July 20, 2013 Sign On The Wall

Risk/Reward Vol. 178

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

"I loved ya' baby/From the start
Loved ya' baby/With all of my heart
Lord, you put a spell on me/I just want to testify."---lyrics from "Testify" by Grand Funk Railroad

"What's it all about, Alfie?/Is it just for the moment we live?
What's it all about/When you sort it out, Alfie?
Are we meant to take more than we give?"---lyrics from "Alfie" by Burt Bacharach

"There's a sign on the wall/But she wants to be sure
Cause you know/Sometimes words have two meanings
In a tree by a brook/There's a songbird who sings
Sometimes all of our thoughts are misgiven."---lyrics from "Stairway to Heavan" by Led Zepplin

The stock indices reached new highs on Thursday, but Wednesday was the big day for yield hungry investors like me. As reported last week (Vol. 177 www.riskrewardblog.blogspot.com ), Federal Reserve Chair Benjamin Bernanke was scheduled to "Testify" before Congress on Wednesday. At 8:30 Eastern, an hour before the markets opened, he released his prepared remarks. And "from the start", the bond market "Loved it, baby/With all of its heart." In the remarks and the subsequent testimony, Bernanke confirmed what other Fed members have been saying recently: that any tapering of quantitative easing (QE3) would be tied to how well the economy is doing, and that the economy is not doing well enough now or in the foreseeable future to warrant it. In so stating, Bernanke seemingly abandoned his comments of June 19th which the bond market had interpreted as putting QE3 tapering on a set timetable beginning no later than September, 2013 with a complete cessation by the summer of 2014; comments which, at the time, sent bonds and bond related securities into a nose dive. His remarks "put a spell" on the all important 10 Year Treasury Bond. Its yield quickly fell below 2.5% with a correspondent spike in the bond's price. (Remember, a drop in bond yields means a rise in bond prices.)

Also on Wednesday, CNBC televised its annual "Delivering Alpha" conference. (In the financial world, "alpha" means performance above a benchmark. It is short hand for profitable, risk adjusted investing, and "when you sort it out/ Alpha is what it's all about" ; it means you "take more than you give.") Tips from such luminaries as Leon Cooperman and Steve Kuhn who were featured at the conference are "moments for which I live." Hailed as clairvoyant for picking ten out of ten double digit winners at last year's conference, Cooperman again listed 10 stocks that he believes will out perform over the next twelve months. And five of them fit within my yield-hungry wheelhouse: two real estate investment trusts (REIT's), two business development companies and a master limited partnership. Universally recognized as a leading bond/fixed income fund manager, Kuhn recommended a re-look at mortgage REIT's which he said had been oversold. When asked to pick the one sector of fixed income which he believed would deliver the greatest alpha over the coming months, he stated unequivocally municipal bonds---about which I wrote last week.

Although I started my re-entry last week, I tiptoed "Cause you know/Sometimes words have two meanings." And the words from the Fed over the past few weeks about the future of QE3 were ambiguous if not contradictory. But Wednesday's pronouncement by Uncle Ben was "a sign on the wall": "a song bird singing" if you will, about which I have "no misgivings." As a consequence, this week I bought with conviction and am now 60% invested. Hopefully, I am again on a "Stairway to Heaven." I repurchased much of what I had sold in late May plus some municipal bond funds, the downdraft from Detroit's bankruptcy having provided an excellent buying opportunity. I am on track for annualized, taxable equivalent dividends of 8+%. All I want is stability but will gladly accept some capital appreciation.

It is my considered opinion that Bernanke's statements will impact the bond/fixed income world in which I dwell like a Led Zepplin concert: taking us from a market that has been "Dazed and Confused" to one that promises a "Whole Lotta Love."