While the Fed struck a dovish tone at its last meeting, market participants may be overly dovish, wh...
How Stable Is Our Footing?
01/12/2012 6:30 am EST
Income investors have a much better base to work from as the New Year begins, writes Bryan Perry of Cash Machine.
In December, which was another wild ride for stock markets around the globe, all but one of the 27 countries that make up the Eurozone agreed to a more structured fiscal union, led by the ECB.
This framework was crafted overnight during a much-anticipated European summit and came as a positive surprise to markets. Stock futures traded higher on the news, which helped repair some of the earlier rout of the major indexes.
The 200-point slide for the Dow post-announcement was in reaction to the ECB’s quarter-point cut to the discount rate, to 1%. This came as an upset to the investment community, which was expecting a half-point cut instead, as it is widely believed that Europe has entered a recession.
Be that as it may, the recent move by central banks to lower interbank lending rates did serve to avert a Lehman-type blowup—at least for now, anyway. And this action, which essentially bolsters liquidity between European and foreign banks, was reassuring to investors and worked to lower yields on sovereign debt issued by PIIGS (Portugal, Italy, Ireland, Greece, Spain) nations as well. Around and around we go.
That brings me to the quantitative easing model...which is now in full bloom in Europe, even though it means that struggling nations must relinquish a certain degree of fiscal sovereignty in the process.
But it had to happen to save the situation from spiraling out of control. Now that Italy, Greece, Spain, Portugal, and Ireland can borrow at attractive rates over the next three years, it provides much needed breathing room for these nations to install austerity measures and realign budgets to meet economic forecasts.
Moving on to matters in the US, more good news from the economic calendar this week is having a latent effect:
By no means is the economy out of the woods, but the numbers are moving in the right direction. Recently, both DuPont (DD) and Texas Instruments (TXN) lowered guidance, supporting the belief that the recovery is fragmented and still fragile.
For income investors, the landscape for high-yield investing has only been fortified by the high level of volatility, the persistently low level for interest rates, the view that Europe has entered a recession, the easing of interest rates in Australia, the easing of reserve requirements in China, and the rise in consumer credit here in the US to $7.6 billion from $7 billion in October. Sure, spending is up, but it’s being paid for by a rise in borrowed money.
These factors all translate to a low-yield environment for traditional fixed-income assets well into 2012, and underscore my approach of strategic high-yield investing in the current market.
Income generation that approaches 10% on a diversified basis will be hard to beat next year as far as the S&P 500 is concerned, but not with how Congressional battle lines are being drawn in a major election year. Just remember that a US economy that grows at a forecasted 2% rate of growth for GDP is a sweet tune for high-yield investing.
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