THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING.. RELY ON NOTHING STATED HEREIN
"Managing is like holding a dove. Squeeze too hard and you kill it, not hard enough and it flies away."---Tommy Lasorda
"I'll squeeze the cider out of your Adam's apple!"--Moe Howard
As reported in Vol. 61, I sold my shares in "agency" real estate investment trusts ("REIT's") (Annaly Capital-NLY and Agency Capital-AGNC) in April in anticipation of the termination of the Fed's quantitative easing (QE2) and the expected, resultant rise in interest rates. (Ironically, in what can only be described as a beauty contest between "uglies", interest rates have actually fallen since then due to the flight of money away from Euro bonds and into U.S.Treasuries, in comparison with which many interest rates are set.) The reason that I sold was my desire not to hold stocks whose profits would (and will) be "squeezed" between the fixed rate of income from the mortgages that these "agency" REIT's purchase from Fannie Mae and Freddie Mac and what will be rising rates on short term borrowing which is expected once QE2 ends in June. I have been looking for companies that will prosper from rising interest rates (other than banks which face other problems including a hesitancy to lend) once interest rates increase.
I found some. My favorite is Fifth Street Capital (FSC), a company that finances medium sized, privately held businesses engaged in substantial restructurings such as acquisitions, buy outs, expansions, etc. This is a space that during the frothy days of private equity in 2005-2007 was dominated by GE Capital--but no more. FSC has secured a significant amount of low cost capital through share offerings, fixed rate bond offerings, locked rate SBA loans and a favorable line of credit from ING. The cost of maintaining this capital will not increase appreciably should interest rates rise. In turn, FSC has lent this pile of money to over 60 well run, medium sized businesses on a senior secured basis (like a first mortgage) at floating interest rates (like an adjustable rate). Thus, if interest rates increase, FSC's profits do as well. FSC pays a MONTHLY dividend at a 10.3% annual rate and has sufficient visibility on its business to have declared dividends throughSeptember, 2011! Since FSC is a business development company, it is a "pass through" tax entity and thus fits better in my 401k. I also bought Prospect Capital (PSEC), a similar company.
My daily review of holdings came in handy this week. This review is necessary as part of my 8% loss limit rule and as such resulted in my jettisoning of Telefonica (TEF) after Monday's blood bath. On Tuesday, however, I noticed a drop in my shares of GMXResources preferred stock (GMXRp), one of my favorite small domestic oil and gas exploration and development holdings (like MHRpD). GMXRp usually trades at or near its redemption price of $25 and rarely fluctuates in price, its 9.25% qualified dividend being its main attraction. The situation was even odder considering its common stock was on the rise. My due diligence revealed that the likely cause of the dip was a large disposition by one of the underwriters of the last secondary offering. I bought a slug of it below $23 which equates to a 10.3% dividend to me (REMEMBER, as the price of the stock goes down, the yield goes up). It has started to rebound.
In a quick reversal, Goldman Sachs has now advised its clients to buy commodities, including oil and copper. You may recall that Goldman advised just the opposite earlier this month. The result on the market for commodities was stunning
Best to you this holiday weekend. May you avoid the squeeze.
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