In a little over one month the much discussed inverted yield curve has completely reversed in a classic "steepening move" that has confirmed a mega-trend reversal in long-term interest rates (read: higher rates). Worth noting is that the yield on the 10-year benchmark T-note has now traded above the Fed Funds rate for the first time in over a year. When that shift is combined with the fact that real GDP growth is also below the Fed Funds rate, history shows that economic growth has tended to slow. A similar sequence occurred in the first part of 2006 and stocks initially rallied in anticipation of a stronger economy only to decline once the economy weakened again, causing one savvy seer to lament, "Could this be déjà vu all over again?!"
Clearly, many conundrums exist; so far, however, the stock market is interpreting the events positively as if the fabled mid-cycle slowdown is behind us with economic growth set to revive. And with money supplies around the world surging, this may indeed be the case. However, higher interest rates typically create a need for higher equity risk premiums to compensate for the uncertainty about the future rate of inflation and the concurrent risk to the value of future cash flows. Additionally, P/E ratios tend to contract, not expand, as rates rise. In such an environment we have opted to play the "long side" of the equity markets in hopefully a safer way using larger capitalization names preferably with dividend yields. In past missives we have mentioned General Electric (NYSE:GE), MeadWestvaco (MWV), Johnson & Johnson (NYSE:JNJ), and Wachovia (NASDAQ:WB), to name but a few, all of which are rated Buy or Outperform by Raymond James and/or one of our research correspondents. As a sidebar, 4.6%-yielding Portugal Telecom (NYSE:PT) owns a large portion of a Brazilian telecom company and was upgraded to Outperform by Credit Suisse last week.
In conclusion, last week a number of folks asked me for a more growthy idea. Subsequently, in our verbal strategy comments we mentioned a stock that nearly every growth portfolio manager we know says is a must own stock, namely NII Holdings (formerly Nextel International). NII Holdings (NASDAQ:NIHD), which has a Strong Buy rating from our telecom analyst, provides digital wireless communication services to business customers located in select Latin American markets. The company's principal operations are in Mexico, Brazil, Argentina, and Peru. Given our longstanding bullish views on all of these countries the opportunities for NIHD abound.