September 7, 2013 Higher

Risk/Reward Vol. 185

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

"Feeling's gettin' stronger
Music's gettin' longer, too
I want to take you higher."---lyrics from "I Want To Take You Higher" by Sly and The Family Stone

"Couldn't see tomorrow today/Then you came
Say what you say/We're floating away
Now I see the sun on the horizon
Now I think that I'll be OK."---lyrics from "Floating Away" sung by Ne-Yo

"He was just tryin' to make things go his way
And honey, you were the believer
He wasn't the deceiver
He was just talkin' trash."---lyrics from "Talkin' Trash" sung by Sam Cooke

With a Syrian air strike on the back burner, the income/dividend focused portion of the stock market once again became fixated on the Federal Reserve; specifically on whether the spate of economic news this week ( purchasing manager numbers, unemployment claims, and the jobs report) would cause the Fed to begin tapering asset purchases (QE3) come its mid September meeting. As the week progressed, the "music was gettin' longer and the feelin' was gettin' stronger, too" that tapering would begin. In turn this news was "takin' higher" the yield on the all important 10 Year Treasury Bond (the significance of which for yield hunters like me was explained in Vol. 172 www.riskrewardblog.blogspot.com ). Indeed, on Thursday, the 10 Year yield rose above 3% for the first time in 25 months only to drop to 2.94% at the close on Friday after a truly mediocre jobs report---a report so disappointing that it shed doubt on the magnitude if not the likelihood of tapering. (N.B. After that report was issued even the Fed's most hawkish member, Esther George, said she supported a cut of no more than $15billion per month which portends that the actual first cut likely will be less---say 10% or $8.5billon)

So what does an income/dividend investor do in times of increasing interest rates (and concomitantly falling asset prices)? "Say what you say", but one can't "see tomorrow's rates today"or anything else "on the horizon." That said, "I think that one will be OK" if as part of diversification, one invests a portion of one's portfolio in "floating" rate senior loan funds. These funds lend money to below-investment grade companies and charge an interest rate that "floats"; that is, an interest rate that is reset from time to time in relation to some agreed barometer (e.g the London InterBank Offered Rate or LIBOR). This "float" provides some hedge against escalating rates. Several large fund managers (e.g. BlackRock, Eaton Vance and Nuveen) specialize in these types of investments. I recommend that you review a list of such funds which can be found at www.cefconnect.com. Go to the Fund Sorter/Screener function, select "Taxable Income", check "Senior Loans", hit "Enter" and then start your review and analysis. You may also wish to look at business development companies that specialize in floating rate financing of all types (senior loans, mezzanine loans, hybrids, etc.) such as my favorites, PSEC and FSC.

One sideshow in the market this week was how a single stock analyst crashed the stock price of oil and gas pipeline stalwart Kinder Morgan (KMP, KMI and KMR) by "Talkin' Trash" about its balance sheet. Whether the analyst (from Hedgeye) was "a deceiver" or "just tryin' to make things go his way", the market "was a believer" as Kinder Morgan's stock plummeted 6% at one point on Wednesday. I have been a KMP investor for years and took advantage of the swoon to buy at $79.45, a bargain basement price in my humble opinion (IMHO for you texters--LMAO).

This week, the "Sly" money was "Dancin' to the Music" of rising interest rates which in turn caused my high yielding portfolio to drop slightly in value through Thursday. (Remember: with income producing assets, prices fall as rates increase.) But, I decided to "Stand" pat, and the portfolio recovered nicely on Friday as the 10Year moderated a bit. I continue to believe that the market has unduly punished income/dividend stocks in anticipation of tapering (See Vol. 182 www.riskrewardblog.blogspot.com) , a situation that should be rectified once tapering begins. So, enough with this vacilation! Let's just start the taper, adjust to it and move on. With interest rates (and asset values) rising and falling daily based upon the odds that tapering will or will not begin and/or the magnitude of the taper should it begin, it has not been "Hot Fun In The Summertime" for yield hunters like me.