The Federal Reserve, along with central banks around the globe, has been easing for over 5 years.  After that long of a time period, market distortions will occur.  What do we mean?  From 2003-2006, the Federal Reserve left interest rates lower than they should have been and this distorted the real estate market.  We remember those days when we heard “real estate has never gone down in price” and “money is so cheap to borrow, I can’t lose”.  We all know how that market distortion played out.  Late last week, Greece issued bonds yielding only 4.75% while emerging market bond funds (funds that invest in fundamentally stable countries such as Russia, Nigeria and Venezuela to name a few) currently have a yield of 5.5%.  In our opinion, investors are not pricing in risk with these investments.  What is interesting to note is that other parts of the fixed income market do offer a much better risk/reward opportunity.

So in a land of distorted rates, where can one find opportunity?  Two potential investments we find attractive are mid-stream gas pipelines (MLP’s) and commercial real estate (not publicly-traded, but a non-traded NAV REIT).

Let’s look at pipelines (MLP’s).  The United States is going through a revolution in energy that could make us completely energy independent in a few years.  This is truly a growth industry.  Major energy companies have already contracted out $90 billion in new pipeline projects over the next 5 years.  The current yield on MLP’s is 6% and, unlike a bond, the pipeline contracts have fee increases each year (including inflation adjusters) that are projected to increase the current payout by 8% per year.  Pipelines also are a more efficient and ecologically safe way to transport oil and gas than trucking or railroad.

A second opportunity is in non-traded REITs that invest in commercial real estate.  This real estate is leased to AAA rated companies such as CVS, FedEx, Walgreens and Tractor Supply.  Typical lease agreements have rent increases every year and, like the MLP’s, income from your original investment increases each year.   We would contend that investing in high quality US real estate yielding 5.75% is a much better risk/reward investment than investing in emerging markets with questionable regimes yielding 5.5%.

Please join us for our webinar April 16 at 12:00 pm EST.  We plan to discuss these topics in greater detail.  To RSVP for the webinar, please visit http://thorrsvp.com/.

Sincerely,

Your THOR Team