WASHINGTON, Aug. 22, 2016 – As of the noon hour on Wall Street, we’re experiencing a fairly typical Monday thus far. Major market averages were off sharply at the open, tried to recover, then dropped again. Down component Pfizer (symbol: PFE) was down, then up as the drug giant’s stock bounced in reaction to Pfizer’s confirmation that its $14 billion deal to buy biopharmaceutical Medivation (MDVN) was a go. Pfizer’s real target is MDVN’s hot prostate cancer drug, Xtandi, which is viewed as a strong rival to Johnson & Johnson’s (JNJ) Zytiga.
As of this writing, all three major market averages are attempting a feeble recovery once again, pinned in the green—for now—by about 0.2 percent more or less. Much of this bouncing about is being fueled by speculation on the direction of interest rates. Fed Chair Janet Yellen is speechifying on that subject and others on Friday of this week at the annual Federal Reserve meeting held in posh Jackson Hole, Wyoming. (Why the taxpayers never complain about the cushy venues the government chooses for its big powwows is beyond the Maven’s ken.)
Yellen is expected to modify hawkish interest rate comments made last Friday by a pair of Fed presidents (Dudley of New York and Williams of San Francisco)—comments that helped stocks to take a modest dive in the week ending trading action, a move on low volume that was nevertheless aided and abetted by weirdly quiet options expiration activities. The Maven senses that Yellen’s ever-wavering Fed has lost a great deal of that institution’s once considerable street cred, making any eventual news on rates something of a non-event. But we shall see.
Betting on interest rate hikes is still a spectator sport. However, our intrepid flock of carrier pigeons has been bringing us news that, according to current surveys, 18 to 20 percent of economists and interest rate geeks are betting on a September hike while a substantial but slippery majority think December is the month to fear.
For a variety of reasons, odds have increased that ultimately, whenever, the Fed’s allegedly planned interest rate hikes will likely come to an end when the top rate reaches 3 percent. That’s down from the 4 percent that was the previously expected peak.
The ultimate answer in this rate hike sweepstakes: nobody has a clue, including the Fed.
In unrelated news that might be related to Monday’s market nervousness, the German government has warned its citizens to stockpile food and water in case of attack. Attack from whom? Perhaps all those well-behaved Islamofascist “guests” Angela Merkel has been inviting into Deutschland without a hint of any methodology for rooting out the terrorists embedded in the European version of “World War Z.”
Or perhaps Merkel & Co. are bothered by the 40,000 Russian troops that have been gathering on Ukraine’s eastern border. They are reportedly already engaged in skirmishes.
In any event, some kind of Putin-inspired destabilization and/or territory grab is a virtual certainty in the immediate future, as the wily Russian president wisely moves to take advantage of the less than five months left in semi-retired President Obama’s vaunted policy “reset.” None of this can help the market’s tone. Or American and European security for that matter.
In other nerve-stimulating news, the price of West Texas Intermediate crude oil (WTI), after jumping dramatically last Thursday and Friday and nearly hitting $50 bbl., has fallen just as drastically Monday, dropping $1.40 bbl. to $47.12 bbl. as we write this, off close to 3 percent. Like everything else, oil these days seems driven by rumors, planted or otherwise. The idiots really are running the asylum these days.
The Wall Street Journal (behind a pay wall) has in interesting article providing more details on the upcoming emergence of REITs as a separate industry sector in the S&P and MSCI averages. A key detail about which the Maven was surprisingly unaware: Mortgage REITs will continue to remain in the financial sector, while (presumably) actual property holding REITs of many flavors are the ones that are going to move to the newly formed sector.
Moving day, according to WSJ, is technically Aug. 31. But, given the complexities involved in index funds and other investments that track sector averages, these moves and actions will somehow become “official” on Sept. 15, as we noted in an earlier article.
Complicating matters further, mutual fund and ETF companies like Vanguard won’t be reflecting these moves in their own sector funds until they do their quarterly portfolio rebalancing, which for many sector funds, happens in October or thereabouts. We’re fudging a bit here since details vary considerably among index and sector funds and ETFs, which means you have to check with your specific investment vehicles to see what’s likely to happen over, say, the next 60 days.
We’ve noticed that our REIT and ETF investments, notably Two Harbors (TWO), New Residential (NRZ) and the Schwab REIT ETF (SCHH) have been mostly slipping over the past two weeks, probably as a result of moves in funds and ETFs that are already underway. Another complication which we’re currently researching: Will either TWO or NRZ stay with the financials? Or will they head for the new index? They are still primarily mortgage REITs, or so they seem. But they also service mortgages and, to some extent, manage some properties, making them some kind of hybrid. Still lots of questions here.
We are still bullish, short term, that those REITs actually migrating to the new sector in August-October will catch a bid as index funds will need to include more of these high-yielding real estate investments in their investment mix. But now, we must factor in the question as to whether REIT X will be staying put in financials or heading off to the new REIT sector. We’ll keep you posted as we figure this out.
We’re still opportunistically picking up shares of SCHH whenever this ETF ticks down (which it’s been doing with some regularity). But we’re holding on for now on new REIT investments until we can figure out where the REITs we’re interested in actually end up.
In other areas, we have added Pfizer to one of our smaller portfolios as a long-term hold, given its high dividend and evident commitment to growth by acquisition. That forward view is somewhat tempered by the fact that Pfizer is also entertaining a corporate split, à la Abbot Labs’ (ABT’s) spinoff of its R&D piece currently known as Abbvie (ABBV). Today’s MDVN acquisition, however, may put a question mark in PFE’s previously announced strategy, but we’re not going to worry about that right now.
Note: An earlier version of this column implied that Yellen’s Jackson Hole remarks were on tap for Monday. That was an error. Her remarks are currently scheduled for Friday, August 26.