CDOs, CLOs, Collateralized Loan Obligations, Colony Financial, Fed, income/dividend bubble, junk bonds, leveraged loans, mortgage hedge funds
Owning Colony Financial (CLNY:US) was v rewarding. I bought it as a cheap distressed assets play, but I suspect my gains actually came from income investors, who are now rushing into the stock. That got me thinking… And it hammered home a couple of lessons: a) Never under-estimate the desperation of income investors, and (more seriously) b) Don’t fight the Fed! Now, that may sound like a contrarian challenge to some – sure, sometimes it can prove v profitable to fight a rising tide.
Except surfing the big waves is simply far more rewarding most of the time. Do you really want to be the investor who faces down the Fed’s steamrolling printing press? Especially with a ravenous horde of zombie income investors chasing after it?!
But it’s becoming increasingly difficult to exploit those lessons. Look around, most yields are too low, most prices too high… Look at property REITs, mortgage REITs, MLPs, closed-end funds (esp. Pimco!), and other assorted dividend story stocks. Most are now sporting fairly nauseating valuations & leverage – while the dregs are simply Ponzi schemes, relentlessly issuing stock & debt to fund excessive dividends. But what’s the alternative – Treasuries?! Oh please, just stab me with a rusty fork.