May 3, 2015 Mixed Signals

Risk/Reward Vol. 265

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

Sorry, but I have been too busy to compose a typical Risk/Reward. All good---just too busy. That said, once again, too much occurred this week to let it pass without comment.

Thursday and Friday were quite a roller coaster ---the Dow down 200 one day then up 200 the next. Despite this action, the week ended nearly where it did last week. Why the volatility, you ask? Mixed signals. Corporate earnings are ok, but top line performance is spotty and guidance is cautious. The economy grew at a disappointing 0.2% in the first quarter, but employment numbers continue to improve. Add to this the uncertainty arising from the Federal Reserve's press release after its mid week meeting. It left many Fed watchers wondering whether the first rate increase would occur in June or September or not at all this year. Mixed signals indeed--- at least for those in the equity market.

The bond market however traded with much more certainty. The yield on the bellwether 10 Year Treasury Bond rose steadily after the Fed meeting. It ended the week at 2.12%, 20 basis points above its close last week. This 10% increase bespoke conviction by bond traders that the Fed will raise rates this year, a sluggish economy notwithstanding. Indeed, the rapidity of the increase in the 10Year yield indicates that many in the bond market see the increase coming in June. Frankly, a rate bump before the release of Q2 economic numbers (which would be in July) makes sense if the Fed is hell bent on an increase in 2015---as it appears to be. If Q2 economic data disappoints, as it well could, the Fed would have a difficult time raising rates at all this year.

At this point, I want an increase in June. If one occurs, it will cause the market to oversell income securities---of this I am certain. And I have identified a slew of great stocks that I will buy if and when an increase occurs. Take a look at my favorite triple net lease, real estate investment trust (REIT), Realty Income (O). O owns nearly 4500 single purpose buildings leased to highly rated tenants like Firestone, Publix, Taco Bell, Home Depot, etc. Moreover, it has increased its dividend every quarter for 70 quarters. Nevertheless, its stock price is down double digits over the past 3 months which has caused its annual yield to approach 5%. It is a must buy once the Fed announces a rate increase. Also take a look at the senior living REIT space where Ventas (VTR), Senior Housing (SNR) and Omega (OHI) have likewise suffered double digit losses since February. These are solid companies with a history of increasing dividends. They too are on my shopping list once the Fed acts.