WASHINGTON, August 20, 2014 – It’s back to one of our favorite 2013 market motifs today: “Waiting for Godot,” with apologies to the ghost of Sam Beckett. Just when you think you’ve got a 30 ft. bull wave to coast, it’s always something. In this case, the market seems to be awaiting release of the Fed’s most recent minutes this afternoon, circa 2 p.m. EDT.
Actually, slowing the stock market’s surprise three-day boom, coming as it did, just after its late-July/early-August swoon, is probably a good idea. Going sideways for a bit is better than another nasty mini-correction like the one we just experienced during which nearly everything got slammed.
Slow selling (assuming the Fed doesn’t upset the applecart this afternoon) for a few days results in the market “working off overbought conditions” as the technical analyst weenies like to say.
In other words, better for a little bit of calm on occasion than unrestrained bouts of irrational exuberance on one hand or irrational panic on the other. Moving sideways for a bit tends to relieve the excess, and hence, the aptness of the tech trader’s terminology.
On the other hand, if the Fed’s minutes provoke the HFTs’ supercomputers to flip, en masse, into bear mode, this afternoon could prove volatile.
Bottom line: we wait for Godot today, absolutely convinced he’ll show up some time, probably after 2.
What the market has been constantly trying to game here is just when and how much the Fed will raise interest rates. It’s inevitable that they will do so, as the extremely low interest rates currently in effect, while helping traders and the 1% immensely are absolutely killing the home loan business and the fixed income portfolios of retired folks.
The semi-retired Maven had ought to know, as he’s stuck in both environments at the moment, futilely seeking safe yield on one hand while looking (unsuccessfully) to refi existing mortgages on the other. Government and banking industry happy talk to the contrary, for the most part, you can still only get a housing loan or a re-fi if you don’t need one. Catch-22.
If the banks could make more money on housing loans, they’d turn on the taps. But with rates this low, they can’t.
Make no mistake. The Maven isn’t feeling sorry for the banks. He’s feeling sorry for himself and the millions like him who play by the rules. The shrinking middle-class backbone of this country never gets a break, perhaps because they don’t go out on the streets at night and burn stuff.
Meanwhile, the banking bigwigs—whose fat bonus checks have never received a palpable hit during this entire crisis—and the 47-51 percent of Americans who don’t pay taxes because the Maven and his ilk do, are having a fine time of it more or less. What, them worry? Welcome to Obamamerica. At least we have just over two years more to endure this most useless Administration since that of James Buchanan. Problem is, will anything be left on January 20, 2017?
But the Maven digresses. When worrying about income—since no one is getting much of that right now if he or she is depending on 9-5 slave wages—the old trick used to be to buy decent yielding bonds, put them in a drawer, and forget about it except for clipping the coupons twice a year. Slow and steady wins the race.
That game is over at least for now with ridiculously low yields. So those who invest have been out there “seeking yield.” I.e., buying utility stocks, junk bonds or junk bond funds, REITs and MLPs. For yield. Since the banking system and A-rated bonds just aren’t doing the job any more.
But what happens when the Fed actually does start raising interest rates, even a little itty-bit? Most of these investments will initially get beheaded without any help from those friendly Islamofascist Crusaders currently running ISIS in Syria and Iraq while infiltrating us via Obama’s Children’s Crusade here.
(BTW, why do they describe these virulently anti-Christian, anti-Jewish serial mass-murderers with a wimpy plain vanilla term like “Islamists” anyway? What does that even mean?)
Ooops, we’re back. Sorry about that digression. (But not really.)
So how to avoid this interest rate fate for your high-yielding portfolio? Well, nothing is certain, but we have at least one idea, which we explore below.
Today’s trading tips
Our “hedgehog” idea? Via one of the many investment news sources we follow, we’ve discovered an interesting and relatively new ETF (symbol VRP) that provides some cushion against the inevitable interest rate hike to come. It invests in variable rate preferred stocks that may give you a bit of a hedge against interest rate rises while still providing better than average yield.
Why not borrow a paragraph from Invesco’s investor info site and let them describe their product?
The PowerShares Variable Rate Preferred Portfolio (Fund) is based on the Wells Fargo® Hybrid and Preferred Securities Floating and Variable Rate Index (Index). The Fund will generally invest at least 90% of its total assets in preferred securities that comprise the Index.
The Index is a market capitalization-weighted index designed to track the performance of preferred stock, as well as certain types of “hybrid securities” that are functionally equivalent to preferred stock, that are issued by US-based or foreign issuers and that pay a floating or variable rate dividend or coupon. The Fund and the Index are rebalanced monthly.
PowerShares’ VRP is essentially a self-adjusting hedge whose yield, while not fixed, will supposedly be geared toward following the interest rate trend up (or down) as it happens, as opposed to, say, a 10-20 year maturity bond whose price will get more and more depressed as interest rates rise. You’ll still get your original coupon in these, of course, but if you have to sell, you could lose your shirt, principal-wise.
In theory, the investments held in a portfolio like VRP’s lower that risk by investing in bonds that should retain most of their principal value by means of those adjustable interest rate payouts. We emphasize “in theory,” though. Nothing is ever guaranteed, of course, and something out there could screw up the underlying investment. Like, for example, the frequent ceilings on how quickly or how high those interest rates can adjust up (or down).
After this type of bond is issued, typically a given, relatively high interest rate is maintained over 5 or even 10 years before it begins to float. And herein lies the problem. If rates have been floating up, but only at a glacial pace, your variable rate bond, usually pegged to something like the LIBOR rate or the Fed Funds or Prime Rate, will likely experience a precipitous initial drop in yield before stabilizing and then, presumably, moving up.
Further, however, that up-move could be slow and less than impressive.
In short, there’s risk in everything. But having a little piece of something like VRP in your portfolio, perhaps substituting it for a REIT you just sold for a big capital gain, might hedge things for you a little bit, along with some kind of investment in Government TIPS inflation-protected bonds. They’ll behave the same way as much of the contents of VRP, we think.
But still, it’s all something, plus you can buy TIPS, too, in various mutual funds or ETFs and spread your risk that way.
This is not the Maven’s most exciting idea. But a little stability, or the illusion of stability, is quite appealing in this market. We’ll still be rolling the dice on occasion as we always have. But in this predatory environment, we also have to make sure that the 1% and Obama’s Chicago Gang don’t gobble up any more of our precious principal than they already have.
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