“It amazes me how people are often more willing to act based on little or no data than to use data that is a challenge to assemble.”
– Robert Shiller
I contend that the markets are moving and that paradigm shifts must now be looked at and put into place. For those institutions and people that have owned all but the shortest of bonds, losses have been piling up. We have 5.00% handles on short Treasuries now, and I expect them to spread rapidly to the rest of the yield curve. The Fed is pushing on inflation, and they are arguably winning their game. Their fight is strictly with inflation, but that is only one aspect of what is taking place in the markets now. As an investor, your focus must be broader than the Fed’s, as there is collateral damage everywhere from their actions.
As yields move up, the cost of borrowing money is also moving up. What the borrowing is for is almost irrelevant now. Every lent dollar for anything and everything is becoming more and more expensive. Just choose a subject – real estate, car loans or leases, mergers, acquisitions – any item, you name it and the costs of borrowed money are generally at 10-12 year highs.
This is also having a profound effect on the bond markets. Yields up and prices down. The Bloomberg Indexes put Treasuries at an overall yield of 4.851%, Investment Grade Corporates at 6.042%, High Yield Corporates at 8.878% and Municipal Bonds at 4.323%. These yields are all up significantly from the last few years, and everyone’s portfolios are bearing the brunt of the move.
Within an income strategy, you could utilize short-duration sources of income, such as CLOs, short-term loans, short-term convertible bonds, funds with short-term municipal portfolios, and covered calls, as some examples of how to deal with our rising interest rate environment. You can also use floating-rate funds, as they can adjust to rising rates. Having a fixed-rate coupon with a long maturity and duration is just not a good place to park money now, in my viewpoint.
On the equity side of the equation, it has also been tough. Our new levels of borrowing are having a profound effect on many corporations, as they have cut into both revenues and profits. The move is underway in both stocks and bonds, and it has just not been a pleasant sight. In the last month, the DJIA is -3.82%, the S&P 500 is -5.04% and the NASDAQ is -5.79%, according to data from Bloomberg.
Now, some of these losses can be overcome with income, and while the liquidating value is generally down, the income is the offset, in my opinion, to the ravages that we are experiencing in the markets. Also remember that the liquidating value only comes into play if you decide to sell or are forced to sell. It is there, most assuredly, but if you are not selling, it has little effect, as the dividends or the coupons are getting paid off the principal value. Since many of the funds pay monthly, this means more money next month, unless some fund cuts their dividend payment.
Now, with our newest funding bill, some sort of government shutdown has been stopped for the moment. Yet, we are going to have to go after all of this again in the next forty-five days – which, in my view, will mean plenty of volatility for the markets, depending upon how things are going between now and then. The ravages of both the Fed and our government are had upon us, and the effects of both must be dealt with in a very rational manner.
“Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard.”
– Warren Buffett
Original Source: Author
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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