January 11, 2014 Ireland's Call

Risk/Reward Vol. 203

THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.

"If your heart's been shattered/The pieces are scattered
All across the ground of loneliness
Just reach for the phone/I'll be there at home
My name is Fix-it/And I'll be there---lyrics from "Mr. Fix It" sung by UB-40

"Ireland,Ireland/Together standing tall
Shoulder to shoulder/We'll answer Ireland's call"---lyrics from "Ireland's Call" sung by The Celtic Thunder

"It just comes natural
Seasons change, rivers wind
Tumbleweeds roll and stars shine."---lyrics from "It Just Comes Natural" sung by George Strait

As it awaits the next round of earnings reports and amidst disappointing (if conflicting) jobs numbers, the stock market has stalled, with the Dow Jones Industrial Average and the S&P 500 both down over 0.5% year to date. However, during that same time period, several fixed income securities have done well---- having had their "heart's shattered/The pieces scattered/Across the ground of loneliness" much of last year. Take a look at the closing tables for preferred stocks (http://online.wsj.com/mdc/public/page/2_3024-Preferreds.html?mod=mdc_h_usshl#C ) and closed end funds (http://online.wsj.com/mdc/public/page/2_3024-CEF.html?mod=topnav_2_3002), and you will see lots of green. As longtime readers know, I am Mr. Fix(ed Income). I am very much "at home" in fixed income because the securities comprising that sector pay handsome dividends (6-10% or more) often on a monthly basis. At this stage of my life, predictable income is what I desire.

As explained ad nauseum in recent editions, fixed income does well in low and/or stable interest rate environments. To the surprise of many, interest rates have remained low (historically speaking) and reasonably stable so far this year even in the wake of the Federal Reserve's decision last month to taper its purchases of Treasury bonds and mortgages (the program known as QE3). As you will recall, I predicted back in September that once QE3 tapering began, the rate on the all important 10 Year Treasury Bond would not breach a 3% ceiling (see Vol. 186, www.riskrewardblog.blogspot.com ), a prognostication which has held true (for the most part) with the 10Year sitting at 2.86% at the market's close on Friday. The reasons are many, but one that is often overlooked is the fact that the bond market is international. And in that regard, one must look to the action this past week in "Ireland, Ireland." No country in Europe (other than Greece) suffered more from the 2008-2009 recession than Ireland. For the past few years, the Irish government has met its commitments solely because of a life line of credit extended by the European Central Bank, the European Union and the International Monetary Fund (see Vol. 43 www.riskrewardblog.blogspot.com ). Indeed, because of its poor credit rating, Ireland has been unable to issue any of its own bonds---until this week. On Tuesday, the bond world "stood tall/Shoulder to shoulder" and "Answered Irelands' call" by buying its 10 Year bonds at a yield of 3.57%, a rate that fell even lower in the secondary market. By comparison, in 2011, Irish 10 Year bonds traded at a yield of over 14%! If the risk associated with an Irish 10 Year bond warrants only a 3.5% rate of return, then surely the risk associated with a United States 10 Year Treasury warrants one much lower. Thus it is not surprising that the US 10Year now trades at a rate below 3% (Remember, the lower the interest rate, the higher the bond price.) Indeed with the 10 Year bonds of Spain trading at 3.8%, those of Italy at 3.9% , those of France at 2.4% and those of Germany at 1.9%, there is a real possibility that in the near term the rate on the 10 Year U. S. Treasury Bond will remain closer to 2.9% than to 3%----and that would be very good for interest rate sensitive fixed income securities (e.g. real estate investment trusts, business development companies, utilities, preferred stocks, etc.) which have been oversold in anticipation of rates on the U.S. 10 Year going to 3.5% or higher.

Just as "rivers wind/Tumbleweeds roll and stars shine", the "Seasons change." And, boy, did they change this year with record cold descending from Canada thanks to a polar vortex. But one person's discomfort is another's profit---and this time "it (profit that is) just comes natural"---to natural gas that is. Over the past several years, a growing percentage of the nation's energy needs has been met by natural gas which is a much cleaner alternative to coal and which has become plentiful thanks to the wonders of hydraulic fracturing (a/k/a fracking). Two of the largest players in the natural gas space happen to be two of my favorite holdings, Linn Energy (LINE) and Vanguard Natural Resources (VNR) each of which pays an annualized dividend of over 8.5% on a monthy basis, and each of which is up over 5% in the past month. LINE was shorted much of last year due to accounting questions and problems with its acquisiton of Berry Petroleum, but those issues appear to be resolved. If so, it has considerable room to run. VNR recently completed an acquisition which should place it in good stead should the demand for natural gas continue to increase.

As this year progresses, may we have as much success in our investments as George Strait has had in country music. He has recorded over 60 Number One records. Few of his titles resonate with me. But, if "x" marks the spot for success, may many of "My Ex's Live In Texas"---the home of Linn Energy, Vanguard Natural Resources and several more of my energy related holdings.