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Out of the Box: I am Reviewing the Situation

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“I’m reviewing the situation
I must quickly look up everyone I know”
-Fagan, in Oliver

You can blame it on China, Iran, President Trump, the Fed or throw them all into the pot and blame the whole lot of them. It really doesn’t make any difference but what we have now is an inflection point, where equities are near their all-time highs, and bond yields are near their lows, of the past several years. You may see this all as a problem, but I see it as an opportunity, and I am encouraging you to stop, look and pay close attention to your portfolios.

Whether you are a professional money manager, or an individual, I am now encouraging you to examine your portfolios, with great care, to see if you can maximize the results. In bonds, for some of the individuals that I help, it is now possible to take profits, for the first time in years, and find better coupons, with better yields, than what was previously owned. The markets are giving us a gift, and I suggest you take it, and quietly say, “Thank you.”

The Bloomberg U.S. Treasury Index is now yielding 1.92%, while their Investment Grade Corporate Bond Index yields 3.17% as their High Yield Index yields 5.73%. The focus in the Press has been on Treasuries, of course, but IG Corporate Index and the High Yield Index have been compressing against Treasuries faster than Treasury yields have fallen. This means that bond prices are rising and that you may find you have profits now in some bonds that have been impossible to find, during the last several years.

I am particularly struck by several rotations that are now possible. First, where you have a profit, I would be examining the 5G space for new opportunities where the credit quality, and the ratings, could improve as 5G is rolled out. Second, I would be carefully looking at duration as it may play a large role in the upcoming years. Next, I would be considering some closed-end funds, where double digit yields are still possible, in a wide variety of sectors. These include Bond funds, MLP funds, Real Estate funds, Gold funds, Healthcare funds and High-Tech funds. There is a wide diversity to choose from and while closed-end funds are quite complex, opportunity abounds, in my opinion.

The same opportunity now exists in equities, in my estimation. I do not see any Recession forthcoming but many stocks are at, or near, their all-time highs and this is also providing opportunities for some appreciation plays. During the last year the DJIA is up 10.20%, while the S&P 500 is up 8.40% and the NASDQ is up 6.29%, according to Bloomberg data. Take some time and take Fagan’s advice and “Review the Situation.”

“This life
One thing counts
In the bank
Large amounts
I’m afraid these don’t grow on trees…”
-Fagan, in Oliver

Given the new attitude of the Fed, I do not expect to see higher yields for years, and possibly many, many years. The Fed is not a stand-alone institution, globally, and with the ECB talking about another round of Quantitative Easing, more loans to the European banks and a possible widening of the assets that they own, the pressure on the Fed is very real. Then the Bank of Japan is not slowing down and the People’s Bank of China is also ramping up their balance sheet. What I now expect from the Fed is at least two rate cuts during the balance of the year and it may not be just one quarter of a point either.

Get this through your heads, the Fed has changed course. The new philosophy favors borrowers, and not savers, and it makes no difference whether you agree with them or not. They are the only people in the United States that do not face jail time for creating money and they can create all they damn please and when they decide to do it. The central banks now “are the Game” and the bond vigilantes have disappeared along with anyone that had the power, once upon a time, to fight the Fed.

The Game has changed.

Deal with it!

Mark J. Grant
Chief Global Strategist, Fixed Income
Managing Director
B. Riley FBR Inc.
U.S. 954-468-2366

Information herein is for general use; is not unbiased/impartial; is current at publication date, subject to change; may be from third parties; and may not be accurate or complete. Opinions are the Author’s, not B. Riley FBR, Inc., or their respective affiliates or subsidiaries. This is not a research report or solicitation or recommendation to buy/sell the subject securities. Investment factors are not fully addressed herein. B. Riley FBR Inc. and their affiliates may have a proprietary position in the subject securities.
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