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Norman Tweed
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Retiree interested in stocks and financial instruments, especially dividend producing stocks. In the 20th century, I was an electrical engineer with Dominion Resources. I use a dividend growth investment style. Quick rules of thumb for complex questions, like fair value p/e using the Gordon... More
  • Interest Rate Environment 2013-2023 6 comments
    Mar 24, 2014 10:16 AM | about stocks: AGNC

    Samuel Clemens said "History doesn't repeat itself, but it does rhyme". Doesn't it seem uncanny that in the aftermath of the Great Recession, we find political economics to appear similar to the prelude to World War II? I believe this phenomenon is related to the Generations as defined by Strauss & Howe.

    In the middle of last year (2013), the Federal Reserve mentioned tapering of its bond buying program and immediately, the 10 year treasury bond interest rate rose from its low of 1.61% to over 2%, culminating in 3% by the end of the year. When this abrupt change occurred, high-yield stocks and REITs dropped in price anticipating a loss of spread between what they could borrow at and what they could make purchasing assets. This was similar to 1941 when the 10 year bond rate bottomed. After that the next 10 years saw a range-bound 10 year treasury bond interest rate of ~2.5%. During this time there was a considerable need for government financing of World War II and its aftermath. I contend that we are seeing the same process today.

    (click to enlarge)

    10 year treasuries 1926-2011

    (click to enlarge)

    (click to enlarge)

    With this benign setting, I believe REITs and other high-yield instruments will prosper at least until 2017. The spread will be reduced as the Fed finishes tapering and begins to raise the short term Fed Funds rate, but even that will be a slow process. I will maintain 25% allocation to bond-like investments that pay high-yield during this period. This will counteract the gyrations of War talk and economic collapse of emerging markets.

    Disclosure: I am long AGNC, MTGE, LNCO.

    Stocks: AGNC
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Comments (6)
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  • Bob Wells
    , contributor
    Comments (7847) | Send Message
     
    Norm...

     

    Very interesting! You have a way my friend of being able to break complex into pieces we can all understand.

     

    Bob
    24 Mar 2014, 04:48 PM Reply Like
  • Norman Tweed
    , contributor
    Comments (7483) | Send Message
     
    Author’s reply » Bob--I wrote this for my brother Roger who felt just the opposite in his newsletter. It is more an argument for benign interest rates even in the face of global turmoil.
    25 Mar 2014, 03:46 AM Reply Like
  • Miz Magic DiviDogs
    , contributor
    Comments (5151) | Send Message
     
    Sounds good to me, Norman!

     

    Also long AGNC & MTGE

     

    Miz
    24 Mar 2014, 10:22 PM Reply Like
  • Norman Tweed
    , contributor
    Comments (7483) | Send Message
     
    Author’s reply » Stay the course, Miz!
    25 Mar 2014, 03:47 AM Reply Like
  • Eddie Herring
    , contributor
    Comments (2123) | Send Message
     
    Norm

     

    Interesting. Thanks for reminding us of the impact of Fed action (and inaction) on these type assets.

     

    Eddie
    25 Mar 2014, 10:23 AM Reply Like
  • Norman Tweed
    , contributor
    Comments (7483) | Send Message
     
    Author’s reply » Thanks Eddie for your comments. I believe it is critical to filter out the Wall Street hype.
    25 Mar 2014, 11:06 AM Reply Like
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