Just a quick interview discussing the Macy's earnings beat. They are and will always be a dog - but the beat is part of a larger recovery in retail. Problem is, online can't replace the total volume of sales lost from store closings.
The broader message here is the pent up demand once we can get past the virus. While the stock market today is living on stocks that either help firms cut costs, cut people, or mainly sell online - the economy can’t run “online” forever.
Today I discuss the most compelling yield vehicle in our portfolio, mortgage REITs. As markets continue to charge higher, how do you commit new cash? Easy, keep buying what is on sale and mREITs have the Fed stabilizing the MBS markets to the tune of $1 trillion of assets owned. . .
Friday Morning hits have a little more energy - even for me!
Maria wanted to know what I'm buying in light of oil stabilizing around $40 a barrel, and the Fed controlling rates for the next few years.
Easy, my post-Covid down and out mortgage REITs and MLPs.
If you know the Fed will control rates, use that knowledge! I quickly lay out my general thesis.
I’m back on The Final Round discussing REITs and MLPs. It’s such a pleasure to be able to develop a few ideas without the pressure of sticking to sound bites and limited time. I mean, come on, they gave me 7 minutes to let it roll like water off a ducks back. Let me give you the short version.
One of the places we look for yield over the next few years are mortgage REITs, which don’t own physical property, they just hold the mortgages backed by residential properties. With the Fed keeping rates low for a few years, these firms have lower funding costs, lower hedging costs, and they are yielding over 10% after many have cut or reduced dividend payments.
Same idea with energy infrastructure MLPs – high yield even after many have cut dividends. Yet, with oil over $40 a barrel, the bad news is old news. I’m just more interested in pipelines that have minimum fees and minimum contract commitments versus the more sketchy exploration companies.
Gold miners are easy – negative interest rates. We saw this back in 2000-2006. Rates were relatively stable, but real rates slowly dropped as gold and gold miners went up.
With the tech sector up huge this year, I explain what I’m buying now for the next 1-3 years.
Enjoy!
Bank stocks have outperformed the Nasdaq over the last month, so what is going on here? Real interest rates are negative at around -1%. When you consider the financial sector has better dividend yields, an actual positive real yield, along with lover leverage than 12 years ago, and massive loan loss provisions they may not need, you can see why some investors would rather see their money in those names than sitting in a 10 year treasury.
Plus, the Fed has been clear, they need to see 2% inflation for months, not a few weeks to change course. We can't even get to 2%, wake me when it happens.
We focused in on the travel and leisure stocks, but really, it’s about the return to normal. Yes, after we get a vaccine, we will most likely go back to our normal lives, and start catching up on travel and activities lost during the crisis.
What didn't get mentioned is the change in inflation from the demand shock this may cause. Remember that the market is a future looking machine, and has shown its hand this week. It’s all about a vaccine with a speed bump heading into the election.
I love getting asked the harder questions and breaking it down into an understandable response.
So, the big news this week is the US dollar hitting record lows not seen for several years. Why does this matter? It's effects your portfolio. Emerging market stocks have had a tailwind along with Gold, and as long as the dollar stays weak, this should continue. Even economically sensitive stocks like industrials can have some upside as our exports are cheaper to foreign buyers.
If you need to get more wonky or impress at your next Zoom happy hour, just say this:
1. There is a ton of emerging market debt that is priced in dollars. So, when the dollar falls it helps pay back money at a cheaper cost - kind of like lowering interest rates. Plus, emerging markets are super cheap compared to hot tech stocks and over the past three months have done just as well.
2. Gold has a negative correlation to the dollar, -0.98 for the math geeks. So, it's not a mystery why gold has surged, just look at the US dollar. As long as the Fed keeps supporting the economy, real yields will be negative and gold will keep rising. (Then spend the rest of the happy hour avoiding gold bugs, they are a little cooky).
3. As we come out of the recovery, a cheaper dollar will help the cyclical stocks/value stocks/not tech stocks as our exports will be more attractive to foreign buyers.
Considering how everybody seems to love tech stocks like it's 1999 all over again, I just wanted to point out that there are other things in the world to invest in.
I love to hang out with Charles Payne - his show pre-notes are excellent and coming on the show is very smooth. He just lets you rip into it and let it out. Here is the thing, I'm not quite as bullish as he is, or the other guests. I get it, tech is doing well. But there are other options than just sinking cash into high flyers.
I suggest looking at what is still on sale. Every time markets head out of recessions, the unloved cheaper and smaller stocks lead for a year or more. Heck, emerging markets are doing as well as tech the last few months and have a fraction of the valuation. But, as with every market top, people will say valuations don't matter anymore and it's different this time.
My last point is simple, you can have a world where the hot stuff doesn't crash, but stops going up while the unloved catch up. That appears to be what is happening this summer.
My first time doing a Skype interview for cable TV from my office! I have to say, I'm impressed considering the other guest had professional studios.
So, the bank earnings were decent, no disasters. While the media may paint it negatively, it's easier to cherry pick a few grim sound bites from the conference call rather than dig into the numbers and see through the noise.
The heart of the matter is clear: the average stock has been going down for six weeks, while Apple and the hot tech stocks have been ripping higher. As a contrarian, and someone who was at ground zero for the 2000 dot.com disaster, I just don't care for the buy high and sell higher routine, preferring to buy what's on sale with some margin of safety. I see the banks, or broadly speaking the Russel 1000 Value index (think the biggest cheap stocks that don't include the FANMAG names), along with some smaller areas like the MLPs and REITs are more my cup of tea when putting new cash to work. Why? Overall, the market is above what I calculate as more of the fair value of the SP500 - closer to 2800 than 3200. We saw that value can rise again back in late May into June, so it's not dead. However, you need to have a longer time line than the next month. Put another way, either the unloved areas show some signs of life - or it's bearish for the general markets. A bull market can't live on a few stocks going higher. But few remember what happened 20 years ago, and nobody said history has to repeat.
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A quick interview - where I stand now. It pretty much says it all. Sometimes you have to be blunt. My basic message is that when you have the support of your client’s, why not stick to your guns and the courage of your conviction?
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