It’s still a fixed income world

The recent largess or Ben Bernanke, announcing his purchase of $50bn a month ongoing of government guaranteed mortgages probably has many worried about inflation coming ahead. It is certainly worth protecting against, but the liquidity simply isn’t turning into increased economic activity. Unemployment is still as bad as ever, with the employment to population ratios at 1980’s levels. The unemployment rate going to 8.1% is simply a massive shrinking of the labor force due to deceptive rules in its calculation. Earnings are also expected to be down this quarter from last year. The Fed is simply less effective at propping up the stock market with each QE announced.

The bigger story is still in Europe. For the last year and a half, the ECB became much more activist, against the will of the effectively sidelined Bundesbank. While the ECB has bought time, the economic situation on the European periphery has been nothing but awful with continuing GDP declines in Greece and Spain and even slowing in Germany. There simply hasn’t been a solution to the fundamental problems of the imbalance between Mediterranean Europe and the high productivity of the German core. Costs are merely rising with time and I firmly believe fixed income investments will be the way to go until the European situation is resolved – which will likely take years.

My favorite investments of the moment are:
1. EXC, a utility which just finished a bunch of mergers and is down due to acquired debt and acquisition costs so that it yields 5.9%. I believe their income from the acquired assets will start to be seen in the future and that the dividend is safe.
2. SDR, a royalty trust with a mix of oil and natural gas fields and a yield close to 10%. These royalty trusts have gotten hammered in past months after a WSJ article warning about declining fields and revenues that have a limited lifespan. With SDR though, it’s a new trust – about 6 months old, so it is still ramping up production and has decades of revenue to come.
Other income investments:
Energy sector: I also hold SDRL, BWP, KMP, ETP and CPNO because I like the yield plus commodity spike protection in the energy sector.
Preferreds: C-PG, HYK, NLY-PC, JPM-PI are some high yields I see as safe
Exchange traded debt: CEG-PA, MLG, PLP, PHR, APA-D
I also hold a significant amount of GLD because I believe gold will take on more characteristics of a currency as central banks remain active – the same GLD I held for 2 years or so really.

I’m going to cut short here – feel free to comment.

Personal note:
After finishing the first level CFA and completing the MBA program, I was disappointed by my lack of success getting interviews in the finance sector and worried about the prospects of competing against laid off workers from the finance industry’s consolidation. I didn’t bother with CFA level 2 and focused back on engineering work, which panned out well as I’ve started a promising career at Sachs Electric on the Automation side as a traveling project engineer (someday a travelling project manager). I’m currently doing a refinery upgrade project in east Chicago (30 min from downtown), and I’ve met up with the local USC Alumni chapter to watch the games.
I’m still reading Mauldin’s free newsletters, the WSJ, the economist, and countless articles from yahoo finance links – as well as books on investing and history (but I’ve gotten MUCH better at hiding that and being more successful socially).
I got tired of having no one to communicate with about the fascinating world of investment and decided to restart the blog … For now. No promises – my work hours are high and due to increase as the job progresses. I’m currently writing this on my iPad while watching the USC game!

Sincerely,

John Taylor
Jctaylor_ucsd@yahoo.com

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About johnonstocks

I've been trading stocks since 2003, active on Motley Fool's discussion boards and using first Hidden Gems, then Global Gains. I no longer have the newsletters, but I keep up on the WSJ and read David Rosenberg everyday at gluskinsheff.com. Education: CFA level 2 candidate MBA-focus in Finance, Marshall, University of Southern California - expected Dec 2010. BS Mechanical Engineering, UC San Diego, June 2002
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2 Responses to It’s still a fixed income world

  1. jbock220 says:

    Good to see you back. I’ve been getting Mauldin’s newsletter, but can’t get into it. I prefer your boiled down version of the cross section.

    • johnonstocks says:

      Thanks. Here’s the shadow statistics page link again – an old favorite: http://www.shadowstats.com/alternate_data/unemployment-charts
      It shows that although the headline unemployment number improved, the U6 which includes part time workers who want full time work remained unchanged and the SGS Alternate which includes the longer term unemployed “defined out of existence in 1994” is simply awful.
      I didn’t have time to comment on the Asian slowdown either – India as well as China, but its happening.
      My point here is not that the worlds coming to an end but that it simply is not a good time to go for growth stocks – and that you won’t see inflation at a level that will kill your income investments (even preferred stocks) any time soon despite central bank action. Remember what happened in Japan after the 1989 crash … We are there and we should consider low interest rates, low inflation, low growth as a primary investment theme. That being said, I gave examples on high yield energy plays that protect against inflation as well.
      Also, the demographic situation – record ratios or retirees to working population in Japan, Europe, and the US (in that order) will make income investing get more and more popular in future years, giving a chance for capital gains as investors switch to this theme.
      Whoops – bit long for a comment – I’d better end it here.

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