With the next FOMC meeting scheduled for this week, July 25 and July 26, interest rates are once again on the table. The consensus is that the Fed will raise rates another 25 bps, bringing the target range from 500-525 bps, up to 525-550 bps, according to the CME FedWatch Tool.
At this point, another Fed rate is basically already priced in the market, so I don't expect to see any long-term damage to stocks as a result of another hike, unless the Fed says something that spooks investors.
If the Fed does take a more hawkish stance than investors were expecting, we could see some volatility, which is why I'm still focusing on inflation-beating investments, at this time.
As with recent watchlists, I want to focus our attention on inflation-beating Closed End Funds (CEF). In case you're not familiar with CEFs, they are a type of mutual fund that issues a fixed number of shares through a single initial public offering (IPO) to raise capital for its initial investments. Its shares can then be bought and sold on a stock exchange, but no new shares will be created, and no new money will flow into the fund.
This week, I'm watching Pimco Dynamic Income Fund (PDI), a closed end fund launched and managed by Allianz Global Investors Fund Management LLC., and co-managed by Pacific Investment Management Company LLC.
The fund, which has Common Net Assets of $4.58 billion, normally invests worldwide in a portfolio of debt obligations and other income-producing securities of any type and credit quality, with varying maturities and related derivative instruments.
The fund's investment universe includes mortgage-backed securities, investment grade and high yield corporates, developed and emerging markets corporate and sovereign bonds, other income-producing securities and related derivative instruments.
Unlike a lot of closed-end funds that have a very specific investment strategy, PDI casts a much wider net in regards to where it wants to deploy its capital, and it's showing up in the funds distribution yield.
At the current price, the fund delivers a hefty 14.10% yield, but it's trading at a 9.04% premium to it to its net asset value (NAV).
I'm watching PDI to see if the price can come back down, closer to its NAV. I'd like to see it trading at no more than a 2.5% premium to NAV.
While it's important to have these kinds of investments in your portfolio as a hedge against market shifts, I am still firm in my belief that we're on the cusp of a new bull market, and you need to be looking for places to park your capital that have serious long-term gain potential.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
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