Volatility has certainly defined the markets in the early weeks of 2014.
But rather than lock in losses by running to the sidelines, instead consider the profits that the boom/bust crowd are leaving behind...
You see, the market to date has dropped just 6% after last year's surge of some 28%.
It's only the investors expecting an uninterrupted bull market party from last year who were caught off guard.
So let's examine the market factors they're wrong about.
And then convert them into a rock-solid, income power play...
These Bull Market Drivers Still Point to Profits
Two factors have helped create the bull market foundation throughout the past couple of years: earnings and liquidity.
On the earnings front, we've seen approximately 80% of the S&P 500 companies report Q4 earnings. So far, earnings for these companies have been healthy. At last count, companies reporting have seen their earnings move up by about 11% year-over-year, on average. That's very good by historical standards. Moreover, about 70% of the companies that have reported already have bested Wall Street earnings expectations.
The fact that earnings continue to be bullish has a lot of fundamental support.
On the liquidity front, although the Federal Reserve has embarked on a "taper" of its bond-buying program, keep in mind that the Fed still is injecting $65 billion per month into the system. Yes, that's down from the $85 billion per month in bond purchases the Fed engaged in just a few months back, but $65 billion isn't exactly pocket change.
What the headline readers miss is that the Fed's recent taper isn't an inflexible dogma that cannot be altered.
I suspect that the new Fed Chair Janet Yellen will put the brakes on any further taper if the economic data begins to deteriorate. As always, the central bank pays keen attention to the macro numbers such as the monthly jobs report, GDP, and inflation. If any of these numbers suggest the Fed's tapering is having an adverse effect on the economy, then Yellen and company won't hesitate to stop the taper.
The bottom line is that tapering is malleable and not a cause for thinking we are going to see a much deeper correction in stocks.
China's Slow Growth Backstop
Now, one major concern for the markets right now is the turmoil in emerging markets led by a slowdown in China. Concerns about China's so-called "shadow banking system" also have helped fuel what's been a global equity sell-off in 2014. Yet in my judgment, these fears have been blown far out of proportion.
As someone very familiar with Chinese politics and how that country's elite policymakers do things, I know that China's government controls the banks and the financial system.
What this means is that the government is able to contain any kind of serious discord in its banking system.
You see, unlike here in the United States, where our debt is denominated in dollars, in China their debt is denominated in yuan. So if China's banking system does run into woes, Beijing is able to essentially print its way out of trouble.
That's not to say that China is never going to have a financial problem; it definitely can. However, the government has much more power than the Federal Reserve does when it comes to instituting policies that quickly relieve financial system tensions.
Given the fact that earnings and liquidity still are fundamentally bullish for stocks, and given the relatively benign situation in emerging markets and China, the correct perspective here with respect to the 2014 pullback is that it is just that - a normal pullback and not a wider correction.
Seize This Income Power Play
Of course, the market action so far in 2014 reminds us that volatility is something that we need to contend with whenever we put our money to work. One way to get through periods of intense volatility, and earn income, is to focus on income-generating assets.
One company I like right now that's providing investors with very attractive yield is energy master limited partnership (MLP) Teekay LNG Partners LP (NYSE: TGP).
This company is a leading liquid natural gas storage and transport company that benefits from higher natural gas prices. Teekay specializes in liquefied nat gas (LNG) transport, as well as liquefied petroleum gas (LPG) transport. TGP has a plethora of long-term, fixed-rate charter contracts with major energy and utility companies, and servicing those contracts are its fleet of 27 LNG carriers, five LPG carriers, 10 Suezmax class crude oil tankers, and one Handymax product tanker.
The revenues generated from the LNG and LPG transport fees allow Teekay to pay out a very healthy 6.7% yield, but that's just part of the appeal. Because of the governmental push toward increased use of clean energy, natural gas use and transport is booming, and will likely continue growing for years to come.
I also like the trend in TGP's distribution payouts. In December, the company declared another increase of 2.5% in quarterly cash distribution, to $0.6918 per unit. This distribution boost, the attractive yield, and the relatively stable price action of TGP this year (it's essentially flat in 2014) are a great way to get paid while also remaining calm during times of market volatility.
Let the market worry, while you lock up your income stream.
Sure, it's great when the value of your shares increases. But are you considering the total return on your investments? Well, Robert Hsu is. And he'll have much more to tell you about in the upcoming weeks, along with some great opportunities to share. Stay tuned.