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Be Your Own Fed
01/02/2013 8:30 am EST
The Federal Reserve's low-interest-rate policies mean investors can do what the banks are doing: using cash to kick off big yields, says Mark Skousen.
The sweet spot of income investing. We're here with Mark Skousen who is going to tell us where the sweet spot is and what's in there.
Well, the sweet spot of investing is right now, because the Fed has just extended the reserve 0% rate policy indefinitely. This is just great for us income investors.
I tell people, be your own Fed. You basically borrow the money at very low interest rates and turn around and invest in Treasuries or you invest in mortgage. That's exactly what the banks are doing, and why can't we do that?
So you have people like Annaly Capital (NLY), these mortgage rates that are leveraged to the hilt yielding 14%, 15%, but they're making a lot of money and they're not losing value. Why? Because the Fed is guaranteeing basically that they're going to make money. So I like that a lot.
Plus the other thing that's really cool is that the banks are not investing with small business anymore because they're playing the game, and they're doing the safe investments with Treasuries and mortgages.
You have a business development company's private equity, and I've been recommending a bunch of these like Main Street Capital (MAIN). Prospect Capital (PSEC) is another one. American Capital (ACAS)...all of these companies are loaning money or investing either through loaning money or equity positions or fees or what have you.
And they're yielding great. You know, 7% or 8% yields. Some leverage involved, but why not? Because the Fed is basically guaranteeing the investment.
So that's why I call it the sweet spot of investing. You're making money, you're seeing values go up. Main Street has increased its dividend four times this year, and they've also increased in price. They've gone from like $25 to $30. Not a lot of money, but we made 25% this year with the dividends.
Absolutely. I guess the Fed isn't...with these companies, the biggest threat is going to be if the Fed turns off the spigot, but because it's the Fed even finding that piece of it, seeing that come into the marketplace means that an exit out of these is easy enough.
It's not like you're going to get burned.
These are liquid investments and I do tell people that. I tell people, this is just something that you should invest in forever and just forget about and so on.
It's not Dominion Power (D).
There may be a time when you're going to have to sell, so you need to subscribe to my newsletter so we tell you when to sell. That sort of thing.
Yeah, it's a great opportunity in a sector that didn't really even exist five or ten years ago.
I'll tell you one other thing that's really cool, and that's the prime rate funds, which I hadn't invested in many years because when interest rates dropped, they lower their dividend, because they're all short-term interest.
Now, Eaton Vance has one called the Prime Rate Fund (EFT). They're paying 6%. There's a little leverage involved with that. They've increased their dividend three times in the last year.
So I think that's a great way to profit when interest rates start rising. It's already doing well, but I think it will do tremendously well if the Fed finally gives up, the economy is recovering, and rates go back up. EFT is a great way to play that. So there's lots of ways to play this animal.
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