Is this a Goldilocks Market?

August 14, 2014 – 9:20 pm  

We have ‘whined’ about the U.S. economy, which while growing, seems pretty lethargic from where we sit.   There are certainly some benefits to us income investors from this lethargy.

The economic numbers that are released keep rates from heading higher–even with the rapidly ending Quantitative Easing.  One week we get economic releases that are ‘good’ and then the next week we get numbers that are ‘bad’ (like retail sales this week).  The continuing train wreak we call the European economy keeps rates in the Euro zone at rock bottom lows–sending cash to the U.S. to capture the big 10 year treasury yield (2.40% is considered great by some).  The Chinese economy is thought to be slowing rapidly and Japan has slit their own throat with a rise in the sales tax from 5% to 8% in April–with a possibility of another 2% rise to come.

As we look at the global macro economic situation it is hard to imagine interest rates moving higher by much anytime soon (of course last year when rates moved up 1.4% when someone whispered ‘taper’ we could not imagine that move either).

The above seems to tell us to do exactly what we have been doing.  Selectively unload securities that are highly valued and perpetual in duration (many preferreds) and move into securities that can offer nearly as high a yield, but have a much shorter duration.  This has been a slow process for us as we have sold 6 issues in the last 8 weeks (actually 5 and there was 1 redemption), but have bought only 3 issues  (2 with maturities in 2021 and one in 2024).  While we have shortened our duration on the purchases we have ended up with added cash.  We will buy tomorrow (Friday)–a short duration issue–although we need to locate that selection tonight yet.

So in summary we can declare that we are in a Goldilocks market.  That said we can also declare that the day will come when the markets rain hell down on us income investors and we hope we are prepared–we guarantee it will happen.