Investment Strategies and Investments:
We continue to favor economic cyclicals, like energy, including: MLPs such as Enterprise Products Partners, L.P. (EPD), Energy Transfer, L.P. (ET), Magellan Midstream Partners, L.P. (MMP), and MPLX, L.P. (MPLX) and natural gas companies like Antero Midstream Corporation (AM) and Antero Resources Corporation (AR). These energy investments all yield around 9% except for AR.
Banks should benefit from a steepening yield curve and we like Wells Fargo & Company (WFC) and JP Morgan Chase & Co. (JPM).
Cyclical and commodity exposure can be added through select ETFs: Homebuilders should benefit from limited supply – SPDR Homebuilders (XHB), Semiconductors are critical in industrial sectors like automobiles – Van Eck Vector Semiconductor (SMH), and agriculture is benefitting from rising prices – Van Eck Vector Agribusiness (MOO).
After 40 years of declining interest rates, there is a misplaced comfort with duration risk. Bond ownership and maturities should be reduced. Bond yields do not justify their duration risk, yet they are heavily entrenched in the traditional diversified portfolios and financial planning strategies of the last 40 years. We are reducing bond exposure and equity income bond alternatives like utilities.
For our more adventuresome clients, we are buying two inverse ETFs: ProShares Ultrashort Lehman (TBT) is an inverse Treasury ETF that rises when bond yields rise. The ProShares Ultrashort QQQ (SQQQ) is the inverse of the QQQ – Nasdaq 100 Index. The SQQQ rises when the QQQ index declines.
Writing calls against stocks with significant appreciation is an excellent way to reduce total equity exposure with stocks without triggering capital gains.
We worry about the US monetary system given its record 129% ratio of US debt to GDP and the growing concerns about the Federal Reserve becoming the only buyer of US Treasuries. The casual trillion-dollar spending bills, when the economy is recovering so rapidly, make the US monetary system look like a Three-card Monte game. A market reaction to this excessive spending and the historic deficit could occur later this year.
Currently, the US economy is leading the world out of recession and the dollar is strong with US Treasuries offering competitive yields. When other global economies begin to strengthen later this year, the dollar will begin to weaken, and gold and precious metals and their producers will resume their bull markets.
There will be many opportunities in the stock market this year, but the deflationary bond-friendly dynamics which have helped traditional asset allocation strategies like the 60 40 stock-bond strategy will find its low-risk high return profile of the last 40 years challenged. However, asset allocation that favors higher interest rates and inflation is where investors need to focus.
Happy Passover and Easter.
Tyson Halsey, CFA