. Even government agencies such as the Federal Reserve Bank have not been any better at forecasting than random guesses.

Many investors also try to time the market, despite warnings from Buffett. In regard to Berkshire Hathaway’s investing strategy, Buffett has said that “our favorite holding period is forever” and that “inactivity strikes us as intelligent behavior.”

Swedroe says investors lack the discipline and temperament to buy only when valuations are excessively low and sell when they are high. Emotions and the drone of CNBC get in the way, tempting investors to follow the herd and trade far too actively.

As for the ability to pick stocks, Buffett has an edge that no investor can possess. Because of his size and stature, he is given opportunities that are unavailable to others. He was able to lend Goldman Sachs $5 billion in a preferred stock that earned 10 percent in 2008, when Goldman needed an investor of Buffett’s stature. More recently, his purchase of H.J. Heinz included preferred shares with a 9 percent dividend.

The average investor, according to Buffett and Swedroe, doesn’t have similar opportunities on a risk-adjusted basis.


Source:  Robert Heubscher, Advisor Perspectives

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida.

D2 Capital Management is a Member of the Southside Businessmen's Club and the Beaches Business Association

Preferred Stock ETFs Generate Robust Yields

Preferred stock exchange traded funds held up during the Cyprus brouhaha, but most investors are more interested in the investments’ ability to generate robust yields.

The iShares S&P US Preferred Stock Index Fund (NYSE: PFF), which comes with a 5.52% 30-day SEC yield, gained 0.20% over the past week, while the S&P 500 index remained unchanged.

A preferred stock is a blended security made up of leveraged companies. The stock has bond characteristics in that they pay a fixed income regularly and do not prosper from the earnings growth of the subject company. Preferred stocks trade on an exchange just like any other security.

On the securities pecking order, preferred stocks are senior to common stock but junior to corporate bonds, and shareholders have no voting rights.

“Preferred stock is a good diversifier, with low correlations to other income-generating asset classes like REITs, MLPs, corporate bonds, TIPs, and popular income ETFs,” according to Morningstar analyst Abby Woodham.

Nevertheless, Woodham warns that preferred stocks come with specific risks, such as their heavy exposure to financials, regulation changes and rising interest rates.

Moreover the tax treatment on the securities vary. Looking at PFF, Woodham notes that the “dividends preserve the tax treatment of the underlying securities’ dividends, which has resulted in its investors usually paying qualified rates on about 50% of dividends, ordinary income on the other half, and capital gains on sale of PFF.”

Source:  Tom Lydon, ETF Trends

PFF is a component of the D2 Capital Management Multi-Asset Income Portfolio.

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida.

D2 Capital Management is a Member of the Southside Businessmen's Club and the Beaches Business Association

Cyprus: A Lesson for Regular Investors

While the current Cyprus "crisis" in Europe may not be particularly relevant to investors here in the United States, there is a significant lesson to be learned.

The island nation has a population roughly the same as Jacksonville and has an economy smaller than Shreveport, Louisiana.  Cyprus was the richest of the ten countries that joined the European Union in 2004. In 2008, it dropped its currency, the pound, for the euro.

Being a member of the EU and the euro zone benefited both Cyprus and foreigners eager to invest there. It made the country more attractive as a place to do business. It particularly lured wealthy Russians, who appreciated the country’s strong protection of property rights beyond Moscow’s reach and its 10 percent corporate income tax rate (Europe’s lowest), not to mention the balmy weather.

The problem—again, a familiar one—was that Cyprus’s two biggest banks couldn’t manage the flood of deposits. Cypriot regulators fell short as well.   Starting in 2007, the Central Bank of Cyprus, realized excessive deposits could cause bubbles and inflation in the domestic economy, so they limited the share that could be lent domestically.  In theory, it was a good idea, except the two biggest banks—the Bank of Cyprus and the Cyprus Popular Bank—simply shoveled the money westward into loans in Greece. Greek government bonds were particularly attractive because they offered higher yields at supposedly zero risk—since everyone knows sovereigns don’t default, right?  Well we know what happened there.

The lesson here is by simply chasing yield or the highest paying investments, you open yourself to increasingly more risk.  There is a reason certain investments pay high interest - the quality of the underlying bonds are less than ideal.  If you can accept that your principal may be at risk, then it might be a suitable investment for you.  But for the rest of us, riskier assets only deserve a small part of any diversified portfolio.

Derived from Multiple Sources

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida.

D2 Capital Management is a Member of the Southside Businessmen's Club and the Beaches Business Association

Bank Loan ETFs Hot on High Yields, Rising Rate Fears

PowerShares Senior Loan Portfolio (NYSE: BKLN) is one of the best-selling ETFs in the first quarter with inflows of more than $1.4 billion. Investors have flocked to the fund in search of decent yields and protection from rising interest rates.

BKLN is appropriate for investors who are willing to take on additional credit risk and who may be looking for floating-rate bonds to protect against rising interest rates, says Morningstar analyst Timothy Strauts.

“Bank loans are denoted ‘high yield’ in large part because the firms issuing them are highly leveraged,” he writes in a profile of the ETF. “Most investors typically become interested in bank loans when interest rates are expected to rise.”

BKLN has a distribution yield of 4.59%, according to manager Invesco PowerShares.

“Financial tastemakers have crowned leveraged loans the ‘it’ income asset class throughout 2013,” reports Michael Aneiro at Barron’s. “Loan funds have been soaking up attention and inflows all year as investors seek them out for their combination of current income and floating rates, which will come in handy whenever rates start rising for real.”

Source:  John Spence, ETF Trends

BKLN is a component of the D2 Capital Management Multi-Asset Income Portfolio.

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida.

D2 Capital Management is a Member of the Southside Businessmen's Club and the Beaches Business Association

Best REIT and Real Estate ETFs for Yield

ETFs tracking real estate investment trusts such as the Vanguard REIT Index (NYSE: VNQ) are a way for investors to participate in the recovering economy and property market, while earning some income. REITs tend to diversify better than an average real estate ETF.

“Although REITs offer relatively attractive yields, they are still equities and are not a higher-yielding alternative to low-risk investments such as Treasuries. Over the past three years, REITs have been slightly more volatile than the S&P 500. Potential near-term risks include slower-than-projected growth, setbacks in the U.S. economy (REITs are strongly correlated to the U.S. equity market), and rising interest rates,” Abby Woodham wrote for Morningstar.

REITs are a hybrid asset class as they offer capital appreciation along with yield. The companies are focused on property management, and rents, so the income is derived from collecting the rents. About 90% of taxable income is passed on to shareholders. REITs are a liquid way to invest in real estate, especially commercial property, while avoiding all of the drama of owning the actual property, reports Woodham.

The REIT ETFs that can sustain and grow their dividend payouts while keeping dependence on capital markets low are going to be the most successful. The yield on most REIT ETFs has been more rewarding than U.S. Treasuries and U.S. equities, drawing much attention to this asset class. Many real estate ETFs are a indirect play on the retail sector, whereas a REIT ETF invests only in the properties.

VNQ is a strong basket of 10 stocks that focus on office buildings, hotels and other domestic companies. The 0.10% expesne ratio is competitive with other ETFs in this asset class and the $32 billion in assets under management ensure there is enough liquidity in the fund. The 3.35% yield is still higher than U.S. Treasuries, reports Zacks.

The iShares FTSE NAREIT Mortgage Capped Plus Index Fund (NYSE: REM) focuses in on residential and commercial property that take on assets in excess of $1 billion. The mix of stable mortgages and lower interest rates is necessary for this fund to remain successful. The ETF has recouped most of the lost assets that entailed after the housing bubble burst in 2008. The 11.67% yield of this fund makes it higher risk, and the $1.1 billion invested is proof that investors are upbeat on the real estate sector.

The SPDR Dow Jones Wilshire REIT ETF (NYSE: RWR) is a fund for investors who want exposure to commercial real estate rather than residential. The focus is on strip malls, apartment buildings, healthcare buildings and office space. The 0.25% expense ratio makes this an affordable alternative to access commercial property, while the 2.66% yield is decent. There is over $2 billion in assets under management.

Source:  Tom Lydon, ETF Trends

VNQ and REM are components of the D2 Capital Management Multi-Asset Income Portfolio.

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida.

D2 Capital Management is a Member of the Southside Businessmen's Club and the Beaches Business Association

In Spite Of Market Rally, S&P Stocks At Lowest Valuation Since 1980

Even after U.S. stocks more than doubled in the four-year bull market, companies in the Standard & Poor’s 500 Index are cheaper than at any record high since 1980 but individual investors continue to avoid equities.

The S&P 500 rose to within 1 percent of its high last week, gaining 131 percent from its lows. The index trades at 15.4 times reported profit, below the average 19.9 reached in bull markets since 1962, according to data compiled by Bloomberg News. The Dow Jones Industrial Average erased all losses from the financial crisis on March 5 and has added 11 percent this year.

While individuals added almost $20 billion to U.S. stock funds this year, the amount is just 3.5 percent of the withdrawals since 2007 and compares with $44 billion placed with fixed-income managers in 2013.  The absence of private buyers shows there’s plenty of money to keep the rally going. However, in the absense of retail investors the rally may be too dependent on Federal Reserve stimulus and will fizzle once central bank support ebbs.

About $10 trillion has been added to U.S. stock prices since the market bottomed on March 9, 2009, during the worst financial crisis in seven decades.

Institutions have been the main beneficiaries of the rally. Individuals drained more than $600 billion from equity mutual funds in the six years though 2012 until becoming net buyers in January 2013. Even now, retail investors remain skittish, withdrawing an estimated $1.7 billion in the two weeks through March 6 and pushing $10.5 billion into bonds.

“The individual investor doesn’t seem like they’ve come back to the market yet,” Joseph Veranth, chief investment officer at Dana Investment Advisors in Brookfield, Wisconsin, said. The firm manages $3.8 billion. “People aren’t convinced this is for real. They’ve been burned twice in a big way, and there’s still doubt.”

Source:  Bloomberg News

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida.

D2 Capital Management is a Member of the Southside Businessmen's Club and the Beaches Business Association

Workers Saving Too Little to Retire

Workers in the U.S. are bracing for a retirement crisis, even as the stock market sits near highs and the economy shows signs of improvement.

New data show that powerful financial and demographic forces are combining to squeeze individuals and companies that are trying to save for the future and make their money last.

Fifty-seven percent of U.S. workers surveyed reported less than $25,000 in total household savings and investments excluding their homes, according to a report to be released Tuesday by the Employee Benefit Research Institute. Only 49% reported having so little money saved in 2008.

The survey also found that 28% of Americans have no confidence they will have enough money to retire comfortably—the highest level in the study's 23-year history.

While Americans are living longer, the extended life spans will make it tougher for workers trying to stretch retirement savings.

The percentage of workers who have saved for retirement plunged to 66% from 75% in 2009, according to the Employee Benefit Research Institute survey.

Only about half of the 1,003 workers and 251 retirees surveyed said they were sure they could come up with $2,000 if an unexpected need were to arise in the next month.

Source:  Kelly Greene, Wall Street Journal

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida.

D2 Capital Management is a Member of the Southside Businessmen's Club and the Beaches Business Association

Cyprus effect on stocks likely short-term

Wall Street's stock rally is facing pressure from another flareup of Europe's debt crisis.

Cyprus' announcement over the weekend that eurozone finance leaders were pressing for a one-time tax on depositors' savings in exchange for a financial bailout shocked global investors.

The proposal to have Cyprus savers share the financial burden of a bailout adds new elements of uncertainty and unpredictability to Europe's debt crisis. Worried depositors rushed to withdraw cash in Cyprus, where banks will remain closed until Thursday.

Investors fear the unprecedented deposit tax, if approved by Cyprus' parliament, could set a precedent for other troubled economies, such as Italy and Spain.

That fear caused investors to be more risk-averse in the short term. Stocks fell sharply Monday in Asia and Europe and traded lower in the U.S., but were well off their early lows.

With major U.S. stock indexes trading at or near all-time highs, some Wall Street pros say Europe's latest turbulence could spark a long-awaited pull back in the U.S. stock market.

"In an environment where people are looking for an excuse to sell, I would say this news is as good (an excuse) as any," says Paul Hickey, co-founder of Bespoke Investment Group. "As you can imagine, a worry among investors is that if they can do it in Cyprus, why not anywhere else? The ... issue is how does it impact trust and confidence in the financial system. That will be the key to watch, and only time will tell."

At this point, adds Hickey, we could see this situation turning into a "modest correction."

Edward Yardeni, chief investment officer at Yardeni Research, says the latest flare-up in Europe is a reminder that the Eurozone crisis has not been solved. "It demonstrates that Europe (and its debs crisis) will probably be with us for a very long time," he says.

But Yardeni says while the U.S. market is likely to suffer some type of sell-off, it doesn't preclude the U.S. market continuing to rise. The reason: He doesn't believe Cyprus will turn out to cause investors to panic and the financial crisis to intensify.

The biggest hit from this latest situation will be to investor confidence, Yardeni said.

On the plus side, Yardeni says U.S. stocks could benefit from the renewed concerns in Europe; the U.S., where the economy is improving, would be viewed as a better place for investors to park their money.

Likewise, the Cyprus bailout is not likely to have a huge negative impact on U.S. economic growth, which has been ticking up as the recovery and confidence (in the recovery) gain traction, says Joseph Quinlan, a market strategist at U.S. Trust.

"The impact on the U.S. should be marginal, or nothing the markets have not already discounted," says Quinlan. "A key offset to weakness in Europe is the re-accelerating growth in the U.S. and emerging markets."

The U.S. economy has proved it can keep growing despite economic stagnation in Europe. And U.S. companies continue to grow their profits despite continued pressure on their profits in Europe, Quinlan says.

Source:  Adam Shell, USA Today

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida.

D2 Capital Management is a Member of the Southside Businessmen's Club and the Beaches Business Association

A Market Breather Coming?

If there is one thing you can count on, it is Wall Street’s tendency to pile onto the current investing fad as if it was the most self-evident truth under the sun. The analogy of sheep is often used when describing investors, and while the comparison is mostly unfair, there is definitely something to it. Anyone looks like they’re swimming if they’re going with the current, and as the old saying goes, never confuse brains with a bull market.

A veritable parade of institutional money managers are taking to the airwaves these days to extol the virtues of stocks, the rally, the economy, etc. All, of course, are fairly safe bets now that we’re near record levels, but a year ago when they were cheap, you could not turn on CNBC or read The Wall Street Journal without being bombarded with dire forecast after dire forecast. We knew it would happen, but the continued ability of the conventional wisdom to be flat-out wrong never ceases to amaze us.

The bottom line is that...most S&P 500 sectors suggest the market will need to take a breather shortly. Notably, the market’s rally in the past several weeks has largely been confined to large-cap stocks, so we would not be surprised to see some rotation into small- and mid-capitalization names as part of such a correction. Given the size of the rally relative to the tangible improvements in the economic picture, however, we think much has already been discounted; a period of relative flat trading, especially into the summer, is equally as likely as some sort of sharp break downwards.

Importantly, the bandwagon-jumping that is currently raging on Wall Street is a mild positive from the standpoint of sentiment. Whereas the last several years has seen an pervasive unwillingness to see the world optimistically, the general sense now is that we’re over the worst of it and are finally back on track. This is good, as it helps weather bad news or the occasional step backward in economic data. The tenacity of the rally through the sequester nonsense illustrates what we mean – two years ago, that mess would have easily been worth 1,000 Dow points.

We believe corrections are a healthy part of stable, long-term trends. As such, we tend not to fear them very much. As investors, not traders, we tend to focus on things that may or may not change the fundamental outlook, and try not focus too much on short-term market gyrations.

Source:  Scott Chan, Leeb's Market Forecast

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida.

D2 Capital Management is a Member of the Southside Businessmen's Club and the Beaches Business Association

Mortgage REIT ETFs: Double-Digit Yields and Risks

Unsatisfied with your low, single-digit dividends and bond yields? Investors can squeeze out more income with mortgage-backed real estate investment trusts and exchange traded funds, but you will have to be comfortable with the potential risks.

Mortgage REITs are leveraged investment companies that borrow to buy mortgages and other real-estate related securities, writes Kathy Kristof for Kiplinger.

If the companies buy “nonagency” loans — debt that is not backed by agencies like the Government National Mortgage Association or the Federal National Mortgage Association — then investors are subject to defaults and potential losses. On the flip side, the added risk translates to a higher yield premium.

Investors who are considering these investments believe that both the housing market and the economy are seeing healthy growth.

“This is a great environment to be a mortgage investor,” Jason Stewart, an analyst with Compass Point Research, said in the article. Stewart is leaning toward nonagency debt, despite the risks, as the investments offer greater rates and real estate prices are rising.

Mortgage REITs have gained 11.7% so far this year and come with an average 11.5% yield.

However, interest rate risk poses a potential problems. A higher interest rate translate to lower capital returns. Additionally, higher short-term interest rates would also increase mortgage REITs’ cost of funds and could cause some to lower dividends.

“You have to keep an eye on the Fed,” Merrill Ross, REIT analyst with Wunderlich Securities, said in the article. “As short-term interest rates start to rise, it’s a good time to get out of these stocks.”

The iShares FTSE NAREIT Mortgage REITs Index Fund (NYSE: REM) tracks U.S. residential and commercial REITs. REM has a 11.24% 12-month yield. The fund is up 26.2% over the past year.

The Market Vectors Mortgage REIT Income ETF (NYSE: MORT) is a similar fund and comes with a 10.76% 12-month yield. The ETF is up 28.0% over the last year.

Source:  Tom Lydon, ETF Trends

REM is a component of the D2 Capital Management Multi-Asset Income Portfolio.

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida.

D2 Capital Management is a Member of the Southside Businessmen's Club and the Beaches Business Association

Perspective on current Market Trends

Many headlines have focused on the Dow Jones industrial average’s record high and its 10-day winning streak. Less noticed is the S&P 500’s attempt at its own closing record. The large-cap index ended today just two points shy of its 1,565.15 closing high set on October 9, 2007.

It’s certainly feel-good news, but you would be wise to keep your joy in check. The S&P 500’s year-to-date total return (price appreciation and dividends received) was 9.5% as of yesterday. This equates to an annualized gain of approximately 60%.  We don’t have to rely on a cracked crystal ball to tell you this size of a gain will not happen. Since 1926, large-cap stocks have only realized full-year gains in excess of 50% two times (1933 and 1954) according to the Ibbotson SBBI 2012 Classic Yearbook (Morningstar, 2012).

Before you hunker down, be aware that stock prices do not have to endure a steep correction to correct their course. Rather, a couple of modestly down months and a few flat months could slow the pace of this year’s annualized return without causing much pain to your portfolio. It is very possible that 2013 could end up being a great year for stocks without the market indexes maintaining their current pace of gains.

Of course, none of this answers the question some of you probably have, “Should I buy or sell stocks right now?” Though the correct answer is to stick to your long-term allocation plan and to not worry about the market’s short-term movement, this kind of thinking is not often easy to follow. So, here are three observations.

Relative valuations are getting expensive.  Nearly half of the 948 dividend-paying companies within the S&P Super Composite 1500 are trading with yields below their five-year averages. (Price and yield are inversely related, so low yields imply high valuations.) On a price-earnings basis, just 39% of the index members with five-year price-earnings ratios trade at a discount to their historical five-year averages.

Conversely, the length of the current bull market, which is turning five years old, favors the bulls. In a report published this past Monday, Sam Stovall at S&P Capital IQ wrote, “Since WWII, the S&P 500 turned on the after-burners in year five, with the remaining bull markets averaging a 21% increase in price -- four of which were in double digits. In addition, four of the five bull markets went on to celebrate their sixth birthday.”

Then there is the macro environment. The market remains more focused on the positive news, such as the improving jobs data and rebounding housing market, than the negative news, such as North Korea’s saber rattling. Sequestration, Europe, Japan and China are all factors that could adversely impact the U.S. economy. Favorable outcomes to some or all of these events would help stocks. The uncertainty is part of the randomness that characterizes stock prices over the long term.

If it were easy to decipher what the market will do next, everyone would successfully employ market timing techniques. The simple facts are that the market moves in ways we don’t expect and focusing on the short-term variations can prevent you from making progress on your long-term goals. So, enjoy the new highs, but realize what happens next week or next month is nowhere as nearly important to your portfolio as what happens over the next decade.

Source:  AAII

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida.

D2 Capital Management is a Member of the Southside Businessmen's Club and the Beaches Business Association

Investment Grade Corporate Bond ETF Yields 4%

The iShares Investment Grade Corporate Bond (NYSE: LQD) is one of the largest fixed-income ETFs and provides a reasonable option for investors who don’t want to invest in speculative-grade corporate debt.

The $24 billion exchange traded fund pays a distribution yield of about 4% and is highly liquid.

LQD’s credit quality is higher than corporate junk bond ETF such as iShares iBoxx High Yield Corporate Bond Fund and the SPDR Barclays High Yield Bond ETF, which pay higher yields.

“High-quality corporate bonds offer relatively safe income and typically yield more than United States Treasury bonds because of their credit risk. Long-term investors could own LQD as part of a diversified-bond allocation, and tactical investors could own this exchange-traded fund when they feel the corporate-bond market is underpriced versus Treasuries,” Timothy Strauts wrote for Morningstar.

LQD has the strongest asset base and superior liquidity than any other corporate bond fund in this sector. The fund tracks an index made up of corporate bonds that have a maturity between 3-25 years. The average credit rating is BBB.

Source:  Tom Lydon, ETF Trends

LQD is a component of the D2 Capital Management Multi-Asset Income Portfolio.

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida.

D2 Capital Management is a Member of the Southside Businessmen's Club and the Beaches Business Association

Are Investors Better Off?

This from Jeremy Siegel, Senior Investment Strategy Advisor, Wisdom Tree

Ronald Reagan, in his first run against Jimmy Carter, is well remembered for asking voters whether they were better off than four years earlier. Given that the Dow Industrials broke into record territory, investors might also ask whether they are better off than nearly five and a half years ago, when the Dow last hit an all-time high.

Unfortunately, the answer is no—not by a long shot. For one, the effect of inflation has eroded the value of the dollar. On an inflation-corrected basis, the Dow would have to hit 15,640 to be worth more than it was in October of 2007. In fact, October 2007 was not even the Dow’s highest point in constant dollars. At the peak of the bull market in January of 2000, the Dow was just over 16,000 in today’s dollars, more than 11% higher than today. For the much broader S&P Index, its inflation-corrected peak of March 2000 was 2,060, more than 30% above today’s levels.

But investors have fallen even further behind than these numbers imply. Because of the Federal Reserve’s policy of maintaining interest rates near zero, a dollar’s worth of savings does not go nearly as far as it did before the financial crisis.

For example, in early 2000, when the U.S. stock market was at its peak, an investor with a $500,000 nest egg in stocks could cash out and invest the proceeds in 30-year Treasury Inflation-Protected Securities (TIPS) yielding more than 4% and generate an inflation-protected income stream of about $21,000 per year. Unfortunately, at today’s near-zero rates, that same investor could obtain only $2,600 of annual inflation-protected income from his $500,000 nest egg, more than 87% less than in 2000.

This means that once inflation and lower interest rates are factored in, the stock market would have to rise to many multiples of its current level for an investor to enjoy the same after-inflation income today as he did 12 years ago.

Although this is most discouraging for those planning to cash out their stocks and live off their savings, we believe the prospects are much better today than in 2000 for those willing to hold on to their stocks. Twelve years ago equities were selling at approximately 30 times their estimated earnings and their dividend yield was a measly 1%. But today stocks are selling at only 13.7 times their 2013 projected earnings, while their dividend yield is over 2%. Furthermore, cash dividends, which were at a record high in 2012, are rising at their fastest rate in decades. And in contrast to TIPS, whose income payments only keep up with inflation, dividends have grown 1% to 2% faster than inflation over the past half century.

No one will argue with the assessment that the last decade has been horrible for stock investors. But despite the ravages of the worst bear market since the Great Depression and the worst recession in 75 years, dividend growth on the S&P 500 averaged 7% a year. And this dividend growth occurred despite the 20% collapse in dividends during the financial crisis Although there is always a risk of losing money in stocks over the short-term, history shows that there has never been a twenty year period in US stock market history when stocks investor returns have fallen behind inflation. Bonds have experienced 20-year periods where they fell behind inflation, and we would not be surprised to see them fall short again, given today’s high bond prices.

The financial markets have come full circle. In 2000 the stock market soared to unjustified valuations, and stock investors paid the price, with the poorest decade since the 1930s. Today bonds are stretched to their limit while we believe stocks are priced to offer investors better returns. The better question for investors is not whether they are better off now than they were when stocks were last at an all-time high, but how they can be better off going forward. With interest rates at record lows and stocks offering the best income prospects in decades, we have little doubt which asset class will win the next race.

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida.

D2 Capital Management is a Member of the Southside Businessmen's Club and the Beaches Business Association

Vanguard’s recently published economic and investment outlook discusses their outlook for interest rates and bond returns:  The Federal Reserve is likely to keep a tight lid on interest rates through at least early 2015, although better-than-expected economic results (for example, if unemployment drops below the Fed’s threshold of 6.5%) or higher-than-expected inflation (above the Fed’s 2.5% target) could lead to earlier action.

For some time now, Vanguard has been encouraging clients to reevaluate their expectations for fixed income returns. For well over a decade, investors have benefited from a historic bond bull market, but given current interest rates, it’s difficult to imagine similar returns in the future. In fact, the Vanguard Capital Markets Model® suggests that the “central tendency” for annualized returns of the broad taxable U.S. bond market will be only 1%–2% over the next decade.

“Bonds are an area of concern for us,” Vanguard Chief Investment Officer Tim Buckley said in a recent interview. “They’re at historically low yields, and the best predictor for future bond returns is current yield. Looking forward, we have low expectations for bond returns.

“At the same time, we’ll tell you not to abandon bonds,” Mr. Buckley said. “They serve a great diversifying purpose in the portfolio. When the equity markets zig, it’s the bond markets that can zag. The other bit about bond funds is that as rates go up, yes, you may have a principal loss, but you’ll be reinvesting at a higher rate. If you stick with the portfolio, you can be better off over the long term.”

The role of bonds in a balanced portfolio - While the return outlook for the fixed income sector is cloudy, Vanguard strongly believes that bonds can have an important place in investors’ portfolios. After all, they could provide two crucial benefits:

• Providing stability and diversification. As Mr. Buckley said, when the stock market zigs, the bond market often zags. Given the lower historical volatility of bonds versus stocks, and their smaller historical downside risk, Vanguard believes the key benefits of fixed income investing should endure in the years ahead.
• Providing income. Despite the low-yield environment, bond fund investors can benefit from rising interest rates because maturing bonds and new assets can be reinvested into higher-yielding bonds. Rising interest rates can still have a material impact on the prices of the underlying bonds, but the ability to reinvest in bonds with higher yields helps to offset the decline in price.

Source:  The Vanguard Group

  
The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida.

D2 Capital Management is a Member of the Southside Businessmen's Club and the Beaches Business Association

History Lesson: Buying High, Selling Low

With stocks hitting a high, everyone wants a piece of the action. Stockbrokers say clients are phoning in orders. Mutual-fund data show investors buying U.S.-stock funds, after fleeing them for years.

Buying at a high flies in the face of common sense but is often hard to resist. Ordinary investors wind up buying at elevated prices and get caught when the market eventually turns downward. Then they get frightened and sell. No wonder so many of them have trouble matching the market's gains.

But this time there is a wild card: the Federal Reserve.

The Fed has gone out of its way to boost the economy through massive injections of cheap money into financial markets. Fed Chairman Ben Bernanke has made it clear, most recently in congressional testimony, that he is determined to do what it takes to keep financial markets stable and the economy growing, as long as inflation remains quiet.

The question is whether Mr. Bernanke can buck the historical trend. Bull markets tend to be getting long in the tooth by the time they hit record territory. There have been exceptions, but lately the average bull market has run out of steam less than two years after hitting its first record.

A bull market is commonly defined as a gain of 20% or more from a low. A bull market ends when stocks decline 20% or more from a high. The current bull market began in March 2009.

The Dow Jones Industrial Average usually has recorded additional gains after it hit record territory—a median of 28%, according to Ned Davis Research. If the current bull market matched that, the Dow would pass 18000 before topping out, up from 14253.77 on Tuesday.

Fresh milestones for the Dow Jones Industrial Average are always cause for celebration among stock traders. Take a look back at shots from the floor of the New York Stock exchange from past jumps for the blue-chip index.

In the 1990s boom, the bull market lasted nearly nine years after its first record. The current period, of course, doesn't seem comparable to that euphoric time. After a high was hit in 1972, the bull market lasted only two months. The last bull market, which ended in October 2007, continued for a year after its first Dow record, rising 21% in that period.

In all but one of the past six bull markets, purchases of stock mutual funds picked up right after the Dow's first new high, according to Ned Davis. In the six months after that first record, the median flow of money into stock funds, in percentage terms, was three times as strong as in the six months before.

Whether it proves wise to jump into stocks now is going to depend partly on Mr. Bernanke.

More than any other time in history, this bull market owes its strength to the Fed. Mr. Bernanke, formerly a professor at Princeton University who was first appointed Fed chairman by President George W. Bush in 2006, may be the world's leading academic expert on the Fed's mistakes of the 1930s, when it stopped fighting the Depression too soon.

Mr. Bernanke has repeatedly made it clear that he doesn't intend to repeat those mistakes, even though some regional Fed bank presidents and many Republicans in Congress complain his policies could create economic trouble down the road. In many analysts' view, the Fed is the bull market's strongest pillar.

Plenty of problems remain that could counteract the Fed support. Those include Europe's continuing financial uncertainty, China's uncertain economic growth and the risk that Washington's spending cuts could harm the U.S. economy. Terrorism concerns and Middle East tensions also lurk.

There is also the chance investors won't pile in this time. In 1972, after the Dow hit a record, skittish mutual-fund investors kept taking money out of stock funds. The 1970s saw repeated economic trouble that created deep skepticism about stocks, not unlike today.

If individuals stop plowing money into stocks now, it wouldn't necessarily end the bull market. The stock market has been dominated for years by hedge funds and high-frequency traders, not individuals. But it wouldn't help.

This leaves investors with two big facts. First, the bull market is old and, in a normal world, might not be far from topping out. Second, with the Fed so active, this isn't a normal world. Until the Fed shows signs of retreat, it will take a serious shock from somewhere else to send U.S. stocks lower.

Source:  E.S. Browning, Wall Street Journal

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida.

D2 Capital Management is a Member of the Southside Businessmen's Club and the Beaches Business Association

Vanguard REIT ETF Yielding Over 3% Beating S&P 500

The Vanguard REIT ETF (NYSE: VNQ) real estate investment trust ETF is yielding more than 3%.

The REIT fund has a three-year annualized return of 20%, compared with 13% for SPDR S&P 500.

The Vanguard REIT ETF tries to reflect the performance of the MSCI US REIT Index, which holds stocks issued by real estate investment trusts companies that purchase office buildings, hotels and other real property.

VNQ has a 3.43% 12-month yield and is up 1.2% over the past month, up 8.9% over the last three months and up 17.5% in the past year.

“Equity REITs are a hybrid asset class, offering yield and the possibility of capital appreciation,” according to Morningstar analyst Abby Woodham. “These firms generate income by managing properties and collecting rent. They are required to distribute at least 90% of their taxable income to shareholders, which is the source of their desirable yield.”

“In the past, REITs were viewed as a liquid way to buy commercial real estate and improve a portfolio’s diversification,” Woodham added. “Real estate also has some inflation-hedging qualities.”

Source:  Tom Lydon, ETF Trends

VNQ is a component of the D2 Capital Management Multi-Asset Income Portfolio.

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida.

D2 Capital Management is a Member of the Southside Businessmen's Club and the Beaches Business Association

Some Words of Wisdom

With the passing of Martin Zweig, Wall Street lost one of the most successful investors in history. But thankfully, good ideas rarely die with their creators, and Zweig had a lot of good ideas that investors can learn from today.

Many tributes to him recalled his memorable appearance on Wall Street Week with Louis Rukeyser on October 16, 1987, where he warned of a stock market crash.

It happened the very next trading day, and Zweig’s reputation as a forecaster was sealed.

Still, that understates his importance. A numbers wizard (he got a PhD in finance from Michigan State), Zweig saw patterns in the market no one else could. His newsletter, The Zweig Forecast, had a stellar track record.

He also had a simple philosophy that can help ordinary investors navigate even the most treacherous markets. By sticking to it, investors can participate in the upside while limiting downside risk. Many people claim to have done that, but Zweig actually did.

Zweig’s nostrums are well known—“Don’t fight the Fed,” “don’t fight the tape”—but they shouldn’t be taken for granted. Used correctly, they’re a recipe for making money and reducing risk.

"Don't Fight the Fed"

“Monetary conditions exert an enormous influence on stock prices,” he wrote in his book Winning on Wall Street. “Indeed, the monetary climate—primarily the trend in interest rates and Federal Reserve policy—is the dominant factor in determining the stock market’s major direction.”

“Generally a rising trend in rates is bearish for stocks; a falling trend is bullish,” he continued.

Why? For two reasons. “First, falling interest rates reduce the competition on stocks from other investments, especially short-term instruments such as Treasury bills, certificates of deposit, or money market funds,” he wrote.

“Second, when interest rates fall, it costs corporations less to borrow. As expenses fall, profits rise...So, as interest rates drop, investors tend to bid prices higher, partly on the expectation of better earnings.”

Isn’t that exactly what’s happening now? After resisting for years while the Fed drove real short-term interest rates below zero, investors have jumped back into US stock mutual funds and ETFs.

And companies have zealously controlled their expenses and have refinanced every bit of debt they could at rock-bottom rates. No wonder corporate profits are at their highest percentage of GDP in more than 60 years.

“Don’t Fight the Tape”

“Big money is made in the stock market by being on the right side of the major moves,” he wrote.

“The idea is to get in harmony with the market. It’s suicidal to fight trends. They have a higher probability of continuing than not...Strong momentum tends to persist...Fighting the tape is an open invitation to disaster.”

Zweig advised investors not to go all in or out, but to keep a position in stocks and increase it when the risk was low, while reducing it when the risk was high. “What you are concerned with is the probability of success or, alternatively, the probability of losing money. You want to avoid loss. So, it’s fine to buy above the bottom and to sell below the top,” he wrote.

How do we know if we’re near a top? Start with the Fed, of course. When rates are low, as they are now, the second of two rate hikes or a one-percentage-point increase in the prime rate would trigger a Zweig sell signal.

Would the end of “quantitative easing” constitute a rate hike? Good question, but I doubt it. That means we probably don’t have to worry about a monetary sell signal until at least 2014.
Zweig found that every bear market from 1919 to 1982 had at least one of three conditions:

• Extreme deflation
• “Ultrahigh” price-to-earnings ratios in the upper teens and twenties
• Or an inverted yield curve, where short-term interest rates exceed long-term rates

Seen any of those lately? No.

We live in confusing times—slow economic growth, the aftermath of a major financial crisis, ballooning national debt, and the loosest monetary policy the Fed has ever pursued. But that loose policy has staved off deflation and the inverted yield curve that often precedes recessions—two of Zweig’s critical indicators for bear markets.

Source:  Howard Gold, MoneyShow.com

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida.

D2 Capital Management is a Member of the Southside Businessmen's Club and the Beaches Business Association

Hyperbole and the Never-Ending News Cycle

Wall Street has developed a worrying tendency in recent years. Always somewhat skittish during bull markets and amazingly prone to making mountains out of molehills, since the financial crisis began in 2008, investors of all types have simply been nervous.

Combined with an incessant flow of so-called news and information from a dizzying array of gadgets, this nervousness has resulted in an ever-more tactical outlook. Wall Street has never particularly embraced strategic thinking, given the requirement for the movers and shakers to basically think in 12-week increments, but trading over the past few months has seemed especially short-sighted.

Think about how the weather is now featured in the news and information you now consume. Until recently, unless you lived in a hurricane zone, no weather system had a name. Now, even snowstorms in the Northeast (which in years past were not considered particularly biblical events), are blown out of proportion and become major emergencies. “Nemo” even made the news 5,000 miles away and elicited worried calls from Europe. We’re not social scientists, but the permanent need to feed a never-ending news cycle must be partly behind this trend toward general hyperbole in everything we do.

Some of the markets seem especially prone to this kind of thing. If you read the hype, emerging markets are constantly alternating between booms and crashes, when in fact they are simply volatile markets whose capital flows exhibit a greater degree of back and forth than, say, Denmark.

Ditto for commodities, which have become the favorite yardsticks for financial journalists to cite for anything going on in Asia, particularly China. Even trading in gold, one of the most stable (strategically speaking) stores of monetary value on the planet, falls victim to this kind of thing. News that George Soros lightened up on a very profitable position in SPDR Gold Trust (GLD) has turned into “Famed Investor Dumps Gold” and the like. Hyperbole indeed - Soros is first and foremost a currency trader, and given movements in the Japanese yen, his decision to reduce his GLD position likely had a lot more to do with the price of gold in yen than the price of gold in dollars. Nothing – we repeat, nothing – has changed within gold’s fundamental outlook.

The Italian election, apparently the "cause" of last Monday’s decline, means that come spring, Italy will be the cornerstone of yet another season of handwringing about Europe’s debt situation. This will be similar to what happened in 2010, 2011 and 2012, albeit with different nations (Greece, Spain, Portugal, etc.).

This pervasive hype surrounding everything all the time is surely unhealthy. And we’re doing much of it to ourselves; the infamous sequester cuts are as good an example of a self-inflicted wound as you’re likely to find, and it is so easily blown out of proportion. Things like furloughed airport security workers and unimmunized children make great sound bites, and there is certainly nothing pleasant about the way in which these cuts could be enacted. Economic growth will undoubtedly be impacted. Mathematically, however, we're talking about $85 billion in cuts within a $3.6 trillion annual budget (i.e. 2.6%), which is not going to move the needle very much from a long-term perspective. Makes great news, though, and certainly scares everyone to death.

Our advice? Keep cool, keep things in context and perspective, and don’t let the hype get to you. Nothing has changed too dramatically, in spite of what you are reading and hearing.

Source:  Scott Chan, Leeb's Market Forecast
  
The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida.

D2 Capital Management is a Member of the Southside Businessmen's Club and the Beaches Business Association

When Preferred Securities Make Sense

Investors seeking income might want to take a peek at preferred-stock funds.

Buyers may reap handsome yields of around 6% with advantageous tax treatment on distributions. Still, you need to understand the nuances of preferred stock to get the most from it.

What is preferred stock? It is a hybrid security that is a cross between equity and debt. Like debt, it pays a fixed amount of interest, and holders get paid before any common-stock dividends are distributed. But like equity, it tends to have larger price swings to both the upside and the downside.
These securities are often issued by highly indebted companies that need lots of capital to operate efficiently. Broadly speaking that's banks and other financial institutions, telecommunications companies and utilities.

Risks to Weigh - Because preferred stock is in many ways priced like bonds, rising interest rates pose a risk to those who invest in it. When interest rates jump, the value of preferred stock drops, just like it does with bonds.

With bonds, the further away the maturity date is, the bigger the interest-rate impact will be. Because preferred is often like bonds with no maturity, there can be an even bigger price risk when interest rates rise, says Guy LeBas, chief fixed-income strategist at Philadelphia-based investment bank Janney Montgomery Scott LLC. Still, he sees it as a good risk these days.

Yields on preferred stock vary but are around 6% a year now, which should be plenty of cushion against loss of principal based on what most strategists predict for interest rates this year, says Mr. LeBas. He expects only a modest rise in long-term rates.

Fund Choices - Fund investors seeking preferred exposure can choose either ETFs or actively managed mutual funds. On the ETF side, look at PowerShares Financial Preferred (PGF), PowerShares Preferred (PGX) and iShares S&P U.S. Preferred Stock Index (PFF). Morningstar analyst Abby Woodham likes the latter, saying its expense ratio, 0.48%, "is the lowest of its peers."

In the five years through February, the iShares ETF returned an average 5.5% a year versus 4.9% for the Standard & Poor's 500-stock index.

Many, but not all, preferred shares produce qualified dividend income that is taxed at a preferential rate of up to 20% versus the ordinary-income rate of as much as 39.6%.


Source:  Simon Constable, Wall Street Journal

PFF and PGX are components of the D2 Capital Management Multi-Asset Income Portfolio.

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida.

D2 Capital Management is a Member of the Southside Businessmen's Club and the Beaches Business Association