Out Of Focus

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Includes: ADRU, BIL, BNO, DBEU, DBEZ, DBO, DEZU, DFVL, DFVS, DLBL, DLBS, DNO, DTO, DTUL, DTUS, DTYL, DTYS, EDV, EEA, EGF, EPV, EURL, EZU, FEEU, FEP, FEU, FEUZ, FEZ, FIBR, FIEE, FIEU, FTT, GBIL, GOVT, GSEU, GSY, HEDJ, HEZU, HFEZ, HFXE, HGEU, HYDD, IEF, IEI, IEUR, IEV, ITE, OIL, OILK, OILX, OLEM, OLO, PLW, PST, PTEU, RFEU, RISE, SBEU, SCHO, SCHR, SCO, SHV, SHY, SPTL, SPTS, SZO, TAPR, TBF, TBT, TBX, TBZ, TLH, TLT, TMF, TMV, TTT, TUZ, TYBS, TYD, TYNS, TYO, UBT, UCO, UPV, USL, USO, UST, VGIT, VGK, VGLT, VGSH, VUSTX, ZROZ
by: Mark J. Grant

[Personal Note: I will be speaking at the MTN-I conference at the Four Seasons Hotel in Miami on Thursday. I hope to see many of my old friends there. Please reach out if you are attending, so we can spend some time together.]

Interest Rates

Pay close attention here. We are verging on the support/resistance line of 2.32%. We have been in a range for quite some time now with 2.51% being the high end. The Fed's Governors keeping talking about rate hikes and downsizing their balance sheet and yields keep heading lower.

You may ask, "What is happening here?" It was just weeks ago that everyone and their brothers were calling for a 3.00% 10 year Treasury. I took the other tact.

Jennifer Ablan, at Reuters, wrote,

Mark Grant, chief strategist and managing director at Hilltop Securities, recommended investors move into 5-10 year corporate bonds 'because I don't see stocks posting double-digit returns after their huge run-up since the elections'.

This is one-half of a strategic play that I have been recommending which I call "Grant's Cash Flow Investing." Half of the money in Corporate bonds and half of the money in carefully chosen closed-end bond funds. This provides a return, at present, of approximately 7.00-7.50% with monthly checks from the funds I like.

I make the further comment that if we break through 2.32% for the 10 year Treasury that there is a gap, a very large gap, until we reach the next support/resistance line. The bond markets are dissing the Fed, and their claims, as the Fed of today certainly won't be the Fed of tomorrow.

The Fed

Mr. Trump is going to appoint three new members of the Fed. That much we know with certainty. What we don't know is if Ms. Yellen and Mr. Fischer will be around to finish their terms. We also do not know who these new people might be but, as Mr. Trump is running America Inc., the United States operated as a business, I would surmise that the new appointments to the Fed will be business people and not economists or academics plucked out of the ivy walls of some university.

Consequently, the call for higher rates may be a short-lived affair and I am betting that it turns out just that way. "Normalization" is an academic concept rooted in history, while lower interest rates are a pragmatic solution to our upcoming military and infrastructure build-outs. We may get another interest rate rise or two, as the yield curve flattens like a pancake, but then the newly constructed Fed may begin to "lower rates" as the new Trump appointed Governors take power.

Oil

The technology keeps improving. America's shale oil wells keep coming back on-line. OPEC and its minions keep cheating on the cuts they have promised. This is an industry in serious tumult.

OPEC, in my view, is a "dead man walking" as they cannot compete with the shale oil drillers where improving technologies are going to swamp the fixed costs and social program expenditures of the OPEC nations and their partners. Saudi Arabia may tout its $2 trillion Aramco IPO (ARMCO), along with some of the lead banks, but I wouldn't touch this offering unless it was about half of the suggested valuation.

The world of oil and natural gas have been turned upside down, even if everyone has lost focus and does not want to recognize the obvious, which is hanging out just in front of their noses. It's funny how often this happens.

The world is full of obvious things which nobody by any chance ever observes.

- Sherlock Holmes

Europe

You can think what you like. You can believe what and whom you would like. You can dismiss Brexit and Grexit and Frexit and Swexit and Italgo. You can do all of these things to your heart's content but what you cannot dismiss, what would be absurdly foolish to dismiss, is the Risk that is resident on the Continent at the present time. "Event Driven Risk" is flashing red across Europe these days and driving capital, by the boatloads, into the American markets.

Here is one reason, in my estimation, that our bond markets are going up in price and down in yield. Mr. Trump, and his policies, may be seen as problematic but the dangers in Europe, the Risk on the Continent, that things may actually run amok, is far greater, in my estimation, than whatever issues the United States has under Mr. Trump's guidance.

You see, but you do not observe. The distinction is clear.

- Sherlock Holmes

Stay in Focus!