Nothing Like a Little Fear to Cool Markets

An airliner goes down and Israel invades the Gaza–the baby goes out with the bath water.

It has been a while since we have seen a true ‘fear trade’ come into the marketplace—one in which the 10 year treasury heads relatively sharply lower in yield while common stocks trade sharply lower.  All of this spurred on by a lack of fact (just talking heads all afternoon speculating) in what happened to the Malaysian airliner over the Ukraine–and then the official word that Israel is moving ground troops into the Gaza–which they have done many times over the years.  When markets are looking for reasons to fall it looks to us like this provides the perfect impetus.  This kind of sums up our viewpoint on today—markets will do what they do without regard for logic.  We would be surprised if either of the incidents today amounts to too much over the long term, but one never knows with absolute certainty and that is the problem and why markets fall.  

As an income investor we can not do much to react to these items.  Sure you can put on a ‘hedge’ of sorts as we did months ago in the model–investing almost $25,000 in Proshares Short SP500 Fund (ticker:SH) because of fear–and losing $1,400 on the hedge thus far (this amounts to a return reduction in the model of .2-.3% thus far).  If you are really smart you can move to cash and then back to stocks when ‘all is clear’ (it is impossible-this is a fools game–we have 43 years of experience to prove you can’t really time the market).  So you diversify across sectors and do the best you can to choose investments that fit your style and needs.  You can add a bit to your cash position sucessfully–without killing your income, but you should not get carried away.

Today our model took a hit of around .25%—big deal–if that was the worst thing that happened to us all year we would be ecstatic—but we know tougher days are likely ahead.  Our hope moving forward is that our dividends will at least equal our capital losses as interest rates begin to move a bit higher  (someday?).