The Federal Reserve has raised interest rates another 0.25% to 2.25% to 2.5% with the target being 2.4%. This is a change from 2.00% to 2.25% with a 2.2% target rate.
Also, the quantitative tightening will not be tightened further – the amount of treasuries in the Fed’s balance sheet will continue to reduce by $30 billion and mortgage backed securities by $20 billion monthly. Previously the Federal Reverse increased the reductions quarterly.
So there is obviously an inflection point on the rise in interest rates and the quantitative tightening. According to FRED data, the level of treasuries held by the Fed will still be above 2012-2013 levels before they engaged in another round of quantitative easing.
Using the “hand in the vice” analogy, the vice is being tightened, but now at the same constant rate instead of the rate going faster. It will still result in some bones being crushed. We are easily seeing who some victims are (typically entities reliant on debt renewals – money is getting tighter). Junk bonds are going to be no escape.
Canadian interest rates typically have kept in “lock-step” with US interest rates and I would expect to see another quarter point increase on January 9th. I wouldn’t expect the Federal Reserve to act again on rates until their May 1st meeting unless if the stock market crashes or normalizes.
Market volatility has really increased since the beginning of October and one observation is that I am really surprised how much the fixed income component of my portfolio (specifically preferred shares) has depreciated during that time period. 5-year government bond yields have dived over 50 basis points over the past couple months, which is not good if you have rate reset shares coming up.
I have been researching companies like crazy at this period of time since a lot has been hitting my radar. You outperform the market by investing at panic bottoms.
My gut feeling suggests that we need to see more of a washout. We are likely to see a huge market rally at some point in the near future (you’ll see the S&P 500 jump up 5% over the course of a few days), and this will simply punctuate the next part of the downtrend – recall that the biggest rallies occur in these down trending markets. It is exactly designed to coax non-committed capital into the marketplace under a false pretense.
My liquidity position is excellent to take advantage. I’ve been waiting for this opportunity for some time. I am in no rush at the present moment to get in – it’s too early. More pain needs to be felt by the marketplace.
Interesting thought’s Sacha, I started my buying at least a week ago. I think tax loss selling is a large part of the market decline. I stopped trying years ago, to buy at the bottom, due to many missed opportunities. I was at 60% cash, now about 35%.
There will be some element of window dressing to not get caught with obviously dud positions, but I think what we have been seeing for the past month is more than tax selling. Time will tell, but as far as the history of these sorts of market downturns go, I would not be shocked to see another 10-15% off the major indicies from current pricing. It has a very September 2000-ish feel to it (people use 2008 which is a wrong analogy).
Interesting…..well the index’s don’t tell the whole story, I thought I read that something like 60% of the S&P was down over 30% (not sure of the exact #’s) I know that the stuff I have purchased is at least 40% off it’s 2018 highs. I agree if we don’t see a bounce in the 1st couple of weeks in January then were going much lower.
Hey Sacha, wondering if you have any thoughts on MLPs that have been recently battered, like Energy Transfer that are selling for mid single digit P/DCF valuation and where their DCF is expected to grow?
What may seem cheap today could be even cheaper tomorrow. Your example of ET, just take a look at what happened in early 2016. This wasn’t that long ago. Clearly if they started trading around 3x earnings you’d have a decent investment thesis!
A lot of these entities, however, dump as much of their operating cash flows into capital expenditures. In ET’s example, they’ve done that, plus a few billion out the door for distributions. That can’t continue forever in a rising rate environment.
It really depends on the issuer rather than the MLP sector as a whole.