Interesting Days Ahead for Income Investors
By: Tim McPartland,
So far July has been a month of mostly treading water for preferred stocks and exchange traded debt issues with values just below the YTD highs–just off by 1/3% during July. Obviously some are down more and some are up more as prices move with many factors such as ex dividends dates etc., but overall they are just off of yearly highs. REIT’s and MLP’s are also just below their yearly highs. Of course commons stocks of all sorts have also been treading water. The model portfolio is up almost 1% for July–about 1/2 of that from dividends and interest received so we would have about a 1/2% of capital gain for the month and we are thankful for that small gain.
Interest rates keep bobbing up and down 5 basis points as various economic news is released. For instance today Consumer Confidence stats were released and we at a higher than expected 90.9 for July–the highest level since 2007. This sent the 10 year treasury interest rate up 4 basis points prior to it falling back to where it had started the day at as new Russian sanctions were being discussed by Obama and a 5 year treasury auction came off with stong demand. This continues a pattern where demand for treasuries overwhelms any possible thought of rising rates–we posted an article on this a couple weeks ago.
The next 3 trading days may well provide plenty of excitement as we have many key reports being released. Tomorrow (Wednesday) we have 2nd quarter GDP with the concensus looking for a rise of 3.1% (but a wide range of opinions of 2.3 to 4%). We have no clue what the number might be, but we would look for interest rates to rise 2-5 basis points if expectations are realized–or if there was a surprise to the downside (by more than a couple 1/10ths) or to the upside we could see a 10 basis points. A crazy number like 4% would likely lead to a 15 basis point rise in the 10 year treasury. Whether the rise would hold is questionable as each as every rise in the last few months has been followed by a drift back down to the 2.45% area. On the other hand we have the ADP employment report tomorrow–15 minutes before the GDP release and it has been more reliable at predicting the nonfarm payroll report which is to be released Friday and surprises in the ADP number tomorrow could confirm or conflict with the GDP report–then what? We don’t know what may happen when the story is written, but it will be interesting to watch.
In addition to the various economic reports the Ukraine is turning into a bigger issue as Putin can do what he wants as no one in Europe or the U.S. has the balls to stand up to him–obviously he is feeling the hesitancy and doing whatever he damn well pleases. Undoubtably this is tempering any potential interest rate rise in the U.S. Also Gaza is a mess which we thought would have been tamped down by now, but Hamas seems to want to continue to commit suicide by continuing to fire missles into Israel. Obviously they are overmatched, but they are not content to negotiate a cease fire–another item to hold down interest rates. We are not as optimistic on these items as we were previously–they are not going to go away quickly.
As is normal there is not anything one can do to react to all these crosscurrents except hope that funds are positioned as well as possible–you can be certain that whichever way you guessed interest rates or stocks would be moving they would move in the opposite direction as no one has a crystal ball and these markets have proved all the pundits to be simply ‘guessers’ with no ability to forecast tomorrow–let alone next year.