THE BULL MARKET REPORT for February 27, 2017

by Todd Shaver | Feb 26, 2017 | Weekly Newsletter 7pm Sunday

The Week Ahead
“US Talks With Mexico Clouded By Mixed Message” was the front page Wall Street Journal headline going into the weekend. For months now all the focus has been on the new administration. Does anything else matter? Washington DC policy is seemingly the only driver of financial markets right now. Accordingly, we will likely need to start seeing some tangible results on healthcare, tax, and trade reform sooner than later. We eagerly await to see where reality meets the promises made on the campaign trail.

No matter what, there is always a bull market here. Week in and week out, we you can find it right here at The Bull Market Report. This week we highlight evidence of a bull market in the following securities: Amazon, Apple, Home Depot, Netflix, Bristol-Myers Squibb, and Tesla.

Highlights From The Past Week
Top Investor Says He Is Disinvesting. Jeffrey Ubben, the CEO of activist investor ValueAct Capital, told the press that his firm had been taking money out of the capital markets as valuations have become overextended, leaving it with $3 billion in cash. "I really feel that the large-cap activist plays are very treacherous with high PEs and not a lot of growth," Ubben said, speaking at the Reuters "Future of Shareholder Activism" event in New York.

Well, it takes all kinds. That’s what makes a market. We certainly aren’t jumping on his bandwagon.  We’re watching, but this market may have a LONG way to go on the upside.  Over-extended markets can get more over-extended and who’s to say the market is over-extended? We don’t think so. Either way, we at The Bull Market Report are not trying to predict the macro direction of the world. Our philosophy is that it is unknowable. What we can do is recognize good companies that will do well no matter what the world throws its way.

Are Trump’s Aggressive Plans Achievable? Concerns about Trump's tax cut plan - arguably the biggest catalyst behind the market's daily record highs - are mounting. Rising opposition to a simple "repeal and replace" of Obamacare could spill-over into other domestic policy targets, most notably tax reform. The current debate suggests that tax legislation might not be finalized until late 2017 or early 2018. Along with the potential for a phased-in tax cut, this would likely spread the growth effects between 2018 and 2019. That’s a long way away and lots can happen in the meantime.

We at The Bull Market Report feel that a tax cut is a bad idea.  The budget is operating at a deficit now, so a tax cut will make it worse.  David Stockman, former Budget Director under Reagan and the perennial bear feels this would be a disaster financially for the United States.  We generally don’t agree with Stockman much because he is SO negative but we sure do in this case.  

Look – we are flirting with a debt of $20 trillion. Cut taxes and we could be looking at $22 trillion to $25 trillion in debt. It just scares us to write this. And it seems like no one is talking about the debt any more. Listen, if  you own a company and it brings in $5 million in revenue but you have $5.5 million in expenses you have to borrow that $500,000 to move to the next year.  If it happens the following year, you now owe $1 million.  If you do it EVERY YEAR you eventually have to cut people, cut expenses, and ultimately if you don’t act fast enough, you go bankrupt.  Just add 10 or 20 zeros to this example to get the results for the United States. (Just kidding about the 20 zeros, but we hope you get our point.)

BMR Companies and Commentary

Amazon (AMZN: $845, flat for the week – all prices in The Bull Market Report are for the week)

This week was the launch of DXagents, a first-of-its-kind group of business leaders and technologists from leading private, public and not-for-profit organizations in Canada, that aims to accelerate the national digital transformation. The year-long partnership includes Deloitte, SAP, Amazon Web Services (AWS), Intel, and others. The mission of the group is to help Canadian businesses better understand and get on the path to realizing their digital transformation opportunities.

Digital transformation refers to the adoption of digital technologies such as cloud, big data, mobile and social media. With recent IDC research finding that 63% of Canadian companies are 'digital laggards' leaving themselves vulnerable to competition from less risk-averse global peers, DXagents was created as a community for Canada-based CIOs, CFOs and other decision makers to more easily and effectively share and discuss experiences related to digital innovation.

BMR Take: Here is a big growth opportunity (this time Canada). Yet again, guess who is involved? (Amazon). Where is Microsoft Azure? Where is Google Cloud? It sure looks like Amazon Web Services has an “in” to doing more business with Canadian companies.

Apple (AAPL: $137, +1%)

Apple has Samsung on the ropes like never before. The competition for the lucrative high-end of the smartphone market is a race between these two companies, which ship over 36% of smartphones globally, according to an IDC estimate.

The war between the two companies for smartphone buyers has raged for years, but the power balance is shifting in favor of Apple, especially after last year's Galaxy Note 7 fiasco and the rising anticipation for the next iPhone.

Mobile World Congress kicks off Monday. This event is one of the biggest smartphone trade shows of the year. Although Apple never makes announcements at the conference, competitors, especially Samsung, usually launch their new mobile product in order to get some press. This year, Samsung is not expected to launch a new phone at the show. Instead, it will likely launch new tablets. While it could be nothing, it could also be a leading indicator that Samsung is really in a tough spot this year, perhaps something has gone really wrong with this year’s model. In contrast, over in Apple’s camp, Apple's Asian supply chain is raising rumors of a very cool redesigned iPhone, with a better screen, longer battery life, and a next-generation 3D selfie sensor.

BMR Take: Apple is taking a bigger bite out of the smartphone market as Samsung is stumbling. Apple is leading the way by innovation. That is what we love to see for our stock picks at The Bull Market Report.

SEE MORE on Apple below in this Report.

Home Depot (HD: $146, +2%)

It’s not too late to buy into the housing recovery. While some fear we are in the 8th or 9th inning of the housing cycle, a recent fundamental analysis published by a major Wall Street investment bank suggests we are not yet that far along. This mean there is still some gas left in the tank for Home Depot.

Home Depot is enjoying strong fundamentals as housing demand continues to outstrip supply. Rising interest rates are not likely to hurt the industry near-term as bad as some may think. For example, it usually takes as much as eight quarters for tightening interest rate cycles to hurt home improvement spending, and Home Depot stock has performed well in rising rate environments in the past.

There is more to like. Home Depot has more stores than peer Lowe’s in yet-to-recover and recovering markets. Accordingly, many think there is upside to the consensus same-store growth outlook of 4-4.5% for Home Depot in 2017-2018. One can also argue that the stock is nowhere near stretched, trading at a PE of 20 that is on par with the 3-year average, and is compelling relative to expectations for low-teens EPS growth.

BMR Take: Business at Home Depot is charging forward. Don’t let all the “late-cycle” discussion talk you out of this holding.

Bristol-Myers Squibb (BMY: $56, +3%)

Bristol is our featured story of the week. It has been a bit of a turbulent ride so far. But hang in there, big time help has just arrived. While JANA Partners pushing for more buybacks and board seats has been helpful, the one and only Mr. Carl Icahn just showed up. Icahn has a history of taking positions in companies and then working to force a sale. Worth about $20 billion, Icahn primarily invests his own fortune.

Icahn was reported to see this drug-maker as potentially ripe for a takeover. Possible buyers could include Pfizer, Gilead Sciences. and Novartis, all of which have an interest in cancer drugs and have money to spend. “I think everybody is looking at Bristol,” Allergan CEO Brent Saunders said in an interview.

Bristol-Myers was itself once one of the drug industry’s major acquirers, snapping up pipeline assets in what it referred to as its “string of pearls” strategy. Those deals landed it the drug Opdivo, which uses the immune system to attack cancers and got remarkable results in once-fatal diseases like advanced melanoma. More recently, though, it’s lost ground to rivals like Merck, which has a similar drug, Keytruda, that has taken the lead in some oncology markets.

Bristol-Myers is still a tempting takeout target. If you believe in the immuno-oncology franchise, then it’s obviously an attractive asset because there’s not many ways to get into this space. While Pfizer has a partnership in immune-system-based cancer drugs, it’s well behind Bristol-Myers and Merck. Novartis, another player in oncology, could raise the cash to do a deal through asset sales and debt. Gilead has amassed billions of dollars from sales of its hepatitis C drugs and is looking for its next move.

BMR Take: Icahn has made a fortune for himself as well as the shareholders who have been there alongside him. Bristol just became one of the most interesting holdings in your portfolio.

Tesla (TSLA: $257, -6%)

What does Tesla's new CFO mean for business? Tesla CFO Jason Wheeler is leaving the company after just 14 months on the job and will be replaced by the electric car maker's original CFO. Tough to be the new guy?

Wheeler, who left his job as vice president of finance at Google to join Tesla in 2015, is leaving to pursue a position in public policy. Hmmm.  We wonder what the real story is. When a company changes CFOs -- particularly by returning to a previous CFO -- it's often an indication that it's "tightening up operating performance” and specifically focusing on margins. Tesla's gross margins showed a drastic decline from 28% in the third quarter to 19% in the fourth quarter. The executive level change is likely a step to fix this problem.

Investors want to know if Tesla is going to lose money on each car it manufactures now as it ramps up production, or if it can come close to earning money off each sale. Tesla said that its Model 3 automobiles will start at a price of $35,000, but the company spends about $80,000 to build each car. Many say that this includes capital investment so it not a comparable statistic. There is a lot of heavy lifting to be done to get to profitability.

BMR Take: Change can be good or bad. In this case, we see good things happening. Tesla is getting back some needed deep expertise at a critical juncture. We continue to see long term value in Tesla. Who else is disrupting the Auto industry is such a big way? (Hint:  no one.) But we also note that innovation in the Auto industry is a tough business.  It hasn’t been done for decades, so an investment here is fraught with risk.  As we’ve said many times using different numbers, Tesla could be heading to $400, or $150, we’re not sure which. And if it does go to $400, it just might hit $150 first.  If you don’t like risk, please exit the kitchen.

Netflix (NFLX: $143, +1%)

Competition is getting red hot. Sling TV is helping Dish Networks add subscribers. U.S. satellite TV provider Dish Network reported a better-than-expected profit as it unexpectedly added more pay-TV subscribers in the fourth quarter than expected.

Analysts said the subscriber additions were largely driven by Dish's lower-priced streaming service Sling TV, even as the company's quarterly revenue missed estimates. Sling TV, launched in 2015, is a way for Dish  to target cord-cutters, or customers who are dropping traditional cable TV for streaming services like Netflix.

BMR Take: The success of Sling TV can be viewed from a few different angles. On one hand, it further reaffirms the momentum in chord cutting, meaning the sandbox Netflix is playing in is extremely lucrative. On the other hand, perhaps Sling TV is turning into more of a competitor for Netflix. Even if the latter trend is true, we think the former trend is big enough overall to take Netflix shares higher. Remember we also have the potential upside of the rumored Apple Services move into TV. People are saying Apple is going to get much, much bigger in this area. After all, everyone is watching Netflix on their Apple phones and tablets!

Upcoming Economic News

MONDAY, FEBRUARY 27

Durable Goods Orders – January
Time: 8:30 am
Forecast: 2.0% overall, 0.5% ex transportation

Durable goods orders are forecast to expand in January after being held back by the Transportation sector in the two previous months. Core orders growth is steadily improving, rising 2.1% year-over-year in the fourth quarter for the largest gain in two years. The general strengthening of global growth prospects and the upturn in the commodity sector are lifting demand for US produced goods.

Pending Home Sales Index – January
Time: 10:00 am
Forecast: 0.9%

The Pending Home Sales Index is set to rise for the second straight month in January as the housing recovery remains firmly on track. Existing home sales rose to a 10-year high in January, lifting sales over the past three months by 6% year-over-year. The home sales pace is aided by rising home lending volume. The MBA index of mortgage applications for home purchases saw its moving four-week average reach a 7-month high in January before dipping a bit in February.

TUESDAY, FEBRUARY 28

GDP – Fourth Quarter (Second Estimate)
Time: 8:30 am
Forecast: 2.1%

Trade activity held back GDP growth in the fourth quarter and continued gains in imports may produce a similar result in the current quarter. But the underlying pace of consumer spending is holding firm, with Retail sales excluding autos and gasoline rising 0.7% in January, equaling an 11-month high. Though annual growth for real GDP is still likely to top 2% this year, lowered expectations for fiscal stimulus reduce much of the potential upside.

S&P Case-Shiller Home Price Index – December
Time: 9:00 am
Forecast: 5.2% yearly change of 20-city index

Historically tight supply of existing home available for sales can keep the S&P Case-Shiller Home Price Index chugging along in excess of 5% annually to December. The four months’ worth of inventory of existing homes at January’s sales pace is near the record low. That has kept home prices rising significantly faster than broad inflation growth for over four years, as seen in the 6.9% yearly rise of the median price of existing homes sold in January.

Conference Board Consumer Confidence – February
Time: 10:00 am
Forecast: 110.9

The Conference Board measure of consumer confidence can continue to ease back a bit in February after reaching the 15-year high in December. Robust levels of confidence will not necessarily translate into a big burst of consumer spending, as the share consumers who indicated in January that they intend to buy a car or home lags the average of the past three years. Yet firmly positive income expectations still point to a solid pace of spending among other consumer goods and services.

WEDNESDAY, MARCH 1

Personal Income & Spending – January
Time: 8:30 am
Forecast: 0.3% income, 0.3% spending
Skimpy recent monthly gains in average hourly earnings hint of a restrained advance for personal income in January. The recent 2.5% annual advance in hourly earnings is not showing the break out in wages many expected, although some other indicators point to faster growth. Continued labor market progress will be needed to push annual income growth back above 4% for the first time since late 2015.

ISM Manufacturing Index – February
Time: 10:00 am
Forecast: 55.8
Heightened business sector confidence and positive output trends are forecast to keep the February ISM Manufacturing Index near January’s two-year high. The new orders component of the index topped 60 in each of the past two months, a firm signal of rising demand. And manufacturing output’s annual pace was positive in each of the three months ending January after declining on this basis throughout much of last year.

Construction Spending – January
Time: 10:00 am
Forecast: 0.8%
Sturdier growth in residential activity is expected to lift overall January construction spending after a decline in December. Housing starts rose 6% year-over-year in the three months ending January following lackluster results towards the middle of last year. And private commercial construction is also aiding the cause, rising 7% year-over-year last quarter.

Vehicle Sales – February
Forecast: 17.6 million
Vehicle sales may show little movement in February relative to January after falling sharply from December’s 11-year high. Even including December’s cyclical high, the yearly advance in the three months ending January was a mere 0.7%. While vehicle sales volume is likely to remain strong in 2017 amid improving consumer finances, sharp gains of the recent past leave little room for further growth.

FRIDAY, MARCH 3

ISM Non-Manufacturing Index – February
Time: 10:00 am
Forecast: 56.5
The ISM Non-Manufacturing Index is projected to hold onto its post-election bounce in February due to sturdy demand for domestic services. The sub-index measuring general business activity in the service sector topped 60 in each of the past three months, signaling a sustained upturn in sales growth. Yet businesses will have to contend with some rising cost pressures, as the Non-Manufacturing index reading on prices rose to the 30-month high in January

Our Take on the Snap IPO
If you are looking at the soon-to-come Snap IPO, look long and hard. It’s coming out at a high valuation and the market may push it much higher after it starts trading. Note that management has gone overboard on the different classes of stock, offering stock to you with NO voting rights, and maintaining 100% control, no matter how many shares you own.  This is not the American way.  Google has done this and Facebook has done this, but they have done it in a quiet, professional way. And furthermore we know their track record.  Snap is being belligerent about it and they have no public track record.  We are passing on the stock.
 

How to Use Options to Lower the Cost of Buying  High-Priced Stocks
Tesla ($257), Google (GOOG: $829) and Amazon (AMZN: $845) have risen so much that sometimes folks don’t like to buy the stock at these lofty levels.  After all, with Google, 100 shares will cost you $83,000. We at The Bull Market Report don’t have a problem with this but many of you do.  If you only have $20,000 to invest in Google then just buy 24 shares. After all, they could split the stock tomorrow 10 for 1 and the price would drop to $83, and you would then have 240 shares.  It’s all the same.  It is just psychological.

OK, with that said, using options you can control 100 shares of Google for only $18,000.  How?  You could buy the January $700 2019 option (called a LEAP) for $18,000, or $180 per share.  There are two negatives though. 1) You would control the stock for only two years, and 2) You would pay a $50 premium to the price of the stock today.  In this example this option allows you to buy the stock at $700, but you have to pay $180 for it, which gives you a breakeven price of $880. If the stock goes higher than $880 in two years you make money, possibly a lot.  If it goes lower, you can lose some or all of your investment.  So it is not for all. And like everything in life there are at least two sides to every story.  If you would like us to expound on this concept please drop us a note at Info@BullMarket.com.

A Word from Gary Jefferson
First Vice-President, Investments
Jefferson Financial Group
UBS Financial Services

"Don't fight the tape." "The trend is your friend." "If you're not long, you're wrong"…………..These are just a few of the Wall Street adages being bantered about as the market continues to climb higher.

What the market senses and, more importantly, expects, is a reduction in corporate and personal income taxes and a meaningful reduction in government regulations that stand to increase (perhaps doubling) the rate of gross domestic product (GDP) growth by the year's end. Investors who are betting against this inertia are, in track parlance, trying to beat the favorite horse by picking longshots.

How high can the market go?  That's the biggest question on investors' minds. What we have learned over the past 30 years is that market predictions are not much better than a coin flip. In fact, a lot of them are mostly headline grabbers and entertainment marketing rather than a serious study of behavioral science. Remember back in the  1990s, when some of the best sellers were "DOW 36,000: Why This Time Is Different"…….or "DOW 40,000: Strategies for Profiting from the Greatest Bull Market in History".  That said, every serious investment firm is obligated to make a prediction, and each one generally has one which is reasonably based on a set of "what if's"; i.e., if earnings are this, then the market should be that. One publication that has taken forecasting to a new level based on scientific quantifying of "uncertainty" is Modern Trader. They say that there is a possible downside of about 6% and upside of about 24%.  

Some other interesting forecasts we read recently include what many experts believe will be the most profitable sectors. There is a consensus that the best performers include Healthcare (biotechs), Financials (regional banking) and Technology, with a lot of support for Energy.

There are many opinions on what will be the biggest fundamental factors affecting the market. Some of our favorite picks were:
1.    Interest rates, the dollar, and the price of oil. (Throughout our 30 years in the business, oil has always been a wild card for the market.)
2.    Tax cuts and infrastructure investment.
3.    Brexit, Chinese economic growth, South China Sea tension.
4.    Three things: Trump, Trump and Trump.

Finally, Modern Trader selected Cybersecurity as the one sector every investor should own in 2017, citing the consistently growing number of cyber incidents across the globe and analyst expectation of worldwide spending on cybersecurity to eclipse $1 trillion cumulatively for the five-year period from 2017 to 2021.
[Note that The Bull Market Report pick Splunk (SPLK: $63) is up 36% since we added it 11 months ago.  Our Target Price is $75.]

Letter to the Editor – about First Solar (FSLR: $38, up 9%)
From: Peter Goransson

[Note that we had sent out a News Flash last week saying that the stock was down sharply in after-hours trading after the earnings report came out, and we were a bit worried about the stock.]

Peter said: “First Solar is actually up 11% today [Thursday]. Looks like yesterday's movement may have been an overreaction. Are you still considering removing this from portfolio?”

Our response:

Hi Peter –
The market turned around this morning when level heads prevailed.  We are breathing a sigh of relief.  

It was terribly disappointing to us to see the reaction to the earnings announcement Wednesday evening, so this 11% move today is very heartening.  No, we are not going to remove the stock from our portfolios. We are going to hang with it for a while.

We really do love this company and if you look at their history, their revenues have been very big, and we believe they will get big again.  And earnings will follow, because historically they are very profitable.
Todd Shaver

Ferrellgas (FGP: $5.89, down 8%)
This stock continues to disappoint and we’ve decided not to wait any longer.  The company made a terrible decision in buying Bridger Logistics with the whopping price tag of $840 million. And it bought Sable Environmental for $125 million in 2014. These purchases were financed mostly by new debt and this is what is dragging down the company.  The firm has made over 240 acquisitions over the past 75 years but these two are icing on the cake – heavily, sludge-filled icing – that is bringing down the company.  When we added Ferrellgas to our High Yield portfolio last year we had no idea how bad a deal this was for the firm and more importantly for the stockholders.  We have said many times that the turnaround is going to take 12-18 months. We now feel it may be on the order of 2-3 years, if not longer, and may in fact bring the entire company down.  

We’re not going to wait any longer.  We hereby remove the stock from our High Yield portfolio.  (It’s not even a high yield stock anymore. As they have cut their dividend so drastically because they are losing money.)

Now, what should YOU do?  If you have a small position in the company you might just forget about it, keep it in your portfolio,  and take a look in a year.  If you have a big position then you might consider taking a loss and moving into some stable growth companies.

More on Apple
Berkshire Hathaway’s gain on Apple is more than $1.6 billion after shares have surged since it hit $105 in November. In fact, Apple was the Dow’s best performer in 2016. The news just came out on Warren Buffett’s investment in Apple:  Berkshire Hathaway bought 61 million shares last year for $6.75 billion, at an average of about $110 apiece. The holding was valued at more than $8.3 billion as of Friday’s $137 closing price.

Berkshire became one of the top 10 Apple investors in 2016, taking a stake of more than 9 million shares in the first quarter and then accelerating purchases in the last three months of the year. The initial purchases were for an average of $99. Not that Buffett’s company bought $12 billion in stocks after the Nov. 8 U.S. election, indicating a continued strong faith in the American economy. Buffett said the market system that has propelled U.S. economic growth for more than two centuries will continue unabated, echoing his optimism about the country. “The build-up of wealth will be interrupted for short periods from time to time, but it will not, however, be stopped. I’ll repeat what I’ve both said in the past and expect to say in future years: Babies born in America today are the luckiest crop in history.”

Now there is one bullish investor! (With a stock price of over $250,000 a share!) We tend to agree with Warren and we would be vigilant in making changes in our portfolio if the market decides it has peaked. If, and we repeat IF that were to happen, there are lots of great stocks in our High Yield portfolio that will allow us 6, 8 and more than 10% a year returns while we sit and watch the market take a breather.  However, at this time the market remains strong, with the Dow at 20 thousand eight.  That’s 20.8 thousand.  Or 20,822.  For heaven’s sake, we just hit 20,000 on February 3rd!  
 

The Weekly High Yield Report
By Michael Foster
Special to The Bull Market Report

It's been another quiet week in the markets, and even quieter in high yield than anywhere else. But before we get to that, we want to talk a bit about some Wall Street chatter we've been hearing from friends both on the buy side and the sell side of the business. Hiring is up in fixed income, especially in the high yield and distressed debt sectors. This bit of insider gossip doesn't sound all that exciting, but it's actually a really big deal. Wall Street hiring is trend driven and often a leading contrarian indicator. When Wall Street starts to invest heavily in one particular corner of the market that is a signal that that part of the market is at or near its peak and a downturn in the next couple of years is likely.

Let's take a look at why that's the case. If you're an investment bank, you make money buying and selling assets for investors. Investors tend to avoid assets when they're down (thus exacerbating the trend) and pile in when they're up (think of how many people were buying investment houses in 2005-2006). When more investors want to buy, say, junk bonds, that creates more demand for people to buy and sell junk bonds, thus turning into more jobs in that sector.

This is especially worrying because hiring is down across Wall Street. This has been an issue since 2008 and it is just getting worse. The fact that fixed income has a temporary reprieve suggests that demand in that sector is really getting hot.

If you want proof, just look at the SPDR Barclays High Yield Bond ETF (JNK: $37). This fund is already up 20% including dividends over the last year, the best one-year performance since 2009. Volumes have also exploded five-fold over the same period. Demand for high yield bonds has heated up.

But what about those surging defaults? Remember in late 2015 when everyone was panicking about the oil-driven defaults in corporate bonds? There was worry that the real risk that higher interest rates would cause even more defaults as cash-strapped companies struggled to keep cash flow enough to service their outstanding obligations. Remember that revenues hadn't been growing for years back then? That's why high yield bonds fell 20% in a little over a year after Yellen raised interest rates.

Those risks remain, but investors don't care anymore. This doesn't surprise us, as the risk of those defaults have been priced into the corporate bond market for over a year now.

There are two lessons to learn here. Firstly, ignore financial press headlines warning about an upcoming apocalypse in an asset class. Trading on that noise is a fast track to poverty. Secondly, being a contrarian investor and rotating into unfavored assets can produce strong medium-term returns.

But now that corporate bonds aren't unfavored, does that mean it's time to sell? Not exactly.  There remain good funds that trade in corporate bonds or similar assets like the AGIC Equity and Convertible Income Fund (NIE: $19.46) and the PIMCO Dynamic Income Fund (PDI: $28), which are up about 24% and 26% respectively, including dividend payouts, over the last year. And the dividend payouts haven't gone down and remain safe. If anything, they're getting safer as interest rates go up. That means there is no reason to sell either of these until the market bids their prices to an absurd premium. The Pimco fund is unfortunately trading at an 8% premium to NAV, almost its highest premium in history.

This is especially disconcerting because the Pimco fund historically trades at a discount and it's rarely desirable to buy a closed-end fund at a premium pricing. We would not recommend buying this fund at its current price level, but selling is not a good idea yet either. This is a very obvious hold in lieu of desirable alternatives. Outside of Pimco, there are few funds that can deliver such a substantial market out-performance.

But we also don't think the fund's premium is going to disappear anytime soon. The closed-end fund investment world is getting smarter and the fund's primary income stream (mortgage-backed securities) are getting less underpriced. In the past, a lot of money avoided this sector because of the hangover of the subprime mortgage crisis. That was an irrational mispricing of the sector, so now money is coming back. As money comes back, it makes sense for Mortgage Backed-focused funds to start trading at smaller discounts or, in the case of Pimco's Dynamic Income Fund, at a premium.

Elsewhere in the high yield world, funds have had a muted week indicating there's still time to buy where there is an undervaluation relative to history. The Invesco Municipal Trust (VKQ: $12.65 , down -1%) and Nuveen AMT-Free Fund (NVG: $14.64, flat) had a week of muted action although the news regarding interest rate hikes remains unchanged:  The Fed signaled what everyone was already expecting this week, which is great for high yield. Similarly, things were quiet in REITs as higher borrowing costs is causing less panic than it used to. The SPDR Dow Jones REIT ETF (RWR: $95) rose a bit over 1%, with only a few REITs under- or over-performing in a week of little news.

For now, high yield remains an attractive sector but it's not a "no brainer buy” like it was a year ago. There are pockets of attractive undervaluations, especially municipal bonds and some REITs, while fair valuation is becoming more common in the junk bond sector. This is a trend that's likely to continue for a while, assuming we don't get any shocking news to the upside or downside. This confirms our view to buy and hold these funds, since they have outperformed the broader market and are likely to continue to do so for a very long time.

Good Investing,
Todd Shaver, CEO, Founder and Editor
The Bull Market Report
Since 1998