Denying Santa

Denying Santa

By Julien B. Booth

September 16, 2016

“It’s not that we need new ideas, but we need to stop having old ideas.” —Edwin Land, Polaroid co-founder

“Data beats emotions.” —Sean Rad, Adly and Tinder founder

The Federal Reserve has hiked rates exactly one time since the “Great Recession” ended. The date was 12/16/2015. The 2 months following, interest rates (10 year) dropped by 22% (bonds way up in price), and stocks were down over 10%.

Beginning 2016 the Ten Year US Treasury yielded 2.27%. Today it yields 1.68 %. It remains 26% below where we started the year.

We do not think this time (incessant rate hike bluster) will be much different, and rates may accelerate downwards even faster with a deceleration in economic growth. Remember, the Federal Reserve only controls short-term rates (unless we consider QE of course). Net, net, rates will remain lower for longer.

Opportunity in the Interim

We have written extensively about the merits of purchasing income-based closed-end funds @ discounts to NAV (See our primer on CEFs here)

The most recent market sell-off is once again providing compelling value in income-based closed-end funds, price declines of 5% range – but corresponding NAV (net asset value) of 1%+/-.

The owners (retail investors) of these funds generally over-react during periods of market stress-especially concerning Fed interest rate increases.

The Federal Reserve raising the short term interest rate is largely academic, it’s just not fitted for today’s macro-economic reality. Such an action will merely serve to flatten the yield curve by pulling down the long end of the curve.

We are past-peak of this economic expansion (post WWII avg. is 54 months-current 85 months); no amount of pontification from Federal Reserve Governors will change corp. profits from slowing, declines in productivity, or lackluster service/manufacturing/retail industry data.

The data is not lying. The Federal Reserve has become a county fair, albeit without the Pig Racing, funnel racing and chainsaw artisans.

We are not bearish on investing, just bearish where there is an asymmetry (of risk-reward) that is not in our favor.

For more information about the merits of buying closed end funds (NEVER @ IPO) for income oriented investors please contact Forest Capital.

As usual, thank you for investing with Forest Capital! For additional information on portfolio positioning, please contact Forest Capital directly at