Stocks Tumble and Interest Rates Follow

Unfortunately our feelings of ‘doom’ yesterday were well founded – BUT that ‘feeling’ is over and we have become rational thinkers again.  Our ‘repositioning’ of the portfolio’s to shorten durations and unload certain MLP’s and common stocks has served us well again.  Our model was off just 10 basis points today–our personal accounts did the same or a bit better.  We have continued to hold our common stock hedge in the form of Proshares Short S&P 500 (ticker:SH) even though it is a loser (as most hedges turn out to be–a little peace of mind is not free) and it is helpful on big sell offs like today.  We like our larger than normal CASH holding even though it certainly costs one some income, but 10 or 12% cash is not a bad thing at this point in time.

As we wrote about many times in the last 2 months we thought interest rates were heading lower after the last jump in the 10 year treasury to the 2.62% area.  We almost tossed in the towel on that call–but one can not deny that on a global basis the economies are so weak and foreign interest rates SO LOW (Germany sold 10 year debt at a rate under 1% today) that our rates MUST be attractive to foreign capital.  Todays ADP employment report was not a surprise–nor will Fridays census bureau employment report be a surprise–so interest rates should drift for the balance of the weak.

For Tomorrow

In spite of our attention to shortening durations we find weaknesses in the model that we need to ‘shore up’.  We have Argo 6.50% Senior Notes (ticker:AGIIL) that we will sell as it is a very long duration note suseptible to drops when/if interest rates rise.  Also we have US Cellular 6.95% Senior Notes (ticker:UZA) with a 2060 maturity that will go as well.  Both will be replaced withshort durations debt issues from this list.  We will not give up any income with this move and will get rid of some weaknesses.

While there is not a reason to believe rates are heading higher soon (quite the contrary) it is not too early to make moves to strenghthen portoflio weaknesses.