What I Said

I stated in “Out of the Box,” last Wednesday:

Looking at the markets, these days, it is quite easy to find yourself lost. Equities at all-time highs, valuations at numbers that make no sense, and tech stocks shooting off like Roman Candles. Yields at all-time lows, or just off them, risk premiums indicating that virtually no bonds have any risk, any longer. All of the tried and true methodologies, that worked in the past, can now be safely stored in your garbage can. You can rummage through it, of course, to your heart’s content, but you will not find much value there I’m afraid.

Most of our lives, in the markets, history served as the guidepost to our future. Not any longer, I assert. Whether it is Robinhood, and the apps merry band, or fixed-income investors, who can no longer afford their lifestyles, or insurance companies, banks, pension funds, or university endowments who can no longer afford what scant yields are available, everyone is under the gun. I do assert that the Fed’s decision, on behalf of the country, no doubt, to drive yields to current levels, and then to hold yields at current levels, is one of the major factors, in my estimation, the main factor, in driving equities to the outer realms of its stratosphere…

I do point out, that for some yet unknown reason, that we will have a correction. I warn about this now because I sense that it may be ugly, especially in the highflyer names. I recall and repeat the lines from my mother when I was a kid, “Jack be nimble. Jack be quick,” and I suggest you follow this strategy.

We all know what happened last Thursday and Friday!

Wham, Socko, Kaboom!!!



You can call my timing a “Wizard’s Warding,” or you can call it “Dumb Luck,” but my warning call was accurate, the timing was on cue, and I stand by my strategical thinking today. I bring all of this, again, to your attention today, because our correction is not over, in my estimation. There will be more to come, as the equity high-fliers begin their drop back to Earth.

Let me be very clear, I am not calling for some exacerbated move, but just a settling. The basics of the markets have not had a radical change. The “bet on tech” just became too frothy and more rational thinking returned, as the stratosphere valuations began to fade, as their lack of underpinnings became clearer.

In my opinion, the biggest driver of both the debt and equity markets continues to be the Fed. Chairman Powell has made it quite clear, no Fedspeak here, interest rates are going to remain at historic lows for an extended period of time. Our “Borrower’s Paradise” and our “Fixed-Income Investor’s Hell” will remain locked-in, for many years to come, in my estimation. I take no issue with the Fed’s path. They are supporting the country and our national debt, which has now exceeded our GDP for the first time since World War II, by holding interest rates at just off of Zero and they will continue to do so.

In this scenario, however, what is good for the gander is not good for the goose. Retirees, seniors, insurance companies, pension funds, university endowments, bank profits from their bond holdings, and the list goes on, are all taking it on the nose. This is the main driver, in my estimation, of the upsurge in equities. No one could find any yield and so they pivoted to equities to try to make up the loss of yield by gaining appreciation. This has worked for some time, as I said earlier in today’s commentary, but I fear the bloom is wearing off the rose. “Take some profits now,” I say, if you haven’t already, as “Wonderland” has changed its governance. The old Fed and the new Fed are now miles and miles apart.

The White Queen has been crowned and the Red Queen, who has been yelling, “Off with their heads,” for decades, has lost control. Please make note of the change. I fear you will be quite sorry if this isn’t noted.

I am particularly concerned about pension funds, and any investments in them, at this point. Yes, the government ones will play out for a longer duration, but play out they will. Whether it is the bonds, or other debt, of the state funds, or municipalities, and there are exceptions of course, where the funding is current, but I think a serious “comeuppance” is upon us. I would be taking a very hard look at any exposure you have, of any sort, including corporations, of pension fund exposure before the clock strikes midnight and it is too late.

It’s time that more pension funds wake up to the fact that Wall Street has, in many cases, sold them something close to modern-day snake oil. We know what markets will do: they will go up and they will go down. What so many active Wall Street managers have sold our nation’s pension funds on is the idea that, for a hefty set of fees, they can help pensions experience almost all of the gains and none of the losses. We need to recognize that for the fantasy it is.

– Pennsylvania State Treasurer, Joe Torsella

Having given you several warnings today, I can almost hear the door-mouse, “What to do? What to do?”

My answer, for those needing yield and a cash flow, are closed-end funds. They are the only sector left, to my knowledge, where double digit yields are attainable. They are not perfect, there is risk, their underlying assets are of critical importance, some have cut their dividends, but all-in-all, if you know what you are doing, you can find yield along with monthly and quarterly dividend payments.

Last week I discussed them with a large money manager. He asked, astutely, why are these yields still available. Unlike ETFs, which are heavily touted, because the more money they take in, the more money the fund manager makes, which is not the case for closed-end funds. In my opinion, closed-end funds are the most overlooked, and the least appreciated, part of the markets. The good news though is that since they are, double digit yields are still available for both professional money managers and for individuals. Take advantage while ye may. At some point, in my view, the gate will creak and then close shut. That is my opinion.

“You may call it ‘nonsense’ if you like,” she said, “but I’ve heard nonsense, compared with which that would be as sensible as a dictionary!”

– Wonderland

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.


Originally published on Seeking Alpha

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