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Your Investment Portfolio 2013: Market Cycle Investment Management Users

Submitted by The Investment Shadow | RSS Feed | Add Comment | Bookmark Me! print

2013 was a great year for the stock market and a terrible year for the fixed income market... you have benefited from both, and are prepared for directional changes in either.

The stock market in general, and Investment Grade Value Stocks in particular, have risen inexorably since October 2011. Until November 2012, income Closed End Funds were equally exciting. In fact, income CEFs established new post financial crisis highs several months before the S & P 500 managed to do so... and then the story changes.

Since Market Cycle Investment Management (MCIM) Portfolios contain at least 30% interest rate sensitive securities (income CEFs, MLPs, REITs, etc.), portfolio market values have been unable to keep pace with the equity only S & P average (or the Dow) since about March 2013. IGVSI equities continue to lead the market as it enters a market value "twilight zone".

Check out the chart from November 2012 to the present:

When you invest conservatively, recognizing that you are in a long term program with specific goals, performance is measured in terms of profits taken, income produced, and preparation for changing scenarios. Stepping away from the table when equity prices reach "bubble" levels has always proven to be the best strategy.

Higher market values in any security do not contribute to, or grow, your income... they just can't.

We have realized every available profit, and hold plenty of equity-destined "smart cash" waiting for new opportunities. Our rally-increased equity CEF levels will allow us to "double dip" on rally profits in the form of year-end capital gains distributions from active fund managers.

Similarly, our income securities continue to produce more than enough income to provide for disbursements and to allow for some reinvestment in issues that have fallen into the red zone... they have been there before. We were taking profits in this area just a year ago; market values were climbing to new highs into the first quarter of 2013... and then it happened.

The Federal Reserve started to consider "tapering", causing income securities to fall in anticipation of higher interest rates; the stock market set new all time high records bringing speculators off the sidelines and dollars out of "safer" income securities. And now, Portfolio Window Dressing and tax loss strategies have further weakened our still-income producing CEFs.

So here we are as MCIM investors, determined to be patient as market correction scenarios begin to rub against this thick skinned equity bubble. When it finally bursts, we'll be ready. Make sure you are also ready in your defined contribution (401k,403b, 457) savings and investment plans. I know your funds and ETFs are at super high levels. Their managers cannot take profits; you have to do it for them.

But let's focus on the income "bucket" of you portfolio, and just for a moment, take a look at that chart I referred you to earlier. The income CEF index line (in pink) reflects the higher interest rate expectations, tax loss transaction picture, I painted earlier. It also shows the impact of the historically low interest rates that have troubled conventional income investors for nearly six years.

While many of you have been settling for yields below 3% in whatever income program you are using, here's what MCIMers can be doing in the income arena right now, based on an unaudited study of more than 80, Federally Tax Free Closed End Income Funds.

All data was gathered from on December 13th and 14th 2013; I expect that a "taxable" CEF study would show similar results.

Of the 82 funds analyzed, the average yield was roughly 7.1%. Yields ranged from a low of 4.3% to a high of 9%, with only seven issues paying under 6% and only four paying more than 8%. 60% of the universe are paying more than 7%. According to CEF Connect, a 7.00 tax free yield is equal to a taxable return of 10.77%..... hmmmm.

So, yes, every dollar you add to one of you CEF positions can be working for you at a rate around 7%, and here we are at price levels that are the lowest they have been since late in 2010. Every additional dollar also: increases portfolio and position yield, while reducing cost per share for quicker profit realization during the next rally...

When Federally Tax Free Income Closed End Funds soared to near record levels in 2012, profits were taken and proceeds reinvested at unprecedented levels. Those investors who invested and reinvested during the financial crisis became the largest beneficiaries of the income CEF rally.

Current Tax Free CEF prices are down roughly 20.5% from their 2012 highs (roughly the level where we begin to find declining equities attractive), but still 31.5% above financial crisis lows. The prospect of higher interest rates is "in there" and won't higher rates allow managers to purchase higher yielding paper?

Tax code motivated loss taking will be over in two weeks, institutional profit-taking seems to be starting earlier than usual as evidenced by a growing equity buy list, income CEF positions may well be reestablished in January. It's time to prepare for some fun in 2014!

Here's some more information from the study:

Of the 82 CEFs analyzed, less than half reduced their payout in 2013; more than half left their payout alone, or raised it. 54% of those managers who reduced the monthly payout have also declared an extra year end dividend; 33% of the others have done the same. Data as of December 12th for some, and December 13th for others.

It could be the right time for some "Buy the Low ones, Sell the High ones" decision making for a change... what's in your wallet?

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