Stop the world -- I want to get off.
I had that catchphrase running through my head here on Thursday morning as I was trying to keep my breakfast down after reading market reactions to the Fed meeting and the million other stories I read every morning. But "stories" is the keyword in that sentence, because this market is so detached from reality.
I Googled that phrase, and it's from a 1962 musical written by Anthony Newley and Leslie Bricusse, the writer responsible for penning the theme songs to "Goldfinger" and "You Only Live Twice."
We can't really get off this planet, no matter what Musk, Branson and Bezos think, so I will stick with the 007 references, more my strong suit than West End musicals. In "Goldinger," 007 and Auric Goldfinger have a memorable exchange in which James Bond exclaims, "I suppose you expect me to talk" and Goldfinger replies, "No, Mister Bond, I expect you to die." Sorry for the spoiler, but JB manages to bluff his way out of the laser that was about to slice him in two, beginning in a very unfortunate bodily region. So, that's my point here. You have to use your brain and manage your portfolio.
Bond used a reference to Operation Grand Slam, a plot that he knew little about, to shake Goldfinger's confidence and save his nether region, and that brings me to the Fed. Remember when it had Operation Twist? Who would name a financial markets maneuver "Operation" anything? Fed members are as clueless as the always-surprised Bond villains, led by Chairman Jerome Powell and his predecessor and their now de facto boss, Treasury Secretary Janet Yellen.
So, let's bet against the Fed, just as the futures market is doing cartwheels this morning because -- I guess -- it could have been worse.
There is nothing worse for stocks than rising interest rates. Full stop. I am in Brazil now and trying to explain that to folks who have seen the Central Bank of Brazil steadily lift its overnight rate, the Selic, from 2% at the beginning of this year to the current level of 9.25%. Can you even imagine that level?
Sure, those of us who are old heads can, and we know how to live through it. The problem in Brazil is that the 10-year government bond rate has actually been declining (the price is rising; I am happy because I own some) and that's the key point. It is the shape of the yield curve itself that matters, not the absolute level of yields. Flat is bad for lenders, and if the Fed is going to raise interest rates and the bond market is going to ignore it and keep bidding down yields on the 10-year U.S. Treasury then we have an environment that is clearly contractionary.
The biggest loser in that scenario is the banking system. So Powell is telling you to lighten up on the Financial Select Sector SPDR Fund (XLF) and maybe even take a shot with some of the short Financial ETFs, such as ProShares Ultrashort Financials (SKF) and ProShares Short Financials (SEF) . Protection is always good.
I already wasted enough space on James Bond and musicals, so I won't go off on a tangent about contango/backwardation and how a flat yield curve actually positively impacts oil futures. Suffice it to say, though, that oil prices aren't going down any time soon. This is exacerbated by the actions of the COP26-addled governments in the West to demonize the hydrocarbon industry. Supply is being artificially restrained. So hold onto Exxon Mobil (XOM) and Chevron (CVX) , keep adding Equinor (EQNR) , the Norwegian giant I mentioned in my last Real Money column, and know that natural gas is often a by-product of the production of crude oil.
And that brings me to my last point. The world just doesn't have enough natural gas for this winter. If you think that natural gas prices will recover and you are not afraid of the insane volatility in that contract -- un-affectionately known by energy traders as "the widow maker" -- then take a shot at United States Natural Gas Fund (UNG) . UNG has been absolutely monkey-hammered in the past six weeks on warmer-than-expected early winter weather in the U.S., but I think a reversion to the mean is due. Also, don't forget that the markets are setting up unfathomable arbitrage spreads to ship natural gas from the U.S. Gulf Coast to Europe and Asia, so stick with Cheniere Energy (LNG) and Portfolio Guru favorite Flex LNG Ltd. (FLNG) .
OK, so I mentioned nine ticker symbols in this column, and that was intentional. Let the market commentators bloviate about the rantings of the Bloviator-in-Chief, Jerome Powell. Steel your portfolio from broad market hiccups caused by idiotic, inflation-stimulating Fed policy -- based on his comments this week, Mohamed El-Erian is on my side on this one... thanks, Mo! -- by buying individual names and sector-focused ETFs.
