October 19, 2013 Sunshine, Lollipops

Risk/Reward Vol. 191

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

"You gotta be bold/You gotta be wiser
You gotta be hard/You gotta be tough
You gotta be stronger"---lyrics from "You Gotta Be" sung by Des'Ree

"My life is sunshine, lollipops and rainbows
That's how the refrain goes/So come on, join in everybody!
Sunshine, lollipops and rainbows
Everything that's wonderful is sure to come your way."---lyrics from "Sunshine, Lollipops and Rainbows" sung by Lesley Gore

"Regulators, we regulate any stealing off this property
And we damn good too
Gotta be handy with the steel if you know what I mean."---lyrics from "Regulators" by Warren G. featuring Nate Dogg

When it comes to investing in this insane political environment, "You gotta be bold/You gotta be wiser/You gotta be hard/You gotta be tough/You gotta be stronger." And the stock market was all of that throughout the debt ceiling crisis. The Dow Jones Industrial Average closed up 162 points for the week and the S&P 500 closed on Friday at a record high. But more importantly, both the stock and bond markets held remarkably steady even during the darkest hours of discord. Call it cryin'-wolf or once-burned-twice-shy, most market participants (including me) did not bail like I did back in 2011. Rhetoric be damned, default was not in the cards, and the markets sensed that fact.

By standing pat, I experienced a day on Thursday that was nothing short of "Sunshine, Lollipops and Rainbows." And why not? Think of how the table has been set for income investors like me. First, default is no longer a threat, so the credit markets will continue to function. Second, the events of the past several weeks have slowed mortgage originations thereby guaranteeing (IMHO) a continuation of the mortgage subsidy portion of quantitative easing (QE3). Third, the debt ceiling crisis will again arise in January militating against a tapering of the bond buying aspect of QE3 any time soon, a fact which should keep mid-to-long term interest rates in check. (Note that on Thursday, the yield on the 10Year Treasury Bond closed below 2.6% for the first time since early August.). Through year end, "everything that is wonderful is sure to come my way": low interest rates, a subsidized mortgage market and easy money---circumstances all favorable to yield hunters. Caution: I am not counseling you to "join in, everybody", but my list of mortgage real estate investment trusts, business development companies, leveraged closed end funds and preferred stocks SHOULD do well in the fourth quarter.

Speaking of income stocks, I have become enamored of another sector---mortgage servicing companies. As you may know, a portion of each mortgage payment defrays mortgage servicing costs which include tracking statements, fielding requests, backroom accounting and, unfortunately handling foreclosures. Under the Dodd-Frank Act, passed by Congress in response to the credit melt down of 2008, "Regulators" have made mortgage servicing unprofitable for mortgage originators. As a consequence, these institutions have sold "off this property" (mortgage servicing rights) to specialized entities such as Home Loan Servicing Solutions, Ltd. (HLSS). HLSS is "damn good" at what it does and has been "handy with the steel" in cutting expenses. That fact, in conjunction with improved underwriting standards and fewer refinancings, has resulted in HLSS being able to pay a 8% annualized dividend on a monthly basis.

What a way to finish the week! If I were a woman, I would be Lesley Gore. "It's My Party" now. Low interest rates are my boyfriend. And, if higher yields on the 10Year Treasury Bond were named Judy, it would be "Judy's Turn to Cry" because "My Boyfriend's Back." and "He's goin' to save my reputation."