POW! Rate in the Kisser

Is your portfolio positioned for a move in rates?

Author

Brandon Walker
August 13, 2022

Estimated read time: 3 minutes and 8 seconds

In this week’s market recap email

  1. Market recap

  2. Skills/methods I used this week

  3. What's in and what's out of my portfolio

What Happened This Week

One month returns: S&P 500 +11.5%, Nasdaq +15%, Russell 2000 16%

Rejoice! The bottom is in!

Uhm?

Bear market bounces are a very real concept - and yes, these are called bear market bounces for a reason because an index like the Nasdaq is still down ~20% from it's peak in November.

The fact of the matter is, GDP is slowing at the fastest RoC (rate of change) in history! 

Why??

Because it just saw the fastest RoC in growth last year! MATH.

The projection for growth is to continue slowing, sequentially, for the next few quarters. Do not chase, do not experience FOMO, stick with what works in these environments (keep reading for what does work!).

Teaching Moment

Rates.

That's it, that's the tweet.

No but seriously, there's a pretty common theme with most of these posts - almost all of them are understanding where yield curves are trading at. You can position accordingly in your portfolio if you understand rate-sensitive securities (more to come in my holdings below).

Behold the 10s-2s spread: a measure of the 10 year curve minus 2 year curve.

We've touched on this is prior posts but there's a reason why we keep bringing it up. Inverted yield curves (i.e. negative on the 10s/2s) are very concerning for our economy.

When the yield curve becomes inverted, profit margins fall for companies that borrow cash at short-term rates and lend at long-term rates.

The darker-shaded sections of the graph indicate recessionary periods for the economy. Almost every single time (all the time if you count whatever 2020 was) the yield curve is inverted BEFORE we enter that period. 

The Fed does not help this by raising rates - since they influence the 2s part of the curve - as slowing growth brings down the 10s part of the curve. 

Case & point: buyer FOMO beware. 

In The Account | my top holdings 

  1. $UUP - Dollar

    1. This past week has been a great spot to convert "physical" cash to buy more $UUP as the dollar comes off its high of mid-July. The dollar remains a core position with the bleak economic outlook ahead - I'm towards my max for a currency here (12%)

  2. BONDS

    1. On the radar last week - in the starting lineup this week. I'm currently not beefing one specific security, instead I'm spreading them out across a few different types that I am looking to work in tandem as the 10yr bounces (that's when you buy bonds). The MOVE index - bond volatility - is also settling down.

    2. In my PA: $BAB, $LQD, $IEI, $BNDD - total 15% of my portfolio

  3. UTES & STAPLES

    1. This continues to be a great rate-sensitivity positioning as a falling 10yr curve, which will fall as growth slows, benefits companies in these two sectors

    2. $XLU, $XLP, $PBJ, $GIS, $BJ, $STKL

On The Radar | positions I want to build / sizing up

  1. GOLD

    1. This one remains on my radar as rates bounce back towards the upside - Gold loves falling rates so these are the setups I like to see to start a position. Gold has made a nice pivot back in bullish territory, but I'm not going to buy something just because I "want to". Buy low, sell high.

Off The Grid | removed positions / short selling opportunities

  1. ANYTHING EUROPE

    1. Europe is typically a few steps behind the Fed in decision making, but behold they started to raise rates into a...wait for it...economic slow down! Short the **** out of Europe.

    2. $EPOL, $EUFN, $EWG, $EWQ, $EWP

  2. RUSSELL 2000

    1. The Russell 2000 is the stock index that tracks "small cap" companies. When the economy slows these companies are some of the first to jump ship as their balance sheets can't support a slowdown. 

    2. $IWM is your ticker here, short the **** out of the Russell.

  3. FINANCIALS

    1. As I stated in the "Teaching Moment" section, inverted yield curve as bad for companies - specifically Banks who lend money. Financials will get smoked if this curve continues to stay inverted so I'm keeping them on the short side of my book.

    2. $XLF, $KRE

Until next week....

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.