Update - January 12, 2021
How to Play the Real Fight in Washington
It’s a battle between Washington and Main Street.
And no… I’m not talking about politics.
This tug of war isn’t getting 24/7 attention from the news. But it’s a story with just as much potential for fallout.
If you’ve been paying close attention, you know interest rates are on the rise.
It’s very tough to call a 1.16% yield on the 10-year anything close to “high,” but coming from just 0.318% last March, yields are certainly “elevated.”
It’s a trend worth watching. If it continues, we will likely see a strong rotation within the market.
We’re Ready!
Fortunately, our Modern Asset Portfolio and the strategy behind it have us nicely prepared for anything that may lie ahead.
The reason rates are climbing is quite simple…
It has nothing to do with the Federal Reserve and its control over rates. Instead, just as I warned in our annual “big prediction” issue, the market is anticipating increased inflationary pressure. With the “blue wave” sweeping through D.C., many folks think spending will soar from here.
But the Fed will play a role in this. It has a hard decision to make.
Does it let rates climb as the natural market surely wants… or does it hold them back by buying up all of those bonds the market no longer yearns for?
One path leads to a slower-growing economy and short-term pain. The other keeps the stimulus flowing and leads to unknown problems down the road.
Again… we’re poised to do well no matter what. Our Modern Asset Portfolio strategy tracks rates and adjusts our allocations accordingly.
For now, we remain in a world where real interest rates (that’s the 10-year Treasury minus inflation) are negative. It’s a world where Bitcoin is strong, the dollar is weak and companies wisely using debt shine brightest.
As we enter the year’s first earnings season, we’ll see the idea in action…
Debt-Propelled Stocks
For example, we got into shares of Logitech (LOGI) shortly after it announced its latest stock buyback plan. The company knows that rates are historically low and debt is not nearly as expensive as it once was. It’s using the idea as a sort of arbitrage, taking on new debt to remove its shares from the market.
The plan is paying off.
We’re up nearly 60% on the play. And with the company set to release its latest earnings report next Monday, that number may soon rise quickly… especially if management updates its buyback plan.
The market expects to see earnings of $1.08 per share for the quarter – growth of 28% from the same time last year. Overall sales are expected to come in at $1.23 billion – up 35.9% from a year ago.
Anything larger than those figures will keep the recent rally intact.
On the subject of rallies… I sure hope you bought shares of 10x Genomics (TXG) when I released the latest monthly newsletter last week. Shares have surged by 20% over the last week.
Very nice.
It makes sense. As I outlined in the issue, the company is wisely using ultra-cheap debt to fuel a quickly growing business. (You can read the full commentary here.)
Here’s a key line from the recommendation:
But if we believe inflation is coming and the Dow will hit 100K because of it, we do need to put a lot more weight into growth and what’s funding it.
A company like 10x Genomics will see its shares surge much further and faster than others that are sticking with the old rules of finance.
If and when interest rates rise again, those old-school rules will be prominent once again. But until then, our strategy begs us to keep doing what we’re doing.
It’s working.
Again, when rates are low and the dollar is cheap, investors get desperate for an alternative.
Crypto Update
If you’re a longtime reader, you know that I once was not a fan of Bitcoin and its cryptocurrency brethren. As Washington prints trillions of dollars just to keep the economy afloat, that notion has changed… dramatically.
Short-term investors who can stand the volatility that comes with this nascent asset class have tremendous opportunities in the space.
Our stake in Monero (XMR) has certainly jumped around in price… but with a value that’s 65% higher than when I first recommended the coin in the October issue, most investors are willing to overlook the ups and downs.
The crypto market is red-hot… and this week’s volatile action proves it.
I believe the market’s big sell-off over the last 48 hours was due to a combination of huge demand, profit taking and decreased liquidity over the weekend.
To me, it’s good news… a sign of a growing, healthy market.
The proof is in the record-breaking volume. More crypto is trading hands each day than ever before. In fact, at the peak last week, 1.3 million Bitcoin addresses were active in one single 24-hour period.
That’s huge.
It means we can start using our traditional volume indicators – like I use in Alpha Money Flow – to sort out the coins with the highest potential of a short-term outbreak.
It’s an idea I’ve been researching thoroughly and will have much more to say about next week.
Until then… enjoy your profits.
Things are crazy out there, but we’re in a strong position to navigate this mess with grace.