March 19th, 2013 10:31 EST
What's Going On In The Markets?
Many of you could (should) be asking yourselves these questions:
Why is the market charging upwards?
Why are the prices of Income Closed End Funds moving in the opposite direction?
What does all this mean for my portfolio?
As to the stock market (your equity positions), this observation should sum up "where we are" at the moment:
If you were to buy almost any common stock or equity based security (mutual fund, ETF or Equity Closed End Fund), you would be paying a higher price than has ever been paid, by any person, at any time in the history of mankind.
This absolutely includes every dollar of 401(k) contribution you make from your paycheck, and it is absolutely true regardless of what is being suggested to you by Wall Street spokespeople. The higher the market rallies, the closer we come to a correction. Typically such corrections range between 15% and 25% and the next one could well start tomorrow --- no human knows this for certain.
My portfolios contain fewer stocks (profits have been realized on more than 50% of my normal holdings) than in pre-crash 1987, pre dot-com bubble 1999, and pre-financial crisis 2007. My "smart cash" balances are about as high as they have ever been, and there are only five Investment Grade Value Stocks (Google IGVSI) on my buy list for tomorrow.
Income Closed End Funds (CEFs) have been moving lower since their November 2012 peak. More importantly though, they have continued to produce regular income at the same rate --- thus,investors are in that magical zone where they can add to their holdings to reduce cost basis per share and increase yield at the very same time.
There are no less than four reasons for this new buying opportunity in Income CEFs:
- Speculators always move out of "safer" income positions near the top of rallies because they think they will make more money more quickly in the stock market.
- Investors are taking their profits in income CEFs and waiting for the opportunity to move back into income generators at lower prices/higher yields.
- After a four year, nearly uninterrupted, run up, income CEFs were due for a correction.
- IRA, 401(k), Savings Plan and general Mutual Fund and ETF investors always re-enter the stock market at or near the top of major rallies. Fund managers have no choice but to buy at whatever level the market demands.
What this means for your portfolios:
- Higher cash positions in the "equity bucket" until stock prices start to move down.
- Fully invested "income buckets" with rising long term income levels because of continual reinvestment of interest and dividends.
- An opportunity for you to take advantage of attractive income levels (6%+ tax free, 7%+ taxable, and 8%+ MLP) in new or existing investment portfolios.
Here are two charts covering the past six years in the market, with additional information at valuestockindex.com