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10YR Treasury says “Get on the gas”

Nov 14, 2023

Good morning! 👋

Futures are in the green after the October inflation report came in weaker than expected.

That’s great!

A hot CPI report would have called the belief that the Fed is done hiking rates into question. A weaker report—like the one we got—solidifies my contention that the Fed may be closer to the end of its follies than people think. And that’s great for stocks.

The biggest risk for investors at the moment is one they do not see coming. Many, particularly those who have gone to the sidelines seeking safety, will wait for an “all clear” sign—only to find that there isn’t one and that stocks have taken off without them.

Be “In to Win” or you won’t… win.

Here’s my playbook.

10YR Treasury says, “Get on the gas”

We’ve talked about this many times.

If rates go up, so does the cost of leverage, which means that big traders will hit the sell button as fast as they can to avoid institutional-level margin calls at the end of the day. If rates go down like they have this morning, traders will borrow a sh__load of money to boost their returns and go on a buying spree.

Keith’s investing tip: Many investors will look to the big names or their favorites, but that is a mistake. Professional traders will go straight for stocks with the most liquidity and efficient price action. Upgrade to Paid

What Home Depot earnings really tell you

Home Depot beat earnings, but… sales declined 3% YoY. More importantly, and perhaps more critically, the company narrowed—a $5 Wall Street expression meaning “reduced”—its full-year outlook. (Read)

This is important.

Home Depot now expects earnings per share to fall by 9–11% compared to prior guidance of a drop between 7% and 13%.

So, what does this tell you?

Customers who may have remodeled their entire homes under normal market conditions are still pinched. So, they may be settling for just a bathroom upgrade or a fancy new light in the dining room.

On a personal note, my experience matches up. My bride and I have noticed considerably less foot traffic and smaller carts at nearly every home improvement store we’ve visited over the past few months.

Putskies could work nicely here.

Looks like I have company

As you know, I think the Fed will raise rates one more time this year while also engineering a hike sometime in Q1 2024.

Then, however, the real games begin.

I think the Fed may finally “see the light” and recognize that they have been just as wrong about rates and labor as they were about transitory.

Longtime readers will recall that I was one of the very first to challenge the Fed several years ago when it embarked on its current round of nonsense. And that I have been as consistent about this as the day is long the entire time.

Now I apparently have company. UBS’s Global Head of Economics and Strategy Research, Arend Kapteyn, sees the Fed making a “raft” of rate cuts next year. (Read)

This is significant because UBS expects the Fed to cut interest rates by as much as 275 basis points (2.75%).

I’m not sure I’d take it that far, but I do see the Fed realizing the error of its ways in early 2024.

If I am as correct about what happens next as I have been about the Fed all along, then that means now is the time to start snapping up beaten-down names like those we talk about frequently.

Chevron + Hess = $15B tax shield

If you recall, I suggested there was more to the Chevron/Hess tie-up than meets the eye when it was announced.

Looks like I was onto something.

Reuters is reporting that Chevron’s purchase may unlock $15 billion worth of tax benefits by using Hess’s past losses to cut future payments. (Read)

Admittedly, you may or may not like that idea, but that’s moot.

The important takeaway for investors like us this morning is that this accounting treatment—which, by the way, is perfectly legal—will free up gobs of cash, resulting in extra annual cash flow that the market does not yet recognize and has not yet priced into the stock.

Chevron has been beaten down mercilessly in recent months, and this could be great for earnings well into 2024 and beyond.

Dinosaur juice never looked so good. 😊

Dividend risk or just blowing smoke?

Income-oriented investors like REITs because they are typically ultra-dependable, rock-solid performers.

Lately, though, the game has changed.

The massive reset prompted by COVID and now current economic conditions means that you’ve got to be super selective when it comes to income-oriented real estate investments.

I’m getting quite a few questions about Innovative Industrial Properties (IIPR), which, if you are familiar with it, is the only cannabis REIT trading on the NYSE.

On the surface, it looks great… the REIT owns 100+ properties in 19 states with 98%+ leased to cannabis operators. It increased its dividend payout 5X over the last 5 years but has held the dividend firm since late 2022. (Read)

Here is where I get concerned.

The REIT’s yield is 9.32% at a time when legal cannabis operators are facing the same inflationary and economic challenges as traditional businesses. Word on the street is that a number of IIPR tenants have missed their rent payments.

I think there is a good case to be made that more will follow.

If I’m correct, that means there is the potential for both a dividend cut and lower stock prices ahead.

I’m thinking $60ish and putskies.

Interestingly, many analysts are still optimistic about the stock, which should set off warning bells in your head like it does in mine. I think Wall Street will try very hard to defend it, but in situations like this, gravity ultimately wins.