Messy Month to Continue No Matter What the Fed Says

Well by now everyone has had their fill of this messy month.  It isn’t that the S&P is off too much–or that interest rates keep falling, but is simply one of leaving no market sector untouched.  Of course it was the oil and gas upstreams–and midstreams and anything that had the word ‘oil’ or natural gas’ in it, that have been the messiest, but now it is anything that is economically related (which pretty much covers all the bases).  

Now as income investors we simply like to collect an adequate reward for a commensurate risk–sounds simply enough, but obviously if it was so damned simple everyone would have it right—and they don’t.  We have income investors everywhere getting hammered–and for those that have studied the markets for a number of years they should not have been positioned as they were—but they “drank the kool-aid”.   They listened to commentators that told them the U.S. economy was just fine even though every other economy of the world was in the crapper.  They listened to commentators all talk about how low crude oil prices were “a tax cut” for everyone.  They are listening to commentators telling them that oil production will continue to climb even with the low prices.  Tomorrow when the Fed gives their meeting statement they may change the wording in the statement–SO WHAT!!  Believe it or not the Fed isn’t in charge of interest rates–sure they may stupidly raise rates next year–but so what–the market will set rates for every prevailing rate except for the shortest of rates–the overnight Fed Funds rate.  Of course the world is on the precipice of a global disinflation–but the Fed continues to talk out of their ass and unfortunately too many people on CNBC who have had it wrong for years are still listened to–we would all be served better if there was no business TV–they have added nothing to the party for a very long time.

Now once again we will stress that those that believe they are buying oil related ‘bargains’ right now may well continue losing more of their investment funds.  Each time we have written in the last month or 2 we have said that there is no hurry trying to pick up bargains.  Bargains are still being created–and absent a black swan event it will be another month (more of less) before rational decisions can be made–in particular in issues related to energy.  Additionally there are bargains being created in preferred stocks and exchange traded debt of lower quality issues–but again there is no hurry to try to pick a bottom in these.  We had a 7% gain goal for this year and will have the same for next year–why do we (or any sane conservative investor) need to pick up bargains that contain high risk with a 15% or 20% current yield?  The answer is – we DON’T have to do it.  When the time is right we will try to pick up a couple bargains –but out of a diversified portfolio it won’t amount to more than a few percentage points of the balance.

So right now it is all about quality—in preferreds and exchange traded debt.  We own too much of the lower quality issues although we successfully unloaded quite a few of the perpetual preferreds (it is fair to say that the lions share of perpetual preferreds are pretty junky and are suseptible to downdrafts).  We wish more were gone but they aren’t.  Stick to quality in new purchases and hold your powder on finding so called bargains. 

Portfolios

Our 2014 portfolio is hanging on to a 8.08% YTD gain as December dividends begin to roll in to the account.  Oxford Lane Capital Term preferreds have taken some knocks–which leaves the 2017 issue (ticker:OXLCP) just a nickel over par with a current yield of 8.48%.  This has a mandatory call in 12/2017 (just 2 years away) and as a BDC they will call these no matter what happens to their overall business.  The issue we own took a 90 cent knock which should be a temporary blip. Fortunately Escalera Preferreds have gained a full $4/share from the bottom a week or 2 ago which has helped the model.

The 2014 Short/Medium Duration Income Portfolio wiggled more than usual so far this week–mainly on the Oxford Lane Preferreds.  It has moved to a loss of a couple hundred dollars–down from a gain for $300.  Recall this model is to toss off a fair income while maintaining NAV and thus far has done just that with a current yield now of 6.72%.

The Static Investment Grade and the Static Junk Quality Income models have both moved back to a loss position–the Junk model has moved to a $17,000 loss while the Investment Grade model is down by just $10,000.  This bears out the quality theme as investors flee the low quality issues.

Readers Questions

We are overwhelmed with reader questions and will try to answer a few on here within the next couple of days.