Sunday, September 28, 2014

Portfolio Update: Yellen & Putin: Deliberate and calculating in their respective theaters! Refocuses light on fixed income.

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Best, Ed
 (If you'd like to exchange thoughts on this post or on other subjects, please connect with me through the Private Chat tool on the right side of this page, or if you'd like to email thoughts, please do so through the Contact Form feature.  For public airings, please use the Comment feature below.  Looking forward to hearing your thoughts!)

FYI….As we know, the geopolitical and economic worlds are weaved tightly together.  The latest example is clearly seen in the above article re Putin’s latest move on Ukraine.   Below are some thoughts that I’ve shared in various exchanges w/folks around the world who are monitoring the situation closely.

I’m following it w/great interest, and finding geopolitical analyses more compelling than pure economic.  Putin is teeing up as many ducks as he can to in order to counter US led economic sanctions.  Putting pressure on Ukraine through these bonds is clever, and could work, but  I don’t think Ukraine will repudiate the debt, nor will they default.  They have reserves, and IMF support, not to mention Western country support for anything that would counter Putin’s schemes.  The market, on the other hand, is not quite that sanguine, as we saw last Thursday, when equity markets tanked on Russia/Ukraine noise.  I think the market is more practically realistic and recognizes that even if in the end, Ukraine and Russia work something out in order to push the issues down the road, (as they apparently did late last week w/an agreement on debt repayments in exchange for gas deliveries) nevertheless, the cloud of an expansionist Putin will continue to hang over the markets and will likely flare up from time to time.  I remain, as a result, quite defensive on my European exposure, both equity and fixed income.  I do think that Draghi will have to accelerate the QE program, largely because the market needs to see something that augurs well for spurring growth.  Right now, the economic read is not very inspiring in Europe.  And when you compound it with the geopolitical impact of Putin, not to mention terror, and fighting in the Middle East, you get a prospect for the EZ economy that is not that optimistic.

In the meantime, in recent weeks, I’ve made some changes to our portfolio positions to reflect the views above, and the latest information that came from Janet Yellen following the last FOMC meeting.  The bond market remains on edge, focusing on when the Fed will make its first move on interest rates to higher levels.  Yellen’s message, on the other hand, seemed to go out of its way to emphasize that though the QE program is winding down, and the Fed has its eyes on employment and inflation as the metrics for raising rates, when the day comes that rates start to go up, the flight path towards higher rates is likely to be slow, calculated, deliberate, and frankly, any other similar word that is the antonym to ‘ratcheting rates higher quickly’!
As such, pullbacks in bond prices, especially in the short and intermediate maturities and in higher credit quality debt, appears to me to  warrant a closer look as an alternative to cash, which, as equities climb higher, should still be readily available to ‘bottom fish’ on equity market pullbacks.  As such, I’ve taken initial positions in several ETFs that allow for a diversified presence in fixed income,  primarily investment grade bonds, while providing liquidity (and little-to-no premium to NAV), such as CSJ, LQD and BSV.
I also continue to look for equities that have fallen to seemingly good valuations and that fit in with our global macro investment themes, most notably, the burgeoning middle class (read: growing discretionary-and staple-spenders) in many EM countries, and the ongoing tech evolution including cybersecurity.  For example, I’ve recently added UN and SIX, and am looking closely at SYMC.
As always, please email/call if you would like to discuss in more detail.
Will continue to keep you posted.

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(Please note: This article is solely meant to be thought provoking and is not in any way meant to be personal investment advice. Each investor is obligated to opine and decide for themselves as to the appropriateness of anything said in this article to their unique financial profile, risk tolerances and portfolio goals).
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Additional Disclaimer: currently long many stocks/ETFs, including UN, SIX, CSJ, LQD, BSV.  Positions may change at any time without notice.  

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