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Markets Spring Back Strongly from January Drubbing

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Virtually all of the equity markets have bounced back strongly from the rocky 2016 start in January.  The S&P500 was off 10% by February 11th, when the markets bottomed and headed strongly higher.

On February 3rd we wrote an article titled “Wild January Could Have Inflicted More Harm Than It Did” and in the article we mentioned that the wholesale selling in the markets were presenting many opportunities for bargain hunting. In the article we outlined a number of issues that we had purchased at what we believed were very favorable prices.  The issues we purchased were REIT DiamondRock Hospitality (NYSE:DRH),  water utility Aqua America (NYSE:WTR), the 7.125% term preferred stock (NASDAQ:GOODN) of REIT Gladstone Commercial, the 6.75% term preferred stock (NASDAQ:GLADO) of BDC Gladstone Capital, Ashford Hospitality 9% perpetual preferreds (NYSE:AHT-E) and the 6.25% investment grade rated baby bonds of Prospect Capital (NYSE:PBB).  Every one of these issues has benn strongly profitable since purchase and 1 has a crazy gain of 14%.

On February 15th we wrote an article “Hold Off on Selling Now, Find Greater Bargains Later”.  This article implored readers to hang on tight to their investments because history almost always shows that selling in a panic results in “sellers remorse” as prices rebound strongly after the panic.  At the time we suggested investors should look at the Cowen Group baby bonds (NASDAQ:COWNL) which had a current yield at that time of 9.2%, the TravelCenters of America baby bonds (3 issues outstanding) and the JMP Group baby bonds which were trading with current yields of over 10%. We held all of these issues in the 2015/2016 Blended Income Portfolio already and did not add more shares as we felt comfortable with the weighting we had allocated to these lower quality issues.  In the last 3 weeks each of these issues has had strong gains.

In addition to the above securities we mentioned buying we also added shares of  Tri-Continental Corp 5% perpetual preferreds (NYSE:TY-A).  Tri-Continental Corp is a closed end fund company and has been around since 1928.  The preferred shares are $50 shares and have a coupon of 5%.  The shares are unique in that they may be redeemed anytime–but the redemption price is $55.  The shares have been outstanding for at least 30 years so we are thinking they are not going to be called in anytime soon.  Additionally Tri-Continental is required to adhere to the leverage rules (must have 200% asset coverage on preferred shares). We purchased these shares after Tortoise Energy Infrastructure (NYSE:TYG) announced the redemption of our favorite investment grade term preferred (the 4.37% issue NYSE:TYG-B).  As most of our readers know this has been a favorite holding for many years–where else could you get a AA rated issue paying over 4%?

Following our own advice our portfolio performance for the last month has been stellar.  When we wrote the article on February 15th we noted that the 2015/2016 Blended Income Portfolio was off 2.93% (although we found a pricing error on the Transocean bonds which meant the loss was actually around 1.93%).  With the strong bounce we have seen recently this portfolio is now up 3.26% (as of 3/9/2016)–a turnaround of over 5%.  We felt confident we would see this bounce, but honestly didn’t believe it would be this strong. Those investors that had more available cash and put it to work during the panic have seen gains that are even better than those we experienced.

 Once again we have seen stock and bond markets enter a “goldilocks” phase with less volatility, but we are under no illusion that this will remain for long.  With global economies continuing to soften everywhere except for the U.S. we KNOW that it is just a matter of time before we encounter another panic.  With incremental funds being generated in our portfolios because of the redemption of the Tortoise Energy Infrastructure term preferreds we are ready to step forward and buy bargains, but we must remind investors that the strong, quick recovery we recently witnessed in the preferred stock and baby bond areas may well not occur next time.  It is very easy to imagine future recoveries taking 4 months or even a year to occur, but if the issues you hold are generally solid a recovery will occur–at some point in the not too distant time frame.

 

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