WASHINGTON, October 1, 2014 – Short column today as we prepare to head off for a 3-day jaunt in the Virginia mountains. It looks like a good time for a break, too, since this market already seems either to be on break itself or already broken. With the illegal quarter-end window-dressing exercise now concluded, stocks are free to begin their apparently pre-ordained swan dive Wednesday morning.
All the averages are down anywhere to one-third of a percent to a full percent, with nearly every sector getting whacked, or at least brutally beaten.
The great fear here is that the bull market will draw to a close and never re-start again now that the Fed is wrapping up QE this month with its final $15 billion tranche of bond and debt buying. It’s intuitively obvious that this will kill stocks and slaughter interest-rate sensitive stocks like utilities and REITs along with assorted bonds, which people will stop buying forever. Right?
Well, no. For it’s largely the interest-rate sensitive stuff that’s on the move back up this morning, as utilities and REITs are looking pretty good after a thorough 30-45 day pummeling. What’s likely happened here is that yield-centric investments got so oversold in the usual interest-rate-hike-fear exit panic that things have been completely overdone. It wouldn’t be the first time.
Granted, there’s plenty of fear on the horizon, with so many global hot spots almost eager to launch World War III, likely with some kind of obscure Archduke Ferdinand-style nonsense that will get blown up out of proportion.
Frankly, you can’t really hedge against existential risks like this by staying out of the market entirely and remaining in cash for a swell zero return. So you tiptoe in, little by little, right into the selling, and eventually, a fair amount of buying will work to your advantage. But caution is still the watchword.
Anything we mention today should be done pretty much in the manner that Carl Sandburg described fog: “on little cat feet.”
We are thinking that interest rate sensitive stuff is oversold and has already bottomed or is close to doing so some time this month. It’s clear at this point that if and when the Fed starts raising rates, likely in mid-2015 or later, whatever hikes occur or are perceived to have occurred will be miniscule.
Administration cheerleaders to the contrary, this recovery, such as it is, is not only anemic. It’s barely sustainable, for the Fed’s huge money printing binge is mostly sitting in the Dodd-Frank-crippled accounts of banks large and small, doing precisely nothing except nice balance sheet stuff that allows banking fat cats to resume their big bonus check collections.
Relatively little of this money is getting into the hands of small businesses, entrepreneurs and you and me. So there’s no “velocity” to it. It’s not moving through the system. It’s not getting anything done, and it’s not helping the middle class, in particular, one doodly-damn.
It’s keeping inflation down, of course, if you ignore the sticker shock at your local grocery emporium. But it ain’t doing much except for fat-cat Democrat donors now about to embark on their sixth straight year of taxpayer subsidies.
What we’re driving at here, is that the selling in yield-investments is, at least temporarily, overdone or nearly overdone, and any interest rate rises to tame technically non-existent inflation are likely to be small, few and far in between.
For that reason, we’ve begun nibbling at high-yield but despised utilities, notably our old standby, the perennially crippled but gigantic First Energy (FE). Fellow Ohio-based utility American Electric Power (AEP) looks kinda nice, too, and both boast swell yields.
The telecoms have been despised for quite a while, so we’ve already picked up a little bit of AT&T (T), focusing more on yield than performance, although their apparent early lead in the iPhone 6 upgrade cycle could reap them impressive data fees that likely will begin to influence the stock some time in 2015.
Likewise, we also like CenturyLink (CTL), the old Qwest ,which is weathering landline losses in a variety of creative ways. And BTW, both T and CTL boast above average yields.
REITs, perennial favorites of ours, have been pancaked for at least 45 days now, and it’s gotten silly. Depending on their investment mixes, any number of REITs are approaching if not already residing in bargain basement territory with outsized yields and undervalued portfolios.
Typically, we like Two Harbors (TWO), and the locally based, beaten up, but cheap Armour Residential (ARR). The latter has the special advantage of paying your dividends out monthly.
Underwater mortgage specialist Pennymac (PMT) looks pretty good as well. And if you want diversity, the perennially popular REIT ETF, symbol REM, is a good way to diversify into a basket of these things. Its 13+ percent yield is a pretty strong selling point as is its current bottom dog pricing.
Lest we forget, there are also fairly steady industry specific REITs like HCP, a healthcare structure ownership REIT and IRT, a REIT that invests primarily in still white-hot rental apartments.
Careful how you tread here, but a small selection of these high-yielders might be a good bet sometime in October for at least a 3-month to 1-year hold, or until some other panic occurs.
We are still adding to our position in Bank of America “A” warrants as well. Banks should look pretty good in 2015, unless someone clones the late Archduke Ferdinand back into being. After all, as we’ve noted here many times, the banks have got all the money. Why not “share” in the fun?
A short aside: we now have more clarity on the upcoming eBay/PayPal split. As we initially expected when we first saw reports hit the wires, eBay has confirmed they intend to split the two companies some time in late 2015 via a spinoff of PayPal. We’re not sure how to play this yet, if at all, but we’ll keep our eyes on eBay’s moves.
We’ll report sporadically for the rest of the week. As usual on our jaunts out of town, we tend to end up in places that have poor internet connectivity—locales still surprisingly numerous in this country.
Have a good week.