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A Cure May Be In Store For The SPDR S&P 500 Trust ETF

When I warned about market correction in mid-August, I also discussed what factors would eventually cure what ails us. One of those factors is presenting itself Thursday, as the Federal Reserve offers clarity on an uncertainty weighing on investors’ minds and weighing down stocks. The probability of Fed inaction on interest rates or the possibility of a minor action with the removal of concern about October should serve stocks immediately. I expect such a scenario should provide immediate & significant upside to the SPDR S&P 500 Trust ETF, returning it toward its highs above $210 and higher as longer term factors. Risk to this thesis could come from a Fed rate action of 0.25% or if the Fed does not clear away concern about a potential action in October. When I authored my warnings about market correction in early to mid-August, I also indicated what the cure for stocks would eventually be. One of those factors appears to be about ready to help out, and that is clarification from the Fed. No matter what happens Thursday afternoon, the Federal Open Market Committee (FOMC) will provide some clarity to investors. Stocks should benefit from the removal of some uncertainty, and I see immediate upside of 2.5% to 5.0% probable for the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) post the Fed meeting. But any gains and the length of duration of upward direction will depend on the specifics of what the Fed does and says. The longer term for stocks and the SPY will continue to depend on the U.S. economy, energy sector issues, emerging market implications, seasonal capital flow factors and the Fed path and accuracy moving forward. 1-Year Chart of SPY at Seeking Alpha In my early to mid-August warnings of imminent market correction (see several links within the summary piece), I suggested the eventual cure for stocks would require a cocktail of medicines. I discussed the implications of seasonal capital flows and that the passing of time toward November 1st and a more welcoming capital flow environment would serve stocks then. I also suggested the U.S. economy mattered far more than the Federal Reserve, and that we would need to see health in the economy to gain traction. That means that the U.S. energy sector must heal or at least not meaningfully infect the rest of the economy. It also means that China only stumbles and does not fall, and that growth recovers in that important sector of the global economy. Finally, I said we needed Fed clarity, and that uncertainty about the Fed’s path was not serving stocks. Thursday, we will receive some clarity on the Fed’s path. Most likely, the Fed will succumb to market pressures and refrain from raising rates at this meeting. However, I’m not sure that is the best case scenario. Rather, I believe a minor rate hike of less than a quarter of a percentage point would serve to satisfy expectations that Fed action is happening this year while also easing concern that the Fed could act prematurely. If the Fed makes a minor move and indicates it is not likely to act in October, pushing expectations for the next hike to possibly December or March, it will serve stocks well. It is also likely to reiterate its data dependence and to note risks to the U.S. economy including China and emerging markets, the U.S. energy sector, and the strength of the dollar. But I also anticipate the Fed will note the strength of U.S. labor and the lack of inflation, which are positives. I suggest such an outcome would be just what the doctor ordered for the stock market. The result, in my view, would be a surge in stocks and a marching of the SPDR S&P 500 Trust ETF back towards previous highs certainly above $205, and probably to $210 or higher without much disturbance. Much depends on the specifics of the very complex data set we will get from the Fed. A risk lies in the possibility that the Fed raises rates by a quarter of a point. Such a scenario, I believe, would send a shock through the market and spur a selloff back to correction lows. That is not perfectly clear, given that investors would like to see the Fed finally get started at some point. However, I expect that given the latest poor indications from China and emerging markets, the Fed will refrain from further disturbing the global economy and the U.S. economy as a result. Despite the likelihood of inaction, in my opinion, the FOMC vote could be closer than in previous meetings. Investors will need to have some indication that October is not a threat as well, or this period of volatility will simply extend to the next Fed meeting. So if the Fed does not act, but leaves the possibility of an October action on the table for investors to worry and debate about, stocks could see their upside limited or completely erased. Over the long-term, what matters far more than the Fed are the health of the U.S. economy and the health of sectors of the global economy that threaten the U.S. economy. That means, not only must U.S. data continue to reflect progress, especially in the labor market and GDP data, but weakness in the U.S. energy sector and manufacturing (relative to it) must dissipate. Also, China must stabilize rather than deteriorate; if this occurs, expect global stocks to rally significantly. Finally, as September and October pass, significant capital flow pressure from institutions ending their fiscal years will dissipate and likely offer support to stocks as the institutions look forward with many securities trading at relative value. We are in a complex period now, where the market is supersensitive to news flow. It is the worst possible time for the Fed to be contemplating action, but it is our situation. Long-term investors should be patient now, but remain focused on the matters discussed herein. I cover the market closely, and invite relative interests in the SPY security and the market to follow my column here at Seeking Alpha . Disclosure: I am/we are long SPY. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Monthly Paying Closed-End Fund NRO Offers 8% Return

Summary NRO pays $0.03 per month per share and currently returns 8%. NRO is currently selling at a 17% discount to NAV. The share price of NRO should grow as REITs gain favor again with investors. I wrote an article in June suggesting Neuberger Berman Real Estate Securities Income Fund (NYSEMKT: NRO ) was a good closed equity fund to place one’s money to get a 7% distribution on a monthly basis. At that time NRO was offering a 7% yield and was selling about 15% below NAV. The issue was selling for about $5.00 per share and was paying $0.03 per share a month. Since the company is now selling at about $4.54 per share (9/16/15), I thought I would take another look at this CEF again to see what is happening. NRO is still paying $0.03 per share a month which takes the distribution return up to 8% at the current price. It reports a NAV of $5.47 per share as of 9/16/2015 and therefore is selling at a 17% discount to its assets. The market price of NRO is down about 7% from the beginning of the year. This coincides with the price drop seen in REITs from the beginning of the year. It appears that investors are running scared from REITs because the FED is threatening to increase interest rates. I am convinced that the threat is much greater than the reality. It will be a long time before the FED gets interest rates up to 2% and REITS will continue to fare well in this low interest rate environment. If I am correct, both the NAV and the market price of NRO will do well over the next year or two. The price of REITs will rise when people realize that government bonds and CDs are not going to pay much more than they currently offer over the next few months. Investors will again pour their funds into REITs to reap a much better return and that in turn will likely cause the price of NRO to rise. The price of NRO’s holdings will rise since it has many REITs where prices have declined because of investor fears over interest rates. A list of the top 10 holdings by number of shares and their price decline is shown below: Ticker Description Shares Price 1/2/15 Price 9/16/15 Difference Current Yield SRC Spirit Reality Cap 617,000 12.06 9.25 -25% 7.4% ROIC Retail Opp. Inv. 593,000 16.98 16.40 -3.5% 4.1% STWD Starwood Prop. Trust 583,000 23.41 21.52 -8% 8.9% BPY Brookfield Prop. Ptnrs. 553,100 22.95 21.40 -7% 5.0% NRF Northstar Realty Fin. 531,900 17.88 13.96 -22% 11.5% CBL CBL & Assoc. Prop. Trust 509,700 19.75 14.68 -25% 7.2% LXP Lexington Realty Trust 497,200 11.19 8.30 -26% 8.2% KIM Kimco Realty Corp. 474,600 25.46 23.60 -7% 4.1% NRFpB Northstar Pref. B 444,484 25.00 24.27 -3% 8.3% UBA Urstadt Biddle Class A 425,693 22.10 18.67 -16% 5.5% Source: My own work with figures from Interactive Brokers The chart indicates that the prices of all REITs have dropped; Some REITs declined as much as 25% to as low as 3%. The REITs that dropped the most are mortgage REITs since high interest rates would hurt their earnings the most. The following chart lists the top 10 holdings of NRO by dollar value and the decline in prices from the beginning of the year. Ticker Description Shares Price 1/2/15 Price 9/16/15 Difference Current Yield OHI Omega Healthcare Inv 396,700 40.43 33.64 -17% 6.5% PSA Public Storage Reit 70,100 187.23 205.65 +9% 3.3% STWD Starwood Prop. Trust 583,000 23.41 21.52 -8% 8.9% HCP HCP Inc. Reit 321,800 44.85 32.72 -27% 6.0% KIM Kimco Realty Corp. 474,600 25.46 23.60 -7% 4.1% HIW Highwoods Prop. Inc. 272,880 44.94 39.00 -13% 7.2% BPY Brookfield Prop. Ptnrs. 553,100 22.95 21.40 -7% 5.0% NRFpB Northstar Pref. B 444,484 25.00 24.27 -3% 8.3% PSApY Public Storage Pref Y 400,000 26.37 26.10 -1% 6.1% ROIC Retail Opp. Inv. 593,000 16.98 16.40 -3.5% 4.1% Source: My own work with figures from Interactive Brokers This chart shows nearly the same declines as the prior chart. There is one major difference in that PSA actually increased in price between the beginning of the year and now. It is also surprising to see the 27% decline in the price of HCP. HCP is a hybrid REIT that invests in both property and loans in the healthcare industry. The price has declined as if it were a pure mortgage REIT. Doing this chart for NRO indicates that HCP should be poised to rise quite a bit as well. Both charts indicate that prices of most of the investments that NRO holds as of 7/31/2015 have declined considerably since the beginning of the year. As these prices regain momentum after investors realize that interest rates are not rising as fast or as soon as expected, the discount between the stock price of NRO and NAV will increase or the price of NRO must increase with them. Conclusion: With NRO currently offering an 8% return along with a huge discount from NAV, it looks like an outstanding buy. Furthermore, it appears to be positioned to make some capital gains as investors begin to realize that interest rates are not going to rise very quickly over the next 2 years. The landscape for this closed fund looks especially good at the current time for an outstanding dividend and possible capital gains in the future. Disclosure: I am/we are long NRO, OHI, HCP, SRC, LXP. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Equity CEFs: A No Brainer In The Nuveen Dow 30 Dynamic Overwrite Fund

Summary The Dow Jones Industrial Average has been the worst performer of the three major US indices so far in 2015, down -5.8% through September 16th. However, a rebound in the global markets could help the DJIA the most since the index represents 30 of the largest multi-national blue chip companies in the US. One CEF that correlates with the DJIA has seen its market price also suffer even as its NAV outperforms the DJIA. This has created a no-brainer opportunity in my opinion. Four months ago I wrote this article, How To Buy The DJIA At A 10% Discount And A 6.9% Yield . Well, guess what? Now you can own that same fund, the Nuveen Dow 30 Dynamic Overwrite fund (NYSE: DIAX ) , $13.66 market price, $15.45 NAV, -11.6% discount, 7.8% current market yield, at an even bigger discount and yield. And if four months from now the fund is at a -13% discount and an even higher yield, I would tell you to buy more. But to me this already is a no brainer. Why? Because I believe institutional investors have got to take notice when an arbitrage opportunity this obvious presents itself. When you know you’re dealing with a pretty straightforward fund like DIAX, which only owns 30 large cap stocks and sells options against 50% of its positions, you can take a fairly large position even with limited liquidity if you know you can hedge the downside in more liquid ETFs. And when the spread is this large and involves index funds, I believe this becomes too juicy to ignore. Note: DIAX also owns a couple popular index ETFs, DIA and SPY , in which options are used as well. Index-based CEFs are the easiest funds to understand and more importantly the easiest to hedge if you want to have an arbitrage position. For this reason and the fact that index CEFs are so predictable in their NAV moves, their market prices usually don’t stray too far from their NAVs. But that hasn’t been the case with DIAX or really any of the four new Nuveen option income CEFs this year. Note: For some background on the four Nuveen option income CEFs, please read the above article link. All of the new Nuveen option income CEFs are index based and they all got started in late December 2014. Three out of the four new funds were the result of mergers between previous option income CEFs from Nuveen. However, DIAX has suffered the worst as it’s the only one tied to the DJIA as its benchmark. So a poor performing Dow Jones Industrial Average this year has just been amplified in a less liquid CEF that correlates to it. This is shown in the following Premium/Discount graph in which DIAX’s discount has continued to widen. So despite a defensive option strategy, DIAX has seen a continued valuation drop in its market price and the reasons for the widening discount I believe are two fold. One is because DIAX was the result of the merger between two old Nuveen option CEFs correlated to the DJIA and if you owned both funds (DPO) and (DPD) prior to the merger, which a lot of investors did including myself, you probably didn’t want to own all of the shares of the new fund simply because that would have given you a much larger exposure in just one fund. This, I believe, resulted in the initial steep drop in valuation shown. The second reason is that DIAX’s market price has fallen pretty substantially since the beginning of the year due to weakness in the Dow Jones Industrial Average, the increased market price discount of DIAX and then also because of the quarterly distributions which totals $0.80/share so far this year. So from a pure depreciation basis, i.e. not including distributions, DIAX’s market price has dropped from $16.38 when it started trading in late December to $13.66 today. As a result, I believe tax-loss selling has now further exacerbated DIAX’s discount as investors lock in a loss with perhaps the expectation that the Dow Jones Industrial Average might be even lower in mid October or later in the year when they could buy the fund back. This is all speculation of course but I can’t think of any other reason why anyone would be so shortsighted to sell DIAX now at a -11.6% discount, particularly when the DJIA is starting to look firmer as some of its weakest components, i.e. Exxon Mobil Corp (NYSE: XOM ) and Chevron (NYSE: CVX ) , show some life. But there’s another reason why this doesn’t make any sense. As an option income CEF, DIAX’s NAV will hold up better than the DJIA in a weak market environment. This is part of DIAX’s strategy to reduce volatility while paying an enhanced yield, something you generally don’t get with ETFs. In other words, the weaker the DJIA stays, the better DIAX looks even if it’s not showing up in the market price for the above mentioned reasons. This is reflected in DIAX’s NAV performance so far this year which is off only -3.5% on a total return basis compared to the DJIA being off -5.8%. That may not sound like a big percentage difference but in the eyes of an institutional investor who might take a larger position in DIAX if they knew they could arbitrage the position with a more liquid ETF that performance difference is compelling in a down market. But then there’s also just the common sense factor. Who would sell a fund that owns nothing but the 30 bluest chip companies in America at $13.66 when its liquidation value is a bona fide $15.45 per share currently? Unlike a fixed-income or leveraged CEF in which you can’t entirely be sure that the NAV would represent the liquidation value (certainly a lot closer than book value however), a $500 million CEF that only owns 30 heavily traded positions could be liquidated in a day at pretty close to its NAV. Now some people could argue that what good is the discount if you never get to realize the step up value? That is true, the liquidation of a CEF is a rare event that you certainly shouldn’t count on. But that’s not the reason you invest in heavily discounted CEFs even though it would be reason enough in a worst case scenario. No, the biggest reason why you invest in heavily discounted CEFs is simply because you receive a larger yield than what the fund is responsible for paying. In other words, the NAV yield of a CEF is what it has to cover. But funds at discounted market prices means you receive a higher yield than what the fund is paying. So in a case like DIAX, its NAV yield is a very reasonable 6.9% but its current market price yield is 7.8% because of the discount. Again, maybe not such a big deal to an individual investor but to an institutional investor, that’s a big difference if you have a large position. Conclusion So what could go wrong? Well, certainly if the global economy takes another leg down that’s probably not going to help the US multi-national companies that dominate the DJIA. And though DIAX’s NAV would continue to outperform the Dow Jones Industrial Average in such a scenario, investors could still drive down DIAX’s market price based on emotional selling and a lack of buyers. This has been happening a lot to CEFs over the summer, i.e. not heavy selling but just a lack of buyers. Nonetheless, I believe this is one of the more compelling opportunities I’ve seen in a while, especially if the Dow Jones Industrial Average component stocks start to perform better since you know DIAX’s NAV will perform close to that of the index, holding up better during flat to moderately down periods and lagging a bit during up periods. But you won’t get any surprises with DIAX and you can lock in a nice windfall yield to boot. On a market price basis, I suppose tax-loss selling could continue and that might keep a lid on the market price for awhile no matter what the DJIA index does but I’ve also got to believe that institutional investors would step up and take advantage of an arbitrage opportunity at these levels. An -11.6% discount to the Dow Jones Industrial Average is huge, comparatively like going back to 2013 when the DJIA was below 15,000. It also gives institutional investors an opportunity to play both sides in a more volatile market environment in which both arbitrage positions will probably be profitable at one time or another. For individual investors, I would not recommend an arbitrage and I believe the current discount and yield is opportunity enough. But if you did want to hedge a position, you could either short the SPDR Dow Jones Industrial Average ETF (NYSEARCA: DIA ) (though you would be responsible for paying a monthly dividend) or you could buy an inverse fund like the ProShares Short Dow 30 fund (NYSEARCA: DOG ) which is a 1X the inverse of the DJIA. Disclosure: I am/we are long DIAX, DIA. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.