Welcome to Shade Capital
Shade Capital Management Inc. conducts asset management, portfolio management and financial planning for both individuals and corporations. The firm offers advice on most financial concerns, including, but not limited to: investments, retirement, 401K and estate planning. The firm was founded in 2007 and has been offering sound financial advice ever since. Shade Capital Management understands that any great success in investing hinges on finding great investment opportunities first. Being able to seize opportunity swiftly and early usually makes the difference between doing well and being well off. Putting clients need first and weighing on the side of caution, Shade Capital Management understands the delicate balance between capital preservation and growing wealth in a marketplace that is prone to both booms and busts.
Investor Beware: BDCs Could Hurt You
In a low interest rate environment many investors find themselves struggling to find a place to put their money. The frustration lies in finding yield for the capital an investor is willing to place at risk. With the treasury yielding around 2%, many safer investments such as investment grade corporate bonds and blue chip dividend stocks are yielding barely above the 2% level as well.
Because of this dearth in high yielding investing opportunities, investors have had to look to higher risk investments to gather any type of yield. Junk bonds recently were a place to hide until the implosion in natural gas and oil this past year sent most of that bond market into a free fall. The overall junk bond market dropped nearly double digits in the recent drop costing investors one to two years of coupons. Not what you want if you are looking for safety and yield.
One other area I think that investors have been rushing into is something called BDC stocks. This group of equities have offered investors fat yields of anywhere between 6-15% over the past several years. BDC stands for Business Development Companies. BDCs lend to middle-market companies and -- like real estate investment trusts -- typically pay out most of their income to investors in the form of a dividend. Some also make equity investments. They often use leverage to enhance their returns.
While BDCs have been around since 1980, they have become popular in recent years among investors hungry for yield in an extended environment of low interest rates. BDCs have also been able to find better lending opportunities at higher yields because banks are doing fewer middle market loans than they used to in the wake of the credit crisis. Middle market loans refer to loans of roughly $100 million or less.
The fat dividends these companies pay do come with substantial risk to investors which was found out recently when two popular ones Fifth Street Finance (FSC) and Medley Capital (MCC - Get Report) cut their dividends this past Monday. The event caused quite a stir in the BDC marketplace sending many of these names lower. The negative activity prompted a noted analyst who follows the sector to speak out in defense of the names.
While there are "headwinds for the group," shares of BDCs have already been beaten down significantly and credit issues are likely to be manageable for most companies in the sector, according to Keefe, Bruyette & Woods analyst Greg Mason.
Still, yields have come down on loans, and Mason argues that isn't likely to change. That's because he believes the Federal Reserve will keep interest rates lower for longer than many investors anticipate, and the demand among investors for high-yielding loans to reasonably creditworthy borrowers far exceeds the supply.
Mason sees several reasons for the selloff, though probably the most important factor was the decision by Russell Investments to remove BDCs from its indices. That decision reduced the pool of BDC investors by some 11%, according to Mason.
Since Russell made its decision, BDCs have traded below book value, essentially preventing them from issuing new shares. Mason believes BDCs can eventually return to trade at or above book value, as opposed to the 90% where many of them trade today. However, he thinks it may be a long time before they return to peak valuations of 1.15% seen a roughly a year ago.
Another concern for BDCs is rising defaults. Fifth Street, for example, disclosed Monday that four new loans had gone into default in its fiscal first quarter ended Dec. 31 and a fifth has defaulted since that time. Mason believes BDCs as a group are likely to see a rise in defaults, but he expects the issue to be manageable.
Declining yields will be a factor for both Whitehorse Finance (WHF) and TICC Capital Corp. (TICC) , two more BDCs Mason expects to cut their dividends at some point later this year.
Whitehorse "set the dividend too high when interest rates were wider and you could charge more for your portfolio," Mason told TheStreet. Still he sees no credit issues in its portfolio.
TICC is a similar story. It invested in the equity portfolio of collateralized loan obligations sold before the financial crisis. Some of these investments generated a whopping 35% yield.
However, Mason is staying optimistic on the group. "I don't see major credit issues across the BDC space," he said.
Another positive for BDCs is they have already sold off substantially, suggesting downside is likely to be limited. Prospect Capital Corp. (PSEC) and American Capital (ACAS) , the largest BDCs, are down 23% and 9%, respectively, over the past 12 months. Following a near-15% drop Monday, Fifth Street is down 30% over the past 12 months.
My take on this group is simple – when things look too good to be true they generally are. With yields still remaining well above 6-8% for the group I expect more downside in an environment that will see interest rates spike at some point. Once interest rates start moving the other way many of these names will see the squeeze of their lives. I have never been a fan of these mezzanine investment companies and am becoming an even lesser one as dividends are being cut and management is scrambling to find opportunities. Although the group may bounce from these oversold levels making for a tempting trade, I would not want to invest my money in this group over a longer period of time. Over the longer term, I expect more dividend cuts and eventually lower stock prices. Invest in this group at your own peril.
Mizuho Financial Group MFG --- The Way to Play Japan
Japanese markets are on fire at present. Many investors are wondering if it is too late to have exposure. I say – Be selective. One set of equities that experienced a nice move off the lows of 2011 is the financials. However, they have spent the better part of 2013 consolidating at current prices.Read more...
Gain Exposure to Consumers South of the Border
There is no disputing that the consumer purchasing power in Mexico and both Latin and South America are growing at a salivating pace. Despite all the opportunity offered by this rising group of consumers, most investors are unable to invest in companies that are benefiting directly from this swell of burgeoning consumers.Read more...
What is ?
M Squared is short for Market Squared a market timing method that enables Mr. Shade to try and find the most optimum investment opportunities for his clients. Let’s face it. Half the battle to be a great investor in any market is figuring out which direction the general market is heading and then investing on that direction using different investment instruments i.e. stocks, etfs, bonds, funds etc.