So What Does Friday Hold for Us?

October 9, 2014  9:30 pm

Well after this weeks wild swings what will Friday hold for the markets?

To start with we have no economic reports of consequence tomorrow–which honestly, are not the market drivers at this time anyway. Unfortiunately there are 4 Fed governors speaking tomorrow and we hope they use common sense when choosing their words. Regardless of what any of them say we can be certain there is no interest rate hike in the predictable future–but sometimes (most of the time) we only need a silly word or two to stampede the irrational crowd.

As noted time and again the MLP’s got murdered today (approximately 3% overall) and we believe there could be more coming–in particular in the crude oil sector–exploration, production and midstream.  While we watch crude oil prices drop, it is most interesting to note that natural gas prices are not dropping–and have not been dropping.  While crude oil is off 20% from the high this year, natural gas is just a couple percent lower than the YTD high. A theme we will be looking at closely as the MLP’s drop is which MLP has revenue DOMINATED by natural gas?  In particular if we eventually reach the stage of shutting in production–natural gas prices will skyrocket–so we want to know who the solid gas players are in the MLP universe.

REITs acted decently today ending the day down only around 1/2%. Preferreds and exchange traded debt fell by 1/10% as interest rates did not fall today.

Interest rates started the day way down at the 2.27% level (10 year)–but moved back to the 2.32-2.33% area.  This lack of movement makes us believe that we will see a tad bit of a equity bounceback tomorrow.  Like yesterday where we noted the up move was a ‘fake out’ because interest rates actually fell with todays equity drop we would have expected interest rates to drop.  Look for a minor bounce tomorrow (unless one of the Fed governors speaking says something newsworthy–and only God can predict that event), but not a mega bounce like yesterday. Do not plan on equity gains being maintained in the days ahead.

We will be making some portfolio swaps tomorrow.  In keeping with our moves to shorten duration we will be selling a couple preferred issues.  We will sell the Legacy Reserves 8% preferred (ticker:LGCYP) and the Campus Crest 8% preferred (CCG-A).  The proceeds will go immediately into a term preferred or debt issue with a short maturity (which are yet to be determined).  With this move we begin to raise the quality of the portfolio by removing some risk issues.  You may ask why we continue to shorten durations when rates are falling?  It is simple–when the time comes when rates move higher (someday) it will be too late to move the portfolio–do not make the mistake of believing you will be able to move once the  interest rate move begins.

Lastly, now is a good time to evaluate whether you simply want to garner income from your portfolio or whether you want to preserve capital while earning some income.  How will you feel if you lose 20% of your capital in a couple months (even if the income remains the same)?  How about if you lose 30%?  We know the answer for our situation–we can not stomach the pain of the capital loss.  Even though we can lock in income we simply are not emotionally built to lose what we have worked hard to save over the years.  Thus we work to lessen risk at this time through shorter durations.