Risk/Reward Vol. 104
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"You got a nice white dress and a party on your confirmation/You got a brand new soul, mmm, and a cross of gold
But Virginia, they didn't give you quite enough information"--lyrics "Only the Good Die Young" by Billy Joel
"Other guys may be rich and handsome/But Baby, I prefer you
You have quality that can't be surpassed/ And the love we have I know is going to last
That's why I prefer you"---lyrics "I Prefer You" sung by Etta James
"We in the time of our lives, baby/Turn the music up, Primetime
Yeah, Primetime, beat by Dion, our third eon
That's what the fu#* we on"---lyrics "Prime Time" by Jay-Z and Kanye West
"The best thing in life is free/But you can give it to the birds and the bees
I need some money/Need some money, now"---"I Need Money" sung by John Lee Hooker
Well, Virginia, did you put on "your nice white dress" and "party" this week when the S&P 500 experienced the "golden cross"? For the uninitiated, a golden cross occurs when the 50 day moving average moves above (crosses) the 200 day moving average---historically a "confirmation" of a bull market. I realize that it isn't quite as stunning as a "new soul", but the prospect of a "rich and handsome" return on one's investment is good news indeed.
And speaking of a "rich and handsome" return, how about the performance of the security type that "I Prefer": to wit; preferred stock. Google "WSJ preferred stock closing table", click on the first entry and gaze on a thing of beauty. Holy (late and great) Etta James! The penultimate column displays the current yield on each stock (note how perfectly many fit my desire for a 7% annual return), and the last column (in green and red) displays how much each has appreciated just since January 1, 2012. Stunning, is it not? The reason is simple. The preferred stock sector is dominated by the financial industry (banks and insurance companies), the stock of which has soared so far this year. It's no wonder that I am loving my positions in BCSD, BCSC, IDG, AEF, AVF, BACL, BACT, NWC, MSJ, JSM, JZK etc. You really don't have to be an early Facebook investor to make money in this market! To learn more about preferred stock investing, consult www.quantumonline.com .
In light of last week's pronouncement by Uncle Ben Bernanke, this week I continued my search for investments that should do well in a prolonged, low interest rate environment. In addition to the sectors discussed last week, take a look at entities that purchase mortgages that are NOT guaranteed by a Federal agency (unlike AGNC and NLY discussed last week). Four years into the mortgage crisis, the world is still awash in sub-"Prime(time)" paper, frankly, much of which is current and performing per its terms. With their own borrowing costs at all time lows and with last week's assurance that rates will remain low, non-agency mortgage REITs which buy these mortgages, such as Chimera, Apollo Residential Mortgage and Invesco, are beginning to perform well. I bought some Chimera (CIM) this week. This is a risky sector. Don't buy unless you have the swagger of a Jay-Z or a Kanye.
Another sector that should do well in a low interest rate environment is floating rate, senior loan funds. Allow me to explain. Growing businesses, large and small, constantly "need some money"--no different than John Lee Hooker Jr.'s need for heroin. Very few businesses have enough cash on hand at any given time to fund new equipment purchases, plant expansions, acquisitions, inventory builds, etc.. They meet these money needs through bank loans, secured by first or "senior" mortgages on their finished goods, equipment and accounts receivable. Typically, these senior loans are for a specific term (e.g. three years) and are subject to a floating rate of interest (e.g. 2% above the prime rate) which is reset periodically (e.g. monthly). In order to maintain their own liquidity, banks sell these loans to pools of money like pension funds, mutual funds and closed end funds, with the banks making a profit by servicing the loans. Individual investors can participate in these loans by buying shares in these various funds which trade on the stock market just like other businesses. I like these floating rate loan funds because they maintain a constant and rolling spread between the cost of money to the funds (low) and the interest rate charged on the loans (medium to high based on repayment risk). This week I bought shares of EFT and JFR, both well regarded by Morningstar.
With no bad news coming from China or Europe and with good corporate earnings and job reports at home propelling the Dow to its highest close since May, 2008, I am hopeful (assuming Israel doesn't bomb Iran) that market volatility stays low-- allowing my high yielders to perform. If this all holds, I will sigh with relief and sing my favorite Etta James refrain:
"At last..."
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