Bond Bears Fight the Fed - Your Money March 19th 2021

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I am guessing some of you might be wondering why the Nasdaq got crushed this week while the Dow avoided some of the carnage. The simple answer is investors are more comfortable holding on to stocks like Coke and Verizon that pay dividends of 3% and 4% respectively (plus they raise the dividends each year) than a high tech company that not only does not pay a dividend, but might take years before any dividends are paid at all. Investors are therefore relying on the hope of future dividends rather than a steady dividend check today. Those future “we hope” dividends coming from “high growth but no earnings or dividend” Tech stocks have to be discounted using current interest rates. As those interest rates go up, the present value of those future “we hope” dividends go down.

Of course, the rate of change in interest rates aka bond yields has spiked considerably in the last four weeks, which means the future value of those cash flows drop precipitously. Enough Said especially if rates continue to rise.

So what else happened this week? Sadly as US bond yields rose, they attracted foreign capital inflows that drool over a positive rate of return vs what can be earned in European or Japanese bonds. The bonus is the US dollar has gone up too. So all those foreign investors are laughing all the way to the bank. Unfortunately, between the AstraZeneca scare (its over) and whispers of increased oil production coming out of Norway and Saudi Arabia, it’s not a surprise the price of crude and by extension oil stocks fell hard this week. However, we feel the pullback is transitory in nature and prices will resume their upward climb in sync with economies reopening.

That means energy stocks will probably have another leg up. As for the price of gold and gold stocks, they held in this week despite the strength of the US dollar. It might have something to do with Bitcoins or the newest fad NFT’s or non fungible tokens. I won’t get into it other than to say that IN MY OPINION, we are witnessing the birth of “electronic tulip mania.” You can look up tulip mania in any history book and if you want an explanation of NFT’s go to our Ocean Wealth channel on YouTube and listen the latest Alpha Advisor episode.

In Canada, the top story around the water cooler came courtesy of Rogers Communications making a friendly takeover offer of Shaw Cable. The deal is priced at $40.50 but Rogers is only trading at $34. Why the discrepancy you might ask? Well the Canadian government is already of the opinion that the telecommunications industry is quite concentrated and if Rogers takes out Shaw, then there will be a defacto monopoly for cable services in many parts of the country. You can argue that Bell Media and Telus provide sufficient choice but can you really say that with a straight face? Given the arbitrage, I am not the only person to think it will not pass the review process.

Turning to next week, aside from bond investors hanging on Jay Powell’s every word at three public events, we note that the Fed Chair may have put himself in a box. If he keeps interest rates low and the economy picks up speed faster than anticipated, that combined with the Democrat’s need to pay for the $1.9 Trillion stimulus bill through tax increases, and it’s all but certain that inflation is coming. Some would argue the bump in inflation is transitory and will settle back down, but I believe it will structurally imbed itself into the economy like it did after the oil shocks of the 1970’s. There is no question the stimulus package combined with the reopening of the economies post vaccinations will juice the US economy as pent up demand springs back like a overstretched rubber band. The question is whether the transportation infrastructure can keep up with demand. Ports are already clogged on both sides of the continent and when demand exceeds supply prices tend to rise.

So that means taking a second look at industrial and transport stocks. They might not rise right away, but all you have to do is look at the huge bump in earnings the Fedex reported Thursday night and the price of the stock today (it closed up $16 to $279.58). I guess the takeaway is this, while some parts of the stock market are clearly trading at lofty levels, there are a bunch that can be given a second look.

Stay safe and Happy trading.

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Steve Bokor

Steve Bokor

Portfolio Manager