Today's markets are like the old "Batman" series: Lots of guttural utterances.
Big Tech turned into a Big Wreck Thursday night as Amazon (AMZN) , Apple (AAPL) and Alphabet (GOOGL) each missed key metrics in reporting Dec. 31 quarterly earnings. Oof! Then, this morning, the Bureau of Labor Statistics reported that non-farm payroll creation was a mere 517,000 jobs in January, just slightly ahead of the 187,000 estimate. Pow!
So, if you though the kindler, gentler Fed Chair Jerome Powell and his cronies on the Federal Open Market Committee were giving the Nasdaq a Bam! This week, no. Ouch!
With rising interest rates -- I am seeing the 10-year U.S. Treasury note quoted at 3.499% as of this writing -- high-duration assets become less attractive. Also the managers that own only high-duration assets are going to get clobbered today.
Markets are like that, but you can never, never forget that old Wall Street cliche: The trend is your friend. The trend is that interest rates are up -- dramatically. The Fed Funds target rate is now 4.75% (by convention the high-end of the Fed's quarter-percentage point range is quoted) and a year ago, it was, according to Bloomberg's excellent U.S Rates and Bonds page ... a quarter-percentage point.
So, how in the world is a world (OK, just the U.S.) in which interest rates are 4.5 percentage points higher than one in which you should be investing in high-duration assets -- i.e those in which profits will be paid further in the future and thus need to be discounted for more periods --? It's not.
At my firm, Excelsior Capital Partners, we don't. But there are nuances and gradations in the way to invest. If you think that interest rates will keep rising, you would take the proceeds from the bountiful cash flows derived from investing in ExCap's core Big Six fixed income strategy -- Gladstone Commercial 6 00 Cum Red Prf. Shs. Series G (GOODO) , Gladstone Coml. Pref. Shs. (GOODN) , Gladstone Land 6 00 Cum Redmabe. Prf. Shs. Series B (LANDO) , Gladstone LD. Term Pref. Shs. (LANDM) , CorEnergy Infrastructure Pref Shs. Series A fund (CORR-A) , and Tellurian 8 25 Senior Notes (TELZ) -- and start investing in currently floating-rate securities, that form another one of our strategies, WYLD. That is a proprietary strategy, but the one WYLD name that I have divulged in prior columns is VLYPO, the Valley National Bank preferreds. I think those are fine buy today.
So, that's how you manage portfolios. Small changes at the margin, and very, very ,very rarely do you change strategy, but tactics are a day-to-day weapon.
What you read from me earlier this week was a Real Money column where I stated, in no uncertain terms, that it was time to go long natural gas, via the exchange-traded funds, the United States Natural Gas Fund (UNG) , Barclays iPath Bloomberg Natural Gas Subindex Total Return ETN Series B (GAZ) , or ProShares Ultra Bloomberg Natural Gas (BOIL) . Those are listed in order of riskiness from least-to-most, but, damn, it is cold here in NYC today, and so it is worth noting that those listings are also in terms of potential returns from a natgas price spike, from least-to-most.
Buy assets, short narrative. Always. When the Fed is working against you -- there will be at least one more 25-basis-point interest rate hike at the March Federal Open Market Committee meeting; after that is anybody's guess -- you don't overweight high-duration assets. The extraordinary combustive power of the carbon atom is the ultimate low-duration asset. Heating your home -- the radiators in our apartment are going bananas this morning -- has absolutely nothing to do with interest rates. Gasoline prices are somewhat higher duration than natural gas, but still much, much lower-duration than flying electric cars powered by nuclear windmills, or whatever the clowns on Wall Street are pushing these days.
Own assets that pay you cash flows. Reinvest those proceeds in assets that ... pay you cash flows. Bam! It's easy. Don' make it hard.
(Amazon, Alphabet and Apple are holdings in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells them? Learn more now.)
