It's Time to Reevaluate Consensus Thinking in Markets
(Bloomberg View) -- The phrase “upsetting the apple cart” can be traced back to the late 1700s, and it is often an apt one for the markets. That's especially true now, as I wonder what could “upset” consensus thinking with a growing number of recent and pending events threatening to send the apples spilling into the streets.
Oil is the first of my concerns. The price was run up to well above $50 a barrel by the OPEC meetings, the widely declared -- but generally falsified -- cutbacks and a largely mistaken belief that the cartel is still in control of the oil markets. The fact is that because of shale oil technology, the U.S. now has the largest reserves on the planet. The U.S. is also exporting at record numbers, and lower oil prices are likely just around the bend.
Oil prices were also buoyed by the serious political turmoil in Saudi Arabia and the havoc now taking place in Venezuela. That South American country is in default on its debts, according to both S&P Global Ratings and Fitch Ratings, and a “reorganization” and “restructuring” -- the words used by the Venezuelan president -- may be far from the truth.
It is more likely that Venezuela may forfeit assets in various courts of law and that cargo seizures may commence. My premise is that their oil will no longer be shipped without various creditors trying to gain control of each and every shipment. U.S. oil production, however, can fill the gap. At that point, Venezuela will fall apart and try to ship oil however it can and at any price in an attempt to survive.
Equities and debt alike, I am not a fan currently of oil plays based upon escalating prices. That is the wrong bet now. Watch out below.
The current expectations for the Federal Reserve are another place where apples may roll. All of the blather about returning to “normal” monetary policy is just fluff in the wind. Since the Lehman Brothers debacle, the world’s central banks have accumulated assets and poured some $21.7 trillion into financial markets, according to Bloomberg data. My own calculations place their total assets at $24 trillion by September. This is “growth” and not “decline,” regardless of the frivolous articles that only discuss the America’s central bank and nothing else.
Also, I point to the obvious fact, given all of President Donald Trump’s pending appointments, that the Fed of yesterday is not the Fed of tomorrow. Proposed Fed Chair Jerome Powell is not Janet Yellen, and I think Powell will be far more dovish than his predecessor. Think this through: With the Trump administration centered on growth and in the process of cutting taxes, then the last thing that is needed is a Fed raising interest rates. I believe the process will stop and could see a serious rally in U.S. Treasuries.
Most everyone has called for higher yields for the past four years. They have been wrong, as the 10-year Treasury note is once again right up against the 2.32 percent support/resistance line. The yield curve could invert if the projected growth does not arrive, though I am not calling for that outcome. The Fed may not say it publicly, but it will recognize that lower yields will help the economy and the federal deficit, and Trump in his bid for faster economic growth. If this occurs, it will be positive for bonds and equities.
My sense is that tax reform is going to pass, and areas that I am watching closely are the “1031 Exchange” and other commercial property legislation. Owners of office buildings, malls, warehouses and other commercial property would benefit from lower taxes on their profits, and they would be able to avoid a 30 percent limit on deductions for interest expense that would be imposed on other businesses. This is based upon both the House and Senate bills.
The Senate bill would also shorten the depreciation period for commercial property to 25 years from 39 years, which would be a boon for commercial property owners. Just as important, none of the provisions that commercial real-estate owners feared, or REIT investors worried about, were included in either proposal. Both the House and Senate bills would preserve the “1031 exchange” provision that enables sellers of real estate to defer capital-gains taxes by reinvesting proceeds in “like-kind” properties.
For investors, now may be a very good time to examine REITs and take advantage of the proposed new legislation. Both equities and the debt of REITs could benefit if the tax bill passes. Apples bouncing about in the street may be picked up, you know.
There is another underappreciated area of the market: closed-end funds. No one touts them because the managers don’t get any more income from them once they are created. However, when combined with investment grade corporate bonds in a strategy that I call “Cash Flow Investing,” these funds present a great opportunity.
The closed-end funds I prefer -- and it is a long and arduous process to ferret them out -- yield from 10 percent to 13.81 percent based upon Bloomberg’s “Indicated Yield” calculations. The ones I favor all pay dividends monthly. The compounding of interest adds 110 basis points to the equation, if re-invested monthly. This means that these closed-end funds yield 11.10 percent to 14.91 percent. You should also take into account that closed-end funds could raise or lower dividends at their discretion.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Mark Grant is a managing director and chief strategist at Hilltop Securities.
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