Where Do We Go From Here?

In our 10 years of income investing we have not seen a market like the one we are currently experiencing.  Demand for virtually all preferred stocks and baby bonds has remained strong all year and we have reached a point where even the junky stuff is trading near $25.  So where do we go from here and what actions are necessary to continue to garner the great gains that we have achieved in the last few years.

1st off we have to say that the markets of the last number of months have lulled a lot of investors to sleep.  Personally we think that there is danger everywhere, all over the globe, and at any moment we could experience a black swan event that will send stocks and bonds down 10, 15 or 20%.  As we mentioned in a previous article all of the global problems barely make the news anymore.  There is virtually no visibility given to the total fiscal disaster occurring in Venezuela right now. Because of the olympics we have heard a little bit about the financial problems in Brazil, but the news has been minimal.  Once in a while the negative interest rates being paid in Germany and Japan are mentioned, but this is a huge story and deserves more press.  With interest rates falling and the spread between short term rates and longer term rates narrowing we are going to see massive issues with financial institutions including insurance companies and banks as their profits will fall.  Pension plans, which already depend upon overly optimistic return projections, have a need to own bonds which provide a reasonable return and those returns just aren’t going to be available.  Sure, up to now as rates have fallen bond values have risen, which has provided profitable investing, but this will not last.  We have seen it week after week–issues are being called and new issues are sold at interest rates that are not really adequate for the risk/reward.  They have only been adequate because income investors have been pushed into the corner and forced to invest in whatever instrument they can buy that provides returns superior to treasury bonds.  All of the silliness with zero interest rates has all been for naught and as we look ahead we see a major shock  coming to all markets—unfortunately we have no idea when it will arrive–next week, next month or next year.

So with all the worries we have what are we going to do differently in our investing?  Basically nothing.  We are now at 15.38% cash in the Blended Income Portfolio, which is available if bargains become available.  We will harvest profits on occasion and purchase new issues with reasonable coupons (say above 6.5%) from time to time.  Remember our goal is 7% annually.  Sure we see income investors out there scalping 50 cent and dollar profits on some of the preferred issues, but that isn’t what we do.  It has been our observation over the years that scalping poorer quality issues for small gains time and time again ends badly when the lower quality issue purchased as a scalp target keeps going lower and lower and before long all the scalped profits are gone.

Our Short/Medium Duration Portfolio has continued to perform well.  With a gain of just shy of 10% in 18 months — we are pleased.  We don’t trade this account so there has been little activity–just redeemed issues and purchases to replace those called.

Lastly remember that this is a very dangerous market,  but since you can’t really predict the timing of any huge event you have to continue to invest.  Burying your money in the backyard still pays zero (less than zero with inflation) and while someday we may have to accept zero we currently will simply continue to fight for whatever return we can get given our conservative nature.