What to Do in the Face of the Great Obama Sell-off

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

Markets reacted sharply to President Obama’s re-election yesterday, as U.S. markets put in their worst showing of the year. For the week, the S&P 500 was down 1.15% and the Dow Jones Industrial Average dropped 1.03%.

The news was not all bad, though. Your January $35 call options on Rentech Nitrogen Partners L.P (RNF) shot up on news of the acquisition of fertilizer producer Agrifos and you booked 157.89% gains on your remaining options on Friday.

A couple of positions in your Dividend Pro portfolio stood out for their defensive qualities.

Last week’s recommendation, the Peritus High Yield ETF (HYLD), ended the week slightly higher, as did the PIMCO Municipal Income Fund II (PML). PowerShares Preferred (PGX) was flat on the week.

President Obama’s re-election is not good news for the stock market in general — and especially not for the U.S. mortgage REIT market, which endured its biggest tumble of the past year in yesterday’s trading. The overarching concern is that Fed policy will likely remain accommodative and that more homeowners would be able to prepay mortgages. That may be good for homeowners but higher prepayments could compress mortgage REITs’ already shrinking spreads even more.

Here is my view:

The current sell-off in mortgage REITS is likely an overreaction that is often typical of the mortgage REIT sector.

Although the days of 15%+ annual yields and capital appreciation on mortgage REITs may be a thing of the past, you can still earn annual dividend yields of 10% or more — a massive premium to what you can get on U.S. Treasuries. So, from an income perspective, REITs still have much to offer.

That said, you are approaching the sell prices on several of your mortgage REIT positions. And if you hit those stops, you should close your positions. You can always re-enter them later. And given the Dividend Pro portfolio’s high exposure to the sector, it may be prudent to reduce your exposure to mortgage REITs anyway.

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Portfolio Update

Global X SuperDividend ETF (SDIV) fell 2.19% last week. This ETF has gathered $161 million since it came to market in the summer of 2011. Still trading below its 50-day moving average (MA), SDIV is a HOLD.

Two Harbors Investment Corp. (TWO) plummeted 8.55% this past week. Two Harbors has investments that could benefit from housing gains, and has also bought prepayment-protected Fannie Mae and Freddie Mac securities that will help it avoid having to reinvest in debt at lower rates. TWO remains a HOLD.

American Capital Agency Corp. (AGNC) dropped 6.88%. This mortgage REIT is trading below its 50-day MA and remains a HOLD.

Prospect Capital Corporation (PSEC) tumbled 11.06%, as the company announced the pricing of an underwritten public offering of 35,000,000 shares of its common stock. The company also declared monthly cash distributions to shareholders in the following amounts and with the following record and payment dates: 10.1675 cents per share for November (record date of Nov. 30 and payment date of Dec. 20); and 10.1700 cents per share for December (record date of Dec. 31 and payment date of January 23, 2013); and 10.1725 cents per share for January 2013 (record date of January 31, 2013, and payment date of February 20, 2013). PSEC is a HOLD.

iShares FTSE NAREIT Mortgage REIT (REM) dropped 5.48%, reflecting the general sell-off in mortgage REITs. Still below its 50-day MA, REM remains a HOLD.

PIMCO Municipal Income Fund II (PML) rose 0.60%, proving yet again to be among the most defensive of your Dividend Pro holdings. PML declared its monthly 6.5-cent payment on Nov. 1. PML is a BUY.

UBS E-TRACS 2x Leveraged Long Wells Fargo Business Development Company ETN (BDCL) dropped 6.74%. Trading below its 50-day MA, BDCL moves to a HOLD.

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Apollo Investment (AINV) dropped 1.64%. The company will report its second quarter results today. Yielding 10.2%, but still trading below its 50-day MA, AINV is a HOLD.

Omega Healthcare Investors Inc. (OHI) ended the week 0.87% lower. With the stock trading below its 50-day MA, OHI is back to a HOLD.

PowerShares Preferred (PGX) was flat on the week, confirming its status as one of your best defensive positions. Yielding over 6.4%, this monthly income payer is a BUY.

Fifth Street Finance Corp. (FSC) dropped 3.30%. FSC goes ex-dividend on Nov. 13 and will pay a dividend of $0.0958 on Nov. 30, after announcing earnings on Nov. 28. FSC is back to a HOLD.

Vanguard Natural Resources (VNR) pulled back 3.63%. The company reported adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) attributable to Vanguard unit holders of $66.3 million for the third quarter of 2012, an increase of 79%, when compared to the $37 million reported in the third quarter of 2011 and 49% from the $44.5 million in the second quarter of 2012. You will receive a $0.20 per unit dividend on Nov. 14, if you are a unit holder of record on Nov. 1. VNR is a HOLD.

CVR Partners, LP (UAN) dropped 5.25% this past week, as the company went ex-dividend. On Nov. 5, the company announced third quarter 2012 net income of $31.6 million, or 43 cents per fully diluted common unit, on net sales of $75.0 million, compared to net income of $36.3 million, or 50 cents per fully diluted common unit, on net sales of $77.2 million, for the 2011 third quarter. The company also declared a cash distribution of 49.6 cents per common unit for the third quarter of 2012, to be paid Nov. 14, to unit holders of record on Nov. 7. Trading above its 50-day MA, UAN is a HOLD.

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PowerShares S&P 500 BuyWrite Portfolio (PBP) dropped 0.77%. With a 10.37% yield, but slipping below its 50-day MA, PBP remains a HOLD.

Rentech Nitrogen Partners, L.P. (RNF) dropped a mere 0.68%. RNF will acquire Agrifos Holdings for $158 million. Agrifos produces ammonium sulfate fertilizer at a plant in Pasadena, Texas. Rentech is announcing earnings today. Q3 profit is expected to soar 663% from a year ago to 61 cents a share. The company has posted triple-digit percentage profit growth in four of the past five quarters. The stock has doubled since going public at $20 a year ago. The company declared a cash distribution of $0.85 per common unit for the third quarter of 2012. The distribution is payable on Nov. 14 to holders of record as of Nov. 7. With the highest yield in the sector, RNF remains a BUY.

UBS E-TRACS 2x Leveraged Long Alerian MLP Infrastructure Index ETN (MLPL) was flat this week. Back below its 50-day MA, but yielding 9.73%, MLPL remains a HOLD.

Annaly Capital Management (NLY) stumbled 7.62%. The agency mortgage REIT reported adjusted Q3 net income of $449.8 million or $0.45 per share. The company’s net interest spread for the quarter fell to 1.02%, which was about two-thirds the spread recorded for Q2 of 2012. Remember, though, the company has plans to repurchase up to $1.5 billion of its outstanding common shares over a 12-month period, lending support to the stock price. Credit Suisse cut its target price to $16 from $17, which represents a 2% discount to book. NLY remains a HOLD.

Peritus High Yield ETF (HYLD) rose by 0.6%, proving its defensive qualities even during a time of market turmoil. Below its 50-day MA, HYLD is a HOLD.

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