Owning Colony Financial (CLNY:US) was v rewarding. I bought it as a cheap distressed assets play, but I suspect my gains actually came from income investors, who are now rushing into the stock. That got me thinking… And it hammered home a couple of lessons: a) Never under-estimate the desperation of income investors, and (more seriously) b) Don’t fight the Fed! Now, that may sound like a contrarian challenge to some – sure, sometimes it can prove v profitable to fight a rising tide.
Except surfing the big waves is simply far more rewarding most of the time. Do you really want to be the investor who faces down the Fed’s steamrolling printing press? Especially with a ravenous horde of zombie income investors chasing after it?!
But it’s becoming increasingly difficult to exploit those lessons. Look around, most yields are too low, most prices too high… Look at property REITs, mortgage REITs, MLPs, closed-end funds (esp. Pimco!), and other assorted dividend story stocks. Most are now sporting fairly nauseating valuations & leverage – while the dregs are simply Ponzi schemes, relentlessly issuing stock & debt to fund excessive dividends. But what’s the alternative – Treasuries?! Oh please, just stab me with a rusty fork.
Junk bonds?
Their call provisions now promise near zero upside, but they still offer plenty of price & default risk if individual companies and/or the economy go horribly wrong. In fact, most bond/income investments now offer that v same proposition – financial repression‘s virtually eliminated any rate-related upside, while rising rates would cause Christ knows how much carnage… Oh, come back Bernie, all is forgiven.
So, is there any value left to buy? Which still offers decent upside potential, may have some defensive merit, and might even suck in the income rabble eventually? Or even the hedge funds? 2012 was definitely the year for mortgage exotica, so what’s it gonna be in 2013? Here’s my bet…let me whisper it, I don’t want to scare the horses:
Collateralized Loan Obligations (CLOs)
Ouch, feeling some shrinkage there?! OK, steady on – actually, it may not be as horrible as you think..!
CLOs are basically a sub-set of Collateralized Debt Obligations (CDOs) – yes, that evil toxic waste which almost destroyed the world in 2007-08! [Structured Investment Vehicles (SIVs),…
