Market Monitor – John Merrill

NBR: 7/13

Guest: John Merrill, Tanglewood Investments

Topic: Market Monitor

Two of our dominate investment themes are: Domestic over International and Lower for Longer rates.

Domestic over International. Global economic growth was upended by U.S. corporate tax reform (and regulatory relief) which together have been the economic equivalent of a tidal wave washing around the world. Three direct effects have been:

  • The US was now a much more competitive home for new corporate locations— which benefits our economy but at the expense of others
  • The US dollar reversed course and began to strengthen—hurting countries with Dollar denominated debt or costs (particularly EM countries)
  • US corporations suddenly had a lot more money from both tax savings and bringing money back from offshore (for new investment, expansion, dividends and stock buy backs) — other countries had no such windfall.

Lower for Longer Interest Rates. We believe that interest rates will be lower than what might be considered historically normal for years to come. Yes, the Federal Reserve will continue to raise the front end rate but rates further out the yield curve will remain resistant to rising in lockstep. There are many forces in place for lower inflation and rates: aging demographics, all time high debt levels and the internet’s price transparency among them.

With these themes in mind, here are three investments we have added to our portfolios–two ETFs and one ETN–all domestic and all paying good incomes.

Stock Picks

ishares 1-3 Year Treasury Bond (SHY). For the ultra-safe income portion of a portfolio this is hard to beat. Short term bond yields have risen significantly in the recent past. The 2-year US treasury offers a yield of just under 2.5% while the much riskier 10-year is only about 0.35% higher. This is the sweet spot of the curve in terms of risk/reward.

J P Morgan Alerian MLP (AMJ). This is an ETN for tax reasons. MLPs specialize in energy transportation assets—particularly pipelines. Investors have punished these shares in recent years first with the decline in oil prices and then with the fear of interest rates rising to such a degree that the yields from MLPs would be much less attractive. We believe that the selling was overdone and the current yield of 7.16% is relatively safe and attractive long term.

Vanguard REIT Index ETF (VNQ). Real Estate Investment Trusts (REITs) have also been in the investor dog house until very recently. This is another area that has been negatively impacted by the fear of where the Fed’s raising of interest rates will lead. As we believe that longer term rates will not rise significantly in the near future, the current yield 3.59 % is attractive particularly when you review its long history of rising distributions.

Disclosures: Merrill owns SHY, AMJ & ETF through his funds

This entry was posted in Market Monitor. Bookmark the permalink.

Leave a Reply