It doesn’t take much to rattle the nerves of the most strident investors when what are seemingly unthinkable scenarios unfold within days of each other; the resultant effect can be a huge spike in market volatility that sends investors running for Mount Cash. As of last Friday, the global markets went into the weekend in a heightened state of alert with the Greek referendum vote, China’s stock market tumbling 20% off its highs, the Department of Homeland Defense issuing terrorist alerts and a batch of employment data that came in light of expectations.
Checking on overseas markets late Sunday following a resounding “No” vote by the Greek citizenry, S&P futures were trading down close to 30 points, or -1.5%, before stabilizing in the hour leading up to the opening bell. At one point in today’s session, the S&P actually turned positive before declining back in the red, led lower by a sharp 5.9% decline in West Texas Intermediate (WTI) crude oil to $53.50/bbl.
The retreat in energy prices runs counter to the notion that the global economy is on the mend. Transportation stocks, typically a sector that would spike higher on such a dramatic move lower for crude, are actually trading marginally lower, a counterintuitive development that has traders totally confused. When markets don’t respond to time-proven patterns of correlation, it tends to put investors in a posture of trying to position themselves in highly defensive asset classes that have a safe and attractive yield.
With Greece daring the International Monetary Fund (IMF) and leading European nations to toss them out of the euro zone, leaving $356 billion of unpaid debt in the balance, the current thinking is that the creditors will carve out a watered-down deal Greece will accept so as to avert a humanitarian crisis that would be played out on cable television. Trying to fast-forward in trying to figure out how these events will impact investor psychology is the real test, not just for Europe’s markets, but those in Asia and the United States, as well.
We live in time when markets are bullish, but nervous, and it’s when isolated situations begin to spread their negative mojo to other markets and the bulls get nervous that they stampede for the exits. The fallout in Greece can be seen in the simple lightening up on equity exposure for no other reason than to take a wait and see posture until some sort of workable resolution takes hold. But then there’s concern of slowing in China that is far more significant than the near-term future of Greece.
What investors can do instead of being highly exposed to the volatility in currency swings and gyrations in foreign markets is to camp out in U.S.-based income-generating assets that do business exclusively with domestic companies and customers. Take, for instance, FS Investment Corporation (FSIC), a Philadelphia-based lender of capital to private firms with annual revenue between $10 million and $2.5 billion. FSIC invests in first lien senior secured floating rate loans. Each loan FSIC makes is secured by each company’s most prized assets, while also not being fixed in the event interest rates rise.
Making capital rapidly available for access by expanding companies is a lucrative business model, affording FSIC to charge 10-13% for capital. Because FSIC is structured as a Regulated Investment Company, it has to pay out at least 90% of its income to shareholders, and that is why its current yield of 8.8% is solid bet on the domestic private lending industry to corporations. This is the kind of steady-as-she-goes asset that investors should consider when it’s hard to make sense of how the market will trade against a landscape of uncertain variables that are not small issues.
The best part of the FS Investment story is still yet to come. If interest rates do indeed rise, then the company will receive a rising stream in interest income that will in turn be sent out to shareholders in the form of higher dividends. In doing so, the underlying stock has a high probability of appreciating nicely for the balance of 2015 well into 2016. This is how investors can stay invested in a stable business paying out a reliable income stream three times that of the 10-year Treasury and leave all the risk in foreign markets to someone else. Sometimes it pays to stay at home — and this is one of those times.
In case you missed it, I encourage you to read my e-letter column from last week about looking past Greece to America’s heartland. I also invite you to comment in the space provided below my commentary.
I will be attending the San Francisco MoneyShow, July 16-18, at the Marriott Marquis. To register, click here. Mention priority code 038970.