By Julien B. Booth
February 11, 2019
I hope this note finds you doing well.
While the news cycle, Presidential tweets, and celebrity nonsense seemingly trough-peak-trough within mere days, economic cycles are a touch longer in duration.
In early January we released a note and chart deck that illustrated such a cycle: https://www.brcwm.com/2019/01/03/grateful-2018-year-end-charts/
The most confirming element of our January outlook is the literal crash in interest rates from the November highs (10 year Treasury) of 3.24% to 2.65% (present). Make bond prices great again – if you will.
More than several folks had lectured “interest rates are going up” – you should not own bonds in 2018. The loss of 20% in stock market value seemed to mitigate the rebukes.
Interest rates are a fundamental indicator of prospective economic performance and generally proceed stock markets. Bondholders by definition have an asymmetry concern; we want to get paid back. One thing we do know is the direction, signal, and rate of change of interest rates.
In the course of 7 weeks, the Federal Reserve completely changed course from a Hawkish (raising rates) chorus to a series of Dovish (not raising) group of crickets. Given the tools and resources of the Federal Reserve, I would expect a better. The Fed is likely one more institution polluted by politics and the resistance to reality.
The crash in rates has been wonderful for us. Our largest in positions are rate-sensitive sectors (Real Estate, Utilities, Preferreds, big dividends, etc.).
For the most part, portfolio balances are back at the all-time highs of summer 2018.
I suppose it is easier to allow continued asset inflation – but certainly harmful in the longer run as debt accumulation is favored in lieu of prudent capital allocation.
The Fed is likely to make Gold great again too.
In the past 5 weeks, nothing has materially changed in our outlook, we have just been blessed with an opportunity to reduce riskier positions with the recent updraft from the December lows in risk asset (growth stocks, etc.).
In addition to the collapse in rates (bond prices up) the earnings expectations coming from Q4 2018 reports seem to further strengthen the case for a slowing environment.
Net, net our short term game-plan has been:
Reduce BB, BBB credit exposure;
Increase duration to higher-quality securities;
Reduce broad stock risk in favor of strong balance sheets (big cash holdings); and
Collect our cash flow.
We will continue to favor capital preservation, consistent income, and quality balance sheets for the foreseeable future.
Thank you for your interest and for allowing us to work for you.