INCLINE VILLAGE, Nev. - Investors have deleveraged. Banks have deleveraged. Europe is deleveraging. Next up: The U.S. government, courtesy of the fiscal cliff deadline. Last week I wrote how going off the fiscal cliff would hurt the economy and the markets. But what if a "grand bargain" type deal is struck, where there is a compromise on spending cuts and tax increases?
Some, like JPMorgan Chase's Jamie Dimon, believe fixing our country's fiscal problems would lead to an economic boom. It would certainly lead to more clarity and give business owners more reason to invest for the future.
I believe that would eventually be true, but I'm less optimistic for next year. Any compromise will include raising taxes and cutting spending, both of which dampen economic growth. Corporations are already reducing earnings expectations. That doesn't bode well for stocks.
As a result, it will continue to be a difficult environment for growth investing, but there are still good opportunities for those that invest for income as long as you are willing to think "outside the box." That's because the traditional cash equivalents and bonds aren't generating much income.
For my clients, I'm taking advantage of preferred stocks and exchange-traded debt. For example, we own a Prospect Capital 6.95 percent Senior Note. This BBB rated security trades at $25.41 and is not callable until May 2015. Another is Renaissance Re 6.60 percent Series 'D'. This equity preferred sits at $25.30 and pays qualified dividends.
Some may argue that the U.S. deficit shouldn't be addressed because any action would lower growth. But that unfortunately means debt would continue to increase. We are in the fifth year of global deleveraging ... it's time to put federal finances on a more sustainable path. Today would be nice.
- David Vomund is an Incline Village-based fee-only money manager. Information is found at www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.