January 18, 2014 Early Bird

Risk/Reward Vol. 204

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

"There is so much waiting for you/Listen here is all you must do
Play the field/You gotta look around
Lovin' is so real/Don't just settle down."---lyrics from "Play the Field" sung by Debbie Gibson

"Baby's got a lot of baggage/It don't seem to matter
Where do I have to go/To find a honey with a little soul
Tokyo/Tokyo"---lyrics from "Tokyo" sung by The Imagine Dragons

"Always was an early bird/With something on the side
Better buy this, better buy that/Maybe let that baby ride."---lyrics from "Early Bird" by Mark Knopfler (of Dire Straits fame)

So how does one "Play the field" when one does not want to "just settle down" on one stock within a sector? For any number of reasons, an investor may want to diversify throughout a sector; may prefer to "look around" especially when "there is so much waiting for you." A case in point is this week's performance in and among those stocks comprising the financial institutions sector. Most financials reported earnings in line with expectations; a few, such as Citigroup, reported disappointing numbers. Investing in the whole sector worked; investing in just one stock could have turned out badly. To gain exposure to a variety of stocks within that sector, "here is all you must do." Buy an exchange traded fund (ETF) comprised of financial institutions. I own XLF for large institutions and KRE for regional banks. Indeed ETF's have revolutionized diversification. With one push of the "Enter" button one can buy the entire S&P 500 Index (SPY), the Dow Jones Industrial Average (DIA), the Nasdaq (QQQ), the Russell 2000 (IWM), exposure to Europe (HEDJ) or exposure to Japan (DXJ). Or, one can access any number of sectors within each index such as XLF. With the onset of ETF's, "Lovin' (a diversified portfolio) is so real."

On Wednesday, International Monetary Fund chief Christine Lagarde and Chicago Federal Reserve President Charles Evans independently spoke to the threat to developed economies (US, Japan and EU) posed by deflation. Previously, I have written of my concern regarding deflation ( Vol 201 www.riskrewardblog.blogspot.com ), and I suspect it will be discussed here throughout the year. Deflation comes "with a lot of baggage", and there is no more instructive example than what has occurred in "Tokyo/Tokyo" over the past 15 years. There, people have deferred purchases with the knowledge that prices will remain stable or even fall. Add to this the lessening of demand incident to Japan's shrinking population and the result is an entire economy that is in the doldrums even after its central bank adopted highly accommodative policies such as zero interest rates and quantitative easing. In a word, Japan's economy is stagnant and Europe's may become so, as well, as the Eurozones's annualized inflation rate was only 0.8% in the fourth quarter of 2013. The US rate was only 1.2%, well below the 2% target. Pressure on the ECB and the Federal Reserve to continue inflationary responses to these deflationary trends is just one more reason why I see a continuation of easy money policies which in turn means that the yield on the all important 10 Year Treasury Bond likely will stay at or below 3% for quite some time. Deflation is bad news for the economy, but good news for those who purchase fixed income assets that have been priced in anticipation of the 10 Year yield exceeding 3.5% in the near term (e.g. preferred stocks, real estate investment trusts, business development companies, etc.)

Speaking of preferred stocks, it often pays to "be an early bird." Indeed, that is why I always keep "something on the side"; just in case desirable new preferreds are issued. I don't want to "let those babies ride". Instead, I had "better buy this/and better buy that." The recent issuance of Series P preferred shares of American Capital Realty Partners (ARCPP) provides an excellent illustration. ARCP is an aggressively acquistive triple net lease real estate investment trust about which I have written in the past (See Vol. 184 www.riskrewardblog.blogspot.com ). I have done very well with its common stock in recent days as it has just completed its largest and most accretive merger to date. To help finance its acquistions without overly diluting its common shareholders, ARCP recently issued ARCPP, a preferred stock which is scheduled to pay a 6.7% annual dividend amortized monthly based on a par value of $25. In its first few days of trading, ARCPP was not well received. I purchased some on Tuesday at $20.60 (providing me an 8+% yield!). By Friday, ARCPP had gained 5% in just four days! This is not unusual in the preferred stock world. The "early bird" often does get the worm. I monitor preferred issuances via the IPO section of Quantum on Line (www.quantumonline.com ), a valuable site for fixed income investors.

Although the start of the year has been a mixed bag for the indices, my fixed income portfolio has done well primarily because the 10 Year has remained stable. That said , I firmly believe (like Mark Knopfler) that "I shoulda learned to play the guitar" or "I shoulda learned to play the drums" because "That ain't workin' that's the way to do it" You may "get a blister on your little finger" or "a blister on your thumb", but "playin' guitar on MTV" sure beats working the stock market. I, too, would like "Money for nothin' and my chicks for free.."