How am I positioning for the Fed interest rate cut?
I continue to buy overweight financials, especially the big ones like Citigroup (NYSE:C), Bank of America (NYSE:BAC), JP Morgan Chase (NYSE:JPM), Morgan Stanley (NYSE:MS), Goldman Sachs (NYSE:GS) and Lehman Brothers (LEH). I'm even short some puts on the Financials ETF (NYSEARCA:XLF). In the short term, financials have to go higher as hedge funds cover shorts and, more importantly, mutual fund managers buy to correct the underexposure to the financial sector. Most Fed easing cycles imply very good returns if you buy just as they begin. The exceptions? The last one. I'm hold financials for the short run but I'm going to lighten up on these as this rally progresses. Why? The recipe is in place for some stagflation.
Stagflation is a period of inflation and low or no growth in the economy. The last time this existed was back in the 1970's in Britain and the US.
Recipe For Stagflation:
1. Weak Dollar: A weak dollar leads to inflation but doesn't help the economy because the U.S. is a not much of an exporter relative to the huge domestic economy
2. Rising Commodity Prices
3. Rising Government Deficit Crowding Out the Private Sector
4. Reduction in Global Confidence in U.S. Financial Investments
5. Xenophobic Government Policy
6. Trade Deficit and U.S. Consumer Addicted to Cheap Imports
7. Technological or Political Changes Leading to Changes in Employment Dynamics.
So what to do during Stagflation? I'm keeping my money well diversified in U.S. multinationals, global commodity producers, inflation indexed bonds, non-U.S. properties, global financial institutions and insurance companies.
I'm mostly staying away from U.S. property REITs for now, though REITs will provide a huge opportunity for profit at the nadir of the stagflation cycle - that's when I'll load up on them. I'm short U.S. treasuries (especially the 20-30 year bonds). I'm staying away from very long maturity fixed income instruments. But most importantly, I'm keeping some powder dry (in the form of cash) to take advantage of any panics and volatility. In the longer run, I'm not predicting disaster for the American economy and its people, just some pain and poorly thought policy over reaction to the recent stupid fiscal and foreign policy of late.
Disclosure: I own GS, LEH, MS, BAC, JPM. I am short puts on XLF. I am short bond futures. See History of Neubert's Top Holdings for other important positions in my tradeable portfolio not mentioned above. I was a Managing Director at both Morgan Stanley and Lehman Brothers. I am still vested in their pension and/or executive compensation plans. I was an associate at Chemical Bank, a precursor to JP Morgan. I am not vested in any pension or compensation plan there.