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Before
getting into thoughts on today's Federal Reserve interest rate meeting below,
I thought it important to remind investors of one simple thought I first wrote
way back at Unfunds over four years ago: bear markets can take one of two
forms - a price correction, or a time correction.
The
bear market that rang in the Great Depression, for example, was a price
correction, one that saw a savage, nearly 90% price collapse from its 1929
peak to the trough in 1933. From the late 1960's to early 1980's, however, we
witnessed a time correction where stocks fluctuated for years in a wide band
with Dow 1000 as the top, but essentially went nowhere over that time. Of course,
that bear market was more damaging than it might seem due to the huge decline
in the U.S. Dollar over that same time, something we had to deal with for a
three-year piece of this bull market and may well have to again before it's
through. However, investors do need to keep in mind that we're fully five
years into this bear market and many stock market excesses have been at least
partially worked off.
While
price/earnings ratios are still near historic highs (with a P/E near 21 on
the S&P 500, for example), that's certainly a far cry from the market's
astounding peak valuation in 2000, which was more than double the current
level. Certain forgotten sectors remain forgotten still: I imagine most
investors would still snort at the idea of looking in the telecom sector for
investment opportunities, which is part of what made MCI such a great
investment, for example. And I've seen it written in a couple of places
recently that CNBC's viewing audience is down approximately 60% from its peak
in 2000; if accurate, that represents a significant decrease in frothiness,
don't you think? Such are anecdotal signals that at least a few select
opportunities may well exist in our market today.
Look,
as my clients know I'm still quite cautious and worried about market conditions,
but what I am saying is this: in the global search for yield (fixed income
markets have been picked to the bone), investors may be missing a few
interesting opportunities close to home.
First,
it might surprise some to know that there exist quality companies (that
aren't REITs, utilities, or leveraged closed-end funds) on our market that
sport surprising dividend yields; indeed, two companies many of our clients
have been buying carry better than 8% yields, a dividend yield I suspect most
investors didn't realize could be had in our market today.
Second,
as CD rates have improved on the back of the Fed's rate hikes, investors
might be satisfied w/such bank offerings and neglect to do their homework. At
my own bank just last week, for example, the very sweet teller told me
proudly about her institution's liquid CD and its attractive 2.75% percent
yield. I didn't bother to tell her about a floating rate product my clients
have been buying with a 100 basis point advantage over her CD; for investors
with more than $250,000, our clients get in cost-free, the product is liquid
in 8 days and it's designed to ratchet up its payout along with interest
rates - indeed, those who are afraid of rising rates might be interested to
know this was the only class of fixed income products to provide positive
returns during the last two rate hiking cycles. Further, investors with more
than $1MM liquid can capture a similar holding with a 5% floating yield and
no up-front cost, albeit with different back-end liquidity.
Finally,
there has been a lot of interest in the energy trusts that are so prevalent
on Canada's market, and with good reason. However, it may be worth digging
deeper for ideas up North because it's not just energy trusts that are
available; the Canadian market offers a range of similar holdings in sectors
ranging from real estate, to other natural resources, to pipelines, to
general business trusts such as newspapers, brewers, manufacturers and more,
all built like the well-known energy trusts - to pay out high current income
to shareholders. Now, it's important to do your homework or work with an
advisor that provides real-time quotes, understands which companies have
conservative payout ratios, aren't issuing loads of new stock and other
important issues relating to these holdings, but it's worth doing some work
up there in this global search for yield. Not coincidentally, we're terribly
well-versed on the subject, but for those that would like another source, I
suggest a wonderful new website that provides and excellent starting point
for such stocks and the energy sector, in general: www.newfuelnow.com.
There
are plenty of reasons for continued caution in today's U.S. market
environment and we will likely have to contend with another bout of Dollar
weakness in the future (though I suspect that challenge may return a little
later than most believe), which is a good reason to look back at a little
more foreign currency exposure than I've been advising since December and
helps make the case for looking at a market like Canada's. However, investors
would do well to keep in mind that, five years later, there are selected
values to be found here in U.S., as well, and there remain a host of clever
things to do in today's hyper-competitive hunt for yield.
Today's
Fed Meeting
While
I have beaten up Dollar perma-bears frequently over the course of 2005, it's
actually the perma-bulls that I find entertaining at the moment. Such types
fervently hope that the Fed will signal it is near the end of its
rate-tightening campaign, believing this would be a bullish signal that would
allow the stock market to roar once again.
I
continue to disagree, thinking that we continue to live in a unique period
where moderately rising interest rates are actually most bullish.
The
biggest concern for our market/economy begins and ends with precisely the
scenario Bill Gross outlined recently: that the Fed's rate hikes will topple
our debt-dependent economy, forcing it to make the difficult choice between
holding rates steady at these new levels and risking recession, or switching
right back to an easing bias and sacrificing the Dollar.
The
longer the economy can hold up in the face of these rate hikes, the better it
is for the Dollar and, I believe, our economy as a whole. Is this a dangerous
game, the Fed's idea that it can engineer the elusive "soft
landing?" You bet, and it's likely to end with a recession or financial
accident, but those outcomes may just occur later in this tightening campaign
than most of us initially thought.
What,
then, should investors expect from Greenspan & Company today? Personally,
I expect more of the same: we all believe another 25 basis point hike is
coming, but I also believe the Fed will leave its post-meeting language intact,
that rate hikes will continue at a "measured pace." Here's why:
- The Dollar -
I continue to believe that the primary reason for this latest tightening
cycle was a defense of the U.S. Dollar. As long as the economy isn't
buckling under rising rates (though there are indeed signals from
important leading indicators suggesting a slowdown could be coming), I
think the Fed will take advantage and continue to cautiously move rates
up in order to hoist the Greenback. We may have actually come
dangerously close recently to the long-feared revolt by our foreign
creditors - they seemed to say so clearly as they began to speculate
about diversifying out of Dollars - and as the world tries to manage its
way out of these gross economic imbalances, the Fed is likely to give
them what they demand, a currency that isn't feeding them consistent
losses on their holdings, at least for now.
- Gold - We
all know the Fed Chairman eyes the yellow metal in his laughable quest
to determine the Dollar's "appropriate" level. It simply
wouldn't be credible for Greenspan to signal that we've now seen enough
rate hikes to contain inflation given the recent performance of gold,
oil and other commodities. This latest inflationary surge, by the way,
was nailed dead-on by Clif Droke, an excellent newsletter editor who
contributes frequently on this and other websites - keep an eye on his
stuff... he's balanced and makes a lot of interesting, accurate market
calls.
- Real Estate
- I just sense an actual measure of resolve on the part of the Fed
Chairman this time around. He seems genuinely confused that despite his
tightening campaign and a halt to money supply growth, credit continues
to flow like water, continuing to buoy the housing market. Consequently,
he also seems to be clearly indicating that he sees this as dangerous
and that he may indeed be willing to risk recession in order to shut
down speculative excess in real estate. Remember, he has been
"bubble juggling" for 5 years, and he appears to see this as
time to prick this latest bubble.
- The Euro -
Actually, I don't believe the Euro is at all on the Chairman's mind, but
I thought it worth mentioning. How would you like to head the European
Central Bank at the moment? On one side, you have certain member nations
facing recession and starting to make noise for a weaker currency;
indeed, it isn't difficult to get inside the minds of politicians
elsewhere around the world and suspect they actually see our recent
performance as positive, thinking, "The U.S. dramatically cut rates
and is now seeing healthy growth, we should pursue the same
course." Never mind that our growth is unhealthy in its imbalance,
it's easy to see this sentiment perking up more and more from
economically illiterate politicians everywhere. On the other hand, you
have another segment in Europe that, since it just felt a big recent
inflationary jolt thanks to the Euro's breakdown in terms of gold and
oil, would not at all be open to the idea of a rate cut from the
already-low level of 2%. Talk about conundrums! While we continue to
hike, in a sense we do at least some of the Euro's work for it,
strengthening our Dollar against it and perhaps delaying the day the ECB
will be forced to more seriously consider changing its policy stance.
And while
I'm on the subject, a final thought: the Euro's recent performance, from a
technical perspective, has been awful, just awful. Having a month ago reached
not only a grossly oversold extreme and measurable chart support, the Euro
hasn't been able to budge an inch while working off part of that oversold
condition - bad sign. I wouldn't have said this a month ago, but a further
breakdown in the Euro looks quite possible, and an interest rate hike today
followed by strong words from the Fed might be the match which lights that
fire.
The
risk to my outlook for today's meeting is this: that the Fed does indeed
signal the end of the latest round of rate hikes is near. Such an outcome
would hurt the Dollar, might finally allow the Euro to bounce measurably from
its technical support zone and would force a re-consideration of portfolio
balances in terms of non-dollar exposure. For the reasons outlined above,
however, I suspect we'll deal with such shifts a little further down the
road.
I'm
expecting more of the same and investors should, too. If the Federal Reserve
does indeed tighten while leaving the phrase "measure pace" in
place, long rates may continue to hold firm or decline, flattening the yield
curve and making the search for yield even more difficult. Even in such a
difficult environment yield environment, however, there are plenty of clever
ways for investors to achieve healthy returns.
Chip
Hanlon
President, Delta Global Advisors, Inc.
19051 Goldenwest,
#106-116 Huntington Beach, CA 92648 Phone: 800-485-1220
Fax: 800-485-1225 www.deltaga.com
A widely-followed
market commentator, Mr. Hanlon served as the C.O.O at Euro Pacific Capital
prior to taking the reigns at Delta Global. He had previously been the
President of Unfunds, Inc. and spent 7 years prior with Sutro & Company
as a Vice President and the company's Los Angeles Director of Syndicate
Offerings.
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