Investing

An Investment Opportunity You Might’ve Never Heard Of…

By Charles Sizemore  |  May 10, 2019

Well, President Trump got his interest rate cut. It just wasn’t quite what he had in mind.

The President has been having a public — and very one-sided — spat with Fed Chair Jerome Powell. President Trump has been criticizing the Fed for raising rates too aggressively and all but ordered Powell to cut rates.

Powell ignored him… as he should have.

I’m not a fan of the Fed. And I’d go so far as to say every Chair going back to Greenspan was criminally incompetent. But I’d still rather have those clowns running the show than anyone in the White House or Congress. It’s the lesser of two evils by a wide margin.

While Powell kept the target Fed funds rate unchanged, rates further out on the yield curve have taken a tumble. Less than two weeks ago, the 10-year Treasury yield touched 2.6%.

And this week, it dropped below 2.5%.

Now, a 2.5% yield doesn’t mean much in a vacuum. It’s the rest of the yield curve that makes the 2.5% 10-year yield worrisome.

In a healthy economy, you expect to see a steep yield curve in which long-term rates are significantly higher than short-term rates. That’s not what we have today.

The yield curve is no longer inverted, but it’s definitely flat — with the three-month yield just 0.06% lower than the 10-year, and the two-year yield 0.18% lower.

That’s no flashing warning sign of a pending recession, but it’s not a vote of confidence by the bond market either, signaling the expectation of sluggish growth for the next several quarters.

We’ll see what happens in the coming months…

In the meantime, we have to figure out how to generate a respectable income stream in a low-yield world. And we’re going even further outside of the mainstream to keep that steady stream flowing…

Think Outside the Box

Now, I’m certain you’ve never heard of this one…

The company manages a portfolio of mortgage revenue bonds (MRBs) that are issued by state and local housing authorities to provide construction or permanent financing for affordable multifamily and student housing, and residential and commercial properties. As of the end of 2018, the company held interests in 63 different MRBs — provided financing for 63 properties with a total of 10,650 rental units.

And they are not in the business of making mortgage loans on single family residences, nor does it invest in mortgage-backed securities.

There’s nothing wrong with those businesses. I’ve invested in mortgage REITs in the past, and would happily do so again at the right prices and yield. But mortgage revenue bonds are a different breed of animal. It’s important to understand the differences.

The word “mortgage” should always raise the question: “How did it do during the 2008 meltdown?”

This particular company? Pretty darn well. In fact, it survived the worst housing-related crisis of our lifetimes with minimal damage.

And how exactly is that possible? I explain more on that in the May issue of Peak Income.

The housing meltdown in 2008 was a nightmare for Fannie Mae and Freddie Mac, and virtually every bank in America, but this quirky, niche business sailed unscathed. They continued to throw off a steady stream of income while the rest struggled to stay afloat.

And that’s what makes this opportunity so interesting.

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Charles Sizemore

Income and Retirement Strategist, Charles Sizemore, CFA specializes on dividend-focused portfolios and building alternative allocations by finding value opportunities outside of the mainstream stock market.

Charles is the executive editor and portfolio manager for Dent Research's premium newsletters, Peak Income and Peak Profits.

He is also a frequent guest on CNBC, Bloomberg TV, Fox Business News and Straight Talk Money Radio, and has been quoted in Barron’s Magazine, The Wall Street Journal, and The Washington Post. He is a frequent contributor to Forbes, GuruFocus, MarketWatch and InvestorPlace.com.

Charles holds a master’s degree in Finance and Accounting from the London School of Economics in the United Kingdom and a Bachelor of Business Administration in Finance with an International Emphasis from Texas Christian University in Fort Worth, Texas, where he graduated Magna Cum Laude and as a Phi Beta Kappa scholar. MORE FROM AUTHOR