Time keeps on slippin', slippin', slippin'...Into the future. As the markets churn with yesterday's red morning/green afternoon and what looks to be the opposite setup today, Steve Miller's investing lesson from Fly Like an Eagle should not be forgotten. All this volatility does is take investors' eyes off the bigger picture. They are losing money. Okay, no one actually forgets that, especially now that real-time quotes are available on every device everywhere.
But the question is: are equities attractive as a class? As I showed in my Real Money column yesterday, the answer is a resounding "no." The spread between the yield on the 2-year US Treasury note (4.47%) and the yield on the S&P 500 (1.77%) is now 270 basis points. But, sorry for another number here, Vanguard's benchmark Total Bond Market Index Fund ETF (BND) has fallen 16.45% year-to-date.
Do you buy bonds and know there will be further degradation versus par values if interest rates continue to rise? It's a sticky problem, but that is what I am doing for my largest accounts. We are buying bonds at 80 cents on the dollar that three months ago were trading at premia to par. A more reasoned approach is in my FLOAT portfolio (composed of 10 floating-rate preferreds,) but I have to keep that one behind the paywall of my site www.excelsiorcapitalpartners.com for competitive reasons.
If you own garden-variety, non-floating-rate bonds and preferreds, my advice is to keep reinvesting the regular interest payments - everything we own pays at least quarterly, some pay monthly - into those same bonds. Thus you are lowering your average cost basis. Also, if the bond is trading below par, and most are these days, you are adding what I call natural call protection.
If CFOs decide to call away your bond and your cost basis is below par, then, bingo, that's a capital gain. But, again, it all comes back to time, as Steve Miller noted. The value of your money is being eroded everyday by once-in-a-generation levels of runaway inflation. If that makes your bond portfolio look somewhat depressing - I have a few that are in that state in the past few weeks, although I am adding FLOAT exposure everywhere that I can - just remember the motto of my firm: Cash flow never lies.
As a creditor, your fixed-income portfolio should be composed of paper from issuers with copious cash flows and bountiful coverage ratios. Also, if your equity portfolio is full of energy names that produce copious cash flows like my benchmark HOAX portfolio (the free-to-all, non-updated version is here,) then you are getting paid via dividend payouts, which, in the energy sector as whole, have been increasing consistently since the Covid panic.
If you own Tesla (TSLA) , Amazon (AMZN) , Meta Platforms (META) or the even-more-scary names in Little Tech now, you have never received a dividend and are completely at the mercy of Mr. Market. He's angry right now, because his step-brother Mr. Bond Market is really angry that the world's central bankers have created this torrent of inflation via their mindless money-printing.
Time is an undefeated opponent. But so is inflation... Yet we have the pathetic people like Cathie Wood of Ark Innovation (ARKK) yammering on about the risk of deflation, a topic which my favorite government employee Janet Yellen spoke about frequently before the pandemic. You have to steel your portfolio against value-erosion and not erode your brain by listening to those who have no idea what they are talking about. My little corner of the Internet is here Thursdays and Fridays. For the rest of your time, just be careful to whom you are listening.
(Amazon is a holding in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells AMZN? Learn more now.)
