Risk/Reward Vol. 333
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
And so the Trump Rally continues as both major stock indices are up double digits year to date. But for me the stunning movement in Treasury securities, in particular movement in the 10 Year US Treasury Bond (10Year), is where I see opportunity. As loyal readers know, I invest based upon signals emanating from the 10Year. Its movement since the election has been nothing short of spectacular. Its yield has skyrocketed 44% since early November which in turn has caused a massive reset of myriad securities priced in relation thereto. With Mr. Market's rotation out of bonds and into stocks slowing, with the Fed funds rate increase on Wednesday and with the Fed signaling, via its "dot plot", three 25 basis point raises next year, one can anticipate that the rate on the 10Year will stabilize between 2.5 and 2.75% for the foreseeable future. Adding stability is the massive 230 basis point spread between the yield on the 10Year and the yield on the German Bund, a gulf that has not been seen since the fall of the Berlin Wall in 1989. I foresee a prolonged period where foreign investors will seek better returns by buying US Treasury securities thus dampening yield increases. (Remember the more demand for a bond the higher the price and the lower the yield.). This move already has begun as indicated by the dollar/Euro exchange rate (which now sits at $1.04) as investors sell Euro bonds, buy dollars and invest in Treasuries. This combination of events is what I have been awaiting and had it not been for a day spent earning CLE credits, I would have entered in force on Friday. I will buy on Monday.
So is my re-entry wholly dependent upon the rate on the 10Year stabilizing? No, Why not? Harken back to June, 2010, Vol. 1 www.riskrewarblog.blogspot.com . Therein I wrote the following:
"...I am in search of a 6%, pre tax return. Throughout most of my life, this would have been a layup. From 1969 through 1997, the 10 Treasury rarely fell below 6%. From 1980 through 1985, it never fell below 10%. So, at this stage in my life all I need is a little inflation. Indeed, right now 90% of my money is parked, waiting for that to happen. Unfortunately, it looks like we are into a prolonged period of stagflation and perhaps deflation. So, Barb and I decided to get off our duffs, and to become more active money managers..."
I have achieved that goal since, but only through trial and error and darting in and out of the market. Now, with the Federal Reserve raising rates for only the second time in ten years, with the prospect of the heavy foot of regulation off of the throats of financial institutions, with unemployment below 5%, with re-inflation a real possibility and with the stock market hitting record highs, reasonably safe 6% returns are available for the first time in several years. The repricing of securities which I noted above has resulted in the availability of investment grade or near investment grade bond like securities issued by reputable (some blue chip) institutions at or below par. Most are preferred stocks or exchange traded debt instruments. Check out SOJB, KYYPP, COFF COFP, AXSD, AHTG, ACGLP, AHLD, ASBD, BACD, CTBB, CTY, WFCW , and the exchange traded fund PGX just to name a few. They are listed daily on the Wall Street Journal Preferred Stock Closing Table, available free of charge. This means I can now enjoy a 6+% annual return from very safe investments without the fear that they will be redeemed at a price less than what I paid (such securities are redeemable, but at par, not below). For an even better return, I plan to purchase some leveraged closed end preferred stock funds such as HPF, HPS, HPI, JPC and DFP. For more information on these take a look at CEF Connect at www.cefconnect.com . In my opinion several are very oversold. Currently, they yield in excess of 8%. Due to the leverage employed (each borrows up to 30% of net asset value which is used to reinvest in additional preferred issues), they are more rate sensitive than individual preferred issues or unleveraged funds. However, they are currently on sale at deep discount which provides a layer of downside protection. Several real estate investment trusts also have repriced into zones that are very appealing. And for my taxable account, several municipal bond closed end funds are ripe for the picking. In sum, in the span of one month I have gone from wanting no securities to desiring more than I can manage.
I will also buy oil companies next week. OPEC's decision to limit production ten days ago plus Russia's unilateral decision to impose production limits will redound to the benefit of both domestic and international producers. I have not decided on which but included will be Shell. The stabilization of oil prices has contributed mightily to the safety of its nearly 7% dividend.
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