Out of the Box: Moan Light Bay
My house is on a canal, just off the Intercoastal Waterway, in Fort Lauderdale. I am but a few blocks from the beach. As 4:00 P.M. struck the chimes yesterday, as the equity markets closed, you could hear the moans and groans and wailing and angst rolling forth from the houses and condos that surround me. It was palpable. I shuddered.
For a moment, I thought that Captain Hook had reappeared. J.M. Barrie’s character was back. Did Smee come with him? The words were echoing down the docks, as people screamed out of their windows.
“In your face, camel cake!”
“Lying, crying, spying, prying, ultra-pig!”
“You lewd, crude, rude, bag of pre-chewed food, dude!”
Just relax and take it easy, I say. While it is accurate that the DJIA was down -1.79% yesterday and the S&P 500 was down -1.65%, we have had a great run and corrections are inevitable. For the year-to-date the DJIA is up +11.31% and the S&P 500 is up +15.05%.
Take a chill pill.
Everyone, of course, is blaming it on the China negotiations. It’s Trump’s fault, it’s Mnuchin’s fault, it’s the Chinese negotiators fault. Fickled fingers are pointing everywhere in the Press and calls for some type of imminent Recession are being bandied about like Tinkerbell flickering in the wind.
This morning, no relief is in sight. The S&P 500 is -17.75 as I conclude my commentary this morning. Bonds are up again though and the 10 year Treasury is at 2.43%. Fixed Income has been a big winner recently, in fact, and it has not just been Treasuries. According to Bloomberg data the Treasury Index is up +0.64% for the last three months and up +1.37% year-to-date.
What has really shinned, though, are the risk fixed income markets with the Corporate Index up +3.17% for the last three months and up +5.94% year-to-date. This is while the American High Yield Index is up +3.58% for the last three months and up +8.58% year-to-date. What you are seeing here is significant compression, as both of the credit risk fixed income markets compress to Treasuries, in a significant fashion.
For several years, as the Fed continued on in their rising rate program, the value of all bonds had declined as yields kept increasing. Now, however, the Fed has switched course and the stodgy old bond markets have reversed course along with the Fed’s new parameters. My advice now is to take a hard look at your bond portfolios and see if any changes should be made as you may find that some of your older positions are now back in positive territory.
I especially like bonds tied to the 5G rollout and I expect many of these credits to get upgraded, and compress in further, as both revenues and profits increase. I point specifically to the tower companies, the wireless providers, the 5G chip makers and even to some REIT’s that specialize in tower properties as many more towers, antennas, will be needed in the years ahead. There are a number of ways to take advantage of the new 5G technologies and, in both equities and debt, I think you should give this some consideration.
The key, when the equity markets are behaving in this fashion, is not to get spooked and to have some cash to take advantage of specific situations when they arise. I would also like to recommend, again, double digit yield closed-end funds, trading at a discount to the NAV, that pay monthly, as a good alternative to appreciation plays. These funds are always an option and while they have been down, in the last few days, my observation is that they have been down far less than the large Indexes. Also, here, you can obtain monthly cash flows which allow for you to make your determinations, each time the Money Truck shows up.
In any event, these are my observations for the day.
Smee: “I’ve just had an apostrophe.”
Captain Hook: “I think you mean an epiphany.”
Smee: “Lightning has just struck my brain.”
Captain Hook: “Well, that must hurt.”
Mark J. Grant
Chief Global Strategist, Fixed Income
B. Riley FBR Inc.
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