The markets have experienced some severe swings recently history and the first half of the year 2011 was no exception. With the issue of whether or not congress increases the debt ceiling; the ongoing financial uncertainties in Portugal, Spain, Portugal, Italy, as well as Ireland; the political unsupported claims heating up in the US for the next presidential election; the uncertainty associated with sustained growth in China’s economy and China’s determination to continue to buy US Treasuries; along with the end of QEII (Quantitative Easing II) and also the question of whether or not the actual FED will implement some sort of QEIII to further stimulate each of our turtle-like economic restorations; all make the question about what to expect in the balance involving 2011 a very difficult anyone to answer.
Nevertheless, there are certain issues that we do know: We know that car finance rates are currently at a historic very low with the FED target pace at 0. 0 for you to 0. 25%. We know that its rate cannot last forever knowing that it only has one route to go… up! When car finance rates go up, the typical response intended for high yield equities is designed for them to drop. It is for that reason that I have always informed owners of high-yield equities such as MREITs (Mortgage Investment Trusts), MLPs (Master Restricted Partnerships), and BDCs (Business Development Companies) to be really aware of and alert to any kind of suggestion of future raises in interest rates. All of these specific equities are sensitive in order to interest rate increases.
When the GIVEN announces that rates are going to be rising sometime in the future, and even gives the slightest hint that the increase is being considered, benefit yield sectors listed above will certainly, most likely, drop significantly. The majority of economists are now saying that due to the very sluggish economic climate and the economic/financial problems within Europe, it will probably be minimal 12 months before the FED tightens. This may well be correct, but even if it is, do not forget that the markets look 6 for you to 12 months ahead, which means that excessive yield investments may soon come under the gun.
When interest rates impact all excessive yield equities, there are other variables that have a different effect on distinct segments. For, example, almost all MLPs are related to typically the discovery & exploration or maybe storage and transport involving fossil fuels such as oil along with natural gas. If, while car finance rates are going up, demand for oil along with natural gas goes up, the law involving supply and demand will result in upward pressure on these types of MLPs countering the impact associated with rising interest rates.
Similarly, when the market sees that the bottom part has been reached in real estate, and home and industrial real estate prices start to increase as demand increases, this can counter the impact of increasing rates in MREITs to some extent. In the case of BDCs, if the economic climate starts to hit its pace and there is increased demand for “middle market” funds for up-and-coming small to middle-size business growth or for new start-ups simultaneously as rates are increasing, then BDCs can grow despite increases in the monthly interest environment.
Of course, the above is also true. In the event that demand for oil and petroleum declines as interest rates climb then MLPs will be in double jeopardy. If car finance rates rise and demand for houses continues to decline and there are zero markets for mortgages, subsequently MREITs will be in greater trouble. If the economy falters and demand for middle marketplace loans disappears along with larger interest rates then BDCs are affected.
We have no way of understanding what will happen, however, we can become vigilant and watch what is happening within our economy and in the world marketplaces. We can watch whether the regard to oil and natural gas goes up or down. All of us hear daily how the company is doing both here as well as abroad. This is not the time to purchase and hold without issue. Buying and holding could be the correct strategy, and if you realize the equities that you own along with carefully monitor the variables that impact them, on the boat how long to hold and when you need to sell. As we enter the addition of the second half of the year, the financial markets seem to believe that the worst type is over for the time being in A holiday in Greece and the rest of the European Popular Market.
The markets seem to believe the US congress will inevitably raise the debt ceiling so your US does not default on its obligations. The markets apparently believe, despite significant political posturing, that the House as well as Senate will get their group act together and solve the looming debt period bomb which seems to present itself to the public in issues about Social Security as well as Medicare more than anything else, yet offers far-reaching implications for our commercial infrastructure, defence and homeland protection as well. Despite 7 directly downward weeks, the major marketplaces ended the second quarter within break-even territory with four days of strong growth showing a long-term positive expectation for the second half.
Will individual expectations be met? Merely time will tell, nevertheless, investors, who are vigilant and not just watch what their equities are doing in the market, nevertheless watch those factors which might be likely to impact those equities, will be one step before the crowd, and will know when is it best to make a move. For now, all three of the above high yield classes are firing on most 8, and for the past season have generally provided spectacular 6+% yields, but there is not any guarantee that this perfect preferential rate environment will last, in fact, it is the wary investor who will be not afraid to pull the particular trigger, and move on, that may have gained the most out from the high yield segment.
In the next clear that rates are usually rising, where is the best location to go for the high yield individual? Perhaps a look at history is the foremost source for an answer. Whenever we look to dividend-paying companies that have raised their benefits every year for the past 25 years, by rising markets and plummeting markets, through rising car loans interest rates and falling interest rates, by peace and through a world war, my bet would be the “Dividend Aristocrats” would be the finest opportunity for total gain. Meantime, we have no indication of the fact that the FED will increase interest rates in the next few months, so the question remains, will the FED begin to sign a change in the tide?
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