As we approach the half-way point for the current quarter (was New Year's Day that long ago?), I wanted to briefly summarize financial market news and our response thereto. Hope was surging along with the market as the books were closed on 2013. As indicated at our client Holiday Luncheon in December and in private conversations with some clients, value investors such as ourselves have been uncomfortable with the dramatic lift off in share prices that manifested itself so widely during the last three months of 2013.  In recent weeks, the advance was halted and a mild correction seems to have begun. A battle between optimists and pessimists is in progress - a battle that I suspect will be won by the bulls.  

The Fixed Income Story

Only a year ago, investors were throwing money at bonds and bond mutual funds in a desperate attempt to improve their yields and income. Disintermediation from banks and credit unions resulted in large inflows to popular bond mutual funds such as PIMCO Total Return fund. Then, Fed Chairman Bernanke let the world know that extraordinary money creation was unlikely to go on forever. This was, to many bond investors, equivalent to crying "Fire" in a crowded theater. In a matter of days bonds were dumped and interest rates rose over 30%. The rest of 2013 was filled with bond Bears citing the end of a secular bull market for bonds: it was inevitable, they explained, that with economic recovery gaining momentum, interest rates would head higher and that ownership of long-dated debt instruments carried the risk of locking in lousy interest rates. The problem with this argument is that it has been wheeled out repeatedly since 2009, when the Great Recession put in a bottom. We are happy to report that through most of the past five years we refused to dump our high yielding, high quality bonds and preferred stocks, thus enjoying yields of 6% - 7% - 8% or more. We did begin our own form of "tapering" by generally not replacing maturing bonds in client portfolios when they matured, since interest rates on replacement candidates had plummeted. However the dramatic reaction in May and June 2013 to Mr. Bernanke's warning, with wholesale outflows from bond mutual funds, caused me to re-consider whether interest rates may have, indeed, finally bottomed. 

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